No Legislation For Earnings

Comment
by Mark Lacter

It's still all about a number. Beyond the debates about tougher jail sentences for the crooks and tighter controls for the bean counters, Corporate America continues to be governed by the almighty number, as it passes from CFO to CEO to boardroom and then onto the Street for ultimate approval.

It's a tricky proposition, this number thing. In a performance-based society, numbers provide the most immediate measuring stick, whether it's SAT scores, test results for an experimental drug or the quarterly profitability of a company.

The question is what numbers get used and why.

It's long been an open secret that government data those numbers on unemployment and gross domestic product that frequently move markets are based on a sampling of economic activity that's subject to often-significant revisions. Mistakes in methodology can skew years of reporting, as happened with the state employment data in the 1990s. Yet nobody pays attention to the revisions it just seems like old news.

Here in L.A., determining something so basic as the total workforce becomes an exercise in educated guesswork. How do you count undocumented workers those busboys, gardeners and day laborers whose very livelihood is determined by the underground economy? How also do you count the thousands of Angelenos in business for themselves through a patchwork of contract work that they don't always report to the IRS?

There is an official number for nonfarm employment 4,093,200 in 2001. It just isn't the right one.

It's the same in business. Every three months, publicly traded companies come out with a number showing earnings per share. Based on whether that number meets, beats or misses expectations, investors will either buy into or sell out of the stock.

But trumpeting a single number often distorts how well or badly the company has done and it certainly doesn't reflect such nuances as extraordinary expenses or seasonal factors. No matter the unrelenting pressure to come up with the right number, no matter how misleading, has led to reckless decision-making. Shareholders want their companies to do the right thing, but they also expect a good number, quarter-after-quarter.

As recently as last week, IBM Corp. found itself tap dancing around second-quarter results that showed earnings of only 3 cents a share, compared with analysts expectations of 83 cents. The difference was a $1.4 billion charge, or 81 cents, to cover job cuts and other write-offs. Without that charge, IBM would have earned 84 cents, a penny above expectations. (It's no coincidence, by the way, that so many companies manage to eke out profits a penny or two above those all-important expectations.) After several hours of nervous anticipation, the markets seemed to accept the explanation. But you get the idea all the soul-searching of the past six months and it's numbers that still matter.

That's why the current overreaching by Congress and the Securities and Exchange Commission will do nothing to appease investors and could, in fact, place a chill in the equities markets. What possible reform is achieved by requiring CEOs to sign off on company financials in three weeks? Sign off on what? All those gray accounting cubbyholes that have been used to generate the numbers Wall Street wants.

They're missing the point. Look beyond the obvious frauds and what you're left with is a system a mindset, really in which Wall Street exerts way too much influence in determining corporate success or failure.

Try legislating that.



Mark Lacter is editor of the Business Journal. He can be reached at mlacter@labusinessjournal.com.

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