Amongst the most common advice given, by most investors, to managements of smaller (or sometimes even larger) listed companies is “Please don’t focus on the stock price movement. Your focus should be on the business and the capital market will automatically reward performance”.
Nothing really wrong in that… I guess.
But, in reality, this is easier said than done. And there couldn’t have been a better example than the most-talked-about topic of yesterday, Elon Musk wanting to take Tesla private! Well well. Having IPO’d in June 2010 by raising $226 mn, with a dream to revolutionize the automotive industry with disruptive products, Tesla catapults to a market capitalization of $64 bn in a short span of 8 years. And it already wants to go private?
Anyways, back to my point.
That a $64 bn market cap company, from a developed market, claiming to get “distracted” by a volatile stock price and “pressurized” to take decisions on account of quarterly earnings is proof in itself of how, in reality, managements are able to stay defocused/distanced from capital markets and its implications. This para from the mail sent to Tesla employees sums it up:
“As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
In this scenario, do you think its practical on our part to expect managements of smaller companies, from emerging markets, to completely disassociate themselves or detach themselves from their stock price? Thanks to the spectacular run that markets, back home, have witnessed over the last 15 years, most Indian managements have been ‘educated’ on what they need to talk in their interaction with investors. While several managements don’t broach stock price related topics, there are others who claim ignorance on their stock price behaviour ;-). In my opinion, there’s nothing wrong in managements’ keeping a tab on their stock price, as long as they don’t over focus on this or take business decisions ONLY to appease the capital market participants. Rather I have come across a few instances where the managements’ ambition of seeing their organizations at multi-billion $ values have forced them to discontinue improper practices (over-invoicing, fund siphoning, mis-allocation of funds etc) they used to follow when they weren’t answerable to anyone (private). And this is true for even companies which have been listed for a while and a plummeting stock price has forced them reverse bad business decisions. The promoters of VRL Logistics reversing their decision to diversify in the airline business OR the promoters of Vakrangee Ltd taking a decision to not invest in direct equities anymore by using its treasury funds OR the promoters of Raymond Ltd reversing their decision to sell JK House to promoters and extended family at a substantial discount – are some such examples that come to my mind.
Happy to hear your thoughts on this.