by Gregory J. Millman

Three companies: one struggling after a bad quarter, one redirecting business to rebuild confidence after an accounting misstep and one dot-com trying to get on the map. But when they talk to investors, in essence they tell the same tale.

Always tell the truth. Remember the story of the little boy who cried wolf? He fibbed first, then nobody believed him when at last he told the truth.

That's all you really need to know about investor relations. You probably learned it in kindergarten. If you weren't paying attention then, securities analysts are happy to help you review now the lesson they think you missed. "If you broke the glass, you're better off owning up to it right away," Michelle G. Applebaum, managing director at Salomon Smith Barney, said at Financial Executive Institute's financial-reporting conference last November.

Applebaum and other analysts on a panel discussing investor relations complained that companies often seem to hide unpleasant facts for as long as possible, then casually mention them months after they've ceased to be relevant - and often merely as a parenthetical aside in a conversation about something more upbeat.

"Some companies say, 'We had XYZ happen last year,'" said panelist James N. Mordy, senior vice president at Wellington Management Company. "But we never heard about it last year, when it happened!"

Parents and teachers would understand. Analysts don't. They'd have you believe the market rewards honesty and punishes duplicity. Sounds reasonable. But is it true? Cynics need only point to Tyco International, whose stock tumbled 23 percent in a single day last December on news that the SEC was questioning its accounting. The SEC's "informal inquiry" reportedly focused on how the company accounted for acquisitions. A company spokesman told the Wall Street Journal the firm was under no obligation to disclose the inquiry, but did so to "protect the interests of investors." The stock's hammering may have left some investors hoping Tyco will be less protective in the future. Who could blame them?

And consider the experience of AES, a successful independent power producer based in Arlington, Va. Unusual for a power company, AES also happens to be a darling of the social investment crowd, so committed to value-based management that it once spent an entire year's worth of earnings to plant trees in the rainforest to offset pollution from a power plant.

In 1992, about a year after the company had gone public, management discovered that a group of technicians in an Oklahoma plant had been fudging data a little to make it look as if the company were doing a better job with pollution control than it was, in fact, doing. The fib was discovered accidentally and, true to its values, AES immediately reported itself to the Environmental Protection Agency. As soon as AES cofounders Roger Sant and Dennis Bakke learned of the problem, they drafted a press release that minced no words: "A portion of the AES people working in the water treatment facility at Shady Point doctored a number of water discharge samples," they wrote. "We cannot comprehend why anyone would trade our integrity to make our environmental performance look better."

The EPA seemed flabbergasted that a company had informed on itself - most wait to be caught, then hire lawyers to deny wrongdoing - and fined AES only $125,000. No big deal as far as the government was concerned.

But investors weren't nearly as forgiving. The reward for honesty? In one day, AES stock fell from $26.50 to $16.50, wiping out $400 million in AES market value.

Eventually, AES stock recovered, and the company wound up on the recommended buy list of almost every major brokerage firm. But that didn't happen overnight; it took many months. Bakke, who had co-founded the company and was the clear heir apparent for the CEO's job, saw that promotion put on hold and his future with the firm in question.

On the face of it, both the AES and Tyco stories make a compelling case for keeping quiet about bad news. But John Silver, a consultant with the New York-based investor relations advisory firm Broadgate, suggests that's the wrong conclusion to draw.

"Companies should always tell the truth and communicate consistently through all the cycles," he says. "Go ugly early. Break bad news yourself. Unexpected bad news gives you an opportunity to cement your credibility with investors. Do it even if there's a risk."

Silver counsels executives to look on the bright side of the punishing stock falls that often seem to follow honest disclosures of bad news. "The spontaneous combustion of market value just burns out the opportunistic short-term investors the company is better off without," he says. "The only shareholders worth keeping are those who stick with the company through thick and thin, rewarding honesty with loyalty."

There may be something to that, however Pollyanna-ish it sounds. The investor spectrum stretches from Warren Buffett to the day traders, and it's increasingly clear that some of these shareholders are more desirable than others. That's why the financial executives profiled here market their stock in much the same way as they market their products. They try to identify prospective shareholders whose objectives and time horizon are compatible with the company's business, and turn them into long-term investors. But they say sometimes the hard part isn't telling the truth - it's getting the right people to listen.