What’s material? It depends …

November 3, 2015

Materiality is one of those fuzzy ideas. Is it a piece of information that makes your stock price move (or would if disclosed)? A change that impacts sales or profit by 10% … or 5 … or 1? One of those events requiring an 8-K filing? Is anything investors want to know material?

Early in my career in investor relations, I learned that accountants can be surprisingly philosophical – arguing vehemently when gathered around a table for late-night discussion of a draft. The same is true of lawyers. And I suppose IROs can disagree on such issues, too.

The Wall Street Journal offered up a couple of explorations this week:

In “Definition of Materiality Depends Who You Ask” on Nov. 3, the quicker read, a WSJ blogger quotes five different definitions of materiality – such as they are – and notes that they are in flux.

In “Firms, Regulators Try to Sort Out What’s Worth Disclosing to Investors” on Nov. 2, the paper focuses on potential shifts in regulatory views – and pushback from companies against overlegislation.

This debate is perennial, and probably unresolvable. But a refreshing aspect is the new interest in whether companies are disclosing too much detail that has nothing to do with investors making decisions – and by its sheer volume may obscure what the real issues are.

Honeywell International Inc., the paper notes, is pursuing on a “disclosure simplification” project to enhance the quality of reporting. In October, Honeywell and its CPAs met with the SEC staff – and the agency filed a short Honeywell slide deck outlining key themes:

  • Eliminate duplicative and immaterial disclosures
  • Customize disclosures to Honeywell
  • Streamline footnotes to address information overload
  • Assess the relevance of recurring disclosures
  • Challenge boilerplate language typically included in company filings
  • Use of cross references

Hmmm … novel ideas. Reducing repetition, making footnotes digestible, taking a red pen to boilerplate and questioning verbiage that’s been in the 10-K so long no one can remember why. This will be interesting.

And what do you think “material” means?

© 2015 Johnson Strategic Communications Inc.

Relationships, not just road shows

September 26, 2015

What makes for a successful IPO? Or sustained capital markets success for established public companies? Discussing the boom (or bubble) in biotech IPOs, an investment banker who specializes in capital formation for that sector, puts his finger on one of the key factors – which applies across industries and company life cycles.

In “A Street-Wise Conversation” in the September Pharmaceutical Executive, Tony Gibney of Leerink Partners, says:

The best management teams focus intently on cultivating relationships with the buy side over years instead of just during the IPO process itself.

handshake_nsfReally, this is true whatever industry you’re in – and whether you’ve been public for 50 years or your IPO is still in the planning stages. Success comes from focusing on relationships, cultivated over time, especially with institutional investors who put money into your sector.

The CEO or CFO whose idea of investor relations is to gear up only when an offering (initial or follow-on) is at hand will walk into buy-side offices on the road show as an unknown – and therefore riskier – story to bet on.

The “known quantity” who has talked to investors for years, provided clarity and insights on his or her company and the industry, developed long-term relationships … That’s the management team long-term investors will want to put their money behind.

© 2015 Johnson Strategic Communications Inc.

Attracting like-minded investors

April 6, 2015

How do we bring in long-term investors? By disdaining short-termism and managing the business for results over the long haul. That, at least, is the short answer in an interview of Tim Cook, CEO of Apple Inc., for the “World’s 50 Greatest Leaders” feature April 1 in Fortune:

“The kind of investors we seek are long term because that’s how we make our decisions,” he says. “If you’re a short-term investor, obviously you’ve got the right to buy the stock and trade it the way you want. It’s your decision. But I want everyone to know that’s not how we run the company.”

Seems like the ultimate free-market view: Investors and companies self-selecting, with short-termers attracted to companies that behave like momentum plays, and long-term investors drawn to companies that manage for the long haul and communicate as much.

So, can we get that done by next week?

© 2015 Johnson Strategic Communications Inc.

Disclosure committees and IR

November 24, 2014

With ever-growing regulatory requirements and the complexity of global business, disclosure committees are playing a crucial role in ensuring accurate and useful reporting to investors, according to “Unlocking the Potential of Disclosure Committees,” a new report by the Financial Executives Research Foundation and Ernst & Young LLP.

And investor relations officers – in most companies – play an important role with the disclosure committee.

In more than 100 companies surveyed, some 65% of disclosure committees included the head of investor relations as a member – along with the controller or chief accounting officer, general counsel or equivalent, CFO and assorted other executives (usually not the CEO).

The study says having multiple functions represented in addition to finance and accounting – such as general counsels, heads of communications and IROs – adds value because diversity brings to the table insights on the business from multiple points of view:

“It’s a cross between finance and non-finance,” said one of the executives, a senior director of corporate accounting and reporting. So it’s important, she continued, to “make sure the right representation of the business is there … I think we have pretty good coverage.”

As a non-accountant and occasional participant in disclosure committees, I try to ask big-picture questions and challenge insiders to explain the business more clearly … because what investors need most from disclosure is clarity and perspective.

Can companies think & act long-term?

September 26, 2014

CEO at windowWhen former Merck & Co. CEO Ray Gilmartin sat down with a governance guru to reflect on “The Board’s Role in Strategy” for the National Association of Corporate Directors’ Directorship magazine, the topic turned to the conflict between short-termism and the sustained commitment that executing a strategy demands.

Gilmartin waxed philosophical when asked about encouraging CEOs to act strategically, even under pressure from short-termist investors:

What’s happened is that there is confusion between stock price and creating firm value. I don’t believe investors are short term-oriented, but boards and management can be. Investors will reward investments in R&D, for example, because they recognize it will create long-term value. Therefore, if you’re lowering your earnings growth or you missed a quarter because you don’t want to cut back on R&D, if you have good relationships with your investors and they have confidence in your operating capability and your ability to deliver, then even though you’re falling short on the quarter or you’re going to lower your earnings to invest in research, they will still reward you for that.

Well, OK. This seems a bit theoretical. The ex-CEO is nearly 10 years out from the corner office, having taught at Harvard Business School and served as an outside board member in the intervening time. It’s been awhile since he sweated Merck’s stock price dropping 12% in two days, or its blockbuster drug going off-patent. Maybe it’s more accurate to say investors will eventually reward investments in R&D, but they may deliver a thrashing in the quarter(s) when EPS falls short. So get ready.

For the here-and-now, I would add two things to Gilmartin’s opinion that boards and CEOs can think and act strategically for the long term:

  • Communicating clearly is essential. A big part of the CEO’s job, as well as the CFO and IRO’s, is to explain that the wheels are not falling off the bus – we’re investing in the future. Then we must show concrete evidence of progress, step by step, in R&D or gross margins or whatever.
  • It takes guts to think and act for the long term. When earnings go the wrong way, the whole team needs to toughen up and be bold about interfacing with investors. Hiding doesn’t help, it hurts.

That’s my two-cents’ worth. What do you think?

 © 2014 Johnson Strategic Communications Inc.

‘Key to success … is preparation’

June 2, 2014

AlaixJuan Ramón Alaix, CEO of the animal health giant Zoetis Inc. (formerly Pfizer Animal Health, spun off as a NYSE-listed company last year), offers wise counsel on communicating effectively with investors.

In a “How I Did It” CEO interview in the June 2014 issue of Harvard Business Review, Mr. Alaix comments:

A lot of people, when they reach a certain age, are reluctant to accept training. That’s not true for me—I’m very open to it. I’d had communication training over my career, but the preparation for our IPO was much more intensive. Before I did my first TV interview, for instance, I probably spent more than eight hours doing mock interviews. I believe that the key to success in communication is preparation. By the time I gave the first road-show pitch to investors, I’d rehearsed it at least 40 times.

Wonderful words from a CEO! As IR professionals, most of us have had the opposite experience: an exec who is too busy to practice and thinks it’s OK to wing it because, after all, who knows the story better?

Ask the people who listen to investor presentations: The CEO, CFO or IRO who is practiced and prepared will always have a greater impact than the one who fumbles with his thoughts – or just reads the script.

It’s good to hear Mr. Alaix endorse the most basic rule of speech making: rehearse, rehearse, rehearse! I’m sure Zoetis is well-served in its communications – and other areas – by this kind of diligence.

© 2014 Johnson Strategic Communications Inc.

Let’s make a deal

May 27, 2014

Mergers and acquisitions are resurgent – a factor in the stock market’s buoyancy, a topic of conversation everywhere and a sometimes challenging reality in our jobs as investor relations professionals.

The current issue of Barron’s advises investors on “How to Play M&A” and offers some stats from Dealogic:

So far this year companies have announced deals worth $1.52 trillion that are either completed or pending, according to Dealogic. That’s up 56% from last year and marks the largest dollar amount for deals since the $2.06 trillion recorded during the same period in 2007. Jumbo deals in particular are making a comeback.

Mergers, divestitures and other deals are popping up all over. The top five sectors are healthcare, telecom, real estate, tech, and oil & gas. Make no mistake, M&A is cyclical, as seen in this chart from Barron’s:

M&A deal value by year

If you observe that the last two peaks in M&A activity coincided with stock market “tops,” you’re not alone – although Barron’s believes this bull still has room to run, in both stock prices and deal flow. We’ll see.

My point here is that IROs and IR counselors should develop M&A communication as a core competency. Mergers are so important to the strategic future of most companies – as buyer, seller or competitor – that we need to dig deeply into how deals do (and do not) create value for shareholders. And we need to consider how to tell that story.

The first instinct of some CEOs, and IR people, is to trot out familiar M&A bromides: “strategic combination,” synergies, “merger of equals,” 2+2=5, “critical mass” and excitement about the future. The press conferences are all smiles. Not that these stories are false, but they don’t tell investor whether the transaction is really creating value.

Worse yet, merger messaging can arise from defensiveness. Execs who have spent months thrashing out a deal may draw talking points from the touchy issues: where the new headquarters is or how the top jobs are divvied up. Significant maybe, but not the main point for investors.

Here are three key needs to consider in communicating M&A:

  • Strategy. An acquiring company must explain why the deal makes sense and keep explaining it. Strategy is not a combined list of products or expanded footprint. It’s how the deal changes your competitive position, how it changes who your company is, three to five years from now.
  • Metrics. Besides adding two companies’ sales together, merger announcements most commonly discuss forecasted cost savings and change to EPS (acquirers love to say “accretive”). How about operating cash flow per share? Return on capital invested vs. your cost of capital, or change in return on equity overall? Impact on dividends?
  • Follow-through. Success in M&A is all about integration, and IROs can help execute the strategy. When it comes to telling the story, plan for follow-up announcements as milestones are achieved. Track those metrics and report the progress. And keep explaining the “why.”

I’m not saying these are the answers. Getting the right messaging depends on all the specifics of your company, the deal that’s in front of you, your industry and what your investors care about the most. But developing that messaging with the CEO and your deal team is one of the most important jobs of IR during a time of transition.

IR professionals also play a central role in managing communication. It’s critical to lay out a detailed timetable for all communications that need to take place on Day 1, announcement day, and following.

Delivering the right investor messages, tailored for each audience, is essential in playing “Let’s make a deal” as a public company.

© 2014 Johnson Strategic Communications Inc.

Do we focus on the long term?

March 17, 2014

We often hear CEOs complain about the short-termism of Wall Street, but a commentary by value investor Francois Ticart in this week’s Barron’s questions whether most companies really focus on long-term value. Let’s include investor relations in that question. Ticart, founder & chairman of Tocqueville Asset Management, says:

Listed companies, the analysts who follow them, and the executives who run them have become increasingly short-term minded in recent years. Stocks now routinely respond to whether they “beat” or “miss” quarterly consensus estimates of sales and earnings, and much of the stock trading takes place on that basis. Needless to say, quarterly earnings have very little to do with long-term strategies or other fundamental factors. By focusing on them, financial analysis has become nearly useless to long-term, fundamental investors.

So think about IR: We say we want long-term investors, but how much energy do we focus on quarterly results and short-term fluctuations, and how much effort do we devote to communicating strategic drivers of our business over a 3-year to 5-year time horizon like the one Ticart favors? Are our own IR efforts part of the problem?

© 2014 Johnson Strategic Communications Inc.

How IR adds value for investors

March 6, 2014

NIRI KC 3-6-2014 Hancock & BurnsAt the NIRI Kansas City chapter’s “IR and Governance Bootcamp” today, Debbie Hancock, vice president of investor relations for Hasbro, Inc. did a great job – with an assist from Bruce Burns, director of investor relations for Westar Energy – marching us through “a day in the life” of an IRO, skill sets we need and the role of IR both internally and out in the capital markets.

That’s a lot of ground to cover – really, the whole job of IR. I’ll share one thought of many that struck me, from Hancock’s comments on a slide headlined “How IROs Add Value to Investors.” Note that she focused on adding value to investors. On her list: representing the company honestly, being prepared with answers for questions, informed and responsive, conveying understanding of the numbers.

The Hasbro IRO  listed one value-add that especially stood out to me:

Put the story together for investors. I think this is super-important…. What are the big takeaways from all this information? Put that together for them, put that story together.

Providing perspective, thinking like someone on the investor side and meeting the needs of an asset manager or analyst trying to make an investment decision, is probably the greatest value we can add in IR.

© 2014 Johnson Strategic Communications Inc.

What’s your creation story?

February 11, 2014

As investor relations people, we often hear or talk about stocks that have a great “story” – by which we mean a memorable explanation of how the business generates value. Stockbrokers and the buy side like a good story.

So I was intrigued by “How to Tell Your Company’s Story” in Inc. magazine’s February 2014 issue, which highlights entrepreneurial CEOs and their corporate offpsring. Writer Adam Bluestein says:

Before it has investors, customers, profits, press coverage, or even a perfected product, every startup has at least one valuable asset: its story. So you might want to ask yourself: Who are you? Where did you come from? Why are you doing this? … your company’s origin story has more power than you might imagine.

Inc. focuses on the sizzle of young entrepreneurial stories, of course, but the power of how and why your business got started applies to corporate old-timers as well. Even decades into a company’s history – sometimes a century or more – the values, initiative and focus of a founder can influence the culture and brand appeal of a business:

The creation myth is not an asset just for startups. As those businesses grow into established firms and individual founders figure less prominently, the origin story can serve as both a road map and moral compass. Keeping that story alive, keeping it true, and keeping it relevant–these are the challenges more mature businesses must contend with.

What’s the significance for investor relations? Well, investing ultimately is a bet on a company, a group of people trying to accomplish something in the bigger world around us. In IR, we hope to connect with investors whose perspective extends beyond the current quarter.

If we can show that creativity and drive are embedded in a company’s DNA, that business is probably a good bet over the long haul. Think about great companies, and you’ll realize they are also great stocks.

What’s your creation story? Have you researched it, defined the distinguishing characteristics, set out the strategic essentials that fuel your business today and will continue to do so in the future?

© 2014 Johnson Strategic Communications Inc.


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