Archive for September, 2008

When fear stalks …

September 29, 2008

An investor relations professional needs perspective.

Of course, it’s hard to make much progress with a company’s growth story, or any story, in a market environment controlled by fear.

Probably the main tasks of an IRO right now are (1) to quickly and proactively answer investors’ urgent questions or concerns as they relate to his or her own company and (2) if the IRO can find any time away from the phone, to think and plan ahead for telling the story once the din of ambulance and fire engine sirens begins to recede.

I am reminded of a psychology lesson from Benjamin Graham in The Intelligent Investor. Graham notes that either the whole market or an individual stock can fall prey to the stalking fears of the crowd:

In the depths of a depressed or “bear” market, the average person can see no ray of light ahead and can think only in terms of worse to come. So too, when an individual company or industry begins to lose ground in the economy, Wall Street is quick to assume that its future is entirely hopeless and it should be avoided at any price. The two types of reasoning are similar and equally fallacious.

Long-term investors know this, of course. They are out there surveying the wreckage for potential values, at least considering when the trend will turn and stocks of great companies will be a “buy.” As IR people, we ought to ask that same question about the companies we work with – and build our story around the information those investors need to find real value.

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Bailout idea: Regulate Washington compensation

September 25, 2008

I’m all for taking action to add liquidity to markets that seize up – not to mention rescuing venerable financial firms if that’s the best way to keep the economy from going utterly in the tank for the rest of us.

But I’d like to offer an amendment, adding to the tweaks coming from Congress: How about a proviso that members of the Senate and House … as well as occupants of the White House, SEC and Federal Reserve chairmen, past or present … draw their pay or pensions in the form of mortgage-backed securities for the next few years ?

This might give the officials in Washington some incentive to deliver on that wishful thought, voiced by some, that taxpayers actually could come out ahead – rather than losing $700 billion – in the Treasury Department’s proposed big investment in illiquid assets.

(OK, this has nothing to do with investor relations. Good luck to all.)

Swimming naked gets so embarrassing

September 23, 2008

While we await the outcome of Washington’s proposed mega-bailout, an observation from Warren Buffett sheds more light on the current financial crisis than most recent commentaries. The quote goes back to six months before Buffett’s announcement Tuesday afternoon that his firm would invest $5 billion in Goldman Sachs. In his annual letter to Berkshire Hathaway shareholders earlier this year, Buffett said:

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA — house price appreciation — would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight.

Of course, a true value investor isn’t above putting money into something “ugly” if the price is right. With the prospect of Uncle Sam writing bigger-than-ever checks to ease the pain of Wall Street’s rummage sale, Buffett decided to buy into the least ugly of the big names, Goldman Sachs.

Apart from trying to learn from the financial industry’s woes, investor relations folks might look to Berkshire Hathaway annual reports as an interesting model. Thirty-one years of shareholder letters are available online. Though most IR professionals don’t have “the sage of Omaha” as a CEO, the candid tone, factual recitation of results, and admission of mistakes offer plenty of examples for emulation.

I probably wouldn’t recommend humor in an annual report – unless your CEO is some sort of sage – because clarity is the main goal in investor communications. And not everyone is Warren Buffett.

Lehman Brothers’ impact on you

September 16, 2008

The latest e-mail newsletter from Tim Quast of ModernIR Trading Intelligence, which tracks the flow of shares through the increasingly complex channels of the equity market and seeks to help public companies and their IROs understand these movements, comments on the impact of Lehman Brothers’ implosion on the rest of us.

Quast notes that ModernIR’s tracking showed heightened activity by the Lehman proprietary trading desk in the weeks leading up to the collapse – possibly unloading equity positions to raise cash. He guesses that the impact of selling off Lehman’s equity positions in a bankruptcy may be “nominal,” less than 5% of equity values, except where Lehman holds concentrated positions in particular companies.

More important is the prospect of Lehman’s withdrawal as a prime broker and banker – the shrinkage of its role as a trading partner and provider of liquidity in many, many sectors of the capital markets:

This is no small demise, folks, and to think we won’t feel ripples for months is naïve, seems to me. Hedge funds are now without a major source of liquidity, financing and support services. Risk managers are without a major counterparty. This will absolutely discount equity prices by 10% at least we think, because higher risk and less access to capital means lower stock prices. The good news is that at last the government stayed out, and we can finally rinse ourselves of financial cholesterol and get healthy again. But it’ll take two years to sort the mess out.

Quast also suggests that, with bulge-bracket firms not bulging nearly so much, IROs should cultivate retail investors and smaller broker-dealers.

(We list the ModernIR site in our blogroll to the right, or link here.)

Pet peeve – graphs that deceive

September 16, 2008

Just as sure as a hurricane brings TV news footage of a reporter standing on a boardwalk with waves crashing in the background, stormy times in the market also bring out journalistic cliches. Breathless and overhyped commentary and pictures abound – in print, on the air and online.

One of my pet peeves is a subspecies of exaggerated reportage: graphs that deceive the eye. I’m not saying it’s intentional, but some graphs depicting the latest carnage create an erroneous perception that overstates the “meltdown.” (The graph shown here is from Page One of today’s Wall Street Journal, though I’m not singling them out.)

The problem is – I know this will sound nerdy – the lack of a proper scale on the Y axis. When a graphic designer sets the base of the scale not at zero but at some higher point, it creates a visual exaggeration. In this case, a Dow Jones Industrial Average index of 10,900 is the base. The truncated scale makes a more dramatic picture, but the reader gets a quantitative impression that is out of context. Instead of a 4.4% drop, our eyes see the stock market plunging more than 95% – very close to “zero” on the graph.

Of course, an editor might say readers are smarter than that; anyone sophisticated enough to read the WSJ can tell the difference between zero and 10,900. Yes, but images do influence our thinking – and more on an emotional level than a rational one.

A leading expert on graphic communication of statistics, Yale’s Edward Tufte, states the positive principle in his book The Visual Display of Quantitative Information:

The representation of numbers, as physically measured on the surface of the graphic itself, should be directly proportional to the numerical quantities represented.

Tufte even offers a formula for a “Lie Factor” to gauge how far out of proportion a graph is. (This calculation is off the scale for most stock-price charts in the media, which are vertically truncated.)

Moving beyond whining about a pet peeve, I might suggest a lesson for investor relations professionals: We should always look at our graphs – those bar charts that fill PowerPoint presentations and some say are eye candy in annual reports – and test them for visual integrity.

The classic bar chart might show EPS rising from $3.00 to $3.25 to $3.50 over three years. If the Y-axis scale starts at zero, the eye sees a 17% total rise – looks steady, not too bad. But if you draw the scale starting at, say, $2.00, the increase in EPS looks like a more dramatic 50% – much more “growthy.” Try it both ways in Excel or PowerPoint; you’ll see. My Excel sets “zero” by default at $2.70 – which really makes for skyrocketing growth.

Financial communicators of all sorts, corporate or journalistic, should be careful to present information not only accurately, but in context and with perspective … which I think means graphs drawn to scale.

Lehman Brothers failure … 694,401,926 losers

September 15, 2008

We’ll let the forensic professionals conduct the autopsy on Lehman Brothers Holdings following its bankruptcy filing.

Over the next few days, we expect to read some extraordinary reporting in our favorite newspapers. Seriously: Those Page One “anatomy of a failure” stories will highlight some important lessons learned and offer keen observations on management and relations with the capital markets.

The financial CSIs will probe the multiple injuries that led to the investment bank’s demise – and no doubt they will point the finger of blame, perhaps spreading ample amounts among the likely culprits. This is not so pleasant to read, but it can be instructive, especially in a time of ongoing crisis.

Politicians, too, will visit the morgue. We’ll probably see some candidates going through the pockets of the corpse in search of election-year gain.

For us, it’s a sad day. We know of 694,401,926 losers – actually, a smaller number of owners of those outstanding shares of Lehman common stock – plus, of course, many other stakeholders including the employees.

The coming days will show us whether investors generally, including those of the companies for which we as investor relations people toil, also suffer deep or long-term losses. Good luck to all.

Most admired: What do investors esteem?

September 11, 2008

I’ve always been skeptical of “most admired companies” articles – popularity contests whose outcomes may depend on who is ranking the companies and on what basis, as well as which firms or industries have had a recent run on Wall Street. Give me fundamentals over popularity. But the cover story in Barron’s this week, “The Market’s Finest,” offers a couple of useful insights for investor relations people. Barron’s polled 70 portfolio managers in U.S. buy side firms, a fair sample of our institutional audience.

It’s all well and good that Johnson & Johnson scored No. 1 in the rankings, followed by Procter & Gamble, Toyota Motor, Berkshire Hathaway and Apple in the top five. (The survey covered the world’s 100 largest companies – so most of us never had a chance and shouldn’t feel regret. See the article for the full list of 100.)

Of more interest to me are the “most important factors” that money managers say shape their views. In order of importance:

… Strong management

… Sound business strategy

… Ethical business practices

… Competitive edge

… Product innovation

Well, maybe the latest quarterly earnings enter the picture somehow. But the enduring influences are quality and integrity of management, along with business strategy and two of its main levers: competitive advantage and product innovation.

And Barron’s observes:

As in years past, this year’s ranking illustrates the fact that corporate respect must be earned over a span of decades. While scandals or corporate-governance abuses quickly can empty a company’s reservoir of goodwill with investors and others, highly respected companies tend to retain their strong marks even during lulls in stock performance or profitability.

Surely these managerial and strategic characteristics should rank near the top among messages that IR professionals focus on disclosing, explaining and (should we say it?) “selling” to the market.

And now, live blogging on conference calls

September 10, 2008

The future is now, as demonstrated by an extraordinary piece of journalism this morning: Floyd Norris, chief financial correspondent for The New York Times, wrote a live blogging commentary on today’s Lehman Brothers conference call with investors.

I have no interest in Lehman (other than wanting to see the U.S. financial system recover and thrive), but Norris’ blog provides an interesting glimpse for investor relations professionals into what is possible – and how much things have changed. Not long ago, it was a big deal for companies to organize conference calls – and then open them up for all investors to hear straight from management.

I’m sure today’s Lehman call isn’t the first IR call to be covered live by bloggers – live blogging at political and business events has become fairly common – but the presence of a New York Times columnist commenting in the blogosphere while the call is going on raises the profile. The blog is indexed with a headline on the front page of NYTimes.com.

So the blog starts a few minutes before the conference call and follows with eight entries – averaging every 10 minutes or so – telling the online reader what Lehman’s CEO is saying. And commenting on what the company is saying. Norris is a columnist, which is journalism jargon that tells the reader his articles in the print newspaper and the blog contain a good deal of his own opinion. It is, from my observation, well-informed opinion – because he also gathers the facts through old-fashioned reporting.

Consider a sample of the comments, and imagine it’s your company:

He (CEO Dick Fuld) says the firm’s “legacy assets” are losing value. That is a nice way to make it sound like the problems are from the past.

It sounds like they are selling control of Neuberger Berman at a significantly lower price than they paid. … Sounds like the previous owners of Neuberger Berman were good at market timing.

Here’s a quote that may come back to haunt them: “Future writedowns are unlikely.”

At 9:30 Eastern, Norris blogs: “The call is over, in time for the stock to open.”

Conference calls have been public for years, but the prospect of instantaneous, high-visibility commentary online is a bit daunting. Your CEO’s words need to be clear the first time, enough that the message is heard and understood even by the play-by-play commentators. My guess is that many investors were simultaneously listening to the call and monitoring Norris’ blog for the media view.

Live blogging gives new meaning to the old, but good, advice: Be careful what you say – it may end up on the front page of The New York Times … or, we should add, NYTimes.com.

(Update: While I didn’t realize it at the time, The Wall Street Journal also did live blogging of the Lehman call. Heidi Moore of the newspaper’s “Deal Journal” presented a live, hard-news report, capturing details of what the Lehman executives said in 31 entries – about one every two minutes. So add WSJ.com to the list of places where your CEO or CFO’s words could wind up – say, 60 seconds after they are uttered.)

Defending yourself in a YouTube world

September 3, 2008

Some good insights on reputation management in the era of Web 2.0 appeared recently in IR Magazine’s blog: In “Stay Awake Online” (August 15), IR correspondent Tim Human notes that investors are increasingly scouring the Web to learn about companies – and can be swayed by attack posts on blogs, nasty YouTube videos and the like. He adds:

But companies can fight back against negative publicity online, with the right know-how. The 2009 Search Marketing Benchmark Guide by MarketingSherpa explains how a major bank reacted to a highly ranked site attacking its reputation.

The bank contacted other sites linked to the negative one and got them to de-link, lowering its importance to search engines like Google. In addition, the bank added lots of search-optimized content to its own site – like blogs, videos and press releases – to fill up more of the top spaces in search listings. As a result, the offending site was knocked from the top page of results.

Got that annual report planned yet?

September 2, 2008

When Labor Day rolls around, I always start thinking about annual reports. It’s a little hyperactive for some companies – but, hey, thinking ahead is part of my calling. When I was in IR on the corporate side, I first began feeling those urges around the Fourth of July.

So September has arrived – time to think about annual reports. For most IROs and communicators, year end is coming up soon.

We’ve mapped out the annual report process over the years, and common elements apply across companies. A few first steps will get things rolling:

… Assemble the team. Identify a hands-on group from accounting, legal, IR, communications – as well as any outside designers or writers.

… Brainstorm. As third quarter winds up, the big picture for the year is coming into focus. Good year, bad year? Problems, achievements? Gather the team to talk about themes, concepts and tone.

… Make a timetable. Sketch out the schedule, perhaps working backwards from the drop-dead mailing date through the various stages of creating, writing and producing the annual.

… Enlist management. Have a first conversation with your CEO or CFO on what shape the annual report might take. Get direction (or buy-in) on the tone and broad messages of the report.

The annual report, print or electronic, is still the marquee publication that investors (and perhaps other audiences) use to judge your company. Its readers are the right audience – we must be sure we reach them with the right message. Whether the annual report is a 10-K wrap or a full glossy book, its clarity, focus and tone are critical to effective communication.

And now the fun begins.