Saturday, September 11, 2004

Market Test


I have always been a firm believer in the principle that every company should stand up to the test of the market. For example, any company which is being closely held by a conglomerate will always perform better if it raises capital from the general public. The market ensures that the value of the firm is evaluated everyday based on the business decisions that its managers take.

Simply put, the market is many a times the best impartial judge of the ROI of a business decision. In an openly held firm, every action of every person in the company theoretically affects the company’s market value. This happens since each employee’s actions will have to affect either the cash flow potential of the company or the risk profile of the company, thus affecting the company’s market price. Thus in such a firm, the onus is on the managers of the firm to align all their structures, processes and plans towards the improvement of the future health of the company.

This belief is only being reinforced now that I am getting a sneak peek in the day to day running of exactly such a company.