Archive for July, 2009

IR & the coming recovery

July 28, 2009

Newsweek-It'sOverThe cover of the latest Newsweek shouts “The Recession Is Over!” A balloon and an exclamation point add emphasis, although writer Daniel Gross layers on the qualifications – making it clear the economy, even if it is at a turning point, remains in turmoil.

For my money, it’s a little premature to celebrate. I’m skeptical of newsweekly covers. And too much pain seems to be lingering – for consumers, workers, capital markets and companies. The sunshine hasn’t broken through enough to banish the dark clouds in favor of sunny days.

Yet a glimmer does shine through, here and there. Recovery will come, maybe soon. And my sense is that investors are looking for signs, seeking each ray of light, asking if good news is coming next quarter, or the next after that.

So investor relations people need to be asking: What’s our recovery strategy? How do we offer forward-looking perspective? What do we say in an uncertain time when we see hope but can’t be sure? And when do we declare recovery has arrived?

Some ideas for you to consider (feel free to add your own as comments):

… Explain the recovery strategy. Our job in IR, any time, is to help investors understand our companies’ strategies for creating value. Right now, shareholders are battered but very much looking forward and wondering what’s next. With more than a little nervousness, they want to know where we go from here.

In a piece called “Beyond Challenging Markets,” the consulting firm Deloitte says shareholder returns vary much more among companies around a recession than in good economic times – that is, some emerge as winners that outperform for investors, while others survive but never quite lift off for shareholders.

Deloitte outlines four stages of strategy for recession and recovery: strengthening the balance sheet, optimizing performance, building confidence and positioning for the future. Most companies have addressed the first two by working to reduce debt and cut costs; now we’re looking forward.

Building confidence as a basis for outperforming in a recovery, Deloitte suggests, may include improving corporate governance; demonstrating a strong approach to anticipating and managing risk; creating realistic expectations and delivering on promises; and responding proactively to the prospect of increasing regulation.

Deloitte says positioning for the future means developing a strategy for achieving near- and intermediate-term growth in existing businesses; changing the business model where markets or conditions have changed (e.g., ongoing credit limitations or sluggish consumer spending); and expanding through M&A or new products.

The consultants’ emphasis is that CEOs and senior management should be doing the work of strategy formation for the next phase of the economy. But IROs, equally, should be taking on the job of explaining strategy for what’s coming next.

… Give historical perspective. One of the best ways to talk about the future is to talk about the past. In today’s Wall Street Journal, Justin Lahart analyzes “the Great Recession” in comparison to eight decades of economic slumps (with cool interactive graphs online, if you’re an Econ nut). Most companies can draw upon experience with past recessions – and the recoveries that followed. So we can speak factually about how recovery tends to work its way through our business.

… Share specialized knowledge. Companies can add value for investors and nurture lasting relationships by sharing industry-specific insights. That means helping investors, especially generalists, understand how the business cycle works its way through your sector, how the competitive landscape is changing, and what special risks or opportunities you see. Your view of the business in which you compete is a valuable perspective to add to the investors’ mosaic.

… Don’t be overly optimistic. A realistic tone, infused with humility, seems to fit the times. Most of us didn’t predict the economic turmoil would be this severe, so we have reason to be cautious about forecasting the strength or timing of recovery.

There are positive signs. Floyd Norris of The New York Times notes: “The index of leading indicators, which signals turning points in the economy, is rising at a rate that has accurately indicated the end of every recession since the index began to be compiled in 1959.” And various industry-specific indicators show upticks.

We could truly be at the bottom, although some business people sound more like they just can’t imagine things getting any worse. The recovery may already be underway. Or, as Norris says, we may be entering the first upstroke in a W-shaped recovery, only to face a second downturn of unknown severity.

To be clear, I’m not trying to call an economic recovery – or deny it. My point is that as IR people we need to be thinking and communicating about the coming recovery, probably without predicting the timing.

When should we declare that recovery has arrived? Personally, I favor a factual approach that keeps investors current on company or industry-specific indicators, including third-party economic data. And then I would suggest waiting to break out the champagne until actual results start to show improving sales and profits.

That’s when investors will start breathing easier.

© Copyright 2009 Johnson Strategic Communications Inc.

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New feature: ‘Browse by topic’

July 27, 2009

Over the weekend I tinkered with this blog a bit to add an index by subjects – under the heading “Browse by topic” in the right-hand column.

Not a big change and not sexy looking, just a small enhancement aiming to make IR Café more useful and easier to navigate. The idea is that if you’re interested in, say, M&A communications you can click on that and get an archive of posts relating to that subject – without a whole lot of clicking around.

In the process, I made subject names more specific for all past posts. Of course, you can still use the search box in the upper right to search by key word – for example, earnings guidance or conference calls, which aren’t separate subjects.

Two goals for anyone with influence over a website are to make it useful and usable. As investor relations professionals, we should regularly look at our company websites to see if we can improve the IR sections against those standards.

Please let me know if this minor change helps you – or certainly if it causes any unintended problems. By all means, pass along any ideas for improvements.

Overconfidence on Wall Street

July 23, 2009

“Wall Street is a confidence game, in the strictest sense of that phrase.”

– Malcolm Gladwell, “Cocksure”
The New Yorker, July 27, 2009

One of the best storytellers writing today about financial and economic topics, Malcolm Gladwell, takes a shot at Wall Street’s overconfidence in the current New Yorker. It’s one of the wittier dissections of the financial crisis that I’ve seen.

The specific targets are Bear Stearns and Jimmy Cayne, the failed investment bank’s former CEO. If you’re weary of retrospectives on those two subjects, this piece might serve as one last thing to read about them. Along the way, Gladwell weaves together readable tales of overconfidence in war and other settings.

All this has, well, not very much to do with investor relations – except perhaps as a cautionary tale if your boss or you are among those who might earn a label of “cocksure.” But Gladwell offers up an insightful, if uncomplimentary, look behind the curtain on Wall Street. The New Yorker, of course, supplies the cartoons.

On the ethics front …

July 22, 2009

Investor relations professionals need to stand on our own ethically, thinking through and following our convictions on what’s right or wrong. The Wall Street Journal brought a reminder yesterday of the need for personal responsibility with news that the head of investor relations for Deutsche Bank has been dismissed.

You may remember the story earlier (“Someone should’ve said No“) about Deutsche Bank hiring private investigators to spy on members of its management and supervisory boards – and an activist shareholder.

Now the tale unfolds further with news of the firing of two executives: Deutsche Bank’s head of investor relations and head of corporate security in Germany. One of four surreptitious surveillance actions cited in press reports involved a dissident shareholder and a media mogul who was in a legal fight with the bank.

To be clear, I have no first-hand knowledge and wouldn’t attempt to judge what Deutsche Bank or its people did. But the reputational consequences, from a corporate and personal standpoint, are obvious. Yesterday’s WSJ headline said “Deutsche Bank Fires Two in Spying Probe.” The story continues to dribble out, with more details in today’s WSJ. In Germany, where privacy and “big brother” tactics are a sensitive topic, newsmagazine Der Spiegel has aggressively reported this story.

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”

Yes, the SEC is more active

July 20, 2009

If you think the Securities and Exchange Commission has been cranking out more enforcement actions since President Obama took office, you’re right, says a July 18 Harvard Law School Forum post by lawyers at Gibson, Dunn & Crutcher.

SEC InvestigationsThe numbers show a big increase in enforcement actions across various categories: new investigations opened (+23% in early 2009 vs. 2008), formal orders of investigation (+154%), temporary restraining orders (+183%) and injunctive actions (+46%). No huge surprise in the upturn: Administration officials have been rattling sabers and talking tough, and members of Congress have been calling for the heads of CEOs as some kind of retribution for the economic downturn. At the National Investor Relations Institute annual conference, as noted June 8 in this blog, NIRI President & CEO Jeff Morgan warned more SEC enforcement cases are coming.

The Gibson Dunn lawyers also mention some qualitative changes:

More telling than the statistics, in the last few months, the SEC has filed a number of high profile cases that demonstrate a more aggressive enforcement approach and that are consistent with the themes that [SEC’s new enforcement chief Robert] Khuzami has articulated. Not surprisingly, the SEC has focused its attention on cases related to the financial crisis. In addition, in an effort to bring cases more quickly, the SEC has also more frequently filed these cases in the absence of settlements and in the absence of parallel criminal cases. Moreover, presumably towards its goal of sending an “outsized message of deterrence,” the SEC has charged senior level individual executives.

Since I’m no lawyer, I won’t interpret SEC developments. You can read details in the Gibson Dunn post. As part of an investor relations team, of course, you should be discussing trends like these regularly with your company’s lawyers.

(Thanks to Dominic Jones @IRWebReport on Twitter for calling attention to the Gibson Dunn post on the Harvard Law site.)

Governance ‘fix’ may be broken

July 16, 2009

Corporate governance “reforms” taking shape in Washington, while aiming to fix the causes of the financial crisis, may in fact add to the problems.

In a memo to clients today, “Corporate Governance in Crisis Times,” the New York law firm Wachtell, Lipton, Rosen & Katz says governance failures of recent years stem from “pressure for short-term performance and quick stock market profits” (greed, you might call it).

But emerging schemes to fix governance, the lawyers note, focus on empowering investors – these might be mutual fund or hedge fund managers – to overrule company managements and boards of directors in matters of corporate policy and direction. Trouble is, at the risk of generalizing, asset managers are the ultimate short-termists. Desire for quick stock market profits is in their job descriptions.

Instead of “reform” like shareholder proxy access, creating a new right to call for sale of a company or dock the CEO’s pay, the lawyers suggest our policy makers should focus on society’s long-term good, including economic growth:

There is no reason to embrace a plethora of ill-conceived federal regulation and legislation that usurps the traditional role of state law and thereby overturn the fundamental legal doctrines that have formed the bedrock of history’s most successful economic system.  The engine of true economic growth will always be the informed business judgment of directors and managers, and not the hunger of short-term oriented shareholders for quick profits.

A long-term focus would mean encouraging boards and CEOs to pursue strategies for sustainable growth. Empowering boards of directors rather than arming union pension funds or special-situation hedge fund managers. Freeing rather than tying down managements. Designing incentives rather than Damoclean swords.

Lawmakers, regulators and courts need to remember that allowing companies to pursue long-term strategies (lawyers call it the “business judgment rule”) is the path both to shareholder wealth and societal benefits like job creation. Beware of making a fix, they warn, that may break more than it repairs:

Particularly at a time of depressed stock market valuations and the resulting danger of opportunistic attacks to bust up or takeover American companies, directors and managers must remain free to invest in the future and take the long-term view, so as to ensure prosperity for future generations.

These guys are lawyers for big corporations, of course. As a free-market sort, I’m inclined to agree that Washington doesn’t have the best ideas on what will restore business to a healthy growth trend. What’s your opinion?

Stakeholders vs. stockholders?

July 14, 2009

A Stanford University business professor, Jeffrey Pfeffer, takes on “shareholder capitalism” in an article in the July-August issue of Harvard Business Review.

Pfeffer argues in “Shareholders First? No So Fast …” that the pendulum is swinging from stockholders toward stakeholders. Noting the recent political changes and populist backlash after the carnage in financial and credit markets, he says CEOs and the rest of us need to get away from shareholder-driven decision making.

I’m not sure I buy the stakeholder-stockholder dichotomy. But we certainly do need to study the mood of our society as we work out corporate strategies – and craft messages for investor relations and corporate communications.

Pfeffer says companies used to be run (in the 1950s and 1960s) for employees, customers, suppliers and communities, as well as shareholders. In the 1970s and 1980s, he says, faith in the wisdom of financial markets became pre-eminent.

He describes the current shift back to stakeholders:

Now opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder value is rightfully under fire. Given the political realignment occurring in many countries, and the residue of the worst economic meltdown and destruction of wealth since the Great Depression, the chances are pretty good that stakeholder interests will remain at the top of the list a bit longer this time.

Even while stockholders were king, some of the most successful companies like Southwest Airlines put employees first, customers second and shareholders third, Pfeffer notes. The people who most influence a company’s success – employees and customers – don’t really get fired up by shareholder value, he suggests. Employees want to be valued (and paid), and customers want quality, price and service.

To me, there’s an element of “straw man” in the stakeholder vs. stockholder debate. Most companies I’ve worked with see shareholder value as a long-term outcome of working to motivate employees and excel in meeting the needs of customers. To the extent that any CEOs actually do fit the image of greed-crazed robber barons, I don’t see their behavior as having anything to do with the interests of shareholders.

Pfeffer even suggests that shareholder capitalism contributes to causing recessions. In that, I think he goes beyond economic evidence and joins the political hordes. Not much good can come from taking up torches to burn CEOs at the stake for our current woes. I doubt that shareholders’ interests led to this or any recession.

But stakeholders are the people our companies serve – shareholders, employees, customers, suppliers and communities – whatever order you list them in.

Our message has to do with what leads to business success. So, yes: stakeholders … and stockholders. What’s your view?

PR does matter

July 8, 2009

Media-and-manI know, I know. “It’s all about the numbers.” Investor relations people (and some CEOs and CFOs), steeped in accounting fundamentals and valuation formulas, are skeptical of public relations. We scoff at press interviews, photo ops … the “spin” stuff PR people do. Of course, no respectable fund manager or analyst would admit to being swayed by a press release, or getting an idea from a newspaper. “It’s all about the numbers,” they say.

Trouble is, influencing the market is not all about the numbers. It’s all about the numbers – plus getting the right people to pay attention.

Two recent studies from respected business schools analyze extensive data on the relationship between press coverage and the market for individual stocks – and conclude that broader dissemination of news has benefits in the capital markets.

The more comprehensive study, a doctoral paper by Eugene Soltes at University of Chicago’s Booth School of Business, looks at all US nonfinancial companies traded on NYSE, NASDAQ or AMEX, excluding the 100 largest by market cap. Soltes and his computer programs count and analyze all articles on these firms, 9.3 million bits of news in total, from the Factiva database for 2001 through January 2007. Then he crosses that information with annual trading data on the stocks, looking for long-term effects rather than a daily “pop” in market activity. Soltes concludes:

The press provides an important and highly visible system of communication between firms and investors. … Specifically, greater dissemination of firm news is found to lower bid-ask spreads, increase trading volume, and lower idiosyncratic volatility. …

By increasing the visibility of firms, greater dissemination may also reduce a firm’s cost of capital.

In this paper, “dissemination” has to do with putting news out and getting it covered in the business press. Soltes says the average firm sent out 21 press releases a year, one every 12 trading days, covering deals, earnings and other news. (His tables give a median of 14 releases a year, just over one a month, a figure I like better as the midpoint in a range of small to large companies). For each release, business publications wrote an average of 1.5 articles – obviously, many releases get no coverage, while some get a lot. Soltes did not investigate why some releases get more coverage – being newsworthy probably is the key, although making connections with reporters also helps.

Soltes’ point is that more is better – more frequent issuance of news and broader coverage of it. Consider the impact of news dissemination on bid-ask spreads:

Based on an average sized trade, a 20% increase in press coverage reduces the average cost of a trade by $1.07. With the average firm having nearly 25,000 trades a month, this translates into a significant reduction in trading costs.

Soltes also finds more dissemination of news increases monthly trading volumes and decreases the volatility of individual stocks. Most companies – and institutional investors – value reduced trading costs, increased liquidity and lower volatility.

The other recent study, by Brian Bushee and three accounting colleagues at the University of Pennsylvania’s Wharton School, focuses on quarterly earnings news. This one looks at the three-day window around earnings (earnings release date, plus or minus one trading day) and yields more detail on immediate trading effects.

The Wharton study looks at quarterly announcements by 1,182 medium-sized NASDAQ firms from 1993 to 2004, excluding large cap companies based on an assumption that differences in coverage are more marked among lesser-known names. The authors analyze 608,296 articles on those quarterly results:

Our results indicate that, ceteris paribus, press coverage has a significant effect on firms’ information environments around earnings announcements. We find that greater press coverage during the earnings announcement window is associated with reductions in bid-ask spreads and improvements in depth.

The impact of media attention extends to retail and institutional investors:

We find that greater press coverage is associated with a larger increase in the number of both small and large trades. … For small trades, these results are consistent with the press providing information to a broader set of investors and triggering more trades. For large trades, these results are consistent with press coverage reducing spreads and increasing depth enough to reduce adverse selection costs and encourage more block traders to execute trades.

Both papers take a mechanistic view of corporate processes for disseminating news and how the media respond. These are data mining studies by accounting scholars – focusing on numbers of releases and press stories, word counts and similar measures of dissemination.

No attention is given to the qualitative nature of the news – positive, negative or nuanced. The authors also do not explore why reporters decide to write more, less or not at all. (The Soltes study does analyze “busy news days,” when a flood of business or nonbusiness news overwhelms XYX Company’s little press release, and confirms that issuing news on busy days has little benefit – although companies obviously can’t control when Michael Jackson dies or GM goes bankrupt.)

Neither of these studies venture outside of traditional “news” databases to analyze the impact of using social media, blogs and so on, to disseminate news. My guess is future studies will prove that the impact on markets comes from getting the word out, by any means, as long as you are reaching the investing audience.

Bottom line: Issuing news has a measurable benefit for public companies in the capital markets – increasing volume, reducing trading costs and reducing volatility. More frequent news is better. Getting more reporters or news outlets to write about the company amplifies the benefit. That’s what the quantitative evidence says.

So when PR people speak of “creating visibility,” it does matter in the market.

From old media to social media

July 7, 2009

Entrepreneurs trying to raise capital – and get businesses up and running – are turning more and more to social media stars vs. traditional media to get the word out, The New York Times reports in “Spinning the Web: P.R. in Silicon Valley.”

The hottest PR people in Silicon Valley, says The Times, care less now about reporters at tech pubs or financial magazines than the influential voices online:

This is the new world of promoting start-ups in Silicon Valley, where the lines between journalists and everyone else are blurring and the number of followers a pundit has on Twitter is sometimes viewed as more important than old metrics like the circulation of a newspaper.

Gone are the days when snaring attention for start-ups in the Valley meant mentions in print and on television, or even spotlights on technology Web sites and blogs. Now P.R. gurus court influential voices on the social Web to endorse new companies, Web sites or gadgets — a transformation that analysts and practitioners say is likely to permanently change the role of P.R. in the business world, and particularly in Silicon Valley.

This, of course, is tech PR – the air has always been rarified around Silicon Valley startups, their founders and service providers. But the Times story has much to say about how information spreads in the rapidly changing world of social media.

One thing remains the same. Communicating begins with building relationships, so that when you have something to say, you’re talking to people who know you. I like the quote from Brooke Hammerling, one of those Silicon Valley publicists. Noting that Twitter is today’s fashionable way to get the news out, she says some newer platform may take its place: “It will morph, but it’s still all about relationships.”

(If you’re an investor relations person who doesn’t think IROs should even care about public relations, come back tomorrow for some compelling evidence.)

Someone should’ve said no

July 6, 2009

Well, there’s knowing your shareholders – and then there’s going way too far.

The German magazine Der Spiegel reports today that the country’s largest bank, Deutsche Bank, hired private investigators to look into members of its management and supervisory boards – and a pesky shareholder.

To be sure, the bank was investigating information leaks it saw as threatening – but it seems obvious someone should have said “No.” Now, the bank faces reputational damage, scrutiny of top executives’ roles – and possible legal action.

A 2001 case involved a union representative on the company’s supervisory board, suspected of leaking earnings info to the press. In 2006, the bank investigated contacts between management board members and German media mogul Leo Kirch, who was tangling with the bank legally. Among the targets, Spiegel says:

The bank also had external helpers investigate a shareholder believed to have links with Kirch – Michael Bohndorf, a lawyer who resides on the island of Ibiza. The investigators compiled detailed reports on his movements and even looked into whether he had any personal weaknesses: alcohol, gambling, women? One insider reports that the agency resorted to hiring women to test him.

For years, Bohndorf has been annoying Deutsche Bank by asking dozens of questions at annual shareholder meetings and taking legal action if his questions aren’t answered. The bank has already informed Bohndorf of the spying operation and apologized for it.

Two other German companies, Deutsche Telekom and Deutsche Bahn, face spying scandals. American firms have fallen into this trap in the past.

When the company is in the heat of battle – litigation, proxy fight, M&A contest – a mood of paranoia can take over in the executive suite. But when it comes to violating the law – or doing something that will look stupid in The New York Times or Der Spiegel – someone on staff should be saying “No. Don’t go there.”

The sanity check, sometimes, might even come from investor relations.