FOOL ON THE HILL
Road Map to Repair (Part 2)

Corporate executives claim to be at a loss for how to help repair the mess caused by nearly a decade's worth of poor oversight of the stock market. So, on Friday, Bill Mann suggested ways CEOs can help investors regain confidence in the U.S. markets. He continues with further suggestions and commentary.

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By Bill Mann (TMF Otter)
August 19, 2002

This is the conclusion of a two-part article. The first installment ran in Fool on the Hill on Friday.

We realize plenty of stakeholders are to blame for this mess, not just corporations or their executives. When times were great, regulators allowed companies to get away with byzantine gobbledygook instead of real, plain-English business performance discussions. Individual investors chased the dream to get rich quick.

Even today, studies report less than 20% of investors even read a company's financials before making an investing decision. Analysts -- well, many of them deserve their own little slice of Hell. Unfortunately, the biggest repercussion on the analyst community seems to be not getting a table at Nobu. Institutional investors didn't care about corporate governance -- their average holding time of any one company was less than a year. Why worry beyond the stock's short-term action, when your idea of long term is structured in months rather than years?

All the while, corporations were rewarded for making stock prices go up, not for good corporate governance. Unfortunately, raising stock prices sometimes included decisions with really long fuses. Along come 2001, the collapse of the telecommunications market, Enron, disclosures of horrible accounting and milquetoast boards of directors, and what happens next?

That's right -- boom.

Now our leaders want to make the bitterness disappear. No problem. Here are a few more ideas.

Call out the bad guys
We're all terrified that the next scumbag executive might be running a company we own. Yes, Washington is on a crusade right now to find the bad guys, culminating in last Wednesday's deadline for CEOs to certify company earnings. I don't recall a single CEO saying he supported the government's specific efforts to clean up the public markets. Instead, we get press release after whiny press release about the danger of expensing options to the American markets.

Get with the program! Your efforts to protect exorbitant executive compensation are of no interest to shareholders. Truth be told, we're pretty torqued about that, too. It's high time corporations pressed for independent corporate boards, demanded criminalization for manipulating pension accounting, established better 401(k) policies, called for proactive investor relations, and, perhaps most importantly, educated the American investing public. Boeing (NYSE: BA), Coca-Cola (NYSE: KO), and others have shown leadership in these areas, but until they're willing to be critical of less-than-stellar practices by others, we're going to have a slow recovery of trust, if we recover at all.

"Bad guys," by the way, aren't just lawbreakers. General Electric's (NYSE: GE) Jeffery Immelt had a tantrum when people suggested GE's disclosures were insufficient, and suggested he could lard up the annual report with tons of data. His response shows contempt for shareholders, and someone should've called Immelt to the carpet for his attitude toward the owners of his company.

Pay some dividends
Washington taxes dividends twice -- once at the corporate level and again at the shareholder level. Killing this corporate dividend tax would cure many stock market woes. Ah, but companies could still improve their perceived suitability as investments by increasing dividend yields, or in the case of chronic money-hoarders like Cisco (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT), paying one at all. Dividends have always brought a countermanding benefit to the table for shareholders -- when stock prices dropped too low, the yield (or percentage of the base investment paid as a dividend that given year) would go up.

A company that has lost 50% of its value but suddenly pays a dividend yield of 6% may be more attractive to an investor than one down 50% that doesn't pay dividends at all. More importantly, companies have just, in aggregate, proven that they're terrible at retaining earnings and investing them profitably. Telecommunications companies (many of which do pay dividends) collectively have blown more than $1 trillion in retained earnings on poorly conceived capital projects. Moreover, the companies with larger asset bases were more apt to take on more debt in pursuit of hypergrowth.

A lot of good it did us. We can't feel the effects of share buybacks. Again, due to execs' past actions, we don't trust that those buybacks are to our benefit, since they mostly cover the dilution from options (which can, in some cases, be a miserable use of capital). Pay a dividend already! A small quarterly check is a nice incentive to get people to come back. And this is certainly true: While companies can bend and torture financial statements to within an inch of their lives, it is pretty tough for a company to fake a dividend check. You want people to trust you? Be better stewards of their money.

Now you have a list of starters. It's going to require bravery, and you may have to break that silly cult of shareholder value that cropped up at the end of the '90s. Sometimes the best decisions make results look worse in the short term. It would be nice if more Americans had access to even basic financial education. Perhaps then shareholders would be less dependent on CNBC's reports and would instead do their own research. That's not your fault; it's Washington's.

To make things better, you need to change the way you do business. The U.S. markets, despite their faults, are the safest in the world. Yet they don't appear to be right now, which is a problem begging to be addressed by more than Scotch tape solutions and a pile of happy talk. It requires action, and action from those who hold the cards.

That means you, corporate leaders.

Fool on!

Bill Mann, TMFOtter on the Fool discussion boards.

Bill Mann's mom offers this: "Please excuse Bill from class. He was his father's fault." Bill owns shares in Cisco. The Motley Fool is investors writing for investors.