share price

Even in the fat cat era, managers hate to admit that their sole object in life is to elevate the share price. One captain of industry, true, kept a terminal on his desk (a very rare piece of chief executive furniture): which would have yielded all manner of fascinating information: he confided that he only used it to check on the shares.

That was possibly the only corporate parameter that he couldn't affect directly, save by jumping out of the window. Even then, he couldn't be sure which way the share price would move. That's one sound reason for avoiding fixation on the stock market. Its gyrations have little short-term connection with the underlying health and future prospects of the business.

It follows that any strategy aimed at elevating the shares is ill-founded, because the strategist can never be sure of the impact of his plans. They may actually prove counter-productive. A famous case is that of the US company, Gould. It sold all its smoke-stack interests, then deeply unpopular with Wall Street, to concentrate on high-tech. Before the strategy had time to work commercially, Wall Street had fallen out of love with electronics - and into love with smoke-stacks.

Today, though, the share price is again in the ascendant - not least because stock market underperformance is increasingly likely to topple chief executives from their comfortable chairs. The price is wrapped up, however, in 'shareholder value', which sounds much more respectable. When companies aim to add or enhance this value, they mean to achieve a rise in the equity capitalisation: i.e, a higher share price.

There is a more complex concept of shareholder value, but it's a safe bet that few corporate chieftains even know that it exists. In reality, equity capitalisation is subject to exactly the same vagaries as the price: market disfavour can wipe hundreds of millions off the shareholder value. Hanson investors know this to their great cost. Since Lord Hanson announced his plans to split the empire into four, the shares have slumped.

That's doubly ironic. First, the whole object of such demergers is to deliver more shareholder value. Second, the rationale and driving force of Hanson have always been the achievement and maintenance of a high share price. The group began to fall apart, not when Lord Whyte's death removed half the famous partnership, but when the share price ceased to perform - no matter what strategems were employed to enhance the earnings per share.

The latter number, eps, once had the same pride of place in corporate jargon as shareholder value does today. Its loss of favour stemmed only partly from the ability of shrewd financiers like Hanson to manipulate the figure (with perfect honesty, but still). More important, while eps relates to the share price, the mechanism of that relationship - the price-earnings ratio - carries equal weight. It gets shareholder value nowhere if eps double, but the p-e halves.

There's a deeper issue still. Is financial orientation really likely to benefit the investor? The question sounds ridiculous. If a company puts investors first, like Hanson, you would surely expect that company to deliver more shareholder value than a firm which gives other interested parties, like customers and employees, an equal priority. The expectation, however, is grounded on a false premise.

Profits and esteem flow from non-financial factors, of which the respect and enthusiasm of customers for the goods and services provided are critical. This high esteem and vigorous demand rest in turn on the cooperation and motivation of the workforce. The result is 'that companies which, perversely, don't put shareholders first did better for their shareholders than organisations that only put shareholders first.'

The quote is from Robert Waterman's The Frontiers of Excellence (Nicholas Brealey). His evidence is a study by two Harvard professors, John P.Kotter and James L.Heskett, which looked at the 11-year records of large established companies that gave employees, customers and shareholders equal priority. Compared to shareholder-first outfits, they grew sales four times faster and jobs eight times more.

The financial payoff from these non-financial advances was spectacular: eight times the improvement in share price and an astronomical 756 times greater growth in net income. The 756 may be highly surprising, but the general principle is not. Profit is a residual, the result of income exceeding costs. Income is provided by customers, and costs are deeply affected by the employees - from top managers downwards - who also have the power to alienate or rejoice the customers.

Even a financially oriented conglomerate like Hanson can't (to quote Waterman again) 'only put shareholders first.' The brands will die unless customers are persuaded to want them, and the employees must continue to produce efficiently. All the same, another cigarette manufacturer once described Hanson's crucial Imperial Tobacco subsidiary, a money machine of awesome repute, as 'a horrible place to work.'

The Kotter-Heskett study suggests that pleasant workplaces can manufacture money even more efficiently. No doubt Marks & Spencer chieftains spare more than a passing thought for the stock market. Long ago, before food weighed in with its full contribution, the store chain used up almost all its dividend cover to keep investors sweet. But its uniquely high standing with customers results from the indefatigable pursuit of non-financial objectives of value for money and employee well-being.

If M&S should falter in that pursuit, the adverse impact on its financial returns would be substantial, but long-term. That is the foundation of the relationship between performance and the share price - analysis shows that the correlation is strong, but only over time. ICI's shares may fall 2% because of disappointing second quarter results, but that's wholly irrelevant in terms of lasting shareholder value.

Lord Hanson may have cause to ponder that truth. According to fascinating research by Matthew Lynn in Management Today, Hanson's personal stake in his group was worth an inflation-corrected £25 million in 1968. Today's stake is worth well under £20 million. Shareholder value, forsooth.