Good directors ignore the stock price: it's too distracting, and it's not what really matters anyway.

• Author: Sutton, Gary
• Position: SUTTON'S LAWS - Column

HE'S AN ICON. The Ultimate Director. You know his name.

In one of those random encounters that should never happen, he and I ended up sitting next to each other at a banquet. We shook hands. Heads turned. He sat and the rest of the room followed suit.

I asked how one of his companies was doing.

"Terrific," he replied, obviously pleased I knew he was on their board. "The stock's been above 50 for almost a month."

I asked what the P/E ratio was.

"You know, I'm not sure," he said, thrusting out his jaw.

I inquired about the operating cash flow.

"Oh, we don't watch those details," he said. "Management manages and directors direct."

How tragic. One more empty suit.

Of all the trivial distractions directors should ignore, the stock price is number one. Your daily value is mildly interesting yet totally irrelevant, except in one case, which we'll discuss shortly. But even then, the premise wobbles.

First, let's review the reality of public stocks.

There are no investors anymore. We are all owned by traders. Most investment funds report more than 100% turnover per year. Take the average daily volume of your favorite blue chip, divide that into the total shares outstanding, and you'll see this again. Your conservative company is probably changing ownership totally once every year.

Sure, day traders and hedge funds do much of that. But don't get fooled when IR shows you that Fidelity and T. Rowe Price and the others have held the stock for years and years. Because what those guys do, since they get bored every Monday, is called "trading around the core." That means when the price drops under a certain low point, they buy some, and each time it climbs over another number, they sell some.

This keeps them busy. It also automatically defines the trading range.

So why should you care, as a director, about the price? There's only one circumstance, a semi-legitimate one, which we'll cover in a minute.

But first, do all stocks stay within a range? No. They crash through those arbitrary floors when something awful happens, and the short sellers drive it down farther and faster. And they'll bust through the ceiling when the fundamentals, like growing cash or increased net earnings, finally make the P/E ridiculously low. That draws the outside investors, not your existing traders, and the short sellers have to cover. And this makes the dramatic leap even bigger.

That's why net earnings and operating cash flow trends are all that matter. They're the baseball...