When Emotion Becomes a Barrier to Logic the Resulting Chaos Always Promotes Mediocrity


The SME (Small Medium Enterprises) market is an exciting place to monitor and work with. New companies starting out and striving to make their mark, others finding the going rough and trying to solidify their position, there's a certain amount of M&A activity (not enough in my opinion), shareholding changes and then of course there’s the real growth companies. It used to be that the availability of capital for growth was a problem but that's certainly not the case now with capital funds readily available either by way of financial instruments or share investment. Altogether a market that certainly is extremely active and gets the adrenaline pumping. It’s been said before that because the SME market is the feeder into the larger economic picture the actual overall economic activity of a region can be measured by the size and activity levels of its SME market.

However, while this market churns away with extremely high activity levels it has to be acknowledged that very few SME companies actually break out of the SME mould. Those that do subsequently hit the big time and move on with IPO’s and become publicly listed companies. A lot of SME's seem to stagnate at a certain level and never push through the barrier of mediocrity. Surely, if a region’s economy is to continue to grow it requires more companies to measure success in quantum numbers rather than be satisfied with single digit growth.

Now there are many varied reasons as to why SME's don't achieve their full potential. I certainly don't intend to canvas them all with this posting but one issue that really troubles me and contributes to lower success rates in this market segment is what I call the “emotion factor” of the original and most likely founding owners. Let me explain.

The life cycle of an SME normally commences with a single shareholder and while the company organisationally grows, shareholding remains constant until certain staff are given minor shareholding as an incentive based on the retention factor. This is a time of shareholder stability as the company continues to grow. Then the need for new capital arises so outside shareholders are introduced but with the founding shareholder always holding a majority and by retaining their Chairmanship position controlling the board. Now the company has reached the point where if it is to make a quantum leap in both size and profit it requires a major injection of capital via issuing new shares. This is where emotion becomes a barrier to logic as the original founding shareholder realises they will no longer be the major shareholder in their company, nor the Chairman and possibly not even a board member. The logic of their actual share value increasing and therefore their wealth being seriously enhanced is over ruled by their emotional pull to the business they created. This is particularly evident when family trusts are involved.

Such a problem is difficult to address and becomes a real barrier to growth. The founding shareholder may try other methods of raising capital to ensure their majority position is maintained but this can lead to financial overreach with dire consequences for the company further down the track. Naturally it could lead to lost market opportunities and/or the loss of their competitive advantage in the market place. On the other hand, what normally happens is that the major shareholder/founding owner accepts that the current operation is, from their personal point of view, satisfactory and serious growth strategies are put aside and the business simply plateaus. The downside of such action is that eventually the company will either be ripe for a takeover or will simply fade away.

Addressing people issues when it comes to egos and emotions associated with business activities can be difficult but I've always subscribed to the notion that it's a challenge rather than a barrier. However it’s really frustrating when you can see the benefits for all involved but “emotion becomes a barrier to logic”.

A lot of SME's seem to stagnate at a certain level and never push through the barrier of mediocrity.

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