Growth should not be the goal
Holding onto investors’ cash stems from a pernicious mindset, warns Henri Servaes
Business leaders are often asked, how are you going to grow? Where is the growth coming from? Do you plan to make acquisitions? There is a lot of pressure to keep expanding, keep moving forward.
This stems from a ‘growth for growth’s sake’ mindset that can end up damaging companies’ returns, making them less capital-efficient and pushing them toward overpaying on mergers and acquisitions (M&A).
Part of the mindset is the way they think about the company’s cash. Traditionally, managers (and board members as well) have imagined that it's their money they are using, and that returning it to investors is an admission of failure.
But that’s wrong. Companies are allocated a certain level of capital on the basis that they use it to produce a return that’s better than its cost. Sometimes managers have to ask themselves whether it's better not to use the capital and give it back to investors instead. Holding on to large amounts of surplus capital doesn't make sense by itself.
