02 June 2006
Company Performance and Stock Price
The concern of the Ontario Teachers’ Pension Plan reported in the June 1, 2006, Wall Street Journal about how Canadian CEO pay packages don’t appear to be linked to their companies’ stock market performance demonstrates the potential divergence of the interests of powerful investors and the interests of other stakeholders in those companies. More significantly, it illustrates a possible separation of the goals of pension plan managers and beneficiaries of those plans.
Boards of Directors supposedly represent shareholders’ interests; but top management must also answer to the concerns of employees, suppliers, customers, public officials and citizens of the host community. Moreover, a company’s stock price may move with short-term impacts on its performance and the “spin” the CEO can lay on its quarterly results more closely than with its prospects for long-term growth and profitability.
The recent scandals involving the backdating of stock options in executives’ pay packages highlight what the effect can be from identifying company performance with stock market valuation. Particularly in the case of a large pension fund like the OTPP, the investor is probably better off using microeconomic measures of a company’s performance rather than the price of its stock. Such a long-term investor needs to asses its holdings on the basis of their likely value over a period that is closer to the time horizon of its clients than to the compensation horizon of its portfolio managers.
The concern of the Ontario Teachers’ Pension Plan reported in the June 1, 2006, Wall Street Journal about how Canadian CEO pay packages don’t appear to be linked to their companies’ stock market performance demonstrates the potential divergence of the interests of powerful investors and the interests of other stakeholders in those companies. More significantly, it illustrates a possible separation of the goals of pension plan managers and beneficiaries of those plans.
Boards of Directors supposedly represent shareholders’ interests; but top management must also answer to the concerns of employees, suppliers, customers, public officials and citizens of the host community. Moreover, a company’s stock price may move with short-term impacts on its performance and the “spin” the CEO can lay on its quarterly results more closely than with its prospects for long-term growth and profitability.
The recent scandals involving the backdating of stock options in executives’ pay packages highlight what the effect can be from identifying company performance with stock market valuation. Particularly in the case of a large pension fund like the OTPP, the investor is probably better off using microeconomic measures of a company’s performance rather than the price of its stock. Such a long-term investor needs to asses its holdings on the basis of their likely value over a period that is closer to the time horizon of its clients than to the compensation horizon of its portfolio managers.
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