The Ever-Increasing Pressure on CEOs to Drive Company Profits

The Demand for Profit Growth

Company A's board of directors prefers a CEO who promises to increase profits over one who maintains the status quo. This preference is not unique to Company A; it reflects a broader trend in the corporate world where CEOs are under constant pressure to boost company profits. The rationale behind this is simple: stockholders demand increasing returns on their investments. This demand drives the relentless push for higher profits, as investors expect their shares to appreciate in value over time.

Inflation also plays a significant role in this equation. As inflation causes numbers to rise, companies must continually increase profits just to keep pace. If a company remains stagnant in terms of profit while costs such as production, employee salaries, and facility expenses rise, it effectively makes less money. This creates a vicious cycle where the need for increasing profits becomes a perpetual goal.

The Role of Investors

Most investors buy shares expecting the share price to increase for future profit. This expectation puts additional pressure on CEOs to deliver consistent growth. While some businesses focus on providing steady dividends instead of growth, this approach is less common. The ownership structure of many companies often prioritizes short-term gains over long-term health, further intensifying the pressure on CEOs.

Public companies, in particular, are under more pressure to show increasing revenues to raise share prices. Failing to meet these expectations can lead to the replacement of the CEO or other executives. In contrast, private companies have more flexibility and may not need to increase profits if the owners are satisfied with the current performance. This flexibility allows private companies to focus on long-term strategies without the constant pressure of quarterly earnings reports.

The Impact of Inflation

Inflation increases production costs, employee salaries, and facility expenses annually. Companies must continuously grow to keep up with these rising operational costs. Remaining stagnant in profits while costs rise means effectively making less money. Therefore, the expectation of ever-increasing profits is driven by the need to meet both investor and stockholder demands.

For example, some large companies like Coca-Cola focus on paying out dividends instead of expanding further. Coca-Cola pays out over 75% of its profits to shareholders due to limited expansion opportunities. Despite reaching peak revenues and income in 2011/2012, Coca-Cola's stock price has nearly tripled. This shows that companies can still provide shareholder value through dividends, offering a stable income even when growth opportunities are limited.

The Consequences of Stagnation

Companies that grow profits have a better ability to expand and show longevity. On the other hand, companies that fail to grow profits may be seen as having poor longevity. This perception can affect their stock prices and overall market valuation. Public companies must continuously demonstrate their ability to grow profits to keep investors satisfied and maintain their market position.

The expectation of ever-increasing profits is not just a corporate mantra; it is a necessity driven by the need to keep up with rising costs and investor demands. CEOs who fail to deliver on this expectation often find themselves replaced, highlighting the high stakes involved in corporate leadership. The relentless pursuit of profit growth is, therefore, a fundamental aspect of modern business strategy, ensuring that companies remain competitive and viable in the long run.