“In the corporate world it’s not about fixing. It’s about fine-tuning perceptions”

Melanie: Greg, our quarterly results are terrible. The stock is 40% down YOY and keeps falling after that acquisition we did last year. We need to fix this or I won’t be the CEO for long.

Greg: Melanie, we don’t need to fix anything. We just need to manage perceptions. Stock price, you see, is often about confidence rather than performance.

Melanie: So, how do we prop it up?

Greg: Simple. We pay dividends and buy back our own stock.

Margaret: How will that help?

Greg: It’s a virtuous cycle. When we pay dividends, investors feel rewarded. When we buy back shares, the reduced supply helps boost the stock price. That makes the company look stronger, which improves market confidence, while we pretend to be trying to fix the mess.

Melanie: So, we are going to hand out money while we already have issues with money?

Greg: Well, Melanie, investors see dividends and buybacks as signals that the company is healthy.

“the key is to reinforce the perception of strength… “

Margaret: But aren’t we just using our own money to push up the stock price?

Greg: Yes! Exactly! And if I may say so, shareholders are rather like employees. Easily pacified with short-term incentives while long-term issues quietly pile up and you work on trying to hide them.

Melanie: How will this affect our performance metrics?

Greg: Well, our Return on Equity, or ROE, naturally increases.

Melanie: Hmm. Increases… even if we are struggling? I like that…Keep going.

Greg: It may seem that ROE reflects actual performance. But no. By paying dividends and reducing outstanding shares, we lower shareholder equity. Smaller equity means a higher ROE. 

Melanie: Financial acrobatics at its finest. But isn’t this just a temporary fix?

Greg: The market relies on confidence, and confidence relies on appearances.

Melanie: And the actual performance?

Greg: Melanie,

“In business appearance is performance.“

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