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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Sep 23

Written by: Jack Ciesielski
9/23/2005 6:28 AM 

Last post was on analyst communications... continuing on that theme, take a look at this resignation letter a from Michael P. Berry, who's now a former director of Corinthian Colleges. (It's an exhibit to a "departure of officer" 8-K filed by the company.) You may recall that COCO had a restatement issue due to revenue recognition last month.

It's a fascinating look at the views of an insider - okay, former insider - and provides an incredible contrast to the usual slickness of analyst conference calls and dreary pablum served up in most "Management's Discussion & Analysis" sections of SEC filings.

For example, do you recall seeing anything like this in any MD&A you've read?

"We are out of control on both the revenue and cost management side of our business, and it is attributable to several factors. Our past success was due to our acquisitive business model. Our present failure is due to the fact that we have not shown the ability to manage those acquired, multiple assets (schools) in our portfolio other than WyoTech. That is due to many factors, not the least of which is a very weak field organization."

Or this:
"I am further bothered by the fact that despite poor operating results, our compensation policy is approaching a level where total compensation is not consistent with performance. Specifically the annual stock grants given out over the years to management at all levels as a percentage of outstanding shares are unacceptably high. Companies our size should not be giving grants of 50k – 75k shares to so many EVPs and SVPs year after year. This is one of the areas our compensation policy is out of control."

Or this:
"As for the board itself, we were each instructed upon selection that consensus is a how the board operates. That to me in the end requires papering over real differences. It is ironic that during the last three plus years on the board, there has been not one dissenting vote on the board other than one time I vote no, and another couple of times I abstained. No one else has ever voted either no nor abstained. That is the result of not truly reaching consensus, but needing to appear to be unified, and papering over differences because there is no confronting the brutal facts.

... That the board is driven by such a consensus model does not serve the needs of our shareholders. Given that reality, I cannot continue in good faith to be on a board that in my opinion operates in a manner inconsistent with good practice. Likewise, I wound not have agreed to take my issues outside the board room as you suggested. They belong properly put in a respectful manner in the board room. If you have objections to my manner and approach, I assure you I could have modulated that, but it is hard when probing questions are met with the same recitation heard so many times before. The probing is necessary to get to the facts, since deep and thoughtful insights and analyses are not forthcoming. "

Well, of course you wouldn't see any of these dispatches in any MD&A. And Berry does give analysts credit for downgrading the firm and not accepting all of the party lines they've been given about the company's performance. But it should also make you think about what goes on behind the filings and the PR-driven, homogenized conference calls. The letter is recommended reading just for shock value alone, and not specifically about Corinthian Colleges. It's a reminder of how dangerously sterile fundamental analysis might become: analysts and investors want a one-minute, five-bullet point summary of what a company is "all about," and companies keep them contented by PowerPointing their investor audiences into brainwashed submission. A lot gets lost outside of those PowerPoint presentations, apparently.