Misguided Guidance

MANY MANAGERS DON'T UNDERSTAND the difference between promoting their products and touting their companies' stock.

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The best managers increase shareholder value by operating the business smartly and allocating capital wisely, so that intrinsic worth grows over time. Almost without exception, the market recognizes this kind of performance, even without any nudging.

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Other managers too often have skipped the most difficult step in the process -- running the business to optimize intrinsic worth -- and try to cut to the chase by engaging in all manner of sleight-of-hand tactics to jack up the share price. This has made some of them very rich, and sent the more flagrant to stand before a magistrate, sullying the already-tarnished name of capitalism. They are neglecting the extra duty of care -- the fiduciary responsibility required of those who sell or promote an uncertain and intangible future promise, rather than a consumer product such as a personal computer or stick of deodorant.

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For the well-managed company, there are compelling psychic compensations and often impressive long-term financial rewards for cultivating a constituency of investors rather than speculators. If a board and its executives desire a shareholder base made up largely of investors rather than speculators, they must act accordingly.

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Warren Buffett, second to none in his respect for the outside shareholder, is unabashedly promotional when it comes to selling Berkshire Hathaway company goods at the annual meeting, yet he won't utter a peep to hawk the shares of Berkshire. He talks in general terms about business and the businesses that Berkshire owns, but never gets specific about earnings.

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Berkshire Hathaway's share-turnover rate is the lowest in America, averaging roughly 15%. No other public corporation's annual meeting attracts more than a small fraction of its shareholders. Berkshire Hathaway, on the other hand, draws an amazing 24,000-plus enthusiastic shareholders who annually make their pilgrimage to Omaha.

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Book: Speculative Contagion: An Antidote for Speculative Epidemics