What My CEO Told Me

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If everyone loves straight shooters, why are CEOs loading up on crooked bullets? After Bill Mann's enlightening look at how even a seemingly harmless company like Dean Foods (NYSE: DF) will skew the way it presents the truth to its shareholders, I decided to leaf through Disney's (NYSE: DIS) latest annual report.

Even the cover is suggestive, with a jubilant Mickey Mouse pressed up against the binding as if he knows he's holding something back. The financial review, a dozen pages deep, reeks of deceptive handiwork. I'm not much for dusting, but I do smell a rat.

Three graphs depict the company's fiscal headway, each one selective in its parameters. Total capital expenditures? A bar chart shows how that line item has fallen since 1996. Fair enough. Yet the improvement in free cash flow only goes back to the prior year, while a chart of the stock's cumulative return goes back 20 years.

It's obvious why the time periods are cherry picked. If you bought Disney 20 years ago when CEO Michael Eisner arrived, you certainly did beat the market. However, the stock's performance has been pitiful since former President Frank Wells died and studio chief Jeffrey Katzenberg bolted to become the "K" in DreamWorks SKG.

In fact, the more powerful Eisner has become, the more destructive he has been to shareholder value. Despite the recent spike after Comcast's (Nasdaq: CMCSA) recent buyout offer, the stock is down over the past three years. It's down over the past four years. It's down over the past five years. That's a fact, but don't let it get in the way of a spiffy looking 20-year graph.

The free cash flow presentation is even more deceptive. Why does the chart only go back to 2002? You already know the answer. It's because the company's cash flow numbers were so much better in earlier years.

Curiosity got the best of me. I dug up last year's annual report to see how honest it was about representing its free cash flow in 2002. You won't believe this! It doesn't compare it to any recent year, choosing to single out improvement only over 1996, a year of negative free cash flow.

I went back another year. Cash flow from operations had fallen to $3 billion from $3.8 billion the year before. What did the company do in its 2001 Annual Report to blur the truth? It just stacked up its 2001 showing against 1998.

This is just one company. Many are guilty of the same crimes. It's up to the shareholder to demand rolled sleeves and consistent reporting. Next time you demand answers and a CEO fires back that "you can't handle the truth," let them know that they better be capable of dispensing it in the first place.

What do you think of Disney's reporting practices? Is the company's compensation committee also cherry picking its financials to justify salaries and bonuses? Are there any companies doing this right? All this and more -- in the Disney discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz owns shares in Disney -- it's why digging through past annual reports was just a matter of digging through the stack on his bookcase.