How much time do Chief Financial Officers (CFOs) spend monitoring their companies' stock prices? Do they feel market prices are important? These and other questions were addressed recently by CFOs from four major U.S. corporations — Brian Gladden (Dell), Charles Holley (Walmart), Jeff Sheets (ConocoPhillips), and Stacy Smith (Intel) — who participated in a panel discussion at the McCombs School of Business. The participants were incredibly forthcoming with insights based on their experiences, and I wanted to share their insights.
Some of the highlights from our discussion included the following:
- CFOs spend a relatively small amount of their time monitoring prices in the stock and credit markets and thinking about how financing and investment choices will be interpreted by the market. They spend most of their time on longer term, strategic issues, but as part of the senior executive team, they do offer the perspectives of the financial markets to the decision-making process.
- From the CFOs’ perspectives, their companies’ stock prices tend to fluctuate too much relative to the fundamental values of their companies. For the most part, stock price fluctuations have very little influence on their firms’ strategic investment decisions. However, as one CFO acknowledged, investors tend to be smart, and therefore stock prices provide a perspective that cannot be ignored.
- Share repurchases are influenced by their views on the extent to which their shares may be undervalued, but this is just one of several considerations. CFOs do not try to time their repurchases to take advantage of dips in their stock prices. One characterization of the repurchase choice was the “residual”, or what is left from the available cash after the firm funded investments, made debt payments and paid dividends. A dividend and a share repurchase are alternative ways to get cash to shareholders, but a dividend can be viewed as a long-term commitment, and in general, will not be raised if the firm is not confident that the higher level can be sustained.
- The days of diversification for the sake of diversification seem to be over. The CFOs expressed the view that somewhat smaller, more focused business units, which benefit from the transparency associated with having their own individual stock price, might be more efficiently run.
- The participants acknowledged benefits associated with international diversification. For example there are advantages associated with being able to switch their focus between markets, such as having the flexibility to access markets when they have the greatest growth potential. Another advantage is the ability to attract talented people from all over the world.
- While the four CFOs represented four global companies, each company is headquartered in the U.S. The participants expressed concerns about the cost/benefit tradeoffs associated with being a U.S.-based firm. There are various tax disadvantages associated with being headquartered in the U.S., and the governance and legal advantages associated with being in the U.S., which has more stable and efficient legal institutions, have been diminishing. These are issues that policymakers are grappling with, and hopefully, can be addressed by academic research.