No kidding, but is this another sign of a post-GFC academic trend. This article from a London Business School professor published by the Harvard Business School caught my attention:
The economist Jovanovic wrote, about a quarter of a century ago, “efficient firms grow and survive; inefficient firms decline and fail”. What he meant is that the market is Darwinian; it will rule out the least efficient firms, with habits and practices that make them perform comparatively badly, and it will make sure efficient firms prosper, so that only good business practices prevail.
Yeah right.
When you look around you, in the world of business, one sometimes can’t help wonder where Darwin went wrong… How come we see so many firms that drive us up the wall, how come we see silly business practices persist (excessive risk taking, dubious governance mechanisms, corporate sexism, grey suits and ties to name an eclectic few), and how come so many – sometimes well-educated and intelligent – people continue to have an almost unshakable belief that the market really is efficient, and that it will make the best firms prevail if you just give it time?
4 Comments
I definitely see the point being made here, but I think it is a bit unfair to judge the market so quickly. Is the market efficient at rooting out poorly managed/run companies? yes. Does it do it quickly enough? No. Look at the businesses that have been around for 20 years or more… this may give us a better idea of the market’s efficiency in this regard. This will be especially true after this economic blip.
MBA Blog
Hmm. I’m not so sure. I was thinking about this the other day when John Story of the Australian Institute of Company Directors attacked the government for its proposals to limit executive pay.
As well as his gig at the Institute, Story is chairman of Suncorp Metway and Tabcorp. Last time I hopped into Commsec and checked the ten-year returns to shareholders in those two companies, they were averaging 3.5% and 3.8% per annum respectively; Suncorp has underperformed the market for seven out of the last ten financial years, and Tabcorp for five. This is in spite of the fact that both are in industries that should be no-brainers and benefited from strong brands (and in Tabcorp’s case a monopoly) built up when they were government-run.
If the experience of the early 1990s recession is any guide, it’s companies like this that mainly benefit from corporate failures elsewhere, which give them a chance to enlarge their market share cheaply and position themselves to benefit when things turn up, often confirming rather than challenging their practices in the process. The Australian corporate sector has plenty of big companies in similar positions; Brambles (average ten-year shareholder return -1.18 per cent), Telstra (-3.5 per cent) and Amcor (2.3 per cent) are three that immediately come to mind. Unfortunately, size does matter, especially when it comes to negotiating for finance, and there’s no sign of that changing any time soon.
Hey Trev, your comment this evening about the manufacturers comment to Keating “I’ll wait and see” springs to mind…as does your report of Keatings exposition in the Comcar afterwards…
Interesting Stewart I hadn’t made the link before but yes it fits the ‘wait and see what happens’ category