The most important role a journalist plays is that of watchdog, holding to account society’s power brokers and rule-makers, those who control and influence our collective march to the future. And that’s no less true for the business reporter than it is for the White House correspondent.
For too many years business coverage has taken a back seat in newsrooms, serving as journalism’s “ugly stepchild.” Business coverage had been a starting point for some, a temporary assignment for others, or a place to gracefully end a career. Political coverage was (and still is) perceived as sexy—charged with energy and intrigue. Business news coverage, however, was often regarded as drone work, boring to the reporter and of limited interest to the average reader. Over the past decade, however, media observers such as Howard Kurtz of The Washington Post have noted a change in attitude toward business coverage. Reporters have increasingly sought business beat assignments (in part because that’s where the jobs are), and business-oriented stories are more likely to be found on the front page.
Despite this evolution in attitude, business coverage frequently lacks depth, understanding and context. A typical business report will dutifully relate a company’s earnings-per-share number, but rarely challenge or even question the validity of that number, or provide to the reader the broader context in which that number resides. Furthermore, CEO’s are rarely challenged as to the accuracy or veracity of their statements, and to verify claims and assertions can be difficult given the lack of access reporters often have to internal financial data.
Business executives, managers and owners are generally better educated about their world than are most of the journalists assigned to cover it. This imbalance puts reporters at a serious disadvantage and has an obviously negative impact on the depth and quality of coverage. The business pages of many papers (especially those serving smaller markets) are often little more than extensions of corporate PR departments. This constitutes nothing less than an abrogation of editorial responsibility.
Understanding the intricacies of business, especially business as practiced by the multinationals, is not easy. And it’s unrealistic to expect a reporter to have the same understanding of economics, finance, accounting and the capital markets as does a CEO with a Wharton MBA and 20 years’ experience. However, somewhere between complete knowledge and absolute ignorance lies a middle ground of understanding that is attainable to any journalist willing to put in the time and effort.
The Executive Club
When a corporation issues an initial public offering and “goes public” (i.e., issues stock that is traded on the open market), there is—in theory—a tradeoff: The management of the company has access to capital through the open market system, but because the stock is now traded publicly the company is subjected to laws and regulations that do not apply to privately held businesses. In exchange for public investment, corporate executives are subject to oversight. Those engaged in such oversight include stock analysts, the Securities and Exchange Commission (SEC), fund managers, institutional investors, and public-interest advocacy groups. The theory is that publicly traded corporations are a trust and, because the public interest is at stake, actions and decisions affecting them are subject to review. That’s the theory; the reality, as one might suspect, is quite different.
In corporate America there exists a club—the Executive Club. Its membership is based on position, power and control of corporate assets, resources and personnel, rather than on a golf handicap or bowling score. Members include board chairmen, CEO’s, COO’s, CFO’s, CIO’s and executive V.P.’s. Club members cumulatively form the executive management teams of corporate America, a separate and special class of people. Membership in the club is limited to a select group of people whose talents, skills and abilities have convinced existing members they have what it takes to lead a major business enterprise. Membership is based on a mix of talent, merit, pedigree, looks and personality. Club membership is highly prized because once one is selected everything changes, starting with compensation. An operating vice president employed by a major corporation may earn between $200,000 and $300,000 annually; but once that person is elevated to executive vice president, his or her income might easily approach one million dollars, and that is before stock options. Compensation for CEO’s can exceed $10 million a year.
Another change is lifestyle. Executives never fly coach and rarely even fly business class, as most have fleets of corporate jets at their disposal. Additionally, the corporations they run are generous enough to provide them with country club memberships, free personal travel, and numerous other perks. Their children attend the best schools, and a typical executive family vacation might be to Scotland, Switzerland or Aruba, not Wisconsin Dells. Furthermore, boards of directors are populated with friends and associates of the executive management teams they are charged with directing. As a result, members of the club are—quite literally—able to write their own ticket in terms of how much they earn and the contractual conditions under which they work. In the real world, club members are seldom held accountable for their actions because controls put in place to deter corporate malfeasance often fail. The SEC is understaffed, and the objectivity of accountants, auditors and financial analysts has long been compromised.
This leaves the Fourth Estate as a last resort for the truth. The stakes can be high, as seen in the Enron failure, where thousands of Enron employees lost both their jobs and their retirement funds, while those in power cashed out in advance of the crash. Even though Enron was a high-profile player with political connections to both the Clinton and Bush administrations, there were only two publications that reached a national audience—Fortune, The Wall Street Journal, and U.S. News & World Report—that called into question Enron’s market valuation and lofty stock price prior to its collapse.
Prior to the 1980’s, when merger-mania and the practice of “greenmailing” first brought market valuation and stock performance to the forefront of media and investor awareness, executive performance was measured in terms of profitability and the ability to manage assets. Under the old way of doing things, managers and executives had time to develop markets and build brands, and success was measured on performance over years, not months. The primary measure of a company’s success today, however, is its earnings-per-share price, reflected in the closely watched performance of its stock. This is the magic number that most concerns both the investment community and members of the Executive Club.
In today’s business climate it is not enough to be profitable. Investors demand growth from quarter-to-quarter, and the large institutional investors (who drive the market) will sell on a whim. Additionally, CEO compensation also includes substantial amounts of stock, so a few cents up or down in the share price can have a substantial impact on personal wealth. These realities put pressure on CEO’s to do whatever it takes to pump up the stock. And “whatever it takes” may include accounting gimmickry or outright fraud. It is therefore incumbent upon the business journalist to understand this environment and the various tricks employed by business executives to hide the truth.
Getting Up to Speed
Journalists entering the profession today are better educated and prepared than their counterparts of even a few decades ago. The journalism schools housed in major universities graduate ambitious young people willing and able to do the research, investigation and writing required for success in the field. Unfortunately, too few of these students have even a rudimentary understanding of economics, accounting, math, statistics, the capital markets, or capitalism itself. This lack of knowledge renders them unprepared as business journalists.
Consider for a moment the preparation required for other news beats. One would reasonably expect a science reporter to understand the scientific method, the differences between the various scientific disciplines, the peer review process, and how science advances knowledge. Additionally, one would reasonably expect a legal correspondent to understand how the courts operate, how ideas are turned into laws, and the impact of major Supreme Court decisions on various groups within the society. One need not be a scientist to report on scientific advancements and issues, just as one need not be an attorney to understand and report on legal affairs. But in both cases one should have a solid understanding of the field. And the same holds true for reporters specializing in business coverage.
Getting up to speed is difficult and time consuming, but necessary. As both a business research specialist and investigative journalist, I have come to believe it’s important for business reporters to know the following:
- Accounting, mathematics and statistics. Why? Because this is how business people communicate. Accounting is the process of recording, measuring, interpreting and communicating financial information to a variety of users, so it’s important to understand its concepts and terminology. Similarly, financial managers make their forecasts and projections using mathematical formulas, and statistics are regularly used to argue positions and explain relationships among businesses, industries and markets.
- How to read, understand and interpret financial statements, SEC filings, and annual reports. Specifically, this means being able to review a balance sheet, profit and loss statement and cash flow statement, and to then make a determination on a company’s financial health.
- How capital markets operate. Specifically, how companies are formed and financed, the difference between corporations, partnerships and sole proprietorships, and how a privately held company is able to take itself public. Money is the oil that lubricates the system; knowing how it flows is important.
- How accounting and reporting tricks are used to embellish corporate earnings, hide management mistakes, and defraud regulators and investors.
Making the Commitment and Taking First Steps
Short of pursuing an MBA or taking several business courses, how might a journalist obtain a solid business background? For starters, adopt the right frame of mind. Don’t be intimidated by the math, statistics or accounting, and don’t become mired in the minutiae. Remember: The objective is not to become an accountant, fund manager, or financial analyst, but to understand enough of their world so you are able to effectively question, challenge and follow-up. Stay focused on what’s important; understand it will take time and that the learning process is ongoing.
When I started writing investigative pieces on business, I searched for a book that could help me sharpen my reporting and writing skills. While I found a number of good books about writing, research and investigative reporting, none described the process I engaged in with my reporting on business. So I set out to write “The Business Reporter’s Handbook” for two reasons: First, the process of researching and writing forced me to deconstruct my job and think through the steps involved in developing and presenting business information and, second, I felt other journalists could benefit from what I learned.
Of course, not every reporter needs to write a book about this process in order to do a better job at this kind of reporting. But because of my experience doing just that, I can recommend benefits that come from reexamining the resources, process and skills that each of us brings to this job. What it leads to is a more solid understanding of the key business practices and strategies we must understand to function effectively as the eyes and ears of the public.
I also recommend that business reporters take an inventory of what they need to learn. To aid in that process, I offer some ideas in the handbook: Make a list of questions for the various subject areas and go after the information. Approach the process as you would any reporting assignment: Determine what you need to know and then work to obtain the answers. Start with accounting, math and statistics, since they are fundamental to all business operations.
In addition to reading about these and other topics, interview experts. Much of what I learned about accounting came from interviewing CPA’s, corporate financial officers, and staff accountants. If pursued with an attitude of persistence and determination, reporters will be surprised at how quickly their own market value rises with their increased level of professionalism.
Glenn S. Lewin is founder and editor of Business News Service. He is a business researcher and freelance investigative reporter, as well as author of “The Business Reporter’s Handbook: A Guide to Researching, Writing and Reporting on Companies, Industries and Markets.”