Economics

Advice To CEOs – Particularly Elon Musk

Often CEOs complain that volatility in stock prices, allegedly caused by investor focus on short-term performance, makes it difficult to manage their companies.  Put aside the fact that much evidence is contrary to the notion that investors are short-term oriented, there is a simple solution to this problem – FORGET ABOUT THE STOCK PRICE.  In the long-run, the market gets it right.  Amazon is worth nearly a trillion dollars and Toys’R’Us is worthless because one had a better business and the market came to realize that fact.  Therefore, what CEOs need to do is keep their eyes on the playing field, not on the scoreboard.  Build a great business and the market will follow.  There is no need to worry about what the stock price is today or tomorrow.

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short-term performance
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There are two caveats to this is advice.  The first is that a company may need to raise new equity.  In that case, it could be a problem if the stock price is depressed in the short-term.  It is ironic in this respect that Mr. Musk is complaining about the stock market.  First, he has publicly announced that he would not need to sell more stock.  Second, the stock price is astronomical compared to the short-term performance of Tesla.

The second is that CEO compensation is often tied to the stock price.  This leads some CEOs to claim that they are being underpaid because the stock price is artificially depressed.  Of course, this is a tough argument to make in the current environment with stock prices generally at record highs.  It is also an easy problem to solve.  Compensation can be tied to long-run financial performance rather than current stock prices.

All of this goes double for Mr. Musk.  He has suggested that a buyout is need because the public market forces the company into short-term thinking.  In the case of Tesla, such a claim makes little sense.  Tesla has benefitted hugely from the public market, which has given it a sky-high valuation that allowed the company to raise billions in capital on favorable terms.  The solution Mr. Musk is simple: forget about the buyout, ignore the stock price, stop battling the shorts, and prove that cars can be made, delivered and serviced at a profit.  In that case, the market will take care of itself.

Article by Brad Cornell's Economics Blog