Isn’t it time to replace stock prices with a valuation rating that truly reflects the financial health of a company? Preposterous, you say. Well, maybe not.
C-Suites, shareholders and the investment community view high stock prices as the Holy Grail for determining a company’s value. Why? A consistently high stock price can result in big rewards for a CEO in the form of salary increases and large bonuses. Shareholders benefit as well with higher returns on their investments. What’s not to like?
With incentives like that, why shouldn’t a CEO of a company with mediocre results aspire to become a Wall Street star by cutting staff and R&D to reduce costs to elevate its profitability and its stock price? The company’s cash flow problems and lack of a pipeline for new products can wait.