In his 2011 President’s Letter, Mark Leonard discussed the importance of keeping your share price within a certain range. Here’s an excerpt from the letter:
Moving on to the “manage the stock versus manage the company” issue… I used to maintain that if we concentrated on fundamentals, then our stock price would take care of itself.
The events of the last year have forced me to re-think that contention.
I’m coming around to the belief that if our stock price strays too far (either high or low) from intrinsic value, then the business may suffer: Too low, and we may end up with the barbarians at the gate; too high, and we may lose previously loyal shareholders and shareholder-employees to more attractive opportunities.
There is a nuance to “stock price management” that may be unusually important to CSI. For nearly all companies, when their stock price gets too low, there is the potential for a “Process”, and obviously we are no different.
However, when CSI’s stock price gets too high, I think we have the potential to lose our most valuable cohort – our senior managers. Most of these employees have been with us for many years.
Most of them started out as operators. They’ve refined their operating chops, learning best practices from their peers and from their own experiments. As vertical market software business operators, I’d say they are amongst the most talented available (and I’m uniquely qualified to be a connoisseur of such talent). They also have another skill, one that is incredibly rare: they respect and know how to deploy capital to generate high rates of return.
Glancing at our ROIC+Organic Growth stats, it is evident that our senior managers consistently generate rates of return in excess of 25% on the capital that they deploy. As investors you’ll know that this is wildly difficult to achieve. How do we keep these multi-talented managers?
Hopefully we provide an environment that is fulfilling, colleagues that are both challenging and entertaining, and work that is meaningful. We also pay them well. They are all millionaires many times over, with much of their net worth invested in unescrowed CSI shares.
If they don’t think that CSI shares will generate high rates of return, they need only sell their shares and use their unique skills to deploy and manage their capital. And because the average business that we buy costs something less than $3MM, nearly all of these managers could be in business for themselves very quickly.
I’ve always tried to avoid having CSI’s shares trade at too high a price. Many members of the board were conscious of the opposite problem.
I think we all now acknowledge the importance of managing our stock into a price range where we neither invite another Process, nor encourage our employee shareholders and long-term investors to liquidate their holdings. I don’t think it will be difficult to keep our stock price marching in lock-step with the intrinsic value of our company. The board and I just have to be conscious of doing so.
You can read the entire letter here:
Constellation Software 2011 President’s Letter
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