I thought this note from the “Small Business Institute” had some good disclosure advice: “Business performance is not linear and is often challenging to forecast. Every public company is going to have bad news periodically. It is a certainty, and every investor knows it. Unfortunately, public companies – especially small-caps – regularly engage in linguistic games to try and camouflage bad financial news. Investors see it coming from a mile away.
Here’s a sample of how revenue-producing companies regularly try to distract investors from bad news:
• Serial, italicized, headline subtitles that refocus attention away from key financial results
• Overemphasis upon non-GAAP results, and even discussing them to the exclusion of GAAP results
• Introducing completely new reporting metrics – just for the quarter – to highlight data that might distract investors from the poor results
• Long-winded CEO quote setting forth how “unbelievably excited” they are about some of the “extremely transformative” things the company is working on that make them “incredibly optimistic”
• Changing the comparative reporting periods to opportunistically highlight sequential results, since the year-over-year comparisons are bad
• Lengthy, bullet-pointed lists of “business highlights” that are predominantly comprised of immaterial information
• Introduction of new initiatives that investors don’t hear much about thereafter
Be smart: the only way to handle bad news is directly. No matter what you’re being advised, every other path destroys trust and erodes value.”
