The shrinking life expectancy of companies

A Boston Consulting Group (BCG) study of 35,000 listed companies in the US has shown the average life span of companies has "significantly decreased" from just over 55 years to less than 35 years.

The study looked at companies failing as a result of insolvency, liquidation, merger or acquisition and other causes, which BCG states are unintended and associated with management failure. It found that almost one tenth of listed companies in the US fail each year. This is an astonishing five-year exit risk of 32 per cent compared to 5 per cent in 1965.

The US experience may provide some guidance for both listed and unlisted companies in Australian. The US study found the "mortality risk" occurred relatively equally across industries and across sizes and ages of businesses. That means all companies have similar risk.

The BCG study compares the pattern of failures to the cycle experienced by forest and ecosystems. This cycle, known as the Holling Cycle was also used by Dr Robert Kay in his recent study about good governance.

BCG also contends that the dramatic fall in the life of companies is due to the booms of the 80s and 90s in which a large number of companies were listed – some failed and some survived. The survivors then disrupted the established businesses, whose survivors then acquired smaller players.

The study found that rapid falls in revenue resulted in more exits, but that this was closely followed by rapid growth. Not surprising though was that lower overall EBIT was generated by younger companies that exited.

BCG states a key to company survival is to renew governance models and "this means setting up the company's board structure and decision mechanisms with a view to endurance". They suggest four key governance principles to follow:

  • Cohesion – A clear and common mission. Plan for succession.
  • Prudence – Avoid severe risks. Focus on the long term rather than immediate total shareholder return.
  • Adaptiveness – Ensure the culture is inquisitive, supports experimentation and diversity of perspectives.
  • Embeddedness – Get the business socially embedded. Make it sustainable, transparent and connected.
Read the full study: Die Another Day: What Leaders Can Do About the Shrinking Life Expectancy of Corporations.