If 2004 proves to be a year of recovery, then the challenges faced by management will be very different from those of the past few years. In recession, most companies know what they need to do: cut costs. But in recovery, corporate muscles that have gone unexercised must be flexed anew. In preparation, boards and top managers would do well to ask three basic questions.

What is success?

In earlier eras, the success of a company was judged by a mixture of measures, including its fundamental economic performance, its reputation with customers and employees, its stock price, and its responsibility to society at large. That changed in the 1980s and 1990s. Academic theory, the takeover boom, and shareholder activism led to a focus on share-holder value, all too often measured through the narrow prism of short-term movements in stock prices. This raises troubling questions as companies look to manage the next era of growth while avoiding the pitfalls of the last.

First, are we rewarding and punishing management teams for something over which they have relatively little control? Research suggests that the relationship between a company’s fundamental economic performance and share price over the near term is loose at...