Forum: Just Stop Talking

Your job is to build a competitive entity, not help traders preserve their bets.
Louis EhrenkrantzOctober 1, 1997

Under most circumstances, the task of communicating with the general public is reasonably straightforward: Tell the truth about any current problem in a way that fairly represents whatever has happened. In interviews, present the corporate goals and your plans to meet them, as well as obstacles that might prevent success.

But when the topic turns to future earnings growth, or the possibility of disappointing results, crafting public commentary becomes laborious and time-consuming. Any statements that might affect the price of the stock are carefully sculpted by spin doctors, deconstructed by in-house attorneys, and analyzed by shareholder relations departments ad nauseum.

This state of affairs has evolved because too many people accept the assumption that the CFO’s job is to “move the stock price,” or, more delicately put, “enhance shareholder value.” Nobody seems to recognize that such frenzied activity, designed to satisfy a small segment of the investment community, is counterproductive to running a business. Furthermore, it does nothing for the shareholders on a long-term basis, which is the only basis on which the CFO should focus.

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I contend that while the corporation has a responsibility to enhance shareholder value by building a competitive entity, the corporation has no responsibility to investment analysts.

There is nothing unconstitutional about refusing to meet with Wall Street analysts, nor is there any purpose in meeting other than to satisfy their penchant for reacting to short-term events. I can hear the howls from the downtown New York canyons. But think about it: What long-term purpose is there in explaining every corporate or industry development? Why aren’t 10Qs, 10Ks, and quarterly and annual reports sufficient 90 percent of the time?

It’s not the long-term investor who is served by rushing to a podium to give explanations and warnings. Rather, we have created an entire world of financial information to benefit the “traders,” who buy and sell shares for their account after striking a deal with a resident brokerage house for a preset commission rate. Some brokerage firms “hire” out their space with a trader in each of many cubbyholes throughout the boardroom. It’s reminiscent of a Ford assembly line, and just as mindless. The proliferation of these traders–armed with television sets tuned to financial networks–has widened the market for gamblers eager to pounce on a favorable or unfavorable comment. These players are the ones who benefit from every broker downgrade, every shortfall in earnings.

I remember meeting one Seymour Mann, CEO of Aceto Chemical, who refused to answer questions about stock evaluation. He really didn’t know whether Aceto’s stock was up or down. “My job is not to engage in stock promotion. My job is to help this company grow. If revenues, return on equity, and earnings move upward, the shareholders will be satisfied.”

We all know of stocks that reported slightly lower than expected earnings and opened sharply lower the next day. Then the analysts lowered their ratings, and drove the stock still lower. This momentum game has helped convert our markets into casinos. The casinos could be eliminated if executives stopped commenting on matters more of interest to the players than to the investors. The backbone of a company’s shareholder list doesn’t give a hoot about the sale of your equipment business, and if they did, they could read all about it in your next quarterly statement.

There is an analogy in the sports world. Some 15 years ago, the National Basketball Association decided to force teams to reveal which players were too injured to play on any given night. The League noted that people who received injury information early had an advantage in betting on the game. It thought it was preserving the integrity of the game, but it was really preserving the integrity of the bet. I say, let the rumors fly uncontested. It is not the CFO’s job to grease the machinery of the grand casino. It’s not your job to preserve bets. Stop now, and maybe the gamblers will get a real job, something for which they’ve been trained–for instance as a croupier in Las Vegas.