Archive for July, 2008

SEC guidance on the Web (follow-up)

July 31, 2008

Good commentaries on the SEC guidance on corporate websites, blogs and the like at two other blogs: TheCorporateCounsel.net and IR Web Report. The devil is in the details, of course, so you’ll want to study the SEC’s interpretive release (update: the full release was posted on August 1).

The broad implication is certain: Companies need to get on top of what they’re telling investors online – intentionally or unintentionally, on the official website or on some employee’s blog or MySpace page. (See July 30 post below.)

SEC clarifies guidelines for Web IR

July 30, 2008

The Securities and Exchange Commission today approved new guidance for public companies’ communication with investors via websites, blogs and other Internet channels, a long-awaited update for investor relations officers and executives who last heard from the SEC on this topic in 2000.

The SEC press release provides a broad outline – and some further hints at the direction were provided in staff comments today – but details are in the interpretive release itself, which has not yet been posted on the SEC website. The commission promises clarification on several issues:

  • Use of websites to comply with Regulation FD requirements. The SEC promises guidance on how companies may disseminate updates or material information online, without the well-worn ritual of issuing a press release to make information “public.” The interpretive release will go into particulars on how companies can evaluate whether (1) their websites are recognized channels of distribution, (2) posting online makes the information available to the marketplace in general, and (3) investors and the market have time to react to the information posted. Details will be of interest to IROs as well as PR staffs and vendors.
  • Liability consequences of online financial communication. Specifics include corporate websites’ provision of data in historical archives (without considering an old news release or financial report “reissued” every time someone accesses it); links to third-party websites or reports (updating the SEC guidance on disclaimers to avoid “adopting” the other persons’ views for liability purposes); and summary or highlighted information (imagine a brief overview of financial reports, without rehashing all the notes and disclaimers in the 10-K).
  • Blogs and online forums, a hot topic among IROs eager to interact with investors in a 21st-century way. The SEC affirms that antifraud provisions of the securities laws do apply to statements made by companies or persons acting on their behalf in these venues. (In my book, this is the only sensible approach.) And companies can’t force investors to waive protections as a condition of entering such a forum.
  • Sarbanes-Oxley and the website. The guidance cuts companies a little slack by discussing boundaries so that not all information that might appear online (many company websites offer areas for marketing, recruiting and other purposes as well as investor info) is subject to Sarbanes-Oxley rules on disclosure controls and procedures.
  • Cool graphics. The SEC gives the go-ahead to creative technologies that use video or interactive features but aren’t “printer-friendly.” Apparently it doesn’t have to be on paper to be disclosure.

It’s great that the SEC is responding to this need for clarity, following a recommendation from its Advisory Committee on Improvements to Financial Reporting. Companies will want to study the guidance to implement best practices, and stay legal, as investor relations enters the era of IR 2.0.

Hedge fund activists – doing what works

July 29, 2008

The best defense against “activist” shareholders going into battle against management is prevention: taking actions on management’s own initiative to realize shareholder value (e.g., cutting costs, making better use of the balance sheet, or confronting difficult decisions in leadership). Activists will keep hectoring companies they think are in need of change because, well, it’s a good investment strategy: 

Activism is become increasingly popular as an investment strategy among hedge funds for one main reason – it works. According to our research at 13D Monitor, the average return for more than 200 material activist campaigns that were completed during the past two years was 18.55 percent, nearly double the average return of 9.49 percent for the Standard & Poor’s 500 stock index for the same time periods.

- Kenneth Squire, founder of 13D Monitor,
“Not Your Father’s Activist,” Alpha, May 2008 

IR & your company’s market cap

July 28, 2008

In an article on perception studies in IR magazine, Brian Rivel, president of Rivel Research Group, drawing on years of talking to institutional investors about companies and stocks, noted a conclusion on the value of investor relations itself:

We can point to cases that clearly show the impact good IR has on valuation. In our experience, 10 percent of company valuation is tied to truly superb IR. A downside valuation of 15 percent accounts for bad IR. That’s a 25 percent swing, so companies that communicate well attract a much higher valuation.

- Brian Rivel, quoted in Adrian Holliday, “Feedback at a Cost,”
IR magazine, June 2008, p.41

Practice, practice, practice

July 24, 2008

As investor relations staffs gear up for management presentations – whether in a quarterly conference call or a road show with investors – the admonition to “Practice, practice, practice” rings true. Telling a story well takes work, Hollywood executive Peter Guber says: 

Great storytellers prepare obsessively. They think about, rethink, work, and rework their stories. As Scott Adelson, an investment banker who uses storytelling to help clients raise capital in public markets, said … ‘Sheer repetition and the practice it brings is one key to great storytelling. When we help companeis sell themselves to Wall Street, we often see the CEO and his team present their story 10, 20, 30 times. And usually each telling is better and more compelling than the one before.’

- Peter Guber, “The Four Truths of the Storyteller,”
Harvard Business Review, December 2007 

Yahoo! is growing up

July 22, 2008

The rough patch Yahoo! is experiencing brings back a couple of IR lessons I’ve encountered. In the spring of 1996, my colleagues and I were cooling our heels in the lobby of a big mutual fund, waiting to see a portfolio manager. Our European-based company laid claim to being the world’s largest chemical firm. Steeped in more than a century of history, measuring revenues in billions of Deutsche Marks and significance in tens of thousands of employees. My colleagues spent their work lives amid a huge complex of chemical and pharmaceutical plants with multistory reactors, environmental scrubbers, pipes everywhere. We were old economy.

Into the waiting room of that fund walked another crew of executives – much younger – and we introduced ourselves. Their company was called “Yahoo!” and the business had something to do with the Internet. This was 1996, so the picture was a bit fuzzy to guys who worried about plant utilization and return on capital employed. Eyeballs? Page clicks?

OK, we chuckled a little … “Yahoo!” seemed like an idea lacking material substance. Of course, this was before the Internet swallowed virtually the entire world’s flow of information and we all became addicted to search engines to sort through it. These were the earliest days of the dot-com bubble, before Alan Greenspan posited “irrational exuberance” could take investors on a wild ride. Yahoo! They were new economy.

The memory has surged back in the recent to-and-fro over whether Yahoo! should be sold to Microsoft, split up or something else. Yesterday, the company gave in partially to activist investor Carl Icahn and agreed to name him and two choices to the Yahoo! board.

For the record, Yahoo’s IPO on April 12, 1996, did fine. Investors loved the brand and the search engine’s potential. Yahoo!’s market cap briefly topped $1 billion that day. It has been a wild ride, as Greenspan predicted, but YHOO now tips the market scales at close to $30 billion.

Yahoo! is just over 12 years old as a public company, 14 total if you go back to two Stanford PhD candidates founding “Jerry and David’s Guide to the World Wide Web.” Nobody questions today that Yahoo! is a business, although shareholders now fret about slumping profits, slower revenue growth, competitors and the like – hence, the push for a quick-fix sale.

There is a certain coming of age in fighting off a takeover and then inviting onto your board someone whose presence the media labels an “uneasy truce.” Best wishes to staff and shareholders of this child of the Nineties growing up – and no doubt facing more changes – in the new millennium.

By the way, the company I worked for in ’96 went away more quickly than Yahoo! – selling or spinning off those chemical plants, going after higher returns in pharmaceuticals. It has merged and changed its name twice, and revamped its management team. Maturing revenue curves have made the Big Pharma world consolidation-prone.

Old economy and new are not as different as either of us thought.

Bubbles & crises – painful patterns

July 18, 2008

Last weekend was a bit scary for the financial sector, even with the market firming up in recent days. After all, takeovers and bailouts are a sign both that decision makers are concerned and that they see compelling reasons to be concerned. So the rescues feed the fear.

A long-term perspective: Banking crises have occurred regularly for 400 years or more,  two distinguished financial economists note in a 2007 book called Understanding Financial Crises. The cycles that cause banks and I-banks to start imploding follow familiar patterns, for example the credit-and-asset-bubble pattern:

The typical sequence of events in such crises is as follows. There is initially a financial liberalization of some sort and this leads to a large expansion in credit. Bank lending increases by a significant amount. Some of this lending finances new investment but much of it is used to buy assets in fixed supply such as real estate and stocks. Since the supply of these assets is fixed the prices rise above their ‘fundamentals.’ …

The process continues until there is some real event that means returns on the assets will be low in the future. Another possibility is that the central bank is forced to restrict credit because of fears of ‘overheating’ and inflation. The result of one or both of these events is that the prices of real estate and stocks collapse. A banking crisis results because assets valued at ‘bubble’ prices were used as collateral.

– Franklin Allen & Douglas Gale
Understanding Financial Crises
(New York: Oxford University Press, 2007)

The authors document, with empirical and theoretical insights, that what looks like collapse invariably evolves into recovery and renewal. Excesses are corrected as people learn their lessons, for a time. Allen and Gale warn that the costs to society of trying to regulate or legislate crises (or bubbles) out of existence can be greater than the short-term pain caused by those same market gyrations.

What do these patterns, or our place in the cycle, mean for investor communications? I’d love to hear your comments, and I plan to post some ideas soon on practicing IR in a negative market environment.

Coffee, tea & investor relations

July 17, 2008

Is there something about IR people and coffee? My interactions with investor relations folks over the years suggest an organic connection between the profession and our caffeine. Most IR people – OK, this is a bit unscientific – imbibe cup after cup of coffee. Morning, afternoon, sometimes evening. In the heat of summer. The more genteel among us sip their tea instead. But isn’t that a variation on the theme?

Maybe the habit flows from, and supports, the daily intensity of practicing investor relations. Maybe it addresses the fatigue of people who often work as road warriors.

So how do you like your caffeine, and why? Any decaf IROs out there?

“Rumors of our company’s demise …”

July 9, 2008

Over on the IR Web Report’s Investor Relations Blog, Dominic Jones offers a thought-provoking commentary on market rumors and how companies should respond to them (“IROs, not regulators should quash rumors”) – in answer to an Andrew Ross Sorkin column in The New York Times.

The Times columnist delves into rumors that helped drive Lehman Brothers’ stock down 11 percent one day last week – and then looks for someone in government who will do something, a variation of the widespread there-oughta-be-a-law philosophy:

There’s no way to quantify whether rumors are more rampant today than they used to be or whether they are just traveling faster. But what is clear is that there seems to be little being done about it. It might be difficult to make a case, but you’d think you’d see subpoenas flying at least as fast as the rumor mill. (“Psst! Hear the Rumor of the Day?” The New York Times, July 8, 2008.)

Jones takes a more free-market approach, calling on the market for a freer exchange of information. Companies and their IR people, he says, should communicate proactively, respond to false reports in something like real time, and stop whining about unethical short sellers who may or may not be spreading phony information.

“A big part of the problem is that companies aren’t effective at countering rumors,” Jones says. Especially noteworthy is his observation that most companies do not respond online to rapidly changing market information. In a world of ultra-short term trading, rumormongers employing e-mail and IMs can easily outmaneuver companies mired in a do-we-issue-a-press-release debate among their executive and legal teams. And shareholders can be the losers.

Jones argues that companies need up-to-date online communication practices more than rigid “no comment” policies. As I said, it’s thought-provoking; not sure there is a universal answer to this one. I have seen companies respond to rumors with timely news releases or public statements – and quell the sell-offs. I have also seen managements keep their own counsel, on the theory that the truth prevails and stock prices even out in the long run. I’ve also seen some pretty ugly outcomes.

The National Investor Relations Institute manual, Standards of Practice for Investor Relations, notes that stock exchanges generally require companies to respond to market rumors if there’s a likely material impact on the stock price – that’s a conversation that should take place. But NIRI goes on to talk about the merits of consistency in sticking to a statement like It is our policy not to respond to market rumors.” The Standards were last updated in 2004, and change is afoot in online IR in 2008.

With more companies starting to embrace online interaction with investors, and the Securities and Exchange Commission warming up to management forays into Web 2.0 for investor communication, the issue of real-time answers to significant questions will be heating up. I agree with Jones that the best responses to rumormongers are likely to come from the marketplace, not from Washington.

Words matter – to IROs as well as politicians

July 8, 2008

For any who doubt that our mission in investor relations overlaps with news-media coverage of companies, an article in the June issue of the Journal of Finance reports a study that parsed 350,000 news stories (100 million-plus words) on firms in the S&P 500 from 1980 to 2004.

What is intriguing in “More Than Words: Quantifying Language” is the attempt by two finance profs and a tech expert to translate language into numbers and capture their impact on stock prices. The findings offer some insights for IR as well as PR professionals:

  • Words do matter. Drawing on Dow Jones and Wall Street Journal coverage, the study found that negative words, especially, are predictive of lower earnings and shareholder returns in the future – and stock prices adjust, partially at least, with only a slight delay from publication.
  • Quantitatively, “the numbers” (that is, publicly disclosed results that many finance folks believe are all-important) account for only part of the change in stock price after an event. Analysts’ reactions also figure in. And the words have their own impact, statistically speaking.
  • Words can be classified as negative or positive. The authors use a linquistic database called the Harvard-IV-4 dictionary to analyze those 100 million words. Thinking in those terms, the point is decidedly not that a company should try to “spin” bad news into positive. But surely the IR team, in communicating results, should consider whether the words it uses appropriately convey the company’s intended tone.
  • The words in Dow Jones and WSJ stories, of course, are written by reporters – although stories often pick up words from press releases or statements. To me, the point is that news reporters are intensely relevant to the process (which some CEOs and CFOs don’t understand).
  • News coverage of companies spikes dramatically around quarterly earnings announcements - one day before, the day of earnings, and one day after. Seems obvious, but this strongly suggests the importance of seizing the quarterly “news peg” to reinforce key messages.
The authors explain the incremental impact of words on stock prices: “Linguistic communication is a potentially important source of information about firms’ fundamental values. Because very few stock market investors directly observe firms’ production activities, they get most of their information secondhand.”
Of course, traders do watch news stories – seeking to capitalize on the market’s short-term underreaction. The authors note: “Even if economists have neglected the possibility of quantifying language to measure firms’ fundamentals, stock market investors have not.” And neither should we.

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