Tracking the right metric


Last week I wrote about the Facebook IPO and how I felt that for the company the shift to stock price metric tracking was a big deal. I said that there has been a shift from what Facebook was and could be to the broader public to how all of its actions impact the stock price for the company. Today, in an article on Forbes they published an article about the impact of what you measure and how it impacts later choices. One of the things they didn’t mention was how frequently this measure or metric is reported. These all matter.

Looking at Facebook, I think it’s rather clear why Zuckerberg has publicly stated that he doesn’t care about the stock price of the company. Stock price is continually reported and when major milestones are passed, either in the positive or negative, everyone is talking about it. Apparently, Facebook dipped below $30/share today. Is this the end of the world? No, but it does mean that a lot of people have lost a lot of money.

Let’s look at stocks. Do they truly reflect the value of a company? I, personally, don’t think so. There are so many factors that shift the price of a given stock in a week, that it’s impossible for the value of the company to fluctuate in such a manner. However, the price of a stock does impact what a business is able to do. Companies are able to leverage their stock values for loans and interest rates, which means that a company can suddenly gain or lose market capital if the stock market swings for something completely unrelated to them and investors sell of their stock.

Despite the fact that, at best, there’s a loose correlation between the actual value of a company and the price of its stock, CEOs are held accountable to this metric by investors. Now, maybe some CEOs do ignore the value like Zuckerberg plans on doing (I’ve heard Jeff Bezos from Amazon does), however, when it’s continually reported and discussed it likely will change some behavior even if the CEO does their best to ignore the stock price. Even if the CEO does ignore it, in many cases the board or the investors will not. They may take serious action if the CEO does not work to ensure that their metric, stock value, continues to increase.

However, this may drive the wrong behavior. Tracking the wrong metric may be answering the wrong question. What increases our stock price may not be the same answer to what keeps our company competitive. A company that reduces work force to cut expenses for the end of the year, may seriously be hampering their ability to compete over the next few years. The change will likely bolster the performance of the stock in the near term but will likely lead to greater drops in the medium or long term.

Company management should not solely be measured on stock price alone and neither should a company. As much as I dislike Facebook and Mark Zuckerberg, Facebook is a company that actually has more value than simply its bottom line. It is able to create new networks and new places for activists to work. Now is this likely to continue? I don’t know. Could another company come along and beat them at it? Definitely. That’s why Facebook bought Instagram and will likely buy other companies that could threaten their market space.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s