Corporate Performance and Scale: Citigroup

Yesterday's post on executive compensation and increasing sizes of large corporations has had me reflecting the issue of size for the last day.

What should we mean by corporate "size?" Assets? Revenues? Income? Employees? Market share?

It's not a trivial issue. I looked at all four of the internal corporate bases for scale when I conducted my proprietary research on corporate performance. However, after reading The Economist's report on executive pay, and noting the steady upward trend in corporate size, in terms of assets, I began to wonder if we have now crossed over the tipping point of size, as it relates to companies' ability to achieve consistently superior total returns.

I believe that my ideal company would be small, in terms of employees, but large in terms of revenues, income, and market share. When asset sizes growth is accompanied by employee growth of similar rates, I suspect that the seeds of faster unraveling of that growth are sown.

When I opened this morning's Wall Street Journal to read the right-hand column piece about Citigroup's woes, and Sallie Crawcheck's re-assignment, I immediately thought of the executive compensation topic, and corporate size.

Chuck Prince has failed at managing the unwieldy financial services behemoth that his predecessor, Sandy Weill, glued together. It's pretty obvious by now that it is simply too large and diverse for any one CEO to competently and effectively run in a manner which rewards shareholders with consistently superior total returns.

Thinking of size in another company, GE, and my post last August, here, I believe there's a case building for more corporate spinoffs, and fewer mergers.

There seem to be at least three colliding trends here.

First, we have ever-larger corporations, which show no evidence of being able to produce more companies which can consistently deliver above-market-average total returns for investors.

Second, we have conspicuous examples of very large, multi-unit, diversified conglomerates, such as GE and Citigroup, which are ineptly run by CEOs who succeeded the architects of the current confiruration.

Third, we have the increasing availability of technology and collaborative ventures which allow smaller, more nimbly-run firms to get access to needed technologies, products, or markets, without having to necessarily 'acquire' the assets and employees to do so. And to use advanced communications, logistics, transportation and marketing technologies to manage what they have more productively and efficiently.

The result, ideally, should be rising market values, market shares, and total returns for companies which do not grow assets or employees as fast as they grow revenues and incomes.

In a manner of speaking, is this not what some of the private equity buyouts are effecting with their purchases of poorly-performing, large companies?

I believe we are now seeing a period in which the escalated sizes of compensation packages, as discussed in The Economist's report, to reflect increasing corporate sizes, are drawing attention to the fact that the performances of such organizations are flagging. And that smaller, better-managed entities carved out of these merged giants would probably be more sensitive to markets, customer needs, competitive forces, and shareholders. This could result in more well-managed, smaller, but still above-minimum-economic-sized firms in which shareholders could invest.