Posts Tagged ‘Short-termism’

Shareholders & ‘the ADD society’

October 14, 2011

Andrew Ross Sorkin, the New York Times M&A columnist, CNBC “Squawk Box” co-host and author of Too Big to Fail, says we’re kidding ourselves when we say we want corporate leaders to think long-term. The problem, he says, is all of us.

“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.

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Posted in Capital markets & IR | 1 Comment »

IR is still about the long term

May 12, 2011

Among several bits of wisdom shared by Jane McCahon last night at a NIRI Kansas City meeting is the idea that investor relations, at its core, still has the mission of building a base of long-term investors who believe in your company and its future.

McCahon is VP of corporate relations for Chicago-based Telephone and Data Systems and its publicly traded subsidiary U.S. Cellular. She is a longtime IRO with experience in several industries and is a former chair of the NIRI national board.

Measuring the success of IR isn’t about this quarter, McCahon says. Success develops over several years as you develop a group of long-term investors who understand and support the company’s story.

You can do perception studies to evaluate how the relationships are going. But the ultimate measure will come in a moment, sometime in the future, when you need your shareholders – when management needs a critical proxy vote, support in an M&A situation or buy-in for a follow-on offering.

In that moment, if you’ve been doing your job well, you’ll approach those investors and the answer will come: “We’re with you.”

As for the near term, McCahon says, make an annual IR plan and put it into practice. Focus on what you can control or influence, not what you can’t change.

One IRO asked how you deal with high-frequency trading and the daily gyrations of stocks in today’s hyper-short-term market. McCahon’s advice:

You can’t. What’s your title? Investor relations – not trader relations. Yes, you have to be aware of what it is and be explaining these events to people. But there’s nothing you can do about it – move on.

McCahon says one of the best things an IR professional can do is spend 50% to 70% of your time focusing internally: educating management about investors’ feelings, preparing execs to meet with analysts and shareholders, coming up with Q&As and drilling managers, sharing the IR plan and managing internal expectations.

“What’s changed in IR?” someone asked. Well, this led to a big discussion about fax machines. Too many of us in the room remember when fax machines were the coolest new technology for rapid communication with the market. We punched in fax numbers and waited for it to send. Today, who still owns a fax machine?

McCahon suggests, though, that the heart of IR hasn’t changed: It’s finding and cultivating long-term investors for that moment in the future when you need them.

© 2011 Johnson Strategic Communications Inc.

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Posted in Career development | 5 Comments »

Say it ain’t so, Jack

March 13, 2009

Jack Welch, the longtime CEO of General Electric whose personal and corporate brands were synonymous with growing shareholder value in the Eighties and Nineties, is backpedaling now … big-time. There he is on Page 1 of today’s Financial Times.

The newspaper quotes Welch in a series on the future of capitalism:

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.”

Well. Not shareholders? The dumbest idea? We’re all wondering …

Was Welch drugged or tortured by Soviet agents? No, wait a minute, the evil empire fell long ago while Welch was still delivering regular-as-clockwork increases in profits – to the delight of GE shareholders.

So what has come over Welch? The Financial Times positions his blast at shareholder value as an executive spurning short-termism. FT lumps a quarterly earnings obsession together  the drive to improve share price.

Surely Welch is right that strategy is long-term and has to do with a company’s customers, product mix, competitive approach, investment in the future, etc.

But preserving and building value seems fundamental to the mission, aspiration, even raison d’être of a company. A corporation is essentially a trust between owners and their stewards. Shareholder value is part of most CEOs’ pay structure. And rightly so, I believe.

Of course, companies usually emphasize pursuit of long-term shareholder value. Investor relations is largely about explaining that pursuit to investors. OK, we can talk about fighting short-termism.

But, Jack Welch or not, I wouldn’t recommend adding ”Shareholder value is the dumbest idea in the world” as a message point in your annual report or road-show presentation. Not today, not ever.

Anyone want to venture a comment on Welch’s statement?

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Posted in Quotable quotes | 1 Comment »

Reputation lasts more than a quarter

August 12, 2008

Winding up another earnings season that’s been a little rough for many, it may help to remember what’s important in the long run. This quarter, too, shall pass. A few years ago Warren Buffett, legendary CEO of the Berkshire Hathaway portfolio of companies, reminded his senior managers:

We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation.

 - Warren Buffett, August 2, 2000, memo to CEOs
of portfolio companies, quoted in Warren Buffett CEO:
Lessons from the Berkshire Hathaway Managers
by Robert P. Miles (New York: John Wiley & Sons, 2002) 

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Posted in Quotable quotes, Reputational capital | 1 Comment »

Institutions vs. I-banks: who’s better?

August 7, 2008

A study by three Harvard B-school folks casts doubt on the assumption some execs have that overworked sell-side analysts are less reliable in their judgments than buy-side people with similar skills who work for institutional investors. It’s unusual to read something nice about the sell side.

“Buy-Side vs. Sell-Side Analysts’ Earnings Forecasts,” in the July/August Financial Analysts Journal, makes a quantitative comparison of earnings forecasts by two sets of analysts on the same 337 companies from 1997 to 2004. It’s a total of 3,526 buy-side and 58,562 sell-side earnings estimates.

Results: The buy-side analysts were more optimistic and less accurate in forecasting earnings than the sell side. Median buy-side estimates were 3 to 12 percent higher than the sell side’s. Median absolute forecast errors were 4 to 11 percent higher for the buy-side analysts.

The authors also offer some insights into differences in work life between researchers at I-banks and number crunchers for mutual funds. For example:

… Scope: Buy-side analysts may follow 50-100 stocks, in broad industry sectors, and write reports on about 15. Sell-side analysts also write on about 15 stocks, but focus on narrower business segments and do not attempt to track as many stocks in total.

… Writing: Buy-side analysts typically write brief reports, two pages or so, getting to the point for their portfolio managers. Sell-side analysts write detailed industry reviews and bottom-up company reports. Thorough reports and narrow specialties could give sell-side analysts deeper insights.

… Compensation: Buy-side analysts are rewarded for the performance of their recommendations and impact on their firms’ portfolio managers. Sell-side analysts are paid based on comparisons to other analysts (e.g., Institutional Investor rankings) and business-generation metrics such as commissions and soft dollars.

Comparing earnings estimates, of course, may be the wrong metric. If you’re a portfolio manager (or a mutual fund shareholder), the more important criterion could be returns on the analysts’ buy and sell recommendations. The sell-side focus, on the other hand, has always been on quarterly and annual earnings estimates. So the study reinforces the sell side’s expertise in short-termism.

The FAJ article doesn’t settle anything, but it’s an interesting commentary on the art of financial analysis on both “sides” of Wall Street. And an argument for IR continuing to reach out to both.

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Posted in Capital markets & IR | Leave a Comment »

Let’s talk about the market …

June 26, 2008

No, not that market – I mean the market for our products or services.

Some time back I was writing an annual report for a bank, so I called up a few analysts and institutions who followed the stock. “What would you like to see in this year’s report?” Their answer was succinct: Tell us about the markets where the bank does business. We’re in New York or Boston and don’t spend much time out in flyover country. Are your customers hourly workers or entrepreneurs, farmers or retirees? How fast is the population growing? Does it look like new suburbia or old urban core? What about median income, business formation, competition? Can we see a map?

The market for goods and services is the economic engine that drives future results, so describing and quantifying that dynamo is of great interest to long-term investors in our companies.

Too often, though, investor presentations and earnings announcements ignore the real-world economic interactions and focus only on reporting the latest numbers. Numbers are critical, but this emphasis feeds the short-term interests that CEOs, CFOs and IROs so often decry.

One way to speak to long-term investors is to put the company’s market front and center in the investor presentation, MD&A introductory disclosure urged by the SEC, website, conference call and so on. We can’t do anything about the stock market, anyway, but we can focus on our markets.

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Posted in Messages & writing | Leave a Comment »

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