We're right in the middle of earnings season: the time each six months when almost every ASX-listed company releases its half- or full-year financial results. And those results are flying thick and fast.
But I want to take a step back from the numbers, and share a story with you; one I think will help you navigate this, and every future, earnings season.
Meet Neutron Jack
You might have heard of Jack Welch. Or 'Neutron Jack' to his detractors.
He was, at one time, the high-flying CEO of US conglomerate General Electric. Turning around the performance of the company with radical cost cutting and divestments, he was considered by many as the best US CEO of the 20th Century.
Now, well, the jury is somewhat back out, given his successors had so much trouble keeping up. Welch took GE into financial services — a decision that was, in hindsight, awful when the GFC hit. And GE has never reclaimed its former glory.
To be clear, too, Welch had plenty of detractors looking for things to blame him for. They decried his strategy and his execution. He was too harsh, too rough, they said. So when GE faltered, they were only too ready to blame him.
For my money, it's probably a combination of both. Welch probably got out at the right time, and the company was probably not as healthy as its headline results suggested. I doubt Welch would admit it, but if he had his time again, he'd likely do some things differently.
Still, those who came after him had choices they could have made. If Welch was still there, he might have made some decisions that saved GE from its self-inflicted pain. Or maybe he wouldn't have.
Other than the high-flying success, Welch is known for his management style. It meant classifying staff as As, Bs or Cs, and actively managing poor performers out of the company (read: firing them, or encouraging them to leave).
That, unsurprisingly, is what his critics most focus on. And I can understand why.
But looking below the execution of that strategy was something we should all consider practicing… something Welch calls 'radical candour'.
'Everyone inside your company should know where they stand with their manager and with the company' is his (paraphrased) approach.
To be crystal clear, his HR processes largely stink (though underperformers do need to improve or find a place they're more suited).
But the idea of 'radical candour' — in general — is both a very good one, and woefully under practiced.
Paging Jack Welch
And nowhere is that more true than in the stock market. Most disgracefully, in the way companies tell — or don't tell — current and prospective shareholders the whole truth.
Corporate spin doctors can be great — when they help translate the company's business and results into easy to understand and digest information. When they help an investor better understand the business, its risks and opportunities, and the real state of affairs, when the headline numbers don't tell the true story.
But those same corporate spin doctors — either company staff or external consultants — can be worse than the devil himself when it comes to obfuscation, half-truths and downright misinformation.
Oh, don't get me wrong, they never actually lie. Because that'd be illegal. So, instead, they:
- Selectively choose which parts of the company to highlight;
- Report underlying, one-off, normalised or some other version of results when there's no clear justification for doing so;
- Pick metrics that tell the best story;
- Hide the bad news at the bottom of page 4 of the press release;
- Claim victories but hide defeats
- Pad the press release or investor presentation with lots of pretty graphs designed to direct the reader's attention to the market opportunity, and ignore the reality
… and dozens of other tricks.
None of which is illegal, of course. And they'd point to the required disclosures deep in the financial statements as evidence of them complying with the appropriate legislation.
Which is absolutely true.
But completely useless when they spend every other available effort to get you to ignore that information and focus on the pretty graphs instead.
It is the opposite of 'radical candour' — it's misinformation, deceit and misdirection.
But still legal. So it goes on.
You have to wonder about the directors of those companies. Are they really discharging their fiduciary duty (to act in the best interests of shareholders) when they approve those investor presentations and press releases?
Are they really trying to help investors make good decisions?
Are you getting it straight? Or are you being asked to swallow a good story, instead?
Where's the radical candour? Or even the garden variety candour?
There's no guarantee that a candid management team can make a silk purse out of a sow's ear, of course — just because they're honest doesn't mean they'll be able to turn base metals into gold.
But there's a very good chance they'll at least admit to it.
A better way
Warren Buffett, CEO and Chairman of US investment conglomerate Berkshire Hathaway (disclosure: I own shares in the company), writes in the company's 'Owner's Manual' (itself a great idea):
"We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less… We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private."
Which strikes me as a pretty good standard.
Foolish takeaway
So, this earnings season, as you read company announcements (and the reports of them in the press), ask yourself:
"Does this feel like the whole story, or am I getting only what management want me to hear"
Then, proceed accordingly. Candour doesn't guarantee success, but it removes a decent amount of downside risk: the chance that something management hasn't told you will cause significant loss.
And it also provides a much better chance that share prices aren't artificially inflated by promises and half-truths.
Because if they are, there's precious little upside, and a heap of risk. And that's not an attractive trade-off.
