Marc Beniof’s words (as noted in a post yesterday, here) sent me thumbing through a few more books in my library. What have other CEO’s had to say about their stock prices?
From the excellent book, Built From Scratch, by Home Depot co-founders Bernie Marcus and Arthur Blank, come the following quotes. (Which, by the way, in no way diffuses my enthusiasm for this book. When studying retail, it is as important to read this as Sam Walton’s Made in America. No question!)
The Home Depot has always been a high-multiple stock. Part of the explanation for it is that the financial community trusts us. (page 183)
Anticipating a hit to earnings from a bad acquisition in 1984, the early days, CEO Bernie Marcus went to the Wall Street throne to plead his case for not punishing the stock price:
We arranged a series of meetings in New York in which Bernie and Ron Brill, every hour on the hour for a full day, came clean with fund managers and analysts who covered our company. Standing before each group, Bernie stood up and bluntly announced, “I am the CEO of this company, and I am a schmuck,” in precisely those words. “We screwed it up…”
After that, Bernie told them about the corrective measures that had been put in place to prevent a repeat in the future. He assured them that the growth and profitability would continue. And they believed Bernie.
…We disappointed the Street for the first time…Suddenly, analysts said we didn’t know what we were talking about. It was the nadir of the business. (page 184)
Finally, the following quote calls into question whether the tail was wagging the dog. How much did attention from Wall Street influence their decision to expand in the Northeast? Don’t get me wrong. I understand that stock price plays a big role in a company’s ability to raise capital for growth needs. There is a reality to wanting the stock price to be high versus low. I get it. But the slippery slope of this mentality can be frightening.
During the first three years of our Northeast invasion [store expansion beyond its Southeast base], 1988-91, our stock just went crazy. Getting a presence to that part of the country exposed us to Wall Street in living color. For the first time, analysts and brokers saw how busy the stores really were. Seeing is believing; our stock price once again was climbing upward. (p197)
There is a disconnect here. It’s creating some serious cognitive dissonance for me. On the one hand, these CEO’s are smart and savvy. They don’t need a lesson in Stocks 101 from me…they understand that the stock price is not a direct reflection on the performance and/or promise of the business. I can’t imagine many CEO’s actually subscribe to the theory of efficient markets in which the stock price is somehow magically aligned with the true value of the business. No, they understand that the stock price is subject to whims, fancies, and misunderstandings of investors.
And yet, there’s this other hand. They keep playing to it. That makes sense in the Home Depot case from 1984 as they desperately needed capital to grow the business, and they saw the best source of capital as issuing new stock or new debt, both of which would be affected by the current stock price. If it plunged, their access to capital would be cut off.
I get that. I understand that when you need their capital, you’re hostage to the Wall Street game. You have to go to fund managers and analysts from time-to-time with hat in hand.
What I don’t get is that they often seem to be struck by the bug themselves. They tend to get caught up in the price, as if it were somehow the only scorecard by which they can measure their success as people in business. And worst yet, they allow (and perhaps encourage) their employees to do the same thing…to get excited by a rising stock price and to believe they are somehow doing something wrong when the price goes the other way.
That may be true some of the time. Sometimes (oftentimes even) the stock price does react to legitimate bad decisions by people in the company. But sometimes it just moves up and down, completely disconnected from the reality of the business.
I have no immediate way of understanding why many CEO’s do what they do. I’ll punt this discourse on the complexity of human psychology and just revisit the quote from Jeff Bezos that got it started (here). It seems wiser the more I think of it:
We have three all-hands meetings a year, and I’ll tell people that if the stock is up 30% this month, please don’t feel you are 30% smarter. Because when the stock is down 30% a month from now, it’s not going to feel that good to feel 30% dumber.