If you ask any CEO of a company, he or she would tell you that their main objective for running the company is to maximize shareholders’ value.
Maximizing shareholders’ value is subjective because as shareholders, we all want different kind of things. Some want better sustainability reporting or others may want higher dividends. There are probably another group who wants the company share price to ascend upwards in due time. But does share price equals to maximizing shareholders’ value?
There are researchers who went around different companies to interview their CEOs and they divulged that they get mounting pressure to increase the share price of the company and inflate the market capitalization. For anyone who are unsure what market capitalization is, they are basically the total value of the number of shares the company issued multiplied by the share price the company is trading. As you can see, there are multiple reasons why the market cap (share price) is important to the management – tapping institutional investors, incentives, influence of market intermediaries, management bonus, etc.
The problem with trying to influence the market share price is it depends a lot on a whole other factors – some systematic like fundamental changes while other unsystematic like macro or black swan events.
The share price of a company can be decoupled from both weak and strong fundamental performance for instance. By weak earnings or changes to the operational positions, investors might value them at a trading range lower than their historical because it is now more riskier than the norm. Even when earnings or fundamentals are getting stronger, there will be a cycle of misevaluation attached to it. For instance, Osim or Super Group. This starts when the company captures the attention of the strong institutional investors or other capital markets, snowballed the effect to other smaller brokers and retail investors and as a result the price gets pushed up higher and higher to become overvalued. In the premium building process, the management will have pressure managing the share price and expectations of the market and might do things that will meet the short term performance, which can be detrimental to their long term success.
The long term costs of focusing on the wrong thing is detrimental to the shareholders who suffer direct losses from owning part of the shares of the company. In the correction process, shareholders usually gets punished severely as they see their company shares dived down to the point of no return, usually. It takes an elevator to rise slowly but dived down by jumping.
In this regard, we can perhaps attribute maximizing shareholders’ value as achieving the fair market value for the company. By fair value, I mean achieving a market capitalization that accurately reflects its sustainable underlying performance of the company. It implies a very different objective from the management as they have to manage the expectation of the market and ensuring the market does not overly placed a premium on their valuation.
I guess when that happens, long term investors get what they deservedly get by staying vested with companies such as Vicom and Boustead where shareholders are rewarded handsomely over a period of time.