Under Scrutiny: Here's why securities analysts view the overly nice and the overly egotistical CEO with suspicion - Investor Relations - Chief Executive Officer evaluations - Statistical Data Included

Chief Executive, The, Nov, 2001 by Laurie Kaplan Singh

Not long ago, Covad Communications Group was riding high, building a nationwide network to provide fast Web access. But on October 20, 2000, after spiraling downward for six months, Covad shares plunged from $10 a share to $5 a share. By year-end, the stock, which had hit a high of $64 in March, was trading at less than $2.

The troubled telecommunications upstart, based in Santa Clara, CA, buckled under a debt load of $1.4 billion. Eventually it sought bankruptcy protection, settling with bondholders by agreeing to pay 19 cents on the dollar.

Covad's stock collapse, followed by the resignation of its top executive, provides a classic example of how financial analysts' perceptions of CEOs impact Wall Street coverage, stock-price performance, and the top official's tenure.

Covad was like many other companies providing high-speed Internet access over digital subscriber lines. But after problems with late customer payments resulted in a drastic widening of losses, Covad failed to meet analysts' earnings expectations and lost their trust.

When that happens, companies frequently make changes in leadership. At Covad, Robert E. Knowling Jr., CEO since June 1998, convened his board. "1 posed the question they obviously had to consider," he was quoted as saying. "Is management fit for duty? Meaning me." No, the board decided, and Knowling resigned on November 1.

At the time, neither Knowling nor Covad would elaborate on the change in leadership. Many analysts said the stumble was largely a symptom of turmoil in the telecommunications business, though some said Knowling shared the blame.

Under his leadership, Covad had just completed a large convertible debt offering when it announced it would miss its third-quarter earnings targets. That's when analysts discovered overstated revenue and cash-flow projections underlying the bond offering.

"Almost every analyst who covered the company felt he had been lied to," says an equity research analyst who spoke anonymously. "On Wall Street, this is a cardinal sin." Almost immediately after the stock's freefall, many investment firms dropped coverage of the company.

A CEO respected by analysts will have far more room for error than one who is viewed as arrogant or overconfident, or, worse, dishonest. "If you get into a crisis management mode, it can really help to have analysts on your side," says Richard Bliss, president of BAM Asset Management. He recalls the accounting practices contretemps of $38 billion Tyco International. That's when David W. Tice, the Dallas-based investment manager and short-seller, accused the company of taking overly large charges and delaying some payments in order to mask weakness in its earnings and cash flow. Then Tyco disclosed that the Securities and Exchange Commission (SEC) was investigating its accounting practices. Investors reacted sharply, and the stock fell to its lowest point. But then analysts stepped in and said, in effect, "We know the company and it's not cooking the books."

"That went a long way to stem the stock's decline and create an atmosphere in which it could recover," Bliss says, In July 2000, the SEC announced it was ending its investigation without taking any action. The company announced that it would move some of its accounting charges to different quarters of the year in response to regulators concerns, giving confidence to some investors otherwise nervous about buying the stock.

Carole Berger, a bank stock analyst for TIAA-CREF Investments, recalls problems encountered by Bank One in the mid-1980s. The company made a series of missteps, including a number of acquisitions Wall Street considered too expensive. It also failed to achieve important economies of scale. "If John McCoy, then CEO of Bank One, had not been so well-liked by the Street, the company's valuation would have plummeted a lot faster than it did," says Berger.

Bank One's new CEO, James Dimon, also provides an example of how a CEO's good relationship with the investment community can provide an anchor of stability during a difficult time. Since he stepped in about a year ago, Dimon has taken a number of actions to improve the bank's balance sheet. Nevertheless, the company continues to miss its earnings targets.

"Any other company would have seen its stock decimated--especially in this market," says Berger. "But Dimon has created a constant stream of information to the Street, making it very clear that he is doing all the right things. And he always comes across as articulate and well-informed."

It's One Part Communication...

Admittedly, a few executives with long and impressive track records do manage to get away with having a lukewarm relationship with analysts.

A blunt-talking executive who earns $7 million a year, Wells Fargo's Richard M. Kovacevich has some detractors. "No one is harder to get along with than Dick Kovacevich," says one analyst who spoke on the condition of anonymity. "He doesn't like us, and he sees our role in the functioning of the capital markets as superfluous. But he knows how to run a bank, and the people who work for him are highly motivated and dedicated."