Your company will fail. V1

Your company will fail. V1

What is the purpose of this article?

This article enables a discussion about your company’s long-term survival and competitively differentiated returns to investors.

The audience for this article includes: individual investors, institutional investors, boards of directors, CEOs and the C-Suite.

This article does not provide tax, legal or financial advice. You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: Your company wil fail. V1

What are the critical learnings in this article?

Most companies will: fail, disappear, or provide poor returns to their investors.

Most companies will not survive.

Few major companies survive:

16% of major companies in 1962 survived until 1998.¹
Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index. An investor who put money into the survivors would have done worse than someone who invested only in the index.¹
31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.²
52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.³
50% of the S&P 500 will not be on the list in 10 years’ time.⁴

Most public companies will not survive.

A Fortune 500 company will survive an average of 16 years.⁵
The typical half-life of a North American public company is 10 years.⁵
Global public companies with $250 million+ market cap have a typical half-life of 10 years.⁵
28,853 companies traded on US public markets from 1950 to 2009. Half life was only 10.5 years.⁶

Global CEOs recognize that there’s a good chance their companies will not survive.

In 2022, 39% of global CEOs thought their company will not be economically viable in 10 years if their company continues its current course.⁷
In 2023, 45% of global CEO thought that their company would be financially viable for 10 years or less, if it kept running on its current path.⁸

Most companies will not recover from a crisis.

Companies do not recover from crisis.⁹

20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.
94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.

Few major companies have sustained value creation.

Few major companies have sustained value creation:

McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations. This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.¹⁰
Less than 13% of global companies had sustained value creation in the 1990s.¹¹
12% of public companies had sustained value creation from 2002 to 2012.¹²
Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”¹³
John Rekenthaler study of the largest 5,000 US companies stock prices rom Jan 2011, to Dec 2020 showed that after 10 years, 42% ended in the black, 36% lost money, and 22% had disappeared. ¹⁴

Major changes almost always fail or create limited value.

12% of change programs succeed. 38% produced less than half the expected results. 50% diluted the value of the company.¹⁵

Most public companies underperform the indices.

The 1,000 biggest publicly traded US stock from January 2011, to Dec 2020, 80% underperformed the Morningstar U.S. Stock index¹⁶
In 2023, 72% of the stocks in the S&P 500 index, underperformed the index.¹⁷

Most actively managed public market funds underperform the indices.

Over a 20-year period, over 93% of large cap US funds underperformed the S&P 500 index

The average hedge funds underperforms the public market indices.¹⁹

From 2011 to 2020, the average hedge fund underperformed the S&P 500 every year.
In 2007 Warren Buffet made a bet with Protegé Partners that an S&P 500 index fund would outperform a group of hedge funds. Protegé Partners selected 5 fund-of-funds, which were invested in a total of 200 funds. In the 2008-2017 time period, a $1 million investment with Protegé Partners selection would have earned $220,000. The S&P 500 index earned $854,000. In 9 of the 10 years, Protegé Partners selection under performed the S&P 500 index. Warren Buffet won the bet.

Many private equity funds underperform the public market indices.

As of June 30, 2020 – the 10-year US private equity index IRR was 13.77%. The SP& 500 index was 13.99%²⁰

Many venture capital funds underperform the public market indices.

Half of VC funds underperform the public markets.²¹

What are your next steps?

Define the words/concepts/data you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people. E.g. S&P 500 Index 500 vs S&P 500 Total Return Index vs S&P 500 Weighted Index
Do your own fact-based data collection and analysis, using current relevant data.
In order to look at your company’s performance, you need people with the mindset of an investor deploying their own cash. You need to engage with them or with people that have that mindset. Note that the mindset of an investor with their own cash may be very different from and institutional investor mindset.

Footnotes

¹ “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

² “Unstoppable” by Chris Zook, 2007, page 7

³ Accenture 2016

⁴ “2018 Longevity Report” by Innosight Consulting

⁵ “Corporate Longevity”, Credit Suisse, February 7, 2017

⁶ “Scale” by Geoffrey West, 2017, Penquin Press, New York, Page 402

⁷ PWC’s 26^th annual global CEO Survey

https://www.pwc.com/gx/en/issues/c-suite-insights/ceo-survey-2023.html

⁸ PWC’s 27^th annual global CEO Survey

https://www.pwc.com/gx/en/issues/c-suite-insights/ceo-survey.html

⁹ “The founders mentality”, by Chris Zook and James Allen, 2016

¹⁰ Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

¹¹ “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed. Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

¹² Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015. Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million. Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

¹³ https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

¹⁴ “How many stocks beat the indices” John Rekenthaler, April 26, 2021 Morningstar

https://www.morningstar.com/markets/how-many-stocks-beat-indexes

¹⁵ “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23

https://www.bain.com/insights/its-8-to-1-against-your-change-program-how-to-beat-the-odds/

¹⁶ How Many Stocks Beat the Indexes? Unlike the children of Lake Wobegon, most companies are below average. John Rekenthaler Apr 26, 2021

https://www.morningstar.com/markets/how-many-stocks-beat-indexes

¹⁷ https://www.marketwatch.com/story/a-record-share-of-s-p-500-stocks-have-underperformed-the-index-in-2023-as-weirdest-bull-market-in-decades-marches-on-5d3b4cf5

¹⁸ SPIVA U.S. Mid-Year 2023 report

https://www.spglobal.com/spdji/en/spiva/article/spiva-us/

¹⁹ “The S&P 500 index out-performed hedge funds over the past 10 years. An it wasn’t’ even close”

https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/