November 02, 2006
Puffery and Executive Credibility
Posted by Lisa Fairfax

Today we covered “puffery” in my Securities Regulation class, which is the notion that statements of corporate optimism in the face of a corporation’s seeming financial distress are not viewed as actionable misstatements because investors expect actors to be overly optimistic and “look on the bright side.”

I have always been troubled by this doctrine, and what it implies about the trustworthiness of corporate executives and directors. Intuitively it makes sense that you would expect officers and directors to project an image of confidence and optimism, particularly when the company may not be doing well. Indeed, studies suggest that officers of major corporations tend to be overly optimistic—it is one of the traits that apparently makes them successful.

My concern is that such a doctrine encourages investors to continually second-guess corporate statements, thereby encouraging a climate of distrust between investors and corporate actors. Thus, when I asked my students what they felt about the doctrine, most of them seemed to accept the puffery doctrine because it confirmed their impression that “executives lie.” To that end, the puffery doctrine facilitates a (growing) distrust of corporate executives.

I am also concerned about its impact on executives. Executives already tend to be overly optimistic. And at the very least, that optimism could lead them to turn a blind eye to the truth—we certainly see threads of this notion in the recent corporate scandals. The problem is that there is a fine balance. We certainly want executives to exude confidence, but we also want them to be able to provide a truthful and realistic assessment of their corporate environment. It is not clear that the puffery doctrine facilities the right balance.

In the end, I always tell my students that the puffery doctrine is like a used car salesman defense—that is, executive statements of optimism should be considered in the same light as statements made by used car salesmen. And who actually believes what a used car salesman has to say? Indeed, several surveys have suggested that used car salesmen represent the least trusted profession. If this analogy is accurate, the puffery doctrine suggests that corporate executives merit the same level of trust as used care salesmen. I find that troubling.

Business Ethics, Corporate Governance, Securities | Bookmark

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