The Daily Interview: Holding Amazon's Feet to the Fire
Banker Gary Lutin, who led a
drive to get Amazon to more clearly report its financials, discusses
the e-tail giant.
Jun 21, 2001 7:28 AM EDT
Few publicly traded companies have been more scrutinized than online
retailer Amazon.com (
which at times has served as the punching bag for Wall Street's
frustrations with the New Economy.
With its formidable spin machine, Amazon has come under fire from
analysts and investors for how it conveys financial information. That
is, until its most recent earnings release. In response to its
critics, Amazon reconciled its so-called pro forma results -- which
exclude many costs of doing business, such as interest expense and
amortization of goodwill -- with results compiled using generally
accepted accounting principles, or GAAP.
Investors have Gary Lutin to thank for these changes, at least
in part. Lutin, an investment banker at advisory firm Lutin & Co.,
has been the public face of an ongoing New York Society of Security
Analysts' Committee for Corporate Governance workshop on Amazon.
Lutin held periodic meetings to discuss Amazon's finances and
disclosure practices before Congress or the Securities and
Exchange Commission began delving into New Economy abuses, such as
analyst conflicts and opaque financial reporting. All along, he was a
pesky thorn in the side of Jeff Bezos, Amazon's chief executive
officer. Here, Lutin talks with TheStreet.com about how well
Amazon's reporting practices measure up now and where he'd like to see
the SEC move with respect to disclosure requirements.
TSC: What did you hope to accomplish by starting the forum, and
secondly, have you reached those goals?
The original objective of the forum was to examine issues and
responsibility for the information used by investors in their
decisions. The issues have become much more visible as a result of the
dot-com -- or New Economy -- issues, in which a lot of these things
were being questioned. We selected Amazon as an example partly because
it illustrated many of the issues, but partly because Amazon itself
appeared to be a leader in the New Economy.
I believe we accomplished a great deal of what we set out to do,
including Amazon's ultimate assumption of a leadership role. They did
in fact demonstrate exactly the right way to present pro forma numbers
so that people could understand them, and reconcile them to GAAP, or
so-called reality-based numbers. They deserve a lot of credit for
having done that. They've also more recently undertaken to expand
their board, to add people with more diverse views, which I think
would also contribute to the desired model of responsibility for
TSC: Why do you think Amazon arouses such passion in people -- it
seems like whether one is in their court or not, the company evokes
this unusual fervor among its followers?
I think a lot of that has to do with Mr. Bezos, personally. He's
devoted himself much more to inspiration than other CEOs tend to do.
The company itself has a culture of almost cultlike enthusiasm, for
the enterprise as well as its community.
TSC: The SEC is now taking up your cause -- it was reported this week
that the commission is investigating so-called pro forma abuses in
four undisclosed companies. From a regulatory standpoint, what would
you like to see the SEC do?
I think the SEC's essential objective of ensuring that investors are
properly informed is very relevant here. However, the regulations that
the SEC has and their means as a regulatory agency may have limited
applicability. If someone makes a statement in which they present a
pro forma number -- in which it is found, through several layers of
adjustments, to be clearly irrelevant -- but then refer to obscure
data that is filed somewhere with the SEC in its GAAP numbers,
technically they have not violated any regulations.
The SEC can enforce the requirements to file numbers; they can also
enforce the regulations that prevent companies from making misleading
statements, but if management presents something they call a pro forma
profit, and it's defined in such a way that it has nothing to with
profits and the company also satisfies the requirements to file GAAP
numbers, they haven't violated any SEC regulations.
What the SEC can do, and what I hope they will do, is that to the
extent that there are examples that they can address that will help
people to understand what is and what is not permitted, is make good
use of those examples.
TSC: One thing you have said you wanted to do was make boards of
directors more accountable. Most investors, however, focus on
management. Why should investors pay more attention to boards, and
what should they expect from their directors?
I think everyone, ultimately, is looking at management. But investors
should understand that the duties of the board members are to provide
oversight and to be responsible for the interests of shareholders.
Board members are not the agents of management. Their fiduciary duties
are to shareholders. And a board member's job is to oversee and
measure performance and to react, ultimately, to make sure the company
adapts to its environment. In the course of doing that, their job is
clearly on behalf of shareholders, and that includes making sure
shareholders are informed.
TSC: You have praised Amazon for reconciling its pro forma results
with GAAP figures in its most recent earnings report. What more would
you like to see the company do in the way of disclosure?
I really don't want to focus on specific disclosure issues. The amount
of information they provide is certainly adequate. What I think is
beginning to concern a lot of journalists, as well as a lot of
analysts -- and clearly the public, too, as evidenced by recent
Congressional hearings -- is the clarity or the reliability of the
information, not simply the amount that is disclosed. And I think that
is ultimately the responsibility of a company's board of directors --
to make sure that the information that is provided, whatever the
regulations are, is clear, understandable and not misleading.
TSC: The issue of a cash crunch at Amazon was the topic of one of the
forum's gatherings earlier this year and had a lot of play in the
media, including on
TheStreet.com . However, that has quieted since, and few today
speak of the chance that Amazon might run out of cash before year's
end -- it was hardly mentioned, for example, at the company's annual
analyst meeting in early June. Do you think this issue was blown out
I'm not sure I'd say it was blown out of proportion. I think the
nature of attention to it was sometimes misplaced or exaggerated, but
it is a real issue. And it's something I'm sure both the company and
trade creditors will be focusing on increasingly during the third
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