Toyota’s Experiment With ‘Patience Money’ – Strategy With RS
Wall Street is extremely ‘impatient’ with corporates, who do not live up to its expectations – it ruthlessly beats down their stock. This compels corporates to take decisions, which will pander to Wall Street’s ‘greed’.
In the process they take ‘short term’ decision to drive up the stock price & make the company venerable in the long run.
Toyota is attempting to discover an antidote to this malady so that it can inoculate itself against it. For that it is experimenting with raising ‘patience’ money.
Gaining access to ‘Patience’ money will entail issuing stocks by the company , which Toyota has christened ‘Model AA’ – it is named after its 1st passenger car. Although it is called ‘stock’ but it behaves more like a convertible bond. It will have a lock-in period of 5 years during which Toyota will give a guaranteed dividend, which will keep on increasing every year. At the end of the 5th year (maturity period) the holder of Model AA will have the option of either redeeming it at issue price or convert it into equity.
What benefit will accrue to Toyota & the investors? ‘Patience’ money will shield Toyota mangers from taking short-term decision to meet quarterly expectations & encourage them to take long-term decisions ,over 5-year horizon, which is in favour of company’s long-term health. Result – The Company has a better chance of emerging stronger at the end of 5th year. Which will of course bring smile on the face of investors.
What do you think of the concept of ‘patience’ money? Will it catch on?
Business Lesson for us: We should attempt to take decisions which will make our business stronger in the long run. And therefore take a pledge not to take short term decisions which will be harmful to the company’s long term health – just to meet investors’s expectations or make them happy.
In this series, Rajesh Srivastava, Business Strategist and Visiting Faculty at IIM Indore gives you a regular dose of strategy case studies to help you think and keep you one step ahead as a professional as compared to your peers. Rajesh is an alumnus of IIM Bangalore and IIT Kanpur and has over 2 decades of experience in the FMCG industry. All previous Strategy with RS posts can be found here