Straight-talking bosses trump artful dodgers during bad times
Executives who tell the truth and avoid softening harsh news win big in the integrity stakes
WHEN ONE PARTY KNOWS MORE THAN THE OTHER, SOMEONE SUFFERS — AND IT’S NOT WHO YOU MIGHT THINK
Whenever you’re dealing with a bad situation, evasiveness, euphemisms and reassuring language may make you feel better, but they’re likely to strike the wrong tone,” warns Anett Grant, of US-based Executive Speaking.
“People need respect, they have the right to be told the bad news in a straightforward way.”
She’s right. What is often most annoying — for example, when a CEO is reporting a poor set of results — is the way they try to couch it as something other than bad news.
In the 1980 film Little Lord
Fauntleroy, Sir Alec Guinness says: “Yes, some people do like to preface the bad news with background information and details of everything they did and everything they tried. Better, though, simply to cut to the chase and tell everyone the bad news. Chances are, they won’t be listening to all your preliminary words anyway.”
Assessing the quality of management — in particular the extent to which they can be trusted — is more of an art form than a science, and each investor has to find his or her own way of doing it, but how management deals with bad news, how quickly it’s passed on and the fullness of the information provided is especially telling.
When a CEO is straightforward in saying the tough stuff, people assume (rightly) that he or she will be courageous in all kinds of essential ways: making difficult decisions; taking responsibility for them; apologising for mistakes. In other words, delivering bad news well demonstrates personal courage.
Unfortunately, there are far too many examples of bad news being downplayed, blamed on external factors, or simply lied about. One of the most egregious in recent history was former BP CEO Tony Hayward’s handling of the Deepwater Horizon oil spill, in which billions of gallons of oil ended up in the Gulf of Mexico. As the disaster unfolded, Hayward characterised the spill as “relatively tiny” in comparison with the size of the ocean, and said the environmental impact of the disaster was likely to be “very, very modest”.
And even when he apologised, Hayward did it with a selfcentred twist that had many cringing (given that 11 people died in the incident) when he said: “I’m sorry. We’re sorry for the massive disruption it’s caused their lives. There’s noone who wants this over more than I do. I’d like my life back.”
This left many BP shareholders feeling, as Ed Markey, chair of the US House’s energy committee said at the time, that “a total change in the culture of this company is necessary”.
But as GMO strategist James Montier famously asked: “When was the last time anyone arrived at your office and started to confess that they were a dreadful business with little or no hope of ever actually improving? Of course, it never happens. Instead, they tell you that they have had a rough time, but whatever the problem was, it is being solved and everything will be great going forward.”
“And yet, giving more information to investors generally, and doing it in an honest and understandable way, is good business,” says Baruch Lev, professor of accounting and finance at New York University’s Stern School of Business.
“That’s not a loose assertion. It has its roots in the economic theory of information asymmetry. When one party to a transaction knows more than the other, someone suffers — and it’s not who you might think.
“When sellers have information about the quality of a product that buyers don’t, the sellers are actually the primary losers, as suspicious buyers drive down prices or abandon the market altogether … managers who are distrusted face a substantial share price discount, a higher cost of capital, and a more volatile stock price.”
Meanwhile, a proliferation of new technologies, including social and mobile media, has created a deluge of financial information for investors, much of which is available on a realtime basis.
Investors can find information on company performance via media releases, online news, quarterly reports, and social media websites, as well as from an array of consultants and specialised ratings agencies. Some investors value these additional sources of information, which compensate for perceived shortcomings in the information available in the company report.
Others worry that too much information blurs insight. “Much of the data that flashes across screens is simply noise, although commentators constantly endeavour to attach significance to it,” says John Kay, one of Britain’s leading economists. “The opportunities created by modern information technology have led many people to overestimate the value of this flow of data.”
Nevertheless, as Andrea Jones-Rooy, a social scientist specialising in complexity, points out, after millennia of relying on anecdotes, instincts and old wives’ tales as evidence of our opinions, most of us today demand the use of data to support arguments and ideas.
“Data is now perceived as being the Rosetta stone for cracking the code of pretty much all of human existence,” she says. “But in the frenzy, we’ve conflated data with truth.
“Data is not a perfect representation of reality: it’s a fundamentally human construct, and therefore subject to biases, limitations, and other meaningful and consequential imperfections,” says Jones-Rooy.
As astronomer Clifford Stoll warned: data is not information, information is not knowledge, knowledge is not understanding, understanding is not wisdom.
Which may be true, but it does raise the question: if not from data, information, knowledge or a proper understanding of things, then how are we to acquire wisdom? As luck would have it, when it comes to investing, the answer may be easier than we might imagine.
“Civilised man has always had soothsayers and shamans and faith healers and God knows what else,” says Charlie Munger.
“The stock-picking industry is 4% or 5% super-rational, disciplined people. The rest of them are sort of like faith healers or shamans.
“Just think of it as heavy odds against a game full of bull … and craziness with an occasional mispriced something or other. And you are not going to be smart enough to find thousands in a lifetime.
“So when you get a few, really load up. It is just that simple.”