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dreamdu5t

Why is the CEO credited with market capitalization? They don't have anything to do with it.

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Market cap = share price x shares

How would you measure a CEO's performance of a public company if not share price?

>"How would you measure a CEO's performance of a public company if not share price?"

Stock price is most certainly not the only dimension by which to measure CEO performance. In fact relying solely on that metric is exactly what fosters our current culture of absurd CEO compensation packages.

Both "Operational Impact" and "Leadership effectiveness" are equally important considerations[1].

Quoting from the source:

"Operational impact. Operational impact refers to the CEO’s influence on the company’s effectiveness in operational areas, such as customer satisfaction, new product introduction, or productivity enhancement, and how well the firm implements its strategy. Operational impact measures often give a better indication of a company’s underlying potential to create value because they are directly related to the immediate stock price, which is subject to market-wide volatility. While still subject to external and internal forces outside of the CEO’s immediate control, this type of performance is more closely related to the CEO’s actions.

Leadership effectiveness. Leadership effectiveness addresses how well the CEO carries out his or her responsibilities, both in terms of executing specific role responsibilities—identifying a successor, meeting with key customers and investors, developing a long-term strategy—and the quality of those actions—communicating with external stakeholders, energizing the organization, and gaining the confidence of investors.Rivero and Nadler (2003)."

Source:

[1] https://saylordotorg.github.io/text_corporate-governance/s10...

Sure, but these factors, at least in theory, are reflected in the stock price.

I guess not necessarily. Maybe given a lot of data, over a long period of time, you could see some of it reflected. But factors such as overall stock market performance, growth due to the market itself, like if mobile grew 500%, you'd expect all stock related to that market to grow also. You might also have artificially inflated bubbles, though you could argue a CEO that can inflate the stock might be good, if you're looking into a quick turnaround, in the long term, it could hurt the business more so.

Even with those out of the way, it undermines the contribution of other employees, like CTO, CFO, the VPs, etc. Unless the CEO was the one who contributed to their recruitment.

Over the long term the delta between company X profit and similar company Y's profit. Granted this does not really work over less than a decade, but if BP, Shell, and Exxon move in lockstep then none of the CEOs are doing an exceptional job even if all three companies are wildly profitable.

>delta between company X profit and similar company Y's profit

If that were true then Amazon is doing terribly under Bezos.

Profits over time is an incomplete metric for measuring company success because CEOs can decide to invest it all back into capex.

That depends on how you calculate profit. Amazon has growing assets which is profit even if they don't pay taxes on their profit.

This is not limited to physical assets, if you do R&D and produce a valuable drug patent then you don't need to pay taxes on that value yet, but actual value was created.

Stock is at best a proxy for what you actually care about.

You're mixing concepts:

* Profits = Revenue - Expenses

* Assets + Liabilities = Equity

New asset purchases are expenses and not profits. Equity (total market cap) is an estimate of the value of the company, including assets and outstanding liabilities.

If you rent out a property for 30 years at same rate as your total expenses including mortgage payments then sell it after that point your profit is not actually zero for 30 years then the full value of the house on the final day. There are actually a lot of different ways you can record such a transaction each of which have different trade-offs.

This is also why asset depreciation is considered an expense. https://en.wikipedia.org/wiki/Depreciation However, it may also be recorded as income with the initial purchase being considered an expense.

PS: There are an insane number of useful ways to run your personal books, and a few legally required methods in various situations. But, IMO your goal should be match the underlying economic situation of your enterprise not simply move numbers around based on an abstract formula.

Assets - (External) Liabilities = Equity

How do you differentiate that from "all three CEOs are doing an exceptional job"?

Well it's by definition not exceptional if all comparably placed CEOs are performing the same. :) But, nitpick aside, I agree there's a flaw here, since it doesn't differentiate between the CEOs performing "to spec" or under spec. Though, when you get to have an agglomeration as big as a large multinational, there have to be serious missteps or moments of brilliance to really differentiate a bad and good CEO. Otherwise, it's hard to tease out the relationship between company performance and market share, entrenched employees, quality of invested capital, etc.

They would not be moving in lockstep.

Basically, companies are never actually identical so optimal moves for every company is going to be slightly different and this will compound over time. However, if each company is making the same moves then and getting the same results then none of them are making optimal choices.

Consider defense contractors may all be in the same market, but they have different contracts. Farms on the other hand are selling a commodity and are often mostly just at the whims of market forces.

It is much easier to compare companies that sell identical commodities.

Well let's start with that logo redesign.

http://www.reuters.com/investigates/special-report/usa-buyba...

http://www.netmba.com/mgmt/ob/motivation/mcgregor/

For some reason, people used to think a track record of profits was relevant.

That's pretty outdated :-)

PROFIT.

> How would you measure a CEO's performance of a public company if not share price?

Wow... um, how about profit, it is a business after all. Business isn't about the share price.

Profit is a terrible metric. Because profit = revenue - expenses, and the easy way to increase profit is to cut expenses like R&D. Good companies pour nearly all their free revenue back into expansion and R&D, which is why Amazon has small profits but a constantly growing lineup of popular products and services.

In that case, why not go the extra mile and register as a nonprofit? After all, if you are not generating profit, why go to all the trouble of having shareholders and the like?

Reinvesting profit doesn't make you not profitable, it just means you've decided to grow with your profit rather than extract it. Amazon doesn't have small profits, they've just plowed their money into growth.

You're confusing profit with revenue. By definition Awazon will have small profits if they put most of their revenue into growth.

No, I'm not confusing anything. What they're putting into growth are undeclared profits, that's a simple fact. When a business subtracts the cost of doing business from revenue, the remainder is profit, regardless of whether that profit is declared as such or whether it's put back into the business to grow it and thus avoid taxation. They could not "grow" if there weren't any profit left over after costs, just because you don't declare taxable profit doesn't mean you didn't have profits.

Business is almost always all about share price for the shareholders, who are the ones who set a CEO's salary (via the board). A drop is share price can diminish or even wipe out any dividends a company might pay out of profits. Many companies don't pay dividends at all (reinvesting profit for growth), so the only possible gain a shareholder has in those cases is through capital gains from selling stock.

> Business is almost always all about share price for the shareholders

And there's what wrong with the world in one short sentence. The market was supposed to be about raising capital so companies could go out and earn profits, the company shouldn't worry or care about its share price in the secondary market, it should be taking the capital and making good business decisions that lead to making profits. Letting the share price be the metric that decisions are made on is letting the tail wag the dog and leads to short term quarterly thinking and bad decisions all around; it's not how a good company is run. Profits lead to good companies which lead to good share prices, you aim for profits and good share prices are the result, not the other way around.

well, I was trying to be specific :) - 'the shareholders'. It's not (usually) that way for 'regular' employees and customers, who typically care more about the mission of the venture (if they care at all :) ). But in the context of CEO/executive pay, the shareholders have an enormous influence - they're the ones providing the incentive and direction, in their own self-interest. That's the way the system is designed from bottom to top.

Some companies controlled by a small number of investors (typically founders) may have other more socially constructive priorities, but I think in even many of those cases, it's lip service, and the real reason those things are priorities at all are because it's 'good business' (it will be better off for the shareholders financially).

> the company shouldn't worry or care about its share price in the secondary market

But "the company" is literally owned by people who buy & sell portions of it in the second market. There are only two reasons to buy shares of a company: dividends and price gains. Owners of company first and foremost want their investment to appreciate not depreciate, ergo company cares about share price first and foremost.

And that's the problem of managing a public company, share holders care about the wrong thing; they've confused the tail with the dog which is what leads public companies to do stupid shit that hurts the business long term to pump up the share price short term. Look, I don't need you to explain how companies work, I'm fully aware, you don't seem to realize I'm critiquing how they work, I'm not lacking in understanding, I'm simply pointing out how the incentives are perverse and lead to companies doing the wrong thing.

Market cap not something attributable to the CEO, anymore than it's attributable to the Janitor. Nowhere in that equation is the CEO actions. They don't determine share price or number of shares. Share price isn't correlated with CEO actions.

Janitors at Yahoo also presided over a 33B growth in capitalization.

> Share price isn't correlated with CEO actions.

> Janitors at Yahoo also presided over a 33B growth in capitalization.

So then who's responsible for making the changes at a company that result in investors paying more for a piece of the company? Investors are willing to pay more for companies with cleaner toilets?

Ask the folks over at Alibaba, they'd be the ones. The main CEO contribution was holding onto an appreciating asset. Success through inaction -- my life dream.

Do you understand how management works?

You're expressing a very naive view on the subject.

And perhaps a deeply cynical one.

How is it naive, exactly?

If Marissa Meyer orders everyone to work from home, then that can be attributed to her. She can take credit for that. It was her action. But if the stock price goes up $5 today, there's no way to show it was a result of ordering everyone to work from home. If you want to make the argument that Meyers actions led to 33b in market cap growth then make that argument. What did Meyer personally do that caused the growth in market cap, and how?

Your original assertion was generic; that a janitor has as much impact on market cap as a CEO. So let's stick with that.

Consider: the CEO of Ford decides Ford will no longer sell petrol based cars (getting the board to go along with it too) and then executes that strategy.

If it succeeds then the market cap of Ford will increase. If it fails then it will decrease.

On the flip side, no matter how clean a janitor can make the facilities, he can't dictate corporate strategy and Wall Street doesn't care how clean Ford's bathrooms are.

This doesn't diminish the importance of a good janitor, but let's be honest about the limits of their impact.

Sold Yahoo to Verizon.

"Yahoo stock was up by 8.5% at the time of writing." http://www.businessinsider.com/yahoo-verizon-sale-approved-2...

I agree, the fact she got them to pay so much is quite impressive. I definitely cant see that much value in whats left but I guess the Verizon board was somehow able to.

But the stock price could have fallen. She should be credited with negotiating the deal and selling the company for 4.5B, and when she resigns the market cap isn't going to drop. She's not responsible for the market cap at all.

If you owned a share of the company, why would you sell to another investor for less than Verizon agreed to pay? Share prices rose 8.5% directly as a result of the price she negotiated with Verizon.

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