Charles Munger: Public Hangings and the Transformation of Corporate Behavior in Earnings Reporting

Johnny HopkinsCharles MungerLeave a Comment

In the 2005 Wesco Financial Annual Meeting, Charles Munger discussed the obsession with companies meeting quarterly earnings targets, sometimes resorting to unethical practices like manipulating financial figures, selling assets, or using channel stuffing to boost short-term results. The penalties for such behavior were relatively lenient. Here’s an excerpt from notes of the meeting:

Munger: In many corporations, there’s an obsession with meeting quarterly earnings targets. To do so, they’d fudge a little, sell stock at a capital gain, sell a building or two…

Then, if that wasn’t enough, they’d engage in channel stuffing – if you were selling through a middleman, you could unload your product at the end of the quarter and make the current quarter look better, but of course the next quarter would be worse.

It went on a lot and the penalties were pretty light. For many major pharmaceutical, consumer products and software companies, at the end of quarter, this was very common.

That’s pretty well over. A few public hangings will really change behavior.

One of our Presidents said if he could execute three people each year for no cause, it would make it a lot easier to govern. When someone said that’s not enough, he said, “Oh yes it is, because I’d publish the list of people under consideration.” (Laughter)

So this is all to the good and the cost of doing it has been really low. The public hanging aspect has really worked. People now go to seminars to learn how to avoid this.

Sentencing shows that if you try to avoid this [companies trying to avoid reporting false or misleading earnings], you’ll get lower penalties, so corporations are putting in policies to prevent this.

You can find notes from the meeting here:

Notes from the 2005 Wesco Financial Annual Meeting

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