Over the next two months, headlines on the financial pages will attempt to tell the story of business profitability in 1979. In a few instances, these reports probably will make front-page news and be recounted very briefly on the nightly television news programs.
But is the news business doing its job by merely reporting numbers? Profits of the major oil companies are certain to be much higher in the year just ended than they were in 1978, for example. In the typical shorthand of headline writing, you will probably read banners or hear newscasters stating that Exxon profits "soared" by 75 percent or some equally astounding number.
There is no question that the petroleum giants have been embarrassed by the large numbers they have been reporting. In the third quarter of 1979, oil profits were up some 100 percent from the same period a year earlier. They increased during a period when consumers were tightening their belts because of soaring costs of energy, among many factors.
Exxon's third-quarter increase in profits of 120 percent over the same 1978 period was greeted with such descriptions as "obscene" by various politicians. At least one corporate executive says he believes this sort of public reaction to business profit reporting is a dangerous development. "Disastrous, often brazen, and certainly thoughtless" is the way businessman David L. Shanks describes not the reporting of corporate profits by the media, but the earnings statements issued by major oil companies last fall.
Shanks is director of corporate public relations and advertising for Rexnord, a major manufacturer, based in Brookfield, Wisc., of bearings, chains, fasteners, knives and machinery.
He has been engaged, for the past year, in a lonely struggle to persuade business that current methods of reporting profits and losses are planting the seeds for future woes. "I'm the guy who feels that the public's gross misperception of profit levels leads to profound, often misdirected, legislation. . . . The misperception continues to build because business and the media communicate profit levels so that they are misunderstood by the majority of the public," says the Rexnord executive.
What Exxon should have reported, in Shanks' view, is that its after-tax profit as a percentage of sales for the third quarter was 5.55 percent, up from 3.27 percent in the 1978 period.
Instead, like other businesses, Exxon reported its net income -- the after-tax profits total compared with the same figure for 1978. Normal changes in economic conditions and business cycles often lead to sharp rises and declines in profits on a year-to-year basis of comparison. Shanks says he thinks the general public is misled in either instance to believe that a business is making too much money or is in trouble.
In support of his thesis, Shanks can point to numerous surveys over the years that indicate that many Americans do not have a clear understanding of profit levels.
A NBC News/Associated Press poll last May found 80 percent of the public saying that business profits were too high. Arthur D. Little Inc.'s Opinion Research Corp., in a report last November, showed that the public estimated all manufacturing industry profits at 32 percent of sales, up from 29 percent in 1976, while the actual level of such profits was 5 percent.
Partially in response, at least two newspapers, the Journal and the Sentinel in Milwaukee, have changed some of their profit-reporting methods. "To the extent that we have time," says Journal business editor Dave Beal, his financial section emphasizes profit margins in corporate earnings accounts. h"We're also trying to get away from using 'record' earnings in headlines, because of inflation that distorts results . . . If a company didn't have record earnings, it lost ground."
The Milwaukee journalist argues that profit margin figures (profits as a percentage of sales) are a better measure of company operations than the percentage fluctuation in total profits on a year-to-year basis. At the same time, Beal says that a measurement showing return on investment would be even better. But under deadline pressures, with typically small staffs, Beal notes that financial sections do not have the time to take data from many companies and translate them into different figures.
Most news business reports on company earnings reflect what the businesses themselves find to be significant -- and percentage growth or shrinkage of profits is a key measurement that corporations highlight.
Frederick Taylor, executive editor of The Wall Street Journal, believes it is "not practical" to ignore a statistic that business leaders themselves emphasize.
As with many similar issues facing the media, part of the difficulty in reporting corporate profits is that there are many different media audiences. Readers and viewers include sophisticated investors and corporate executives as well as the general public with no special expertise or interest, other than as consumers and citizens.
Rather than limiting the emphasis of corporate financial reporting to profit margins, as suggested by Shanks, a better approach would be for businesses to provide more extensive disclosure in their reports to the media -- including profit margins and the traditional percentage change measures as well as return on investment and more sophisticated guides to a company's performance.
This would place the onus for making independent judgment about what information to report or emphasize where it belongs -- in the newsroom.