Archive for September, 2009

Watching Washington

September 29, 2009

All eyes are on Washington this fall, as the country watches hope and change take hold through new laws and regulations. When NIRI President and CEO Jeff Morgan briefed a group of investor relations people and corporate lawyers in Kansas City on changes coming our way from DC, “scary” was a word that kept recurring.

Jeff Morgan 9-29-09“There are a lot of scary things happening in Washington, and some potentially good things happening in Washington,” Morgan said Tuesday evening at the NIRI Kansas City chapter meeting.

Motivated by the financial crisis, Morgan noted, politicians have turned from talk to action on regulatory issues that have been around for years. Rightly or wrongly, he added, politicians see only two causes for the financial crisis: corporate greed and lack of adequate regulation. So they are bent on fixing those problems.

Morgan said significant changes in the way corporations are governed are in the works in Congress and at the Securities and Exchange Commission (SEC):

  • “Say on pay” proxy votes and input from a federal “pay czar,” initially targeting financial companies that got bailouts, could be expanded by Congress to all public companies.
  • If say on pay spreads, institutional investors – many of whom lack the staff to examine every executive pay proposal – would outsource the research and perhaps the voting to RiskMetrics Group. RiskMetrics sells governance advice to companies, and chastises those who don’t measure up to its standards.
  • An SEC proxy access proposal to expand shareholders’ ability to nominate board members seems likely to take effect, and Congress could weigh in to expand the mandates. That would empower activist investors such as union pension funds to target companies for changes in governance.
  • An SEC change in Rule 452 to eliminate broker discretionary voting, starting January 2010, seems likely to disrupt voting of retail stockholders’ share.
  • Various proposals are kicking around Congress on board compensation committees, separating the CEO and chairman roles, requiring certification and training for directors, eliminating staggered boards and other issues.

What can companies do? Get senior management to reach out to Congress with the public-company viewpoint on proposals for federal intervention. Take pre-emptive action by implementing compensation and proxy access programs designed to enhance, rather than put a strangle hold on, good governance for companies.

Two good sources on legislative and regulatory changes are Jeff Morgan’s blog on NIRI.org and Broc Romanek’s blog at TheCorporateCounsel.net.

We’d better be watching Washington. Says Morgan: “Corporations are the lifeblood of America, and we’re doing things that are dangerous to those corporations.”

Don’t be ACORNed

September 28, 2009

Regardless of your politics, it’s clear that what happened to the activist group ACORN this month is an extraordinary case study in Web 2.0 and the rapid loss of reputation. It’s a new media nightmare.

Before answering “What’s this got to do with IR?” here’s a recap of the action:

acornACORN is the Association of Community Organizations for Reform Now. An advocate for the poor, labor and liberal causes, ACORN organizes voter registration drives, demonstrations and efforts to influence government or pressure businesses. While controversial and oft-accused of improprieties, ACORN has won victories against big companies and been an ally of some top Democratic leaders.

Along came two politically motivated social media types, James O’Keefe and Hannah Giles. Like other 20-somethings, O’Keefe has been producing videos for the Web – in his case, needling liberals. Giles, a 20-year-old college sophomore, got in touch with O’Keefe with an idea to go after ACORN with a made-up event.

The two concocted a scenario to test the community organizers’ integrity. O’Keefe would play the role of a pimp and Giles a prostitute. The pair gathered a few props, went on the road with a hidden camera, and set out to entrap ACORN.

Visiting ACORN offices in DC, New York, Baltimore, San Diego and San Bernadino, O’Keefe and Giles told ACORN counselors they needed advice on getting a house for the prostitution biz, hiding income from the IRS, avoiding police detection, and smuggling underage girls into the country to use as prostitutes.

The poseurs got their shocker. Some of the ACORN officials went along, seemingly ignoring the illegality and morally outrageous nature of acts they were discussing. The videos show ACORN people casually giving advice for how best to carry out and conceal the purported illegal enterprise. “Pimp” and “prostitute” seemed to be treated like any other client.

BigGovernment.com, a new conservative website, linked up with O’Keefe and Giles and used their sensationalized attack videos to create momentum for its September launch on the Internet. It’s been a success: The ACORN videos went viral, with links from a host of blogs and tweets; they were huge on YouTube; the slam on ACORN struck a chord with conservative talk hosts; and the controversy crossed over into mainstream media. Within days, Congress members were denouncing ACORN and voting to defund it. Everyone’s investigating.

ACORN has been tripping over itself with denials and counter-attacks. It denounced “indefensible” actions of its people and fired some. Accused the video makers of distortions and filed a lawsuit. Invoked the respected names of its silk-stocking Advisory Council. Posted its own video. Launched an “investigation” of itself. ACORN has tried all the usual reputation-defense tactics. But the damage is done.

This isn’t a small-time hit. BigGovernment is the brainchild of Andrew Breitbart, a conservative Internet entrepreneur who has worked with Drudge Report, a top right-leaning site, and a similar aggregator, Breitbart.com. The sophisticated distribution and marketing of the “news” is worthy of film propagandist Michael Moore or liberal political activists MoveOn.org. These people play hardball.

Well, enough politics. What does the ACORN story have to do with corporations and IR? Investor relations professionals need to envision, for a moment, the potential for a new media nightmare for their corporate reputations.

Build your own scenario. Imagine a couple of 20-somethings bent on doing damage to your company, products or industry. You can’t predict what store, office or plant they may visit. Starting with sophisticated new media skills, they add well-funded distribution – and show no civility or restraint in their attack.

Will the “gotcha” go viral? How much will it damage the company’s reputation?

The anti-business analogy to ACORN’s current organizational torment argues powerfully that companies need to prepare for potential crises created through interactive media channels. Skirmishes already have taken place – but may intensify.

Companies ought to minimize risk by being sure our people are all trained in ethical conduct. If we consistently do what’s right, it’s much less embarrassing. Culture can prevent problems – or not.

IR and other functions must develop robust social media skills, so we’re prepared before a crisis strikes. And we should invest in early warning systems – assuring timely internal communication, as well as monitoring the social and regular Web.

Our crisis communication plans – including IR components – must be up to the challenges of the 21st Century.

Don’t be ACORNed.

© Copyright 2009 Johnson Strategic Communications Inc.

Quote, unquote – Reputation

September 25, 2009

Suffering the slings and arrows of public distrust for the pharmaceutical industry, Merck & Co. is becoming more accessible to various stakeholders – and changing its business model based on what it hears – CEO Dick Clark says in the Q3 2009 issue of NYSE Magazine. Clark says restoring trust is about doing and saying:

At the end of the day, reputation is grounded in actions, accompanied by candid, timely and transparent communication.

Sounds like a motto for the practice of investor relations.

Anthropology of Wall Street

September 24, 2009

If you’ve worked on stock offerings or M&A transactions, you have probably noticed that the smartest guy in the room is always the investment banker. At least in the investment banker’s opinion. (And I say this without any envy or doubts.)

So I perked up when I saw a piece in my college alumni magazine about a new book. In Liquidated: An Ethnography of Wall Street, Karen Ho explores the culture of investment banks. She says the i-bank tribe’s most revered value is “smartness.”

Ms. Ho started researching the culture of Wall Street as a Princeton grad student in Anthropology. Usually, talk of Anthropology conjures images of going to a rain forest to study strange customs. But Ms. Ho, now an Anthropology prof, finds her cultural oddities in the jungle of downtown Manhattan.

At one point she decided field interviews were not enough – she needed to get inside Wall Street by working there. She recalls a Goldman Sachs recruiting session:

“So why should you work here?” asked the recent white male alumnus from Harvard. “Because if you hang out with dumb people, you’ll learn dumb things. In investment banking, the people are very smart; that’s why they got the job. It’s very fast, very challenging, and they’ll teach as quickly as you can learn.”

Sound a little elitist? Repeatedly, Ms. Ho says, Wall Streeters told Ivy League prospects in recruiting sessions for i-banks things like, “We hire only superstars” and “You are the cream of the crop” and “You are all so smart!” (A few years ago, recall, Wall Streeters had jobs – and even needed to hire more.)

Once inside, of course, the oh-so-smart bankers reinforce the self-image. Ms. Ho says that feeling of smartness is what the Wall Street culture is all about.

Now fast forward to the financial meltdown of 2007-09. The article notes Ms. Ho’s conclusion that Wall Street’s latest downfall resulted not so much from greed or stupidity as from the smartest-guy-in-the-room syndrome:

The crash is the natural result of a Wall Street culture in which the self-proclaimed smartest people in the world came to believe that high share prices trumped all other corporate values and, in doing so, imposed their ethos of live-for-today risk-taking on the economy at large.

Not everyone on Wall Street, of course, embraces an elitist culture. I have worked with i-bankers who are humble, down-to-earth and friendly. And some investor relations and corporate execs play know-it-all. On the other hand, as a stereotype for i-bankers, there is some truth to the image of “smartest guy in the room.”

[Disclosure: I have not read Ms. Ho's book. The magazine version was fine, but I don't think I'm up for an Anthropology tome published by a university press. Her bottom-line conclusion is interesting. Let me know if you read the ethnography.]

Two bottom lines (at least)

September 21, 2009

DollarSignGreenAs everyone knows, corporate earnings today commonly include two bottom lines: Companies report net income and EPS under Generally Accepted Accounting Principles, and then there’s a second number on the street that takes out one-time items. These metrics are commonly called GAAP earnings and “operating earnings,” without one-offs.

Over the years the gap between these two numbers has been growing, so that operating earnings for the S&P 500 have averaged nearly 24% higher than GAAP earnings in recent years, says a column (“Investors, It Pays to Mind the GAAP Gaps”) Friday in the Money & Investing section of The Wall Street Journal.

Says the Journal:

It isn’t clear why the difference has grown so wide. One inescapable conclusion is that, since 1995, either by happy accident or accounting shenanigans, one-time losses have grown more quickly than one-time gains, elevating the operating earnings that Wall Street watches.

Investors have mixed feelings about excluding one-offs from earnings. When you throw in EBITDA or adjusted EBITDA, which proponents in some industries prefer as a tool for valuation, some investors are confused or skeptical. You may have heard unconvinced accounting profs push back on “Earnings Before All the Bad Stuff.”

The Journal observes that companies tend to label negative events (write-downs or special charges) as one-offs more often than happy events (windfalls or gains on assets), and excessive write-offs may signal deeper problems:

Investors are well advised to watch both figures for another reason: Some companies have bigger differences between GAAP and operating earnings than others. According to research by Société Générale quantitative strategist Andrew Lapthorne, those with bigger gaps tend to underperform in the long run.

An interesting cautionary note, that bit about underperforming long-term.

Companies need to be careful that one-time accounting items and adjustments do help investors understand the business realities. Inflation in the gap between as-reported and “operating” earnings raises questions. For IR professionals, clarity in reporting (including consistent accounting approaches) should be the goal.

Social media: Be a leader

September 18, 2009

Thinking a little more about investor relations engagement in social media (or hesitancy to engage), I believe IR people should step forward and offer some leadership in strategy and policies for corporate and employee involvement in the interactive Web. This is not to say take over, which IROs don’t have time to do and other departments would resist. But offer input, show thought leadership.

This issue came up today among IROs in a webinar on social media and IR organized by Bulldog Reporter’s IR Alert. I spoke on the panel but thought I would pull some thoughts – and resources – together to offer readers of IR Cafe.

Two compelling reasons for IR to lead internally and help shape the strategy:

The message. I think of IR as one of the keepers of the corporate brand. Who are we, what’s our story, what do we mean as a company, how do we create value in the world? The CEO, of course, is communicator-in-chief. But the IRO should be nearby, helping to clarify and deliver the message.

Yes, I know – the products are where the money comes from, so brand managers and marketing communications people often drive the agenda for media of all sorts, which now include Facebook, Twitter and the like. Most social media efforts spring from marketing, customers service or PR.But consider the audiences.

But communication strategy has to flow from understanding our audiences. We have customers, who may be learning about our products – or talking about them to friends – on networking platforms. We have employees, who may be talking about work and the company on social media sites. And we have investors – the IR audience – who own the company, after all, and increasingly are using social media to learn about it, in addition to the company website and traditional sources.

Go to search.twitter.com, a small but easy window into social media, and look for your company or big products. When I do this, I find a significant amount of chatter is on financial matters – investors trading links and opinions. We need to be sure the corporate story, the value-creation story, is reaching these audiences.

The risks. One role of IR within a company is to play gatekeeper – to be sure no one blabs the material information before the company properly discloses it to broad audiences. The IRO is, among other things, a Regulation FD gatekeeper.

Do we need to say what the risks are in social media? It’s a wild and woolly space. Consider the confidential information an employee might let slip, unthinking: We’re all excited about this new product that starts shipping November 1 … Everyone’s afraid of losing their job, because sales have just been tanking this summer … My division is being combined with this other one … The CEO had a heart attack.

I’m no lawyer, but what I’ve heard from several attorneys – including Ben Orlanski of Manatt, Phelps & Phillips on the webinar today – is that the same securities laws and SEC rules (reg FD!) apply to social media as everywhere else. So IROs should be involved, both in developing policies and in day-to-day activity, to guard against selective disclosure by the company – in Web 2.0 as well as other forums.

The other social media risk IROs talk about is the crisis. What happens when rogue employees post a YouTube video doing gross things with your pizza? Or angry soccer moms start tweeting and Facebooking about your TV commercial? Social media platforms spread information – true or false – rapidly and uncontrollably. That pizza video reached 1 million-plus viewers in three days, and investors were in the audience – the stock price dropped 13% (it has recovered). Crisis management is a topic unto itself, but the risk is reason to be prepared.

How to lead. As with so many areas of corporate policy and strategy, the influence of an IRO or outside agency is mostly informal – getting up to speed, reaching out internally to build support, be an active participant in a team. In the case of social media, that means working with Legal, Finance, Marketing, PR, Customer Service.

To me, decisions of where and how to engage in social media – blogs, Twitter, Facebook, there are hundreds of channels and tactics – are questions of strategy that each company must answer for itself. And no two approaches will be identical. But the necessity of thinking through the policy issues applies to every company.

Most public companies have disclosure policies, a giant “business conduct policy” and/or an array of policies covering various areas of employee conduct. Social media are relatively new, but already huge. So companies really need to update their policies to cover involvement of the company and employees in Web 2.0.

I’ve scanned some social media policies of big companies. The ones you can readily find on the Web are from tech companies, who have embraced the culture of sharing their information (even internal policies) online. Take a look at these:

I like Sun’s best among these, because of its plain English and subheads that guide the employee through it. Some business conduct policies are too lawyerly for most employees to get the message (or may even spawn little rebellions).

Charlene Li, co-author of Groundswell, has been preaching the “We need a policy” message for a long time. In a post from way back in 2004, she offers a simple example of a blogging policy, with links to more resources. So if you don’t have a policy that includes up-to-date thinking on social media, you need to catch up.

Communicating with the capital market has always been about using different channels to reach various segments of the investor audience, and IR 2.0 is here.

(Some previous posts and resources on this blog: IR 2.0 – A Menu linking to resources by topic, IR Website Checklist of what should be there, Tiptoeing into 2.0 on trends in corporate engagement, Twitter for IR? thoughts, Social media, reputation & IR, and Social media strategies: Talk, listen … or? Or go to the right side of this page, find “Browse by topic” and click IR 2.0 – Web & social media.)

Please comment with your ideas or links to social media & IR policies or resources.

Good news is, we’re all learning together. Have some fun along the way!

© Copyright 2009 Johnson Strategic Communications Inc.

Social media: Go there

September 17, 2009

Social media guru Brian Solis, principal of Silicon Valley PR firm Future Works, visited the Kansas City chapter of the Public Relations Society of America (PRSA) tonight – bringing the message that interactive web platforms are transforming the way companies communicate with their publics.

Brian comes at social media from a branding and public relations perspective, and his PR 2.0 blog is well-known. His first engagement in social media was selling digital cameras through the old bulletin boards and forums of the 1990s. And he still approaches the topic looking for measurable impact on sales of products.

As an investor relations practitioner focusing on communicating with financial audiences, I see most companies struggling to come to grips with social media. Web 2.0 is a threat to corporate reputations – and an opportunity. Most companies are still experimenting and trying to clarify their strategies. Some are in full denial.

Several messages that Brian shared stuck with me:

  • We are moving into this uncontrolled, overstimulated world of social media. Like it or not, customers and investors and employees are talking about our companies in blogs, on Twitter and Facebook, with videos on YouTube.
  • Most companies and communicators are struggling to find the best ways to participate in social media to connect with their audiences. “We’re all sort of equal in terms of what we don’t know,” Brian said. This was reassuring to hear from a guy who’s been at it since before Facebook, Twitter, etc. existed.
  • There is great value in personally visiting social media sites, searching for your company and brands, and listening to what people say. We should know who the influential reporters, bloggers and Twitterers are in our industries. By monitoring, we can calculate sentiment, garner feedback and get an early warning on crises, he said. Observation and data come before engagement.
  • Companies need to address the organizational issues of social media. In a couple of years, all areas of our companies will be using networking platforms, one way or another, Brian said. It’s inevitable given the rapidly rising public use of websites for networking, content creation and sharing.

Brian noted that his contacts from companies seeking help come from different departments: Customer Service, Marketing, IT – not just PR (usually not IR, I bet).

As communicators, we should come to grips with policy issues raised by new media and put tools and procedures in place for people across our companies. As IR people, we need to lead in planning for disclosure and capital market impacts.

Update: See also a post on this topic by Dan Schawbel on the PR 2.0 blog, and a neat post by Laurel Papworth, an Australia social media strategist, with lots of examples and links to social media policies (thanks to Dan for the link to her blog).

Pushback on ‘TBTF’

September 15, 2009

Propping up banks that are “too big to fail” with taxpayers’ capital doesn’t improve the US financial system or benefit bank customers – it just concentrates more power in the hands of a few giant institutions – Tom Hoenig, president of the Federal Reserve Bank of Kansas City, argues in this week’s Barron’s.

Noting that the 20 largest US banks already own 70% of the banking system’s assets, Hoenig says combining failing banks into bigger institutions only increases that concentration – in turn, further concentrating risk in a few megabanks.

Congress might consider whether the centralization of banking is a good thing as it takes up regulatory reform this fall. At this point, President Obama’s regulatory proposal seems to accept the “TBTF” mantra that has governed US policy so far – proposing to deal with the concentration of risk in megabanks by incrementally increasing their capital requirements, then taking them over after they fail.

Hoenig, the Federal Open Market Committee’s longest-serving member, doesn’t think TBTF is a healthy policy:

“I’ve seen banks close for making mistakes,” says Hoenig. “I’ve seen other banks too big for the regulators, being supported by the U.S. taxpayer. It’s harmful to the infrastructure, and sends the wrong message, that influence is what really matters. If we fail to address ‘too big to-fail,’ it will only get worse.”

Hoenig warns of “an oligarchy of interest” linking megabanks and the Washington power powers-that-be who use government policy to sustain them. Instead, Hoenig advocates more market discipline, decentralization and competition. Now there’s a radical idea for reform. But will it play in Washington?

Schoolmarm & the three Rs

September 14, 2009

FederalHall-GovtPhotoPresident Obama commemorated today’s anniversary of the collapse of Lehman Brothers and the ensuing financial panic by going to the Wall Street playground and delivering a schoolmarm’s lecture to the boys who’ve been acting up. (News story here, text of speech here.)

Like many a grammar school teacher, Mr. O lectured all the kids without differentiating much between those who actually misbehaved and those who followed the rules. For example, the president said:

I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

The president retold the brief history of the financial crisis since September ’08. Not delving much into root causes or the cyclical nature of markets, he focused on the misdeeds of Wall Street. He reminded us (twice) that the crisis was already raging when his administration walked in the door. In this lecture, he made it clear that the schoolboys have failed to learn the three R’s.

The first “R” word is risk. And risk, we gathered from the president, is bad. At least, it’s bad when Wall Street fails to properly anticipate or control it – he spoke of risky loans, risky behavior, reckless risk. These may be seen more easily in hindsight, perhaps, but the president definitely wants financial markets to take less risk.

The president also invoked responsibility. We heard the second “R” word 20 times in its various forms. Mostly, he chastised the giants of the financial world for not acting responsibly … and urged them to grow up and embrace responsibility.

Most of all, Mr. O lectured on regulation. He said the financial crisis came about, essentially, because of a lack of adequate regulation from Washington. And he promised the errant schoolboys more regulation – much more – and by the end of this year if he and Vice Principal Barney Frank have anything to say about it.

Don’t get me wrong. I’m not defending executives on Wall Street, or elsewhere, who failed to disclose risks to investors, dodged responsibility for their actions, or found ways to exploit loopholes in regulation. The wreckage of shareholder value is producing recriminations – and malefactors deserve what they get, you might say.

Mr. O offered one admonition to corporate leaders that I think is correct:

The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before — and you don’t have to wait for a new law to do that.  You don’t have to wait to use plain language in your dealings with consumers.  You don’t have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote.  You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

Those are actions CEOs and boards of directors could begin taking, and if they demonstrate responsibility maybe the powers in Washington will feel less need for severity in imposing all manner of new regulation. Maybe.

President Obama had all the rhetoric right today at Federal Hall. His speech, of course, was short on detail and long on generalities. He really was speaking to people outside the financial markets, those who deeply resent the bailouts and bonuses and (especially) both happening at the same banks. The symbolism of going to Wall Street to deliver the lecture was the main point today.

Whether the new rules that the financial markets eventually do get will actually improve things – or merely shift risks into different forms and sectors while stifling the flexibility (and discipline) of the free market – we will see in time.

IPOs – not coming back?

September 9, 2009

The market for initial public offerings is drier than a creek bed in Death Valley, but don’t wait around for spring rains to make IPOs start flowing again, two Grant Thornton advisors say in “The Slow Degradation of the IPO Market” in the September 2009 issue of Mergers & Acquisitions.

David Weild and Edward Kim of Grant Thornton write:

Recent signs of life in the IPO market have led some to believe that the worst is behind us and that we’re about to enjoy another bountiful period of IPOs. Don’t be fooled.

While conventional wisdom may say that we are merely experiencing a cyclical downturn in the IPO market, exacerbated by the credit crisis, we assert that the reality is much darker. In fact, we believe that, given its current structure, the market for underwritten IPOs is closed to most of the companies that need it.

Sorry to pass along this gloomy picture, but it’s useful for investor relations practitioners to have a perspective on the overall landscape of our profession.

Weild and Kim say the decline in IPOs arises from long-term causes in the US stock market and regulatory system, not the bear market or recession of 2007-09.

Among the structural factors are regulatory and legislative changes that contributed to a weaker sell side: repeal of Glass Steagall, which coincided with large firms swallowing up i-banks that used to focus on venture-backed IPOs; Regulation FD, which democratized information for investors but reduced the value of sell side research; legal restrictions on conflicts of interest between research and investment banking, which may be good but took more of the reward out of sell side research; a crackdown on use of one-eighth point spreads, which had given market makers an incentive to generate volume in small cap names; and decimalization, which cut spreads in most stocks to $0.01 and further hurt market making.

All this adds up to a structural and legal landscape that doesn’t favor IPOs, especially smaller companies that might want to emerge into the public markets. The market’s big second-quarter bounce brought only four venture-backed IPOs, and the authors don’t expect great things even if the stock market recovers further.

The guys from Grant Thornton do offer up a “solution” – creating a new capital market where stocks might trade in 10 or 20-cent increments, brokerage houses could earn improved commissions, and i-banks might stage a comeback. They propose allowing companies to opt-in for this “Back to the Future” marketplace.

Given the devastating impact of the recent bear market “scandals” on any kind of financial innovation, I wouldn’t wait around for this idea to gain political traction. Instead, I hope the pessimists are wrong and IPOs do recover. Access to capital markets through IPOs has been an important factor in US technological and economic progress, not to mention the growth of industries like tech and biotech.


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