The Tyranny of High Expectations: My old friend Don Ferguson forwards me an article on the Enron trial that provides a fascinating—and horrifying—insight into the practice of investor relations today and the intense pressure CEOs feel to meet or beat analysts’ expectations. Enron’s former investor relations chief Mark Koenig recalls what happened when analysts increased their estimate of the company’s fourth quarter 1999 results, days after Enron closed its books for the period.
“‘I was kind of sick about it,’ Koenig said. ‘We had great success in keeping that estimate in line in the past.’ He said he was concerned ‘that there would be a significant decline in the stock price.’
“Koenig said he sounded alarms and called Enron’s accounting chief, who Koenig said also conferred with Skilling. Within hours, Koenig said, Enron had met the increased target—31 cents per share—even though books for the quarter had been closed for days.”
I have no interest in excusing or even explaining the behavior of Ken Lay and Jeffrey Skilling, which was egregious. I’d be very happy to see Skilling in particular serving long, hard time. But what Koenig is talking about here is a much bigger problem than Enron. Every CEO in America is under intense pressure to keep the analysts happy and failure to do—even for a single quarter—can wipe billions of dollars off a company’s value and cost leaders their jobs.
Not every CEO chooses to manipulate the numbers, of course, but many do and not all of them cross the line quite as dramatically as Enron appears to have done. Jack Welch achieved, as everyone knows, 100-plus quarters of profit increases at GE, and there are those who believe that “confusing but apparently legal gimmicks” played a part in the company’s ability to “master the quarterly earnings ritual with almost eerie efficiency.”
But I suspect that almost every CEO makes decisions that are not in the best interests of the company, its key stakeholders, and even long-term holders of its stock in order to meet those quarterly targets.
“‘I was kind of sick about it,’ Koenig said. ‘We had great success in keeping that estimate in line in the past.’ He said he was concerned ‘that there would be a significant decline in the stock price.’
“Koenig said he sounded alarms and called Enron’s accounting chief, who Koenig said also conferred with Skilling. Within hours, Koenig said, Enron had met the increased target—31 cents per share—even though books for the quarter had been closed for days.”
I have no interest in excusing or even explaining the behavior of Ken Lay and Jeffrey Skilling, which was egregious. I’d be very happy to see Skilling in particular serving long, hard time. But what Koenig is talking about here is a much bigger problem than Enron. Every CEO in America is under intense pressure to keep the analysts happy and failure to do—even for a single quarter—can wipe billions of dollars off a company’s value and cost leaders their jobs.
Not every CEO chooses to manipulate the numbers, of course, but many do and not all of them cross the line quite as dramatically as Enron appears to have done. Jack Welch achieved, as everyone knows, 100-plus quarters of profit increases at GE, and there are those who believe that “confusing but apparently legal gimmicks” played a part in the company’s ability to “master the quarterly earnings ritual with almost eerie efficiency.”
But I suspect that almost every CEO makes decisions that are not in the best interests of the company, its key stakeholders, and even long-term holders of its stock in order to meet those quarterly targets.
posted by Paul A. Holmes @ 6:22 AM
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