Trusting Company Peformance

This article (free registration required) from Mckinsey is right on the money.

Executives worry too much about accounting strategies that aim to smooth the performance of companies over time and reduce everything to a simple, bottom-line number. To show what goes into it, companies and their investors would be better served by a greater degree of disclosure. This in turn would help rebuild the trust between them.

Trying to judge a company on one number, like EPS, is like trying to determine a person's health by looking only at their pulse or only at their blood pressure. A company, like a person, is a complex system. To determine how the company is doing, one must look at all aspects of operation. Why earnings are down matters more than the fact that they are down. Companies should help investors out with more disclosure of not only the numbers, but how the numbers were calculated. And here's a response to the common argument that more detail is just an extra expense and a waste of company time:

But such disclosures aren't as widespread as they should be. Moreover, any move toward more detailed accounting will likely generate criticism that it will not only prove too expensive and complex but also lead to the disclosure of competitive information. I disagree. There shouldn't be any significant increase in costs merely to produce information that is—or should be—prepared for a company's management and board of directors already. Indeed, if companies don't have this information, its absence raises questions about the integrity of their financial systems and the ability of their senior executives to manage.

I couldn't agree more. How about replacing some of those glossy color photos in annual reports with more info to help out the people who really own the company?