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The flattery industry

That flattery works wonders is hardly a new thought. Dig into Chaucer’s Canterbury Tales and you will find the Wife of Bath, a sort of 14th century femme fatale, recommending flattery as perhaps the most successful means of seduction. Small wonder then that, 600 years later and much more prosaically, company bosses use flattery as the bait to hook shareholders. Except that the object of their flattery is a bit different. Rather than whisper sweet nothings to would-be investors, bosses talk up the performance of the companies they run. Everything becomes bigger and better, slimmer and sturdier, leaner and meaner.

The trouble is that flattery is subject to the law of diminishing returns – the more that bosses flatter their company’s performance, the more the pressure grows to maintain the illusion. So flattery proliferates. Simultaneously, expanding in the opposite direction is the regulatory drive for a bit less smoke and mirrors, a bit more objectivity, rigour and clarity.

Thus this week the Financial Reporting Council (FRC), the accountancy industry’s regulator, returned to one of its favoured subjects, quoted companies’ use of subjective and inconsistent ways to quantify – and almost invariably flatter – their performance. It dumps these under the heading ‘alternative performance measures’, cannot resist turning that into an acronym – APMs – and points out that almost all companies use them. The council’s especial complaints are that:

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