Most analysts have encountered “Managementus Imperialis”, the member of company management who knows everything. Not only do they know everything, but they expect you, the analyst, to take everything at face value without further pesky questions. I don’t think this type of person knowingly sets out to mislead or frustrate the investment community. It is a somewhat drawn out and subtle process that gets them to the point where they believe that they are the fount of all wisdom regarding their company.
The process is self-selecting. Unless you are in a severely depressed industry, only optimists get promoted in corporate America. Being optimists, they naturally only look on the sunny side of the street. People who work for them recognize this and also tend to emphasize the good developments over the bad. This is compounded by people not wanting to argue with, or bring bad news to, their boss. By the time a person gets to a “C” level position in a major corporation in America, people have been saying yes to them for a very long period of time. From there it’s a small step to believing that if everyone says yes to your ideas, you must always be right.
My wife, who once practiced law in a large law firm, referred to this as “Partner’s Syndrome” – once a person made it up the greasy pole to partner, they assume that everything they say is right and shouldn’t be questioned. (My wife, much to her credit, has long since left the practice of law and now works as a pastry chef, doing what she loves.) I’ve seen it play out numerous times in investor disclosure. A member of management will make an assertion about a program, a plan or a fact and expect that to be the end of it. Who can forget “The seven breakaway strategies to grow sales” that were floated a few years back even though management refused to identify any of the strategies. Often there will be an assertion of fact about a trend that contains just enough truth to sound plausible, but upon closer examination doesn’t merit being called a broad based trend. Years back, I heard an assertion that “the primary drawing area of a store is a ½ mile radius”. I even repeated it myself many times. When I finally got around to checking the source for this statistic, I found that there was none other than the CEO’s gut instinct. By that time it was an industry standard.
So how does an analyst approach the problem, recognizing that management has a lot more facts about the business at their disposal than the analyst? My best advice is to remember that it is your job to question everything. If a statement is not backed up by hard facts, it’s an assertion, not a fact. To modify an old saying, “There are lies, damned lies, statistics and CEO facts”.
I would love to hear if other people have encountered this phenomenon.