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I have never really enjoyed Halloween. When I reflect on why, I think that it comes down to the fact that Halloween is about everyone dressing up in costumes, pretending to be something that they're not to scare, humor or impress everyone else. Go ahead, call me the Grinch of Halloween if you like; however, every time I answer the door on Halloween, the uber-practical side of me just wants to scream out:

"Sham!"

"And, you are not Bill Clinton; you are the 1st grader's dad, who works at our community bank and has been wearing that same mask every Halloween since you picked it up your freshman year of college for that "Presidents and Pinups" party at the fraternity house!"

"And finally, you are not a scary green-faced witch; you are Bill Clinton-mask guy's wife who works at a public accounting firm and loves to bake those fantastic rum-laced pumpkin muffins that you pass out while your little princess trick-or-treats every year!"

However, the polite side of me smiles, comments on their great costumes and offers the kids candy and the parents a beverage ? sending them on their merry way.

The scariest thing about this tale is that dressing up in costumes and disguises is not isolated to people having a good time on Halloween; it unfortunately can exist every day with both people and entire companies. Some people and companies seem to have an overwhelming need to put on a corporate costume, based on what they want people to see and what they think is expected of them. However, if this projected image is not an accurate reflection of reality, then we get what I like to refer to as the "perception v. reality gap"?or in Halloween terms, "hollow" vs. "hallow."

I first noticed the perception v. reality gap when I was doing consulting around enterprise risk management. Many of my clients were very paranoid about others finding out about their areas of deficiencies and exposures, and had a strong bias towards being hush-hush when one was discovered so they could quickly and quietly do something about it. What puzzled me even more was the added tendency of some of these firms to then go further and tout how excellent they were in this exact area both internally and externally. After a while, these firms had not only established an inflated perception with others, but almost unbelievably had also convinced themselves that they were just as good, if not better, than they were saying they were! It always reminded me of the saying, "the easiest person to convince is yourself [and your employees]!" Case in point, Enron, WorldCom, Lehman Brothers, etc.

The stark reality is that the greater your perception v. reality gap, the greater the exposure.

For example, if the perception is that a pharmaceutical firm has a strong pipeline of promising drugs, however, the company is secretly seeing a notable spike in the number of cases of potentially serious side effects and is frantically scrambling to try to isolate and address the cause; then there is a significant perception v. reality gap that may or may not be exposed. Often, the probability of the gap being exposed is small, like a less than 10 percent probability. This leaves management with a choice, trick or treat. Unfortunately, I think that too many managers are willing to roll the dice and try to "trick" outsiders by not "treating" them through the truth and transparency about the potentially serious side effects. If the gap is realized by investors, it will likely create a decline in the price of the company's stock, as investors react to the newly transparent uncertainty exposed by the news about the troubling side effects. However, even more importantly, the company is also likely to experience a further decline in stock price attributable to the loss in trust in management and the company's disclosures. It is these second types of declines that are most difficult, and sometimes near impossible, to recover from.

The bottom line is that yes, it is important to manage the perception of both yourself and your company. However, that does not mean inflating the perception as high as you can. Rather, it means managing the perception to be as close to reality as you reasonably can. This is easiest if you are fully transparent, open and honest about the current state of the organization with your investors, employees, and, of course, yourself!

So please, do yourself a favor and drop the costume and the tricks this year and just focus on the treats!

Sincerely,

The Grinch of Halloween

DAVID M. WONG is director of cross-asset strategy and planning at CME Group, the world's largest and most diverse derivatives exchange.

October 28, 2011

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