The most useless thing a CEO can do…

I have a question for you:

What do you think the economy will be like on June 30, 44 weeks from now?

And with what level of confidence?

Now, let’s make sure you’ve considered all of the inputs into that decision: interest rates, inflation, local and global economic growth, currency, wages, government spending, the savings rate, house prices, and more.

Still confident?

Okay, let’s overlay the X-factors.

You know, like, oh… Maybe a pandemic? Geopolitical tensions (or worse). Terrorism. Drought. Floods. Fires.

And they’re just the ones I can think of.

How confident are you in your prediction, now?

But we’re not done.

Our predictions don’t count for much – no-one is paying attention, anyway.

But what if you’re, say, an ASX-listed company CEO.

And investors want to know what you’re expecting for the current financial year.

You get up in the morning, look at yourself in the mirror, and what do you think to yourself?

The best ones – the honest, self-aware ones – will shake their heads ruefully and mutter “Why are they asking me? I’m doing my best to run the business as well as possible, but I don’t have a crystal ball…”

The less-great ones – those for whom hubris and arrogance are regular bedfellows – will rely on their overinflated egos and self-assurance and think “I’m glad they asked. I’m so good, I can forecast these things with confidence!”

I jest.

A little.

But the biggest problem?

Both of our mirror-gazing CEOs will, that day, make a forecast anyway.

They’ll tell the ASX what they think will happen.

It’ll be (mostly) honest, based on their best guesses, usually with a strong dose of optimism and self belief thrown in.

And investors, who, like Mulder and Scully (from the X-Files – ask your parents) just ‘want to believe’ will duly listen, and factor those forecasts into their own investment decisions.

The blind leading the visually-impaired?

You betcha.

Why do CEOs do it?

Because, as John Kenneth Galbraith observed, “…pundits forecast not because they know, but because they are asked.”

Because investors have become so used to management forecasts, we expect it. We demand it.

Because CEOs want to be popular, and liked, and respected, and supported. So, when the market asks, they answer.

Which begs the question: Why do investors expect them to know?

The answer to this one isn’t much better.

Because we hate uncertainty. Because we want to believe that CEOs have magical powers of foresight. Because we like to believe they can somehow magically manifest the future they forecast.

Because, as one industry insider once said, in response to my question “Well, what else would we put into our spreadsheets?”

True story.

We turn a blind eye, choosing to believe the fiction, rather than question. Because it’s easier that way.

Doesn’t this whole thing just sound a little bit bonkers.

Or more than just a little bit.

We are so desperate to avoid uncertainty that we’ll willingly suspend disbelief in exchange for the emotional comfort of an almost-baseless forecast.

CEOs are so keen to please (and to be seen as being ‘in control’) that they’ll consciously and subconsciously go along with the charade, publishing a forecast because, well, we asked.

Truly, it is the stuff of collective delusion.

Worse, when those forecasts are missed, we blame the CEO, as if it was their fault.

Perhaps more insidiously, we slap those who guessed correctly on the back, praising their foresight.

My 9-year old knows better than that.

He might try the same thing, sometimes, but at least he’s honest enough to ‘fess up when we call him on it.

The bad news?

It’s not going to change.

The charade will roll on, month after month and year after year.

And if you reckon that’s bad, I have even worse news for you.

There is no-one more hell-bent than a CEO who’s given a public forecast.

They will move heaven and earth to hit that number.

Reckon that’s a good thing?

Ask anyone who’s worked for one of those CEOs.

The long term damage done in pursuit of short-term objectives is frightening.

I’ve worked for businesses that have sold weeks and weeks of extra inventory in the last week of a year, just to get a number.

I’ve known companies to destroy brand equity by giving massive discounts to try to get a few more drops of juice out of a dry lemon.

They tell themselves it’s a one-off.

They tell themselves they’ll make up for it next year.

But when ‘next year’ comes, there’s a sales hole already (from all of that end-of-year stupidity), so they end up having to go even harder, just to catch up.

And on and on it goes.

It is corporate madness. Pure and simple.

The solution?

I’m glad you asked.

I have a few:

– Look for great management. People who say ‘I don’t know’. Or who don’t give baseless / best guess forecasts.

– Ignore the predictions of those who do give forecasts. But know that they’ll be sorely tempted to make suboptimal choices if they start to fall short.

– Focus on the long term. And prioritise businesses they do the same.

Frankly, I will give a management team bonus points for refusing to give a forecast, even if the professional investing class cry foul.

I wish more of them did it.

In the meantime?

It’s up to us to choose wisely.

And to remember that we don’t have to play the investing game by rules that don’t make sense.

Fool on!

The post The most useless thing a CEO can do… appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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