Management Forecasts And The Inevitability Of Exaggeration

The press has not learned, despite repeated experiences, that televangelists, medical researchers, elected politicians and chief executive officers are often incapable of telling the truth. That is not to say that they are liars. It only means that, at their core, all of the people in these professions are driven to make their world look as bright as possible. Every Congressman promises to bring prosperity to his district even if the next set of appropriations will send his constituents nothing. CEOs are rarely willing to say that their companies are in trouble.

The press has not learned, despite repeated experiences, that televangelists, medical researchers, elected politicians and chief executive officers are often incapable of telling the truth. That is not to say that they are liars. It only means that, at their core, all of the people in these professions are driven to make their world look as bright as possible. Every Congressman promises to bring prosperity to his district even if the next set of appropriations will send his constituents nothing. CEOs are rarely willing to say that their companies are in trouble.

In the last week, the chief executive of GE (GE), Jeff Immelt, said that his company would both continue its dividend and keep its “Aaa” rating. Soon after, GE said that it would reexamine its dividend in the second half of the year. Someone in the GE legal department must believe that optimistic forecasts only serve to give shareholders hope.

The head of Bank of America (BAC), Ken Lewis, had maintained for some time that his firm had a strong financial foundation. His veracity was so great that BAC shares dropped over 60% in a month. The market came to believe that the bank’s finances were so bad that it would probably be nationalized. Lewis decided to take his case to the public by appearing on TV. This only made many shareholders believe that the man was desperate to keep his job. Bank of America’s shares only began a rally once it was clear that the federal government planned to put in a number of measures to keep this sector from failing.

In almost all cases, chief executives cannot live with the fear that they are incapable of making their companies better. Boards select optimists to run their companies, much to the detriment of the companies.  A man with an upbeat view of the world is bound to come to a tragic end. The pessimist is the better manager. At least he knows the he courts disaster with every decision and he rarely does anything to raise expectations.

Business school professors and management consultants would make the case that having dour chief executives would kill risk-taking and innovation.  But, the pessimist is not at all against risk. He is simply depressed about what he sees as the likely outcome. His capacity for risk is based on an ability to accept poor outcomes and talk about them out loud rather than hiding them from view. As Oscar Wilde said, “The pessimist is one who, when he has the choice of two evils, chooses both.”

Douglas A. McIntyre