“Good To Great” or “Consistently Superior” ?

Much of my work for the last decade has involved measuring the performance of publicly-held U.S. corporations. There is really only one body of work of which I am aware that sounds remotely similar to mine. The Wall Street Journal has made a few references recently to that body of work, by Jim Collins in his book, “Good to Great,” published in 2001. I decided to acquire a copy and read it myself. Amazon was very helpful in providing me with an inexpensive copy, with no benefit to Collins in the process.

What I found upon reading Collins’ methodology was an odd mixture of quantitative and qualitative bases of analyses. There are a variety of problems with his methods, which I will address both here and in subsequent posts.

To start with, Collins uses cumulative returns over long periods of time to judge a company as “good” and/or “great.”

However, my own research on large U.S. publicly-held companies reveals that among companies which outperform the S&P 500 average total return over a period of years, firms which consistently outperform the S&P index, on average, create shareholder wealth at a much higher rate than companies which earn most of their total returns with a few years of outstanding performance.

This is a very non-trivial issue. If, as CEO, your decisions are guided by the desire to “maximize the present value of the firm”, how do you choose when to maximize that value, which in turn maximizes shareholder wealth? Will the decisions you make enrich some shareholders at the expense of others because they own your company’s stock at different points in time?

It is highly likely that a consistently-superior firm’s great wealth creation is a reward for not forcing investors to be market-timers. Collins completely misses this distinction in his work. Since it is the first screen by which he typifies companies, it therefore compromises the entire remainder of his findings and body of work as described in the book.

I must admit, I was rather shocked that such slipshod and simplistic quantitative definitions of “good” and “great” performances would exist in a book so seemingly well-regarded in the business community. Perhaps it is yet another case of the broad class of mediocre managers and leaders being unable to distinguish “great” work when they see it.

As I read more of Collins’ book, I will post additional comments on the differences in approach and findings between his work and my own.