Value of Your Company, If you are a senior executive of a publicly held company

If you are a senior executive of a publicly held company, you probably pay significant attention to the standard financial metrics of the capital markets: your share price and earnings per share. We’d guess you are probably paying too much attention. Financial advisors and the media often make the same mistake. They regard your share price as the ideal target of your strategy and the primary reflection of its effectiveness.

Of course, share price matters, as do your shareholders. But your share price is, by its nature, an output: a complex, rolled-up reflection of company performance, conjecture, fickle asset-class preferences, risk appetite, ownership mix, supply–demand equilibriums, and fluid expectations held by millions of shareholders who can change their minds in a millisecond. Good luck trying to manage that.

Moreover, your share price is subject to a more fundamental paradox that affects every publicly traded company: the paradox of market equilibrium. The better your operating results, the harder it is to create shareholder value. Not only is it harder to outperform the market, but you run a greater risk of underperforming the market.

This paradox exists because millions of shareholders base their expectations for future performance, at least in part, on prior performance. If you continuously deliver exceptional performance, investors expect you will continue to do so. They will price the value of that future performance into your share price.

To create shareholder value by generating actual stock returns, you must exceed the embedded expectations of your investors. But if your operating performance is good, they already expect you to improve, and it is harder to surprise them. Do even better, and they will expect even more. Like the Red Queen said in Lewis Carroll’s Through the Looking Glass, it may take all the running you can do just to stay in the same place.