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Wednesday, February 28, 2007

Measured By This? 

The market plummet yesterday spotlights an issue that bedevils CEOs and is a major PR problem for them. Many are measured on the basis of their companies' stock prices. But, markets are irrational, as we saw yesterday. A panic in one spot radiates through the world into a major sell-off. There is little consideration for the value of underlying stock.

It has never made sense to me to value a CEO's ability against such variability. The CEO can't control it: No one can. However, we have major shareholders screaming at CEOs to raise their share prices or else. Institutional shareholders are not patient. They want to know now what the CEO is going to do in the next quarter to add value, and they will complain if it isn't enough. Sadly, investor relations plays into this madness rather than ameliorating it. IR officers these days are marionettes on strings being moved here and there by demands from large shareholders who will dump the stock in a minute if they get the right price.

There needs to be more common sense in dealing with markets. There isn't now.

Comments:
Your concerns about measuring CEO performance by tracking stock price is especially valid today when far too many investors play the stock market more as a casino game than as true investors in a company. Rapid-fire trading has replaced long-term investing and this entirely changes the dynamics of the market.

To me, this is neither good nor bad, but merely a fact. I can't change this any more than a CEO can control the price of his stock. (And if anyone can control the price of a stock, they're doing something illegal.)

But it is worth noting that on a day like yesterday, many company stocks move down not because of any change in the fundamental outlook for the company, but merely because of market intertia.

Unfortunately, there is an historical element here. Even before the era of computerized trading and a broader atmosphere of "betting" versus "investing," the stock market exhibited these characteristics.

On days like these, IR folks can do little but watch. You can take steps to reassure large and small shareholders alike, but the mass media will have a greater impact on the market as a whole than anything you can do for your company stock. This is a day when the leading voices are the ones that will be heard above all others.
 

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