Facebook faced issues with its IPO – including a brouhaha over the analysts for Morgan Stanley and three other underwriters lowering their estimates in the middle of FB’s road show. Some commentators call for SEC regulations to require investment banks running IPOs to disclose their analysts’ opinions broadly, not just to their favorite institutional investors. Something about a level playing field.

Reuters says Facebook told the analysts they’d better bring down their revenue and earnings forecasts, a wink-and-nod sort of investor relations not regarded as acceptable in recent years. Something about Regulation FD.

People care because the IPO lost its sizzle on the very first day, then dropped further. FB shares closed this week 16% below the IPO price. The Financial Times has a good narrative. Poor Wall Street. Poor Mark Zuckerberg. Poor speculators.

The hounds of the plaintiffs’ bar are in full chase, of course, barking loudly and threatening in all directions. The SEC and Congress are investigating. As a high-impact disclosure issue, this will be one to watch.

JPMorgan Chase continued to convulse over its trading loss of $2 billion, or is it $3 billion, or … whatever the amount, reputational damage exceeds the financial loss.

From an IR perspective, at least two aspects of JPM’s debacle are interesting:

• The disclosure (or lack of disclosure) of the risks JPMorgan and its “London whale” were taking – and the losses they incurred. IR people should take a close look and consider how we would treat similar setbacks in our companies.
• Corporate governance concerns came to a boil over doubts about the JPM board’s risk-policy committee and whether it had the right stuff to actually oversee risk for what is, basically, a huge global risk-taking machine.

Washington stalwarts, once again, are calling for new laws and regulations to codify the good sense that the old laws and regulations haven’t quite brought about. And we’ll be treated to the spectacle soon of Jamie Dimon going before Congressional panels to be used as a prop for politicians’ campaign videos. Oh, well.

General Motors filed an amendment to its proxy statement today noting that it “recently learned” of a related party transaction last year that it hadn’t disclosed.

GM says CFO Dan Ammann’s wife is a partner and COO of an advertising agency that got about $600,000 from a GM subsidiary in 2011 – and he didn’t know about it, so it wasn’t in the proxy. The deal was reported in AdWeek last fall, according to the Detroit Free Press, but apparently the $600K eluded the proxy writers. Oops.

Executive compensation remains a lightning-rod issue, especially in an election year. Plenty of misinformation is floating around, including this misleading headline from Associated Press: “Typical CEO made $9.6 million last year, AP study finds.”

You have to read way down into the story to find that AP’s sample included only S&P 500 companies, the largest cap companies in the U.S. market. Actually, AP had data from only 322 that had filed proxy statements through April 30. The other 7,000-plus publicly listed companies in the United States? Not part of the study.

None of my clients’ CEOs has $9.6 million in compensation. How about your boss or clients? But the AP headline paints with a very broad brush: “Typical CEOs …”

The AP headline might have said: “Large-cap CEOs made $9.6 million …” As it is, politicians trading on Joe Sixpack’s envy will just run with the anti-CEO broadside.

And companies will deal with the widespread assumption that CEOs and other execs are paid too much. Investor relations pros need to focus on providing the real numbers and explaining – in plain English, not legalese – why pay is what it is.

What do you think?

© 2012 Johnson Strategic Communications Inc.

Facebook pulled it off.

- The New York Times “DealBook” site, May 17, 2012

A nice summary by NYT “DealBook” writers Evelyn Rusli and Peter Eavis. Facebook did pull off the IPO of the year, pricing at $38 a share for a total sale of $16 billion. The market initially valued the company at $104 billion.

Congratulations, FB!

There is a sense of relief, after the IPO with more media hype than any in recent memory, in seeing it priced and starting to trade. Following a few more days of craziness, no doubt, investors can settle down and begin looking at Facebook as they would view any other public company.

Here are a few bits of information for the curious investor relations pro:

• Facebook’s May 17 news release on pricing the IPO
• The company’s Investor Relations webpage with links to financial info
• The Facebook registration statement

Being public will impose a new sort of discipline on Facebook the company. Thinking about disclosure vs. trial balloons and leaks. Telling investors the basics like revenue and earnings. Meeting quarterly expectations or taking a beating. Perhaps a future day when hedge funds and analysts call for a new CEO.

I’m not going to second-guess the valuation, roughly 100 times trailing 12-month earnings. Or $115 for each of those ballyhooed 900 million users. Enough market gurus already are opining on FB, and people were willing to pay the $38.

Rather, I’m looking forward to watching the biggest social network as it grows and matures in the coming months and years. The “DealBook” writers comment:

The question is whether the company’s management will make it work.

Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors believe Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management can’t unearth it.

© 2012 Johnson Strategic Communications Inc.

Q: Do you ever wish you were publicly traded?

A: Oh God, no. I have the greatest job in the world, because I work for a guy who runs the company for the next 20 years, not the next 90 days. It’s tough being a public company, and I wouldn’t wish that on anyone.

 –  Steve Feilmeier, executive VP & CFO
Koch Industries, Inc.

As investor relations people, we rub elbows mostly with publicly traded companies. We think about how to get our message out to the capital markets in competition with other public companies, especially our peers within narrow industry sectors.

But a whole other class of competitors exists in a parallel universe – competitors for capital and, in our businesses, for customers. Maybe we ought to pay attention.

What started me thinking was Steve Feilmeier, CFO of Koch Industries, who spoke this morning to the Kansas City chapter of Association for Corporate Growth. Known to outsiders mostly for media attention in political controversies, on the business side Koch is a $125 billion company with 67,000 employees – the No. 2 privately held business in America. No. 1 in profitability, Feilmeier hastens to add.

Right at the start, Feilmeier says being privately held is a competitive advantage:

We benefit from not having to report earnings every 90 days. All of our decisions are based on, How is this going to work out in the next 10 years?

And it’s working out just fine for Koch (sounds like “coke”). The firm is doubling revenue every five or six years with a dozen operating companies in agriculture, energy and manufacturing. Although Koch doesn’t report publicly, Feilmeier makes it clear those businesses are delivering even better growth in EBITDA (slides here).

An example of Koch’s presence: AngelSoft, its toilet tissue brand, is the No. 1 SKU in Walmart stores. No. 1. Feilmeier says 60 truckloads a day leave Koch’s Georgia-Pacific subsidiary loaded just with AngelSoft four-packs bound for Walmarts.

The ongoing shift in institutional investor preferences among asset classes is the other thing that got me thinking. I keep hearing about pension funds, endowments and real people putting more money into alternative investments – capital that isn’t flowing to publicly held companies represented by IR pros.

Consider these stats: In 2001 U.S. pension funds held 65% of assets in equities, but that dropped to 44% by 2011, according to the Towers Watson Global Pension Assets Study 2012. in those 10 years, the “Other” category in asset allocation – real estate, private equity and hedge funds – quintupled from 5% to 25%. Apply those changes to $16 trillion in U.S. pension assets and you’re talking real money.

Without getting in over my head further on macro views of the capital markets, my point is that public companies ought to think strategically about their investors. Institutions and individuals don’t have to invest in any particular public company. They might even flee the stock market, with some of their funds, for “alternatives.”

And this brings me back to Koch. Feilmeier’s description of why Koch keeps growing at the top line – and especially the bottom line – holds lessons that public companies and IR people might take to heart. A few interesting ideas:

• Do investors see management-by-quarterly-numbers, or something like Koch’s “patient & disciplined” creation of wealth? How do we discuss performance?
• Can we demonstrate how our incentive pay turns managers into entrepreneurs, who get paid when they deliver (and not when they don’t)?
• Do we have real accountability? Koch doesn’t believe in subsidizing any of its businesses, so operating execs are responsible for balance sheets and P&Ls.
• How do we make decisions? Koch demands rigorous comparison of every capital project with alternatives – will this investment deliver the best return?

Koch, of course, is a giant company. There are well-managed and poorly managed firms of every size in both the public and private arenas. But the principles Feilmeier discussed are common private-equity approaches to driving performance.

Private vs. public is a common debate among CEOs and finance folks. Some private companies long for public status – and a fortunate few make it through the IPO process to get listed. On the other hand some micro-cap and even mid-cap public companies wish they were private, to escape the hassles of quarterly reporting.

Whether public or private, maybe we need to get back to basics of running companies by rigorous disciplines of wealth creation. And public companies need to communicate how those disciplines create real shareholder value.

What do you think?

© 2012 Johnson Strategic Communications Inc.

As a casual weekend reader, I passed over the gray-looking shareholder letter. I did have to circle back and see if there was an explanation of that puzzling schematic diagram on the cover – it was an engineer’s view of the company’s proprietary oil sands technology, of all things, decorating the cover of the annual report.

Finally I landed on a page headed Financial Highlights. And there I dug in.

You often hear investors say, “It’s about the numbers.” Or if you talk a bit more, the numbers and management – because having the confidence to bet money on a company includes believing in the management team.

But the numbers – more particularly, key metrics - are the main thing investors are looking for in a company’s disclosures, reports and presentations.

The metrics and what management is doing about them are the strategic message.

When I landed on the financials in this report, my eye was drawn to the 5-year history of sales and a similar line for net income – both up nicely in 2011, looking like the last time oil prices were high, in 2007-08. I scanned down to ROE and ROCE, both of which which this company provides – nicely. Other metrics of interest … well, they weren’t there, until I went to work on the financials with my calculator.

My thought is that investor relations people ought to make key metrics – those viewed by management and your investors as driving the share price in the long term – easy to find in news releases, reports and presentations. Because key metrics are what investors, whether institutional or individual, are looking for.

• Earnings per share. Sure, I know the theories about cash flow or some other measure being more important, and some managements are passionate about EBITDA as the key metric. For most shareholders EPS is still the bottom line.
• Growth rates of sales and earnings. Whether the picture is pretty (sales up 23% in the current period) or ugly (earnings down 14%), companies ought to make growth rates easy to find. And do the math for investors; don’t make ‘em get out their calculators.
• Return on equity - or capital employed or assets. To know whether a business is attractive as an investment, the most basic question is whether it earns more than its likely cost of capital. If  ROE is 27.5%, as an investor I’m comfortable on that issue. If it’s 7.5%, I’m going to look a little closer.
• Profit margin & its trend. Gross margin seems to be the most popular, or operating margin. Investors want to know the power of a business to take raw material or merchandise, sell it and turn a profit. Margins provide an objective view of the impact of rising costs, dropping prices or lack of scale.

Every industry and many companies have their own key metrics. Same-store sales growth. Net income margin. Proven reserves. Milestones in drug development. Whatever investors see as driving the value of the company for the future.

Of course, companies also offer up all kinds of non-GAAP metrics like “adjusted EBITDA” or “ongoing operating earnings” – which investors may or may not trust. If it works for you, OK, but you may want to validate that with your investors.

In any case, settle on your key metrics (not 20, just a few) and then use them …

Investor reporting ought to emphasize, say, three or four key metrics – make them highly visible in words, tables and graphs – and explain what you are doing about them. When they improve, take credit on management’s behalf – this is what we did to add 50 basis points to margin. When they go the wrong way, acknowledge it and tell shareholders what management is doing now to turn the situation around.

I see metrics as the core message of investor relations. What do you think?

© 2012 Johnson Strategic Communications Inc.

I can’t help feeling that all the hoopla around the social media giant’s pending public-company status may be a sign of a frothy top in the stock market. I hope not – and I do wish Facebook success in its IPO. It’s a wonderful growth story.

The stock market has had a good run recently, despite some nervous days. The S&P 500 is up 110% since about this time in 2009. The Nasdaq Composite has reached a level it hasn’t seen since 2000, not the top of the dot-com bubble but the time when prices were still deflating. And the market may keep rising for now.

Two things bother me a bit about the Facebook IPO:

Valuation. The prices being bantered about seem a little unhinged from reality. Andrew Bary’s commentary this weekend in Barron’s is interesting:

The best businesses can be poor investments, if you pay the wrong price. That’s worth considering as Facebook readies the most closely watched initial public offering in years—a deal that could value the seven-year-old company at $100 billion. …

Assume Facebook comes public at around $40, a slight premium to its private-market price. That would value the company at $92 billion, based on 2.3 billion shares outstanding. At $40, Facebook would trade for 93 times trailing earnings and 25 times 2011 revenue of $3.7 billion. … If Facebook’s profit doubles in 2012, topping the 65% gain in 2011, it would earn 86 cents and trade for nearly 50 times earnings.

The FB offering brings back “eyeballs” as a major performance metric – in this case, Facebook’s 845 million users and the assumption that there simply must be ways to make lots and lots of money off of all those eyeballs.

Exuberance. That gee-whiz enthusiasm, built on a rising market and a technology so popular grandmas are using it to follow the kids’ activities online, is just a little scary. The New York Times‘ Jeff Sommer commented this weekend:

THE financial system may not be in great shape, but why dwell on it? Stocks are rising and I.P.O. euphoria is in the air. … Greed in the market is rising, and for some seasoned investors, there is an uneasy sense they’ve read this script before.

“It’s like we’re finally emerging from nuclear winter for I.P.O.’s but we’ve forgotten our history,” said Harold Bradley, chief investment officer for the Kauffman Foundation and a former executive with the American Century mutual funds. “If we don’t start paying attention, we’ll be making the same stupid mistakes all over again.”

If the stock market teaches anything, it is to keep historical perspective, watch the broader context of the economy and markets, and not bet too much on an upward-sloping line you can draw through the past couple of years’ performance.

Good news for investors is that Facebook’s S-1 filing reports five years of rapidly rising revenues and three years of real earnings, also fast-growing. So this isn’t an “idea on a cocktail napkin” IPO from 1999. But neither is it J&J or Procter & Gamble.

If I were the IRO for Facebook, I would be emphasizing three messages to investors:

1. Revenue and earnings. We have ‘em, and here’s why they are sustainable. Investors should understand the varied revenue streams and their profitability. The IR story is about financial returns, not the social mission.
2. Value for customers. Not the 845 million – users are essential but aren’t the ones who pay Facebook. The business is selling access to FB’s users to advertisers, application developers and the like. How much value does Facebook deliver to these customers – now and over the next few years?
3. Durability. Investors must be concerned about what happens if Facebook’s “cool factor” wears off and users start taking photos and events and friends to newer, cooler platforms. Facebook needs to communicate its strategies for sustaining the dominant position in social media.

A friend tells me his worst investment decision ever was Apple: He bought AAPL at $15 a share and sold when it hit $35 – and he’s been kicking himself all the way up to $450. I must admit my investing instincts run in that same vein. Apple is a great example of “cool” staying cool – for consumers and shareholders. So Facebook may soar in its IPO – and continue to fly in the years to come.

What are your thoughts on the Facebook IPO?

© 2012 Johnson Strategic Communications Inc.

Citing the obvious risks in trying to predict what will happen in a fragile global economy, FT management editor Andrew Hill notes that many companies are simply waiting, hoarding cash, holding off from embracing any particular scenario. But, he adds, mere expressions of caution don’t do much for their investors:

As executives’ reluctance to commit themselves grows, so the appetite of outsiders to know about their future plans increases. Investors are now far more interested in the “outlook” section of the company report than in the backward-looking summary of the historic results. But in their public statements, most chief executives hide behind a “lack of visibility”, adding to the general nervousness.

Hill says CEOs should “embrace uncertainty” in 2012 while at the same time communicating what they can see in the current situation:

Business leaders need to count on their ability to be the one-eyed man in the land of the blind – a proverb recently recast by Richard Rumelt in his book Good Strategy/Bad Strategy: “If you can peer into the fog of change and see 10 per cent more clearly than others see, then you may gain an edge.”

“We are the ultimate ADD society,” Sorkin said today in a speech to the Association for Corporate Growth Kansas City chapter. Patience is nowhere to be found, and that goes for the stock market and demands it places on managements, he said:

We keep saying we want more shareholder democracy because we want executives to think long-term. The problem is not that the people in power are short-termists, it’s that we are short-term thinkers.

As Exhibit A, Sorkin cited the statistic that the average shareholder holds onto a stock for only 2.8 months. Less than one quarter. Of course, high-frequency automated trading turns stocks over in milliseconds, and multiple times every day. But even individual investors can be fast-moving and fickle:

I would love to find a way to get our country back to being an investing society, not a trading society.

Sorkin acknowledged there’s no sign of that happening anytime soon. (Coverage of the rest of what Sorkin had to say is here or here.)

The investor relations person in search of a patient investor, in this environment, is something like a mythical but tragic hero. Solutions, anyone?

© 2011 Johnson Strategic Communications Inc.

“There’s basically a race to the bottom. They’re all dysfunctional in their own way,” Lauria says of the trio of companies that have been generating negative headlines. He reviews the CEO firings, shifting strategies and downward-moving stock graphs and then names “the worst board” – well, I won’t spoil it. You can watch the video.

No doubt H-P, Yahoo! and News Corp. might respond, “Who is Peter Lauria? What qualifies him to judge the merit of our boards of directors?” And they’d be right. He’s just a journalist who covers media, technology and telecom for Reuters.

On the other hand, he’s not alone in his assessment.

The positive side of this: If you’re doing investor relations for a company that does have a long-term, consistent strategy and high-quality board and management, you’ve got some very attractive selling points for long-term investors.

Focus your IR messages on the track record of your strategy and how it’s paying off, the quality and experience of management, and the expertise of your board. The long-term investors will be with you.

Jerome Booth, research director of London-based emerging markets specialist Ashmore Investment Management, makes an interesting point in a Sept. 14 Financial Times column. He posits that global markets are moving, slogging really, through the classic five stages of grief. When we lose a loved one, we follow a pattern described by psychiatrist Elisabeth Kübler-Ross as the five-step model of grief: denial … anger … bargaining … depression … and, finally, acceptance.

Booth applies this to global markets.

As investor relations people making our rounds with investors, we might probe what stage the patient is in, on any particular day, before launching into our story.

What has died, Booth writes, is our complacence in using debt to meet all needs:

Western Europe and the US now face years of painful deleveraging. The loss they feel is the death of the levered model enabling them to live beyond their means, plus a loss of prestige as their economic models have failed.

As an EM guy, Booth says we’ll have to adjust to kowtowing a bit to emerging markets. In the West right now, he writes, we’re in denial:

When faced with a truly awful prospect we explore and then cling to any theory or hope that reality may be different. Even where political leaders understand the immensity of their loss, the denial of their electorates constrains their action.

There are examples of anger – riots in Greece and other nations over economics. And of bargaining to delay unpleasant consequences or sweep them under the rug. Still ahead, perhaps, is the loss of hope a patient feels as depression. And we haven’t seen many signs yet that our leaders – or we the people – have moved on to acceptance of realities so we can deal with what needs to be done.

All this is very global and “macro,” but let’s think about how it applies to IR messages about the businesses we speak for:

• Above all, are we helping our management teams to avoid living in denial?
• In offering forward-looking views to investors, do we spell out assumptions on the economic factors that drive our particular businesses?
• Do we explain how we plan to perform if the economy stays weak for a long time, vs. signing onto consensus hopes for recovery in H2, or H1 2012, or  … ?
• When our stock is beaten-down, do we listen to see if the investor on the line is in the anger stage or depression – or maybe in a place to hear reality and look forward to ways out of the doldrums?
• Do we deal with debt and balance sheet metrics, including strategies for managing the balance sheet, in a way that helps investors understand?

Just a handful of thought-starters. I’m not arguing where investors’ sentiment should be – just saying IR people need to pay attention to where it is.

Mainly, I appreciate Booth’s wry insight into the psychology of today’s happy-nervous-elated-terrified-optimistic-not so sure-ever mercurial stock market. I’d love to hear your reactions.

© 2011 Johnson Strategic Communications Inc.