Over the past two decades, corporate America has become obsessed with “shareholder value.”
This narrow measure of company performance, which evolved into a religion in the 1990s, holds that what’s good for a company’s stock price is also what’s good for the company, the company’s customers and employees, and the economy. So, today, the performance of companies and CEOs are judged primarily by their stock prices. capitalising on this theme, Bloomberg has put together a list of CEO “underachievers”–big company CEOs whose stocks have done the worst relative to the broader market since the beginning of each CEO’s tenure. Meg Whitman of Hewlett-Packard sits atop the list, with HP’s stock having underperformed by a startling 30 percentage points since she took the job. James Gorman of Morgan Stanley and Brian Moynihan of Bank of America hold the 5th and 6th slots, with both banks having struggled in the past couple of years. And the staggeringly well-compensated CEO of Occidental Petroleum, Stephen Chazen, owns a place in the top 10. Although some CEOs certainly deserve a place on an “underachiever” list (Chazen jumps to mind), the problem with judging CEOs this way is that it encourages CEOs to make decisions that might pump up stock prices in the near term but actually hurt them over the long-term. It also encourages companies to treat “shareholder value” as a much higher priority than the other kinds of value that great companies create: Value for customers, value for employees, and value for society. At most companies, for example, firing employees and cutting research and development expenses will increase this year’s earnings per share–something that Wall Street generally applauds. But firing employees and cutting research and development spending this year may also depress growth two or three years from now, when the products that this extra investment might have produced would finally have hit the market. Thus, in the interests of pleasing impatient short-term shareholders, the companies might be shortchanging their long term performance. One of the problems with the U.S. economy, in fact, is that American corporations have become so obsessed with near-term profit growth that they’re achieving it by underinvesting in the future.
American corporations are currently posting the highest profit margins in history, which they have achieved primarily through cost-cutting and efficiency. At the same time, however, these corporations are paying the lowest wages in history and making capital investments at a strikingly low rate. (See chart below).
The record-high profit margins that this cost-cutting and low investment have produced have helped drive the stock market to a record high, but they are also arguably hurting America’s long-term economic growth (and stock performance).
For companies in the midst of an implosion, meanwhile, as Hewlett-Packard is, judging a CEO by the company’s near-term stock performance seems even sillier. HP’s business was collapsing when Meg Whitman took over as CEO. The business is still collapsing, but the company has also begun to set appropriate expectations and work its way out of trouble. In HP’s case, a successful turnaround will take several years. So to judge Whitman’s performance based on the stock price thus far seems myopic at best.
A company’s relative share price over the long term–5 to 10 years or more–is certainly one of the measures with which a CEO’s performance can be judged, especially if the stock price is viewed in conjunction with other measures of corporate value creation. But obsessing about near-term stock performance at the expense of customers, employees, and long-term investment is short-term thinking. And it will just continue to hobble the economy. SEE ALSO: Great Companies maximise Value, Not Just Profit
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