When Ron Johnson was fired by J.C. Penney’s (JCP) board of directors back in April, a period of what can only be described as intense media focus started to slowly fade away; with the events of the past couple of days, suffice it to say that JCP is back in the spotlight.
In an article from the weekend edition of the Wall Street Journal, the events of the past week were highlighted; while I think the company’s apparent reversal in the course of twenty-four hours is worthy of discussion, it’s not what caught my eye. I find this even more interesting: “Mr. Ullman, during a breakfast meeting on Wednesday with about 30 investors hosted by brokerage firm Sterne Agee, made encouraging comments about the company's progress in luring shoppers back to its stores…
On Thursday morning, Penney released a statement saying that it expected sales to turn positive in the fourth quarter, reversing six quarters of declines. Later that afternoon, it announced the offering. Mr. Hannah told investors on a conference call on Thursday evening that the decision to proceed with the offering was made that day, after the company became aware of unease on the part of suppliers.”
The problem is this: head over to J.C. Penney’s investor relations page and attempt to find these conference call replays; you’ll quickly realize that they don’t exist. Events like these are held for a select group of individuals, who are deemed worthy of being present. I’ve been to analyst events with dozens of companies present, and found something similar (which you can often hear at the end of call webcasts): after the initial Q&A, management will move offstage to a secondary room – where analysts are free to ask questions that you’ll never hear the answers to.
Here’s the question I can’t seem to find an answer to: why? What is the rationale for giving this select group of market participant’s access to management without offering the public access to that same information? Let’s hope that material nonpublic information isn’t being revealed; if it’s something we’ve all heard before anyways (or if it’s immaterial to the stock price), what harm comes from recording such interactions? In the case of J.C. Penney, a press release was issued on Thursday [meaning the day after the CEO made encouraging comments to a select group, per the WSJ]; beyond that brief release, the individual investor has heard nothing from the company. Did Mr. Hannah, the CFO, simply reread these sentences to the select group on Thursday night? Why were the rest of Mr. Hannah’s comments unavailable to us prior to the Wall Street Journal’s publication? Is unease amongst suppliers something worth discussing? Does this fall under the heading of general corporate purposes that the company presented as the rationale for the equity issuance?
Again, we’re not just talking about impromptu, thirty second conversations between executives and analysts as they’re passing on the street; we’re talking about breakfast meetings with dozens of investors and analysts that could’ve been recorded with ease.
As usual, Warren is ahead of the game and offers a practical approach for the rest of corporate America; here’s what he says on the subject, from the Berkshire Hathaway (BRK.B) Owner’s Manual:
We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others. We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.
At Berkshire you will find no “big bath” accounting maneuvers or restructurings nor any “smoothing” of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are a very rough “guesstimate,” as they necessarily must be in insurance reserving, we will try to be both consistent and conservative in our approach.
We will be communicating with you in several ways. Through the annual report, I try to give all shareholders as much value defining information as can be conveyed in a document kept to reasonable length. We also try to convey a liberal quantity of condensed but important information in the quarterly reports we post on the internet, though I don’t write those (one recital a year is enough). Still another important occasion for communication is our Annual Meeting, at which Charlie and I are delighted to spend five hours or more answering questions about Berkshire. But there is one way we can’t communicate: on a one-on-one basis. That isn’t feasible given Berkshire’s many thousands of owners. In all of our communications, we try to make sure that no single shareholder gets an edge: We do not follow the usual practice of giving earnings “guidance” or other information of value to analysts or large shareholders. Our goal is to have all of our owners updated at the same time.”I think – or should I say hope – that this injustice will soon be a thing of the past. Considering the ease with which any communications could be shared with owners all but instantaneously in this day and age, there’s no explanation for its continuation; more importantly, I’d be willing to bet that minority shareholders have often been shortchanged by a management team looking to appease analysts that can make their lives more comfortable (you scratch my back and I’ll scratch yours). Simply enough, shareholders should not stand for this; it must come to an end.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "Patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.