The Hindu Business Line : On candour tests and `engaged' boards

AMONG the recent postings on the accounting-related sites is the latest "Rittenhouse Rankings". Carried out by and Beyond Communications, the survey, encompassing a sample of 100 from among the Fortune 500 companies, analyses "disclosure in CEO letters to shareholders". Why? Because, as the site explains, "this communication in a company's annual report is considered by many investors to be the most widely-read, brand-shaping corporate publication."

Rankings for 2003, released about a fortnight ago, shows that 87 per cent of the CEOs failed to candidly report their bottomline performance. The `candour test', as it is called, required CEOs to include diluted earnings per share (EPS) numbers for prior and current years; match these EPS numbers to those in the income statements; explain the difference between GAAP and non-GAAP EPS; and clearly explain significant year-over-year variances in EPS.

A press release on the site notes that the survey has found over the past five years "a positive correlation between candid communication and superior stock price performance."

Top-ranked companies in the survey saw their share prices rise by 21.5 per cent over two years, while the foggy communicators gained only 7.3 per cent. "Although half of the CEO letters in the Survey provided at least one financial performance measure, there was no clear attempt to link this to the bottom line. Seven per cent of the CEO letters omitted all discussion of financial results."

Perhaps a similar survey in India may see a higher percentage preferring to avoid any number talk. A model that Rittenhouse suggests is that of Berkshire Hathaway. The company CEO, Warren Buffett, holds a '16-year record', beginning his letter by reporting on the year's per share performance, comparing this to the performance of the S&P 500 Index and calculating "the compounded growth rate over the more than 30 years since he took over the business."

On a related topic — that of boards — David A. Nadler's article "Building Better Boards" in a recent issue of Harvard Business Review was on the need to be `engaged' rather than being dangerously passive or automatically certifying. "Engaged cultures are characterised by candour and a willingness to challenge," he writes.

Thus, for engaged directors, agendas are not opportunities for informal interaction; the challenge is not regulatory compliance but high performance.

What would be the beliefs of these engaged directors? "If I don't come prepared, I will be embarrassed; if I don't actively participate, I won't be fulfilling my responsibility; and if I can't carry my load, or if I can't agree with what's going on, I should resign."

Talking of auditors, we know their jobs start with engagement letters. But how far they are `engaged' is a different question. And a candid accountant is often an oxymoron.

AccountSpeak@thehindu.co.in

More Stories on : Accountancy | Account Speak

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Fuelling a minor issue

Non-corporate sector: Largest contributor to national income

Hike is between hijra and hilarious

Loss of elite company

On candour tests and `engaged' boards

Reward salesmen for deal-by-deal pricing

Idiosyncrasies in IDR

Politics of the hawks

Regulator for steel