GE’s stock drop indicative of much bigger problems for American business
GE’s stock price meltdown two weeks ago is not the result of a weak company or even a weak economy, but rather of something much more threatening to every publicly-held company: the stock market. We have finally reached the point where the stock market has become the enemy, creating such disproportionaltely high stakes for even understandable minor falters that it puts CEOs at too much risk to be able to make really good long-term decisions.
Short-term management has been the bane of the past decade, creating more harm to the future of American business than any short-term benefits that were generated. Short-term management is defined by a focus upon driving continuing short-term profit results often without regard to the threat such decisions represent to the long-term growth potential of the company. As discussed in The Alpha Factor, even short-term profit can be generated without undermining the long-term growth of a company, IF the tactics used to drive that reported profit had strategic value and were not going to weaken the company’s overall ability to generate strong future growth.
Unfortunately, the most debilitating version of short-term, cost-side management has been driven by the extraordinary demands of the stock market. GE’s predicament and Jeffery Immelt’s bruises over not meeting a short-term predicted profit goal demonstrate just how dangerous the emotional, “I-don’t-care-how-they-do-it-as-long-as-they-do-it” mentality of stock analysts has become. Here is a company that is strong, vibrant, and probably better poised than most to create a strong future, yet it was spanked by both the former CEO and the stock market because of a simple, unpredicted change.
Could it and should it have been predicted? Possibly. But the bigger point is the punishment administered for failure. How can any CEO of a publicly-held company be expected to make strategic decisions in the face of such potential punishment for things that may be beyond control and have little or no long-term effect on the strength of the company?
Combine this with the excessive incomes being showered upon CEOs even of losing companies for hitting target stock price goals, which typically only provide profit to stock holders who have little or no long-term interest in the company, and you have a formula for disaster.
The entire “gambling” aspect of the stock market has become one of the most potent enemies of long-term success for American business. My hope is and has been that the model for generating both long-term and short-term sustainable profit growth presented in The Alpha Factor will help provide a more rational and more valuable way of analyzing corporate stock value.
I pray for the day that may occur.