You may have read this in the news the day before. If not, please read it first. _____________________________________________________
SEC: IBM misled investors on expenses REUTERS[WEDNESDAY,JUNE 06,2007] SAN FRANCISCO: IBM misled investors by overestimating the impact of stock-based compensation expenses on quarterly earnings in 2005, the US Securities and Exchange Commission said on Tuesday. The securities regulator made the statement as it reached a settlement with International Business Machines Corp., in which the company agreed not to commit future disclosure violations.
The SEC did not impose any monetary penalties and IBM, the world’s largest technology services company, did not admit or deny the SEC’s findings in the settlement announcement. “IBM misled investors by failing to disclose information that would have allowed them to accurately determine the impact that the company’s decision to expense stock options would have on its financial results,” SEC Associate Director of Enforcement Scott W. Friestad said in a statement. “The facts here are particularly troubling because the disclosure decision was driven, in part, by management’s perception of how the news would be interpreted by analysts,” Friestad said.
In an April 5, 2005, conference call, IBM led analysts to believe that the company expected stock option expenses to reduce first-quarter earnings by 14 cents per share and to reduce full-year earnings by 55 cents per share, the SEC said. IBM, however, actually expected stock options expenses to reduce earnings by only 10 cents per share in the first quarter and by only 39 cents for the full year, the SEC found. IBM’s first-quarter earnings, reported nine days after the conference call, fell short of average analysts’ estimates by 5 cents per share, a big miss for the company. Some analysts later complained that IBM, in effect, had led them to believe that the stock options’ impact would be larger than it actually was, disguising the magnitude of the earnings shortfall.
_____________________________________________________
The above case is a prime example of one of the risky decisions taken by one or more executives in a company. It is not rare, but it is very dangerous. If you have read our guide on making business decisions, you will see how ‘reputation’ fits in the picture. IBM could afford this situation because of the huge brand it has built. A small or medium sized company would have faced stiff penalties. Still, this makes the life of current directors at IBM a bit more tight, because investors will not forgive forever.
The above is an example, that you must avoid at all costs. Anything involving reputation and investors is a dangerous mix, and a couple of bad decisions by executives can bring a company down. There are numerous examples for this every year. As directors and executives, the place to show creativity is in making big business deals and launching new products. Any financial creativity in reporting numbers is dangerous.
If you really think something is an okay way to present the number, have the courage to bounce it with a few key investors, offline. You will immediately know where you stand. The big lesson is this: there are very few IBMs in this world, and with 100% information being stored in some server or tape, everything can be played back in the court at a later date. If you love your business, please don’t do it. If you don’t, this site doesn’t have much for you.
Â
