Today, with the pressures on business executives to meet their projections and to always present a glowing picture to analysts, it is understandable how some succumb to the temptation to present a rosy outlook when things actually might be deteriorating.
This article analyzes ways by which the CEO of a publicly held corporation can lead his or her company in a fashion that will not get him or her into trouble with regulators and stockholders and yet will provide for the long-term health of the company.
First of all, some background. CEOs have a duty to their shareholders to preserve and enhance the value of their stock. CEOs are custodians of the shareholders’ trust and, to some extent, their wealth.
It is, therefore, understandable that a CEO will strive to do all in his or her power to keep the price of the company’s stock rising. Herein, however, lies the rub. In their efforts to continually advance the value of their company’s stock, they sometimes issue reports that are less than accurate and overly optimistic.
This inevitably has a negative impact on the CEO, the company and the value of its stock. In the long run, it is a very poor strategy for enhancing the corporation’s stock value.
How can this tendency be controlled? I will provide you with policies which, if followed diligently, will protect you and your company from the dangers and damages resulting from overly optimistic pronouncements.
Think about the recent debacles in corporate America — how, for example, Enron was publishing glowing results and wonderful prospects just before the company imploded. Today, no executive wants to be in the humiliating position of having to backtrack and restate earnings and projections after being so aggressively optimistic in earlier pronouncements.
However, having safeguards in the following four areas will go a long way to protect you from overestimating your company’s prospects.
1. Audit Committee:
All executives of publicly held companies are very familiar with audit committees. In fact, the Sarbanes-Oxley Act (SOX) of 2002 clearly puts a focus on audit committees in its Section 301. However, I would go further in what is expected of the audit committee.
I would specifically mandate that the committee take an active role in financial presentations to the investment community. Specifically, I would make the audit committee clear all financial pronouncements to the public.
In this fashion, management will get a “second set of eyes” to look at and approve financial information that emanates from the corporation. This procedure, in my opinion, should make management feel more secure about financial data that could later come back to haunt it.
2. Investor-Relations Firms (IR firms):
Keep in mind that the IR firm is focused on promoting the company to its shareholders by promulgating glowing information on what the company is doing and where it is going. This is their mandate. So, you can hardly blame them when they get a little too ambitious.
What to do? I would appoint someone (the chief financial officer or someone within his or her staff comes to mind immediately) to oversee the functions of the IR firm to be sure that all of its pronouncements are accurate and not unduly rosy.
3. Remember the Long Run:
Japanese firms are noted for their focus on the long term. In fact, I have read that some Japanese firms actually have business plans and budgets that go out 50 years! How’s that for looking ahead?
The point is that management in the typical Japanese firm is not focused on the current performance of the company’s stock or on its latest earnings figures. They are focused on where they are going and how they are going to get there.
Also, keep in mind Warren Buffet’s approach. He certainly looks to the long term and is brutally honest in his annual reports. If a particular year turns out to be not as good as expected, he clearly explains the situation and why it happened.
If you focus on the short term, you will inevitably get hurt. If things don’t turn out the way you expected, you will have to do a lot of explaining. Therefore, get your eyes off the current value of your company’s stock.
I know that this will take discipline, but it is doable. The price at which your company’s stock is trading is merely a snap-shot of today’s value, which is influenced by many factors, not only the long-term prospects of your company.
4. Remember SOX:
I have written several articles for the E-Commerce Times that talk about SOX. If it is ignored, it can be a mine field for management.
Take a look at Sarbanes-Oxley: Avoiding Its Pitfalls. This article has a good deal of hands-on advice on what you can do to comply with SOX. I wrote it to give you practical advice on corporate governance after SOX.
Also, Serving on a Board After Sox has some practical advice on what a board member should watch for in order to be assured that he or she carries out board duties in a manner compatible with the new regulations.
Be Conservative About Outlook
The temptation to let the present value of your company’s stock guide your decisions can be a strong one. It is natural for you to look at the current trading value of the stock.
It can, however, be disastrous if you make decisions based upon what the price of the stock is today. Putting a great deal of emphasis on the current quarter’s financial results can be another recipe for disaster.
My feelings are that you should be as conservative as possible in informing the shareholders and the investment community about the financial prospects of your company. It’s always a pleasant surprise to have better results than you’ve predicted.
Keep your eye on the horizon, not what’s under your feet today. It can pay dividends for you and your company in the long run. And, good luck!
Theodore F. di Stefano is a managing partner at Capital Source Partners and can be contacted at [email protected].