Why Should Twitter Need to Keep Growing?

But lost amid this crisis has been the fact that Twitter is finally turning a profit. The company actually made almost $10 million last quarter, after years of losses. You'd think that would be a cause for celebration among shareholders, not a stampede to exit Twitter's stock, causing $6 billion in wealth to vanish in a single day. 

 

If Twitter's profit is fleeting and growth is essential to keep making money, than I can definitely understand all the agitation here. But we know, of course, that many perfectly profitable companies are punished all the time by investors for not growing those profits fast enough. Simply making money is not enough. You need to be making more and more money every quarter.

 

Twitter's a great service, with over a half billion users -- nearly a tenth of the planet -- and it could make steady profits for years to come, only to find its stock in the doghouse. 

 

I wish I could say that greedheads on Wall Street were inflicting this unfair punishment, but it's also you and me -- and millions of other investors -- who want high returns on our stocks so we can retire securely. And the stock of companies with faster growth is the stock that goes up.

 

Tons has been written about the evils of investor capitalism, an economic system where impatient shareholders drive the corporate train, not managers thinking about the long term. If you want to understand why companies do so many yucky things -- like fill your Facebook feed with ads or cut corners on environmental rules or replace their in-house janitorial staff with contractors who pay janitors much less -- look no further than the imperative to boost quarterly earnings. Executives may feel they have no choice but to do those things, even if profits are healthy and steady. Otherwise shareholders will bolt and those executives will be replaced. 

 

Of course, the profit imperative yields good things, too: like an unrelenting drive to innovate. In fact, Twitter is a little unwieldy to use and, thanks to that stock hit, its CEO is pledging to move urgently to create a "better Twitter." If Craigslist were a public company, yes there'd be annoying banner ads, but it would have scrapped that famously jumbled navigation system long ago -- and improved in other ways, too. Instead, Craig Newmark is making plenty of money, users are happy enough, so the company doesn't bother. 

 

It's worth recalling that the golden age of managerial capitalism peaked in the late 1960s, right before American companies started to get their asses kicked by Asian and European competitors. If Detroit faced the kind of investor pressures that are commonplace today, would it still have been crushed by Toyota and Honda? Maybe not. 

 

So I get the value of active and impatient shareholders. But we need the right balance here. A company like Twitter might be best off investing heavily in long-term research to develop new products or better understand user behavior, as opposed to whacking staff and bombarding us with more sponsored tweets, but the market wouldn't have the patience for that. Which means that the company's leadership has no incentive to take the long view. If things don't turn around in a few quarters, Dick Costello may be gone. 

 

Reformers have long been pushing various ideas to combat short-termism -- from changing how stock earnings are taxed or how CEOs are compensated to remaking corporate governance. (See, for example, this 2009 report by the Aspen Institute.) But even though plans to temper investor capitalism often have bipartisan support, they haven't had many champions in Washington. 

 

We've written here often about the need for a next wave of financial reforms to take up where Dodd-Frank left off. Expanding the time horizon of corporate America and Wall Street should definitely be a key priority in that wave.