A misleading obsession with share prices
I have been of the opinion that a total obsession with share price – and the associated view of maximisation of shareholder value is eroding the western economy faster than any other cause. One of the first lessons I learnt when I joined for my MBA was that good profits is a natural consequence of doing good business. But what we are seeing these days is everythign is being manipulated so as to achieve higher quarterly share prices. A huge amount of research has gone into actually figuring out how the immediate management actions translate to increase in shareholder value.
The recent discussions on how US economy is growing but not jobs – I find it a bit ridiculous. The measurement of what economic growth is I think completely wrong. It has nothing to do with real economic growth, but more to do with the perceived economic growth, which is what the shareholder value is all about.
I read this article recently in Financial Times by John Kay. He talks very rightly about this situation.
Hope one day I can do a bit of research to prove my thoughts 🙂
In my own consulting practice, I try to get executives to realize there are four basic directions for-profit companies can point to as a goal:
Any of the first three are a viable strategy. The last, as you noted, is a by-product of effective pursuit of any of the other three. If an organization makes a choice to make the last their goal, they are doomed to fail in all/any of the other three.
On the spot Jeff!
But I guess one of the reason why the fourth item on your list is the most talked about element is perhaps because of the ease with which it can be quantified and how easy it is to show before-after effect of some action. In none of the other areas thats the case.
In fact if you look at the surge of the procurement function in many organisation, I think the main reason for that is the buyers have started to quantify their contribution in terms of bottom line.
So the question is is there some kind of alternative that investors and managers can have to look at real performance in a meaningful way? Lots of ideas I guess have come and gone EVA, Balanced Scorecard and so on. But nothing really that could lead to retiring shareholder value as the key indicator of performance of managers and companies.
Coolness:
Sort of measurable. The net margin that Apple gets on iPods and Macs relative to others’ music players and computers is "coolness". From a pure numbers p.o.v, Apple could run a comparison on those unit counts against the nt norm for each.
Customer happiness:
Subtler, but compare retention rate to industry norm and factor in cost of selling to existing customer with product sold to existing.
ALSO
I neglected to mention another key factor you can run a company on — almost never chosen in U.S.: employee satisfaction. That you can measure comparing turnover to industry/regional norms and calculate cost savings in recruitment/initial training/learning curve.
Keep thinking about this topic. If corporate business is ever going to be effective, they are going to have to escape the fetish of "shareholder value" as an *end*, without forgetting that’s it’s a vital symptom of success and not to be ignored.
Indeed, the future of corporations in a way depends on how they can become sustainable from a holistic point of view. Looking ahead while keeping the financial perspectives in view.
But as you yourself point out measuring some of the elements is rather underdeveloped for now. There is a need for a simple to use and quantify balanced scorecard like tool that anyone and everyone can use to justify their activity. That will help change the tide.
Hi Pramod,
Reached your blog through Surya’s.
Just wanted to say your comment on Surya’s blog about how companies are identifying the Top-20, Mid-70 etc. is very much a reality in my org. We do this exercise every year to identify high potential employees. We also use it to identify mid-level employees who need resources/training so that they can move to the Top 20. BTW, we are not forced to put someone in the Top 20. If we think no one from our team qualifies, then it’s okay to say so as long as we have consistent evidence. I think this is a good tool to get a macro view of employee strengths and weaknesses.
However, the next logical step for me would be to use this information for resource planning i.e., if i am a manager managing one Top-20 employee but 3 Mid-70 employees, then, shouldn’t my team count as just 3 or 3-1/2 (in man hours) rather than 4 given that some of my team members are not able to produce results at desirable levels? This is the aspect I find missing in most companies….well, at least in mine. Â
Share price is far from perfect yet it’s as close as you can get to a metric when evaluating a company from the perspective of public markets.
In order for one to place the "costs" perceived at some company level in a better framework, try to switch perspectives and adopt the view of the anonymous potential investor looking at several companies or the view of the market as a whole over time and you’ll see the "benefits" of such imperfect system.