Road Map to Repair (Part 1)

It may seem amazing to shareholders in the depths of cynicism, but many corporate leaders are seeking ways to rebuild trust in the U.S. stock market. The terminally cynical might say they're just trying to restart the gravy train that got them rich. Bill Mann says to company executives, "You want our trust? You best figure out how to earn it." Here's how.

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By Bill Mann (TMF Otter)
August 16, 2002

Call this "A Memo to Corporate Executives."

Scott Schedler, The Motley Fool president, attended a U.S. Chamber of Commerce meeting yesterday in which dozens of America's top corporate executives followed up on President Bush's Economic Forum held Tuesday at Baylor University.

As he recounted parts of the meeting, Scott noted that these leaders voiced doubts they can regain investor confidence in corporate America and the stock market. I've got to agree -- this is pretty important. But when members of the executive cohort have treated their company coffers like their own little private Kuwaits, enriching themselves at the expense of their shareholders, it's simply going to take more than platitudes at a roundtable in the heart of Texas. And besides, you're sitting with the very same people who were asleep at the wheel during the big investor fleecing of the last eight years.

Fortunately for our corporate and regulatory leaders, while our governmental leaders and corporations may be at a loss for getting things back on track, we at The Motley Fool have been paying attention to what concerns individual investors. We hear from thousands of investors each week, so we have a good idea of what it will take to get people interested in the stock market again. In May, we put together the The Motley Fool Manifesto, which offered ideas to all stakeholders of the public markets, but here are more "to-dos," just for you.

Let me say to corporate America: You damn well deserve to be in this boat right now. Don't play mystified. Don't act surprised. Just recognize that your willingness, collectively, to take advantage of years' worth of a buoyant stock market, and to do things that are in no way in the best interest of your outside shareholders, has chosen now to bite you squarely in the behind.

Americans get into a snit when some tin-pot dictator siphons money from his national coffers. It shouldn't surprise you that we're a bit distrustful when insiders have been getting wealthy based, at least partially, on their willingness to game the system or cheat altogether.

So enough with the "few bad apples" refrain. It's tired and people aren't buying it. Why? Because they don't trust you. And why don't they trust you? Because they feel you didn't respond to festering corporate governance problems until they became painful for you. People are angry -- they've been hurt, and they no longer believe the "everything's just ducky" song-and-dance that got 'em into such straits in the first place. They felt rich with you for a while, and now they feel like you used them, even if your particular shop is as clean as a whistle.

Let me tell you what keeps me awake at night. Americans are now buying things like real estate with money that, only a few years ago, would've been earmarked for the stock market. (Don't think there's a resulting real estate bubble? Guess again.) Moreover, after years of perceiving the U.S. markets as the world's safest haven for investment money, people now believe the game's rigged, and those controlling hundreds of billions of dollars in investment capital internationally are looking elsewhere. There's no safer market than ours, but corporate malfeasance can still royally screw it up.

You want to get people to come back? You want to rebuild trust? Earn it, and trust that your opening moves are likely to hurt. When people have been lied to and taken advantage of for so long, the truth doesn't look much different right out of the gate.

1. Stop whining
When I hear people say stock options have fueled American industry, I want to retch. Every time a media organization says stock option accounting "would cost industry" billions, I want to give up. It's a lie, and you know it. Even worse, whether or not we know it, corporate abuse of stock options has created the appearance of a rigged system that routinely fleeces outside shareholders.

In 1994, even though big industry and its congressional lackeys pulled out every stop to threaten the existence of the Financial Accounting Standards Board (FASB) over its proposal to require stock option accounting, the FASB was brave enough, at a minimum, to call expensing accounting "best practices." When you fail to account for stock options, you provide shareholders with disclosure that is less than best practices, as determined by the leading accounting authority in the land.

Quit bastardizing accounting. Stop hiding expenses from shareholders. Figure out how to make your accounting as accurate as possible. Expensing stock options granted in exchange for services by vendors, yet not those granted to employees, is a joke. You may think you're acting in your best interest, but you're not. You look self-interested, and shareholders, after the last two years, are fed up.

2. And while we're on the subject of accounting and disclosures...
At one time, investors bought corporate spin hook, line, and sinker. Not anymore. We're tired of hearing earnings outlooks were great, until a typhoon hit Brunei.... There's a reason your "pro forma" outlooks don't have the same effect they once did. People are skeptical about the financials you report to the SEC, and you expect them to pay more attention to ones you don't?

Get your lawyers, public relations flacks, and "message consultants" out of the process. We don't need "technically GAAP compliant" disclosures. We need honesty. Berkshire Hathaway's (NYSE: BRK.A) Warren Buffett regularly says things like, "I give your managers' performance a D-." He's not in the game of massaging the truth, and people know that. He didn't demand that credibility -- he earned it. Treasury Secretary Paul O'Neill earned it as the chief at Alcoa (NYSE: AA). Few other executives have, because they're too worried about spin. Spin kills.

When you massage the truth, expect people to abandon you. And not just you, but the collective you. The sins of some rub off on you. They say something; you say something similar. If they're lying, you're suspect. Period. More honesty may have cut the bubble off at the top and limited the damage of the downside.

I'll cover the other half of the roadmap for corporations on Monday.

For now, have a great weekend.

Fool on!

Bill Mann, TMFOtter on the Fool discussion boards

Bill Mann wasn't even there. At time of publishing, he held shares in Berkshire Hathaway. The Motley Fool is investors writing for investors.