Watch out executives: Investors are paying attention
Jul 28th 2009 4:45PM
Updated Dec 4th 2009 6:54PM
"I think there's a lot of anger out there on the part of smaller investors," over corporate governance issues like executive compensation, activist hedge fund manager Eric Jackson said to DailyFinance.
Data from Google Trends analyzed by DailyFinance indicates that the number of searches for investor relations information from large companies -- predominately financial institutions like American Express (AXP) or Bank of America (BAC) and quasi-financials like General Electric (GE) -- have never been higher than the time surrounding those companies' earnings releases the last several quarters. The increases range from an approximate ten-fold jump for Bank of America and GE to more than forty-fold for American Express at the height of the fall financial crisis. So what should investors be looking for?
If you're reading an earnings release or listening to a company conference call for the first time, you're probably not alone. Both are ways to get information directly from the source and are starting points of the research process of many investors -- or even taxpayers wondering when (or if) they're going to be paid back by bailed out firms. But understanding the statements of large financial companies can be difficult, and that should make investors tread carefully when it comes to putting their money at risk.
"A warning sign is complexity," explains Jackson, who founded Ironfire Capital and gained fame by successfully challenging top management at Yahoo (YHOO) and Motorola (MOT) using innovative social media techniques. "A company like Citigroup (C), on their last earnings call, they... only present their numbers after a dozen assumptions -- you have to wonder how real" management's portrayal of the company's financial situation is. Financial companies often cannot be analyzed using easier-to-understand cash flow accounting, meaning that investors must instead decipher results based on accrual accounting rules.
Changing the workings of corporate board rooms will be a time-consuming process, however. Jack Bogle, who founded fund management company Vanguard and has lectured and written extensively on the agent problems in modern capitalism, told DailyFinance that there won't be any quick fixes. "Banks are where the greatest crisis exists today," and that could spell opportunity for speculators to take advantage of big price swings around earnings announcements. "In my impression... what used to be a market of long-term investing turned into a market of short-term speculation," with a "staggering" amount of trading and turnover in popular funds -- all of it zero-sum activity, that Bogle estimated has quintupled (at least) since he started Vanguard in 1975.
"The markets have always required both long-term investors and speculators... [but] most innovation benefits Wall Street," at the expense of the individual. Sooner or later, Bogle believes, people will wake up to this fact and start demanding accountability by those who manage their money and those companies they invest in. "We will, and must, come back to restoring long-term investing to the star of the show."
James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns BAC and GE, but has no personal position in the stocks mentioned above.