Previous chapters in Part Four explored how to manage a company to create value. The final element of value creation is ensuring that the company’s stock market price truly reflects its potential to create value. Many executives still believe that the purpose of investor communications is to achieve the highest possible share price. But the overriding objective of investor communications must be to align a company’s share price with management’s perspective on the intrinsic value of the company.
A gap between a company’s market value and its intrinsic value brings significant disadvantages to all the company’s stakeholders. If a company’s stock price exceeds its intrinsic value, the price will eventually fall as the company’s real performance becomes evident to the market. When that fall comes, employee morale will suffer, and management will have to face a concerned board of directors who may not understand why the price is falling so far and so fast. Too high a share price may also encourage managers to keep it high by adopting short-term tactics, such as deferring investments or maintenance costs, that will hamper value creation in the long run. Conversely, too low a share price has drawbacks as well, especially the threat of takeover. In addition, it makes paying for acquisitions with shares an unattractive option, and may demoralize managers and employees.
Nevertheless, executives worry constantly that their market value isn’t high enough or that ...