Price of candour: Lessons for shareholders from Infosys and the MCX experience

“The CEO who misleads others in public may eventually mislead himself in private,” remarked one of the greatest investors of our times, Warren Buffet. This statement of Buffet reflects the significance of what is referred to as " Candour" by him.

Candour is a quality possessed by the management of companies which Warren Buffet admires. He believes that a company should disclose financial performance fully and genuinely. The disclosures should not just be what is expected from under GAAP but should be beyond that and should cover non-GAAP or extra- GAAP details as well.

One of the key expectations that Buffet has from the management of the companies is that they should disclose the likelihood of a company meeting its future expectations. The annual report and letter sent by Warren Buffet to the shareholders of Berkshire Hathway reflect this aspect.

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While candour is important for a company in order to have the continued faith of shareholders and win the interest of prospective shareholders, it comes at a cost and can cause immediate and huge losses to the shareholders themselves.

Take the case of Infosys. The company came out with the projection of its earnings that was revised downwards. The impact of this was immediate on the share price. The price of each share went down by more than 8.5% on the news that the Q4 performance of the company in the current financial year may not be on expected lines.

Narayana Murthy was very candid in admitting this and remarked, “The Infosys culture is to proactively bring bad news to people because we want to be remembered first as honest and decent people and then perhaps as smart people. We will follow the adage that let the bad news take the elevator, while the good news takes the stairs”.

While the long-term prospect of Infosys probably remains a long-term story, the sharp fall in share price has made shareholders, especially small ones, jittery. While the company is working on a three-pronged strategy to rebuild itself. The recent volatility in the share price of the company has made many people worry about the expected future price of the company. It is not for the first time that shares of Infosys have seen such single-day volatility. The share price of the company had gone down by 21% last year in a single day when it announced Q4 earnings of the last financial year.

So what can be gathered about Infosys’ own performance, given its approach towards honest declarations?Are these kinds of announcements desirable or should the company be more careful in communicating bad news rather than calling a spade a spade?

Any company has two options as far as disclosures are concerned 1) Disclose what is expected by the statutory provisions and 2) disclose what investors like Warren Buffet look forward to. In India, unfortunately many companies go for third option as well i.e. hide details which can harm the company and tweak information to make it market friendly.

Infosys traditionally has been broadly following the second approach as mentioned above. One important lesson that comes out from the Infosys story is that the investors can rely on the integrity of the management which puts the company on a higher pedestal as compared to many other companies, even its peers.

If a business model is intact, the shareholders can take such announcements as aberrations or temporary hitches that the company is facing. If shareholders are not convinced about the capability of the management, they can exit and limit their losses.

Now let us compare the Infosys example to some other companies where honesty and transparency were completely missing.

Shares of FTIL and MCX are examples where shareholders are still facing volatility as nothing is known about how things will shape up in future.

This is applicable for many other companies which are found deficient in honesty and transparency. For shareholders across companies, Infosys sets that honesty, and transparency only pulls down the price temporarily with a kind of guarantee of consistent value creation in future.

This price is quite small in comparison to the shocking loss that the companies working behind the veil and hiding critical details from investors can cause. The price of candour is very small which is compensated by future value creation.

The author is a financial planner and columnist. He does not own shares in the companies mentioned in the article.