How leaders should respond to falling markets

Yesterday’s 0.4% fall in the ASX200 capped off a horror month on the bourse.

The benchmark index lost 7.3% in May, its worst monthly fall since May 2010.

Many executives will say they don’t pay close attention to their company’s share price.

Robbie Cook, Wotif managing director and CEO, tells LeadingCompany he can’t be too fixated on what the sharemarket is doing.

“I don’t spend my day peering at my screen,” he says.

“The bottom line is you cannot control what the sharemarket does broadly. We can control what is driving our business, what’s driving our profits. Hopefully the sharemarket will reward that.”

However, a long-term rise or fall can prompt significant challenges for a company’s management.

Here are just some of the ways managers are affected by stock prices, and some of the ways they can react.

1. Angry shareholders make for angry times

It’s no coincidence that since the global financial crisis and the ongoing global malaise following it, there has been a noted rise in shareholder activism both worldwide and in Australia.

When the value of investors’ holdings is rising, concerns about the direction and competency of a company’s management don’t seem so urgent. This changes when things go south.

In Australia, recent months have seen Paperlinx chair Harry Boon fight to keep his seat and Billabong chair Ted Kunkel successfully oust Derek O’Neill in a bid to douse shareholder anger.

Overseas, unhappy shareholders have had some high-profile wins. Shareholder pressure at Yahoo has claimed the scalps of both CEO Scott Thompson and director Patti Heart, and at UK insurance giant Aviva, shareholders forced out CEO Andrew Moss by voting down his pay packet.

How to keep shareholders on side? Share buybacks can make you popular, as can buying up the stock yourself.

2. It cuts into the pay packets of executives

For executives who receive their wages in options, a falling market, and the likely effect on their company’s share price, can severely cut into the value of their pay packet.

Options are the ability to buy a company’s shares at a set price sometime in the future. Granted to executives, they’re intended to align their incentives with those of the investors. If the share price rises above that price for the shares given by the option, executives can buy shares on the cheap and sell them on for a tidy profit.

A falling sharemarket undermines this dynamic. Through no fault of their own, executives may see the potential gain from their options drying up before their eyes.

Clever executives can push to change the composition of their packet, though staying option-heavy can help convince shareholders they’re in it for the long haul.


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