Archive for August, 2008

Quote, unquote – Joys of flying

August 30, 2008

No doubt you’ve noticed the airlines’ cutbacks in amenities – we were told by an attendant earlier this week that “everything is for sale” and a bag of pretzels would be $3. A wisecrack in this weekend’s edition of Barron’s sums up the customer’s view of troubled airlines:

TO THE LIST OF LIFE’S TRYING experiences — illness, injury, Newark Airport — you might soon add another: Flying this fall. If a 15% cut in global capacity doesn’t drive up prices, airlines are charging for “extras” like bags, aisle seats and that flimsy pad they pretend is a “pillow.” And if UAL’s (UAUA) plan to cut another 1,550 attendant jobs is any indication, you may soon have to fetch your own drinks … Oh, wait, what drinks?

– Kopin Tan, “Can We Be Confident About Confidence?”
Barron’s, September 1, 2008


Risk & return: Is half the formula missing?

August 29, 2008

One thing investor relations people need to improve is disclosure of risks.

I’m not talking about legal disclosures – pages and pages of “risk factors” in the 10-K or Q, from the possibility of bumpy economic times to, God forbid, the unexpected demise of the CEO. These are risk notifications. Yes, they inform investors – especially if one compares the current period to prior years to see what new risk factors have bubbled up – but the language is so, well, lawyerly.

We need to work on explaining and quantifying the business risks that an investor should incorporate in his valuation of our companies’ shares. The market gurus say it’s all about risk and return. But our focus in IR – and the obsession of many analysts – is on the income statement, the return side.

In the classic financial models, risk has everything to do with valuing a company. The stream of future cash flows that people work hard to forecast is discounted by the cost of capital, a subjective number that most analysts simply plug in as a guess. The real cost of capital, or discount rate, is made up of the risk-free return (easy to estimate) plus the risk premium (much harder). You formula buffs, get out the old textbooks or see here or here – and consider what goes into the “d” or “re” term.

As a profession, investor relations people need to work on how to profile risk in a company. Uncertainty is uncertain, but we have some qualitative and even quantitative assessments of risk- from the macroeconomic uncertainties right down to the sensitivities in a product’s sales.

Three recent episodes have started me thinking about risk:

… The massive failure of financial institutions to manage the risks of lending and investing activities, as evidenced by mega-writedowns by banks and I-banks continuing through 2008.

… Another meltdown in a biopharma company’s share price after the FDA called into question the safety of a key product for diabetes.

… The reaction of global markets to Russia’s war-like actions in Georgia, which made investors ratchet up the geopolitical part of their risk premium.

The issue of “miscommunicating risk” was raised this month in the IN VIVO blog, an adjunct to a magazine of the same name that covers deals and business trends in the pharmaceutical and biotech industries. IN VIVO commented:

There seems to be a big disconnect between the seriousness of a safety issue from the regulatory perspective (where a safety “update” by FDA treated two deaths from pancreatitis as important information for prescribers, but not a call to action) compared to the reaction of investors (“The sky is falling!”).

IN VIVO wondered aloud whether the two biopharma companies involved might have headed off the market’s Chicken Little reaction by better disclosing their perspective on the risks in advance, before the FDA turned on its loudspeakers.

In any industry, companies need to work hard at properly communicating risk. IROs should make it a major focus – preferably before the roof starts to cave in.

Thanks – NIRI & University of Michigan

August 23, 2008

This week I’ve been attending the Theory and Practice of Investor Relations executive education program at the University of Michigan Ross School of Business. The seminar is an opportunity to delve into financial, regulatory and communication aspects of IR with an expert faculty – plus a diverse group of colleagues who bring their own experiences and insights.

The annual program is co-sponsored by the National Investor Relations Institute (NIRI) and the University of Michigan. I was thrilled to attend with a scholarship awarded at the NIRI 2008 annual conference in San Diego. One purpose of this post is to say thanks to NIRI and the University – and, at end of the week, I strongly recommend it to any IR, finance or corporate communications executive.

Besides advancing my own skills, the seminar has been a time to step away from day-to-day work and think about what we do as IR and communications professionals. I’ve assembled quite a few of my comments and take-home learnings on a Lessons @ NIRI-U of Michigan notes page in this blog. Let me know if anything sparks a question or reaction for you.

Vikram Pandit & his annual reports

August 14, 2008

The September issue of Portfolio magazine carries an interesting profile on Vikram Pandit. Nine months into his role as CEO of Citigroup, Pandit is the subject of a spate of recent news articles probing whether he is up to the job (or whether Citigroup is too enormously complex to fix).

The electrical engineering grad and PhD in Finance (see bio) “has researched his plan to fix Citigroup with a focus bordering on obsession,” Portfolio says, including reading Citi annual reports that go back to 1956. Explaining his interest in a half-century’s worth of annual reports, Pandit comments:

With any organization that’s been around for 200 years, it has a history and culture. It develops a unique DNA in many ways. To get a clear sense of that picture has been very important to me.

You have to admire the recognition that history and culture matter, even in a gigantic business organization. People working up and down the corporate ranks do have some sense of heritage, “a unique DNA,” however mixed those stories may become through innumerable mergers, de-mergers and changes of strategy. Looking into what made a company great may help lead a CEO in charting the path forward to future greatness.

As an IR practitioner, I found the use of annual reports as a chronicle of corporate DNA intriguing – and challenging. Beyond the numbers, each year’s report to investors is an opportunity to capture and describe the life force of a company, not only the business strategy buy also the personality and human drive, that ultimately produces the financial performance investors are seeking. Long-term investors often are betting on that DNA.

(Endnote: Thanks to’s blog for alerting me to this profile.)

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) 

Keep an eye on the water

August 9, 2008

Companies continue to swim in what could be turbulent waters, especially management teams struggling with weak performance or caught in an economic riptide. And then there are what some folks call the sharks.

Shareholder activists are just as active in 2008 as last year, according to FactSet Research Systems Inc., a data-crunching firm. Activists unleashed 262 campaigns, including 53 formal proxy fights, in the first half of 2008. It’s virtually unchanged from 259, with 55 proxy fights, in the first half of 2007.

According to Financial Week (July 28-August 4), “A handful of hedge funds continue to pick the most fights.” Eight hedge funds are responsible for 30 percent of the battles, with Carl Icahn and Philip Goldstein’s funds at the top of that list, FW says.

FactSet runs a surveillance and intelligence service called SharkWatch, as well as a takeover defense monitoring and advice service called SharkRepellent. (We might guess from the names that there is a lack of affection for hedge funds and other activists – although FactSet gathers and sells data to varied players in the capital markets.)

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.

The media – your summer thriller?

August 5, 2008

Here’s a summer reading idea, since we have a few weeks left, maybe with some pool or beach time: Manage the Media (Don’t Let the Media Manage You) by journalist William Holstein. It’s a quick, easy read in the Harvard Business School Press “Memo to the CEO” series: 100 pages, with many anecdotes and a real-life point of view.

Even if your job in investor relations excludes dealing with the media, this little tome offers valuable insights, so think outside the silo. Sooner or later today’s headlines on executive pay, shareholder activism, CEO missteps and other topics may come home to roost – and as an IRO you will have input into how your company communicates in a crisis. A little forethought now may help avert a nightmare later.

Attacks on corporate reputation pose some of the worst risks to shareholder value, and the author notes that CEOs and boards are starting to realize the need to manage those risks:

In response to the rapid emergence of coalitions of critics, shareholders and investors, and in recognition of the increasing prevalence of Internet-based communications, there appears to be growing consensus … that the broad role of communications must be more deeply integrated into how CEOs chart their business strategy. Communications can no longer be a sideshow.

Media relations also caught the attention of NIRI in the July issue of Investor Relations Update – worth a peak if you haven’t read the article.

Not that a CEO, VP of public relations or IRO can really “manage” the media. Giving up that illusion is the first step toward successfully working with the media. What Holstein presents is a practical set of suggestions for how companies can manage themselves to communicate more effectively.