Archive for March, 2009

Monday, Monday …

March 30, 2009

I guess we learned a couple of things in Monday’s market:

  • Rallies don’t go on forever, especially amid negative business fundamentals (say, two of the Big Three teetering on the brink).
  • Attention CEOs: President Obama is an activist shareholder, and if you take the government’s money you should know who’s in charge.
  • Economic and industrial policy is unhinged from philosophical principles (this happened in the last administration), and global policy actions seem likely to continue in ad hoc reactive mode.

Those of us laboring in the investor relations trenches can continue to expect, shall we say, a fluid market environment. Stability and comfort aren’t in the macro picture  for the foreseeable future.

Who’s most shareholder-friendly?

March 24, 2009

The March 2009 Institutional Investor is a must-read for IROs.

The names of top-ranked firms in 57 industries are reason enough to take a look at “America’s Most Shareholder Friendly Companies,” an II ranking based on relationship evaluations by 675 buy side analysts and portfolio managers. Yes, the list includes some of the market’s longtime “blue chips,” but also a few you might not have considered.

You can check rankings in your industry here for a mini-benchmarking.

But the common themes among top-ranked companies are even more compelling. Beyond working hard on delivering fundamentals amid a tough economy, managements are focusing more than ever on relationships with their investors. Here’s a sampler.

Southwest Airlines:

“Any time that circumstances are difficult, it puts that much more stress on providing the right information,” [CEO Gary Kelly] says. “We work hard to establish a baseline understanding of Southwest Airlines’ vision and who we are, and we do the best we can to set reasonable expectations.”

Baxter International:

“The thirst for information from investors has grown significantly over the past 12 months,” says Mary Kay Ladone, vice president of investor relations. The challenge, she explains, is trying to find the right balance between “delivering a simple message that allows shareholders to make investment decisions, but not simplifying the message to the extent that we mask some of the uncertainty. This has always been the case, but the current environment has heightened it.”

… she adheres to five basic principles when communicating with shareholders and potential investors: “simple, transparent, responsive, timely and accurate.”

Kimberly-Clark:

[CEO Thomas] Falk and his investor relations team keep shareholders informed of developments – even when the news is not good – by scheduling regular meetings in the offices of buy-side analysts in major markets and by making themselves available to answer questions. “Good investors are always probing for the soft spots in your strategy and your deliveries,” he says. “They have done their homework.”

Procter & Gamble:

“At the heart of our investor relations approach is the clear understanding that our shareholders are the owners of the company and that we need to be pro-actively responsive to them,” [CFO Jon Moeller] says, adding that P&G hosts investor meetings eight times a year at its headquarters and also attends most major investor conferences. “We make sure they understand our strategy, how we’re competitively advantaged and how we’re building on that.”

You might say it comes down to basics. Companies that execute well on the fundamentals of investor relations – clear communication of strategy, timely disclosure of changes and generous access for shareholders – earn favor and loyalty from the buy side.

And those relationships pay off in an uncertain era.

A surprise in the cereal box

March 23, 2009

surprise-in-cereal-boxImagine my delight when I opened up a box of Cheerios and found a surprise inside: a snap-together plastic sports car. Cool! … Yes, I know. They say men are just 8-year-old boys in grown-up bodies, and this explains my glee upon running across a cheap little toy.

Call it quirky, but the surprise in the cereal box made me think of investors and their reactions to a pleasant surprise. We’ve all seen the pop in a company’s stock price when it beats earnings estimates.

But there are other surprises a company can give its shareholders.

Investor presentations offer an opportunity. How about surprising an audience with a speech offering deep insights into your industry and markets, rather than the usual data-dump-in-a-Powerpoint-file? How about announcing a news item at a meeting, approximately simultaneous with a broad release? Or brightening up an analyst day with a bit of entertainment? In a small way, just running on time is a nice surprise (beating a 10- or 20-minute limit demands two disciplines: saying only what matters, and practicing to nail the time).

A little psychology on the substantive side also can help relationships. Sure, there aren’t many positive surprises – earnings or otherwise – in today’s brutal economy. And you can’t hold back material information.

But IROs can help management look for opportunities to highlight an unexpected benefit or unpromised outcome. An acquiring company can deliver synergies faster than projected. A new CEO can implement changes he hasn’t been ballyhooing publicly. A cost-cutting program can exceed its targets. In each case, management can influence both what it promises up-front and how well the company executes. Never over-promising should be a core principle of IR.

For investors, a surprise is like finding a toy in the cereal box. Cool!

(I’m going to go play with my car now.)

© Copyright 2009 Johnson Strategic Communications Inc.

What’s up with live blogging?

March 20, 2009

One of the strange inventions of our new media era is live blogging of conference calls by financial media. What’s up with that? 

Today, for example, The Wall Street Journal is live blogging the Goldman Sachs conference call on its AIG risk. The odd thing is, of course, it’s a conference call – an investor could be listening live to get the news personally in real time.

Live blogging is minute-by-minute, as fast as a reporter can type a summary of what he’s hearing. You read things like this from the WSJ:

10:56: The hold music is Mozart. One of the better symphonies.

11:04: The conference call starts.

… 

11:12: If AIG failed, GS would have been able to collect on its hedges. That is why the company said it had no material exposure to AIG.

11:12: Viniar on AIG collateral: “We also have taxpayer money at GS and it’s our responsibility not to lose it.”

11:13: If GS was fine if AIG failed, how was it fully hedged? Viniar defends not returning some of AIG’s collateral or taking the discount. “We had about $7.5 billion of collateral, and if we had to take a discount on it, then GS would not be fully covered.” …

All well and good, but live blogging reminds me of play-by-play commentary on a basketball game – it lacks something if you don’t watch or hear the game itself. Live blogging is in print, with no video or audio. It’s a step removed – almost live, but not quite.

My thought: An investor who wants to be in the know would listen to the Goldman Sachs call. An investor could follow the live blog at the same time, but there isn’t much value without hearing or seeing the actual event. 

In fact, it’s spring break so I am watching – right now on TV – the University of Kansas play its first-round game in the NCAA men’s basketball tournament. The game is live, and I’m seeing it first-hand.

Wouldn’t it be silly, it occurs to me, to follow the game through a live blog? But wait. Going back to the WSJ.com home page, I see there is a live blog on the KU game … Lagging a few minutes behind what I see on TV, there’s the play-by-play. But I’ve already seen each play before it’s reported. I could multitask and read this almost-live blog for additional commentary – or I could just watch, get all the information I need and enjoy the game. Then, I might read a news story or column in the morning paper to find well-thought-out commentary on what happened (in sports or finance).

News media are in a period of experimentation, and live blogging is part of that. For my money, live blogging of a conference call does not provide a good substitute for listening live. Even then, the value depends on the blogger’s ability to add insightful explanation in real time.

McKinsey: Good time to open up

March 19, 2009

Transparency is “in” again, big-time. But what transparency should look like in ongoing conversations with investors isn’t always clear.

McKinsey & Co. consultants Robert Palter and Werner Rehm outline a sensible strategy in “Opening Up to Investors” in the January ’09 McKinsey Quarterly. It begins with not hiding in tough times:

As the credit crisis sorts itself out, one outcome investors and regulators will almost certainly demand is more transparency into the strategy and the underlying operating and financial performance of companies—not only the financial ones at the storm’s center but all companies. Managers should enthusiastically embrace such reforms.

The consultants urge companies to take action by thinking through and bolstering disclosure in three areas:

  • Give additional detail on how you create value, such as more granular P&L and balance sheet data to help investors value business segments.
  • Provide a candid assessment of performance, including initiatives that don’t work out and discussion of trade-offs such as pricing and margin.
  • Offer long-term guidance on your value drivers – estimated ranges on a handful of key operating metrics that drive value (not quarterly EPS).

The McKinsey piece suggests quite a few examples of disclosures to implement these three broad actions in specific industries. It’s available on the McKinsey website, with free registration. (Thanks to financial communicator Nick Iammartino for passing along the McKinsey article.)

Is AIG or Grassley more offensive?

March 17, 2009

One of the nastier comments to come out of the financial crisis is in the news today: Sen. Charles Grassley, ranking Republican member of the Senate Finance Committee, brings up suicide as an option for executives in failed financial firms.

From the AP story on Grassley (in an Iowa radio interview) joining the outcry over AIG executives receiving bonuses:

“I suggest, you know, obviously, maybe they ought to be removed,” Grassley said. “But I would suggest the first thing that would make me feel a little bit better toward them if they’d follow the Japanese example and come before the American people and take that deep bow and say, I’m sorry, and then either do one of two things: resign or go commit suicide.

“And in the case of the Japanese, they usually commit suicide before they make any apology.”

As I said – nasty. Suicide is not something to treat lightly. I learned long ago, in some past economic down-cycle, that executives of failing businesses are truly in danger. Their companies’ collapse and personal financial losses can seem like the whole world falling apart. This remark lacks compassion and real-world perspective. It’s offensive toward American and Japanese executives.

Of course, we don’t expect much of our politicians – and Grassley is as entrenched as a politician can get, after 50 years in elective office. When the economy is in the dumps, those who fancy themselves populists always villainize the business people whose misjudgments or greed contributed to the economic crisis. But can’t politicians be civil, or at least humane?

Steady as she goes

March 16, 2009

In turbulent times it’s not changing strategies – but staying the course – that builds a strong corporate reputation, according to this year’s “World’s Most Admired Companies,” in the March 16 Fortune.

What quality wins respect for firms like Apple, Berkshire Hathaway, Toyota, Google, Johnson & Johnson, Procter & Gamble, FedEx, Southwest Airlines, GE and Microsoft – this year’s Top 10?

The consulting firm Hay Group, which helps Fortune survey 4,000-plus analysts, executives and directors to pick the most admired large companies in 64 industries, points to consistency in strategy:

Most important is a strong, stable strategy, which confers important benefits in unstable times. Companies that change strategies must usually change organizational structures as well, and making that change in a recession is a heavy burden just when corporations can bear it least. It forces employees to focus inward rather than outward and becomes a giant sink of time and energy.

Of course, fixing a broken business model isn’t optional if your old one is doomed. But we must recognize that changing direction is disruptive – and reputation is one of the casualties – Fortune says.

Hay Group found that, in general, less admired companies change structures far more often than the Most Admired, the main reason being a strategy switch. An extreme example is the Detroit automakers, which are turning themselves inside out as they seek strategies for survival at a moment when they should be focused on serving buyers.

The moral of the story: While “change” is popular, even more important is the ability to design and execute a strategy that endures.

As investor relations practitioners, we should emphasize the stability and durability of our companies’ strategies – and explain how those strategies will get us through the tough times.

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?

Talk about real economic value …

March 12, 2009

Most investor relations people have run into fund managers who aren’t satisfied with the tables in the 10-Q. Donning green eyeshades, these investors want to slice and dice operating cash flows, cost of capital, and returns on capital in pursuit of … well, their own metric.

They’re after some version of a shareholder-oriented performance measure known as “economic value added” (EVA) or economic profit. To build value, the approach says, a company must earn a rate of return greater than its cost of capital.

Bennett Stewart, one of the originators of EVA, continues to promote its benefits for companies that are truly committed to building shareholder value. Speaking today to a Financial Executives International gathering in Kansas City, Stewart argued other metrics like free cash flow and even return on capital can create perverse incentives for managers – while improving EVA invariably creates real shareholder value, the kind a shareholder sees in the share price.

Essentially, EVA is a non-GAAP calculation of net operating profit after taxes (a cash flow measure) minus a capital charge (the firm’s cost of capital times capital deployed). You can look at EVA as a spread between return and cost of capital, compile a detailed EVA P&L, look at EVA margins at each level, and consider changes in the trend. You can get lost in an endless stream of alphabet-soup abbreviations.

Stewart says “EVA momentum,” a ratio of change in EVA to trailing-year sales, is highly predictive of market value for public companies.

To confess my bias, I’ve have always liked the EVA approach. Stewart’s book The Quest for Value (HarperBusiness, 1991) is one of my favorites in the finance genre. Its shareholder-oriented insights are relevant in developing messages on, say, a proposed merger or new initiative – even for companies that don’t formally use EVA.

Stewart, who left EVA consulting firm Stern Stewart & Co. to start EVA Dimensions in 2006, now is working to “commoditize” the management approach with a software package, a stock rating tool and a hedge fund using EVA methodology. The EVA Dimensions website offers a variety of articles – and, yes, promotion – on using the approach to manage for results.

Stewart offers innumerable proof cases for EVA, but two of our best-known corporate giants offer a good contrast:

  • Wal-Mart. Managers minding only the P&L might focus on raising margins, but Wal-Mart chose a low-margin pricing strategy to pull consumers in, driving faster turns of inventory and higher returns on capital. And it invested in profitable growth. Stewart wrote WMT up as an EVA champion in 1991; since then it has continued to build value.
  • General Motors. When Fortune wrote the carmaker’s early obituary this fall (“GM: Death of an American Dream”), a bar graph showed eight straight years of negative EVA – and a TTM figure of minus $11.5 billion. Oddly enough, GM also was getting horrible marks for negative EVA two decades earlier when Quest for Value was written.

As if to emphasize the relevance of EVA in the Internet era, Stewart also cites Google’s high EVA momentum and stock-price appreciation. So investment in profitable growth and careful management of capital work in the new economy, too.

For companies burdened by the recession, Stewart says, “The first message of EVA in these tough times is don’t go cutting and slashing and burning … We should cut where we should cut, and we should invest where we should invest [in projects and businesses where the numbers show positive economic returns].”

The decision on whether to use EVA as a management tool is typically an issue for CEOs and CFOs. Accountants also have something to say about it. (One FEI member today asked a controller sitting at our table, “So are you ready to start keeping two sets of books?” referring to GAAP accounting plus EVA.) Investor Relations communicates whatever management adopts.

If a company uses EVA, the IRO needs to work diligently on how to communicate the shareholder benefits clearly. Focus on intuitive concepts like earning returns greater than the cost of capital, generating cash and increasing the productivity of assets. Benchmark EVA communications. And don’t bury investors in jargon.

The EVA body of knowledge suggests important principles for investor communication. Most companies, for example, don’t do a good job of talking about the relationship between the income statement and balance sheet. We need to discuss cash and what happens to it. We need to explain (and quantify) management’s effectiveness in using assets to create value.

An IR approach driven only by disclosure requirements is likely to obsess over GAAP accounting – to “worship at the altar of EPS,” Stewart would say. Instead, we should explain performance in terms of real economic value for shareholders. Assuming we really are in the shareholder-wealth business.

Graham & Dodd on today’s market

March 11, 2009

For perspective amid the market turmoil, I’ve been reading the classic Security Analysis by Benjamin Graham and David Dodd. The first edition, from our local library, takes us back 75 years to the market of 1934.

In the midst of the Great Depression, the value mavens write:

img_28511Economic events between 1927 and 1933 involved something more than a mere repetition of the familiar phenomena of business and stock-market cycles. A glance at the appended chart covering the movements of the Dow-Jones averages of industrial common stocks since 1897 will show how entirely unprecedented was the extent of both the recent advance and the ensuing collapse. They seem to differ from the series of preceding fluctuations as a tidal wave differs from ordinary billows …

Sounds a little like the rise and fall we’ve experienced recently. Graham and Dodd, while expounding quantitative approaches for hundreds of pages, also comment on the role of human nature:

One of the striking features of the past five years has been the domination of the financial scene by purely psychological elements. In previous bull markets the rise in stock prices remained in fairly close relationship with the improvement in business during the greater part of the cycle; it was only in its invariably short-lived culminating phase that quotations were forced to disproportionate heights by the unbridled optimism of the speculative contingent. But in the 1921-1933 cycle this ‘culminating phase’ lasted for years instead of months, and it drew its support not from a group of speculators but from the entire financial community.

This, too, sounds a bit like the bull-to-bear cycle from the 1990s to present. Back to Graham and Dodd, in 1934:

We suggest that this psychological phenomenon is closely related to the dominant importance assumed in recent years by intangible factors, viz., good-will, management, expected earning power, etc. Such value factors, while undoubtedly real, are not susceptible to mathematical calculation; hence the standards by which they are measured are to a great extent arbitrary and can suffer the widest variations in accordance with the prevalent psychology.

The authors say “the investing class” is more likely to be carried away with speculative values and intangibles when investors have “surplus wealth” to deploy. In hard times like the 1930s, investors will apply “the old-established acid test that the principal value be justified by the income.”

That, to me, is an application of market history to investor relations. We can expect investors in 2009 and beyond, battered by the bear market, to be much more focused on the acid test – the visibility of real earnings. And more skeptical of excitement and potential. We should communicate to investors where they are.