The circle of deception continues: Investors blame analysts for stock losses who blame investment bankers for bringing bad deals who blame boards for no oversight who blame CEOs for greedy stock option plans who blame their CFOs for deceptive reporting who blame the accountants for the gray areas who blame politicians for agreeing to fuzzy rules who get voted out of office by investors. What’s lost in this shuffle is the single greatest and fairest capital allocator ever invented, the stock market.
Who is ever going to want to invest again, what with all the finger pointing going on? Laughing loudest are foreign investors, whose own markets are rigged more than a wrestling “Smackdown.” And legislators, whose business experience in most cases is begging for $1,000 checks, are going to heap on new regulations that will make the New Deal look like kindergarten recess. Longer jail sentences and expensing stock options won’t solve anything.
No Fudging
A return of trust and investor confidence can only come from removing temptation. Up until now, CFO Scottie fudged the numbers because CEO Bernie was going to yell at him if they missed what the Street wanted. But if investors already knew the real numbers, or any part of them, there would be no fudging. By way of analogy, I used to run a football pool, and one guy made me e-mail my picks to him on Fridays. “I trust you,” he’d say, “but send ‘em anyway.”
Public companies, who eat our public capital, should be forced to live in a public space. If they want confident investors, it is time to open their books and let investors analyze their prospects. Then and only then will the stock market be able to do its job. With all that real time data in the market place, Wall Street analysts will stop making stuff up. Almost magically, discussion will shift to long-term issues: research and development, efficiency, big new markets.
Every company worth investing in now tracks its sales pipeline, factory output and almost every internal measure down to paperclips via Web software. Management can make smart and quick decisions weekly to adjust operations. This is how modern companies are run. A chief financial officer can “roll up” all the numbers monthly and spit out a profit and loss statement. It can almost be done with a mouse click. At the end of a quarter, sales and expenses are “frozen” and negotiations begin between management and accountants over how much of the raw data to actually report.
The holy trio of Sales, Expenses and Taxes are reported, based on generally accepted accounting principles. But the only thing ever accepted is that none of the numbers are real. Every single company lies, with made up garbage like reserves, goodwill, depreciation, amortization, capitalization, write-downs and deferrals. “Generally accepted” and legal, but they are all accounting fabrications and have nothing to do with real life. Both ends of the scale are abused: Microsoft deferred huge Windows upgrade sales until it needed them, and Enron reported immediate sales from huge multiyear contracts.
Give me the raw numbers and let me draw my own conclusions. In October 2000, the Securities and Exchange Commission implemented Regulation Full Disclosure, which made companies disclose market-moving information to all investors at the same time. Now it’s time for the SEC to add what to report and how often.
The technology is already out there. PeopleSoft and Siebel and Oracle make a killing — or so they say — selling an alphabet soup of software: CRM (Customer Relationship Management), ERP (Engineering and Resource Planning), and SCM (Supply Chain Management) software. A CEO can track how the company is doing on a day-by-day, heck minute-by-minute basis. Screens are in place to provide a real-time gauge with a needle that bobs back and forth between profitability and losses. CEOs rarely use it. Instead they watch their stock price.
Give me the password, and let me watch your numbers in real time. Sure it’s too much information, but I want it, I crave it. This is what information technology budgets were spent on in the ’90s; it won’t cost an extra penny. A Christian & Timbers poll found that 59% of 225 major company executives surveyed thought their boards of directors didn’t have the “financial smarts to determine if their books were cooked.” That scares me more than bad legislation. Like sushi, I like my numbers raw, and with them, I get a virtual seat on the board. My vote is binding via buy and sell orders.
Accountants can vouch for the integrity of the numbers, manning keyboards in hermetically sealed rooms if that helps. Accountants can also hide customer sensitive information, but it’s already out there. You think salesmen and buyers don’t brag about their big deals? Many hedge funds already know. Confidentiality is overrated since it rarely exists anymore.
Owners Unite
With the books wide open, the CEO and CFO can no longer be tempted four days after the end of the quarter to drop in some sales or capitalize some expenses. The Street will already know, and adjust the stock price based on the raw numbers. No more silly whisper numbers, or “beat-by-a-penny” surprises.
Every pension, mutual and hedge fund should hold back its votes on board slates, option grants, and accountant selection until a company fully opens its books. As owners, let’s take back the process. Believe me, no one will like the alternative, the Securities Act of 2003.
Today, there is a presumption that all managers are crooks. Hardly. With open books, great managements will be provided all the capital they need and bad ones fired, but none of them tempted.
email soon as possible
Posted by: tameca | November 13, 2006 at 09:07 AM