In the late 1960s, a young banker named Joel Stern was working on a project to transform corporate management. Stern’s hunch was that the stock market could help managers work out how their strategies were performing. Simply, if management was effective, demand for the firm’s stock would be high. A low price would imply bad management.
What sounds obvious now was revolutionary at the time. Until then profits were the key barometer of success. But profits were a crude measure and easy to manipulate. Financial markets, Stern felt, could provide a more precise measure of the value of management because they were based on more ‘objective’ processes, beyond the firm’s direct control. The value of shares, he believed, represented the market’s exact validation of management. Because of this, financial markets could help managers determine what was working and what was not.
In doing this, Stern laid the foundation for a ‘shareholder value’ management that put financial markets at the core of managerial strategy.
