Over the weekend, I read the past three CEO letters from Elite Information Group (Nasdaq: ELTE), one of the companies that last month I rated as a promising small cap. While no CEO letter is the be-all and end-all for assessing managerial quality, I walk away from Elite's letters with just a terrible impression of CEO Chris Poole.
Poole's three letters since becoming CEO in 1999 are 5% substance, 95% fluff. These letters, in their purely promotional form, are a slap in the face to shareholders. Intended or not, letters that are this lacking in substance are a signal that Poole does not view his shareholders as the partners that they are. Partners deserve useful, understandable information, not the kind of jargon-laden nonsense dished out by Poole (or, more likely, a PR consultant who probably wrote these letters).
It's a shame, too, because Elite looks good based on the numbers: consistent operating cash flow, a debt-free balance sheet, and a low valuation. Elite is, after all, the leading provider of time management and billing software to the legal industry, with clients that include more than half of the top 100 U.S. law firms and more than a third of the top 1,000 U.S. law firms. The irony here is that Poole actually has a good business he could be saying smart things about.
It boggles the mind why he instead chooses to grandstand about his company's growth, innovation, and customer service. These three subjects form the body of each year's letter, and are discussed in a shallow, fake-smile sort of way. It smacks of an infomercial, and makes you feel like you're being sold a bill of goods.
After reading these letters several times through, two very bothersome issues stand out: empty words and a lack of supporting facts.
Empty words
So much of what Poole writes is noise. Each letter includes one or two nuggets of actual information, surrounded by paragraph upon paragraph of business-ese. Here are a few of the more offensive examples from the 1999 letter:
... we will continue to focus our efforts on building shareholder value by extending our consistent track record of growth and a focus on innovation and customer service.
Pure noise. And:
It will be a challenge to replicate our success over the past several years, but we are up to the challenge.
Great, thanks. As it turned out, however, sales in 2000 ended down 11.8%, and the stock price was cut in half. These facts were, of course, unmentioned in the 2000 letter, which instead treated shareholders to this nest of buzz words:
With the advent of Internet-based applications, telecommuting and the global marketplace, Elite is keeping pace by developing highly secure Web-based products and services that meet the needs of today's busiest professionals. An increasingly mobile workforce needs information anytime, anywhere -- not just in the office. Our application service provider (ASP) offering, e-Connect from Elite, brings the entire suite of Elite applications to the Web for unsurpassed convenience and flexibility. Elite WebView is a unique "thin client" application... .
This type of gibberish concerns me not just for its utter lack of substance, but also for how it reflects a CEO who seems to put on whatever face he thinks shareholders want to see. In 2000, it was go-go Web. By the following year, when the issue du jour had become corporate trust, his letter was suddenly all about values and business longevity, two previously unmentioned subjects:
For more than 50 years Elite has operated according to the principle that focus and dedication, coupled with a strong set of business and personal values, will create success.
No substantiation
That last quote leads directly into my next concern: Poole rarely provides supporting evidence for his statements. What kind of strong values does Elite operate by? There's no telling because he didn't care to elaborate.
The lack of substantiation is a recurring problem. In the 2000 letter, he claims that, "Elite continues to outperform most of our competitors..." By what metric -- sales, market share, profit margins? No specifics are given. The same difficulty arises later in that same letter when he claims that, "Customer service and retention are critical in our business, and feedback from our customer base tells us that we are succeeding." If that's true, then why not offer retention rates and trends in retention?
The unsubstantiated boasts continued in the 2001 letter: "Rather than limiting our growth potential, this [difficult economic] environment allowed us to further distance ourselves from our competition." Once again, no market share or sales statistics are offered to support this claim. Why not? He may not be lying, but when specifics are glossed over, I believe a Fool should be skeptical.
Conclusion
A company may have a good business and an attractively priced stock, but if management doesn't communicate forthrightly with shareholders, I ixnay that company from long-term investment consideration. It might be a stock worth "renting" if the valuation is cheap enough (which itself is risky), but nothing more. Why partner with a management team who doesn't view you and treat you as a partner?
And here's a message to Elite's CEO: If you find this article offensive, please endeavor to write a letter next year that's worthy of your shareholders' trust.
Matt Richey is a senior investment analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. For his best Foolish stock ideas and in-depth analysis that you won't find anywhere else each month, check out our newsletter, The Motley Fool Select. The Motley Fool is investors writing for investors.
