Importance of share price to a company

When it comes down to it, a publicly traded company is pretty much a slave to its share price. Its sole aim is to create growth or dividends for their shareholders. If the company fails to do this, the share price drops and this allows all sorts of issues to arise. Some examples of such issues are:

  • Management shake-outs

  • Less opportunities to sell the company to or merge with larger organisations

  • Less credit available to the company

Motivating management

In many cases, the high level management is paid partly through stock options. These stock options will fluctuate as a share price fluctuates. If the share price falls, the high level management, are in effect, getting paid less. Even if upper management does not get paid partly though stock options, they can still be in-line for bonuses if the company does well.

Between bonuses, personally held shares and stock options, it is in the upper managements financial interest to grow the company so that they can also profit.

Power of directors

Although the company cares about its share price, the directors of companies have other issues that they may also have an interest in. The director cares about their long term survival. If the company ceases to exist, there will be no board and no position for a director. Often the director also cares about:

  • Employees

  • Creditors

  • Communities damaged by corporate action.

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