Restoring trust in management.

• Author: Lev, Baruch
• Position: Investor Relations

Investor resentment against companies and their managers, at an all-time high, is damaging as it drives investors to desert equities and lobby for costly regulations that restrict managerial authority. The solution? Develop a coherent strategy to win over investors.

The first decade of the 21st century was the worst in recent stock market history. If that wasn't enough to discourage investors, they had to endure a parade of corporate accounting scandals and embarrassing managerial pay abuses and stock options manipulations. Not surprisingly, investors' resentment of public companies and their leaders is at an all-time high.

And not just in the United States, as many stock markets around the world fared even worse than the U.S. Parmalat, SpA (Italy), Satyam Computer Services Ltd. (India), Olympus Corp. (Japan), Nortel Networks Corp. (Canada) and SinoTech Energy Ltd. (China)--a partial list--prove that accounting manipulation isn't "made in America."

Nor was the failure of managers and directors of the financial institutions that collapsed in the recent crisis restricted to the U.S., as evidenced by similar mishaps in the United Kingdom, Germany and other countries. Investors worldwide have ample reasons for indignation.

In contrast with the recent noisy but harmless Wall Street protests, shareholders' resentment isn't benign. It is seriously detrimental to companies and their managers. Investors are deserting equities in droves, seeking safety and higher returns in fixed-income securities, precious metals and other alternative investments.

Moreover, investor activism is on the rise. Investors push hard for legislation enhancing the monitoring of managers and restricting their authority and control span.

"Say on pay" legislation in the U.K. and the U.S. mandates an annual shareholder vote on managers' compensation. The Sarhanes-Oxley Act (2002) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)--tightening regulation, encroaching on managerial authority and encouraging whistle blowing--are among the costly outcomes of investors' resentment.

Managers clearly need to respond to this crisis of confidence, but such response is seriously hampered by deeply rooted managerial myths and misconceptions about investors and capital markets. For example:

* Most managers believe investors are short-term oriented, obsessed with quarterly earnings, and all that is needed to mollify them is to regularly beat the consensus earnings estimate by a penny.

* Managers are also convinced that the widespread criticism of their pay is unjustified, motivated by envy and misinformation. Hence, what's required to allay the concerns is just better public relations.

* Or consider earnings guidance. It is widely believed that guidance is a capitulation to investors' short-term approach as well as enhancing litigation exposure. Accordingly, "don't guide" is the pundits' advice.

It should be no surprise that these and many other managerial beliefs--shaping their capital markets actions and communications--are refuted by solid evidence, yet they...