Archive for February, 2010

News affects stock price? You bet

February 25, 2010

We can all probably guess the least favorite news in the eyes of investors. Yes, it’s the earnings warning: Pre-announcing a disappointment in the numbers produces the most negative response in stock price, a new study shows.

The CXO Advisory blog, which reports daily on studies of investing theory and practice, provides a good summary of a February 2010 working paper by three finance professors who looked at the impact of 285,917 news releases from 2006 to 2009. Or you can access the original paper here.

Negative news hits stock prices harder, on average, than positive news helps, the study shows. And announcements of bad news also tend to be anticipated by stock price declines, suggesting the possibility of leaks.

The five most negative announcements for stock price impact? Pre-reporting bad financial results, FDA rejections of medical products, loss of a customer, poor financial performance on regular reporting dates, and product defects.

The five most positive? Pre-reporting better than expected financial results, share buybacks, FDA approvals of pharmaceuticals, spin-offs and EU pharma approvals.

During the financial crisis, context seemed to change the market’s reaction to news announcements: Issuances of debt or secondary equity offerings, for example, weren’t seen as such negative events during a time when weaker companies couldn’t access the capital markets.

The authors, who classify corporate announcements into nine major categories and 52 subcategories, believe regulatory changes such as Regulation FD in 2000 and Sarbanes-Oxley in 2002 have given news releases a more powerful impact on the market by encouraging an instantaneous, direct-to-shareholder communication mode. In fact, the professors observe:

Possibly as a result of the vagueness of the SEC’s information release requirements firms err on the side of disclosing too much information. Additionally, firms may prefer to release immaterial news in order to attract the attention of potential investors.

One possible use of this study for IR is to help gauge materiality of various kinds of events – the loss or gain of a major customer, for example – based on the average impact that similar events have had on companies’ stock prices.

© 2010 Johnson Strategic Communications Inc.

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Cowboy ethics

February 23, 2010

As an American child of the Fifties and Sixties, I grew up on westerns on TV and in movie theaters. John Wayne, Marshal Dillon in “Gunsmoke,” the “Bonanza” Cartwrights. Good guys in white hats. Not until recently, though, did I hear about “cowboy ethics.”

It seems that a veteran institutional investor, Jim Owen, a former partner in NWQ Investment Management, has started a nonprofit Center for Cowboy Ethics and Leadership and written a book called Cowboy Ethics: What Wall Street Can Learn from the Code of the West, among others.

I ran across cowboy ethics belatedly from a news story on some people in Wyoming trying to write some of this philosophy into the state’s statute books.

If you’ve got a bit of cowboy in your background, you can learn the basics of cowboy ethics from Owen’s Ten Principles to Live By. I’ll share three of them:

  • Ride for the brand.
  • Talk less and say more.
  • Remember that some things aren’t for sale.

In an age of corporate scandals, revisiting your core values seems appropriate.

Selling a pig in a poke

February 22, 2010

For starters, “a pig in a poke” is an ancient expression referring to a scam in the Middle Ages. The trickster would go to the market with a bag tied at the top – inside was an active, wriggling animal that the seller promoted as a small pig. The hapless farmer who bought this bag would later discover what it contained – not a valuable pig to provide future meat, but a cat, comparatively worthless in a world with too many cats already. You could buy a pig in a poke, or sell one. Later, someone inevitably would let the cat out of the bag and the truth would be known.

And so we come to Bank of America‘s merger with Merrill Lynch, announced at the worst point of the financial crisis in September 2008 and closed on Jan. 1, 2009. The deal is back in the news today, and the conflict is over what BofA disclosed about what was inside that bag back in the fourth quarter of 2008.

A federal judge in New York today said he would approve a settlement between BofA and the SEC over lack of adequate disclosure in the bank’s merger with Merrill – but the judge called the consent order “half-baked justice at best.”

The slap was directed mostly at the SEC for not punishing BofA more harshly, but US District Judge Jed S. Rakoff also had a few choice comments on the company’s disclosure around the deal. I gather from news reports that Rakoff can be a little cranky – but in reacting angrily against “too big to fail” banks and the government that bailed them out, he is echoing the feelings of Main Street America.

As an investor relations counselor rather than a lawyer, I find the lessons on disclosure – and IR decision making when “selling” a deal – more interesting than the fine legal points of who’s right or wrong between the SEC and BofA.

In his opinion today, Judge Rakoff said the bank failed to make adequate disclosures following the September 2008 merger announcement, running through the proxy statement leading up to Dec. 5, 2008, approval by BofA shareholders, and right on through the Jan. 1, 2009, closing.

Rakoff cited two basic decisions not to disclose:

  • The choice not to disclose in the proxy statement on the merger than BofA was allowing Merrill to pay $5.8 billion in bonuses to execs and top employees “at a time when Merrill was suffering huge losses.”
  • The failure to tell shareholders, before either the vote or the closing, about “the Bank’s ever-increasing knowledge that Merrill was suffering historically great losses during the fourth quarter of 2008 (ultimately amounting to a net loss of $15.3 billion, the largest quarterly loss in the firm’s history).”

By not disclosing these flaws, some folks – obviously including the judge – think BofA sold its own shareholders a pig in a poke. Judge Rakoff’s take on it:

Despite the Bank’s somewhat coy refusal to concede the materiality of these nondisclosures, it seems obvious that a prudent Bank shareholder, if informed of the aforementioned facts, would have thought twice about approving the merger or might have sought its renegotiation.

What is far from obvious, however, is why these nondisclosures occurred. The S.E.C. and the Bank have consistently taken the position that it was, at worst, the product of negligence on the part of the Bank, its relevant executives, and its lawyers (inside and outside), who made the decisions (such as they were) to non-disclose on a piecemeal basis in which inadequate data coupled with rather narrow parsing of the disclosure issues combined to obscure the combined impact of the information being withheld.

The consent order includes several “remedial actions” – including requirements that BofA get SEC approval for its choice of independent auditors, disclosure lawyers and compensation consultants for the next three years. Judge Rakoff describes these as mild corrections for a BofA attitude in need of adjustment:

Given that the apparent working assumption of the Bank’s decision-makers and lawyers involved in the underlying events at issue here was not to disclose information if a rationale could be found for not doing so, the proposed remedial steps should help foster a healthier attitude of “when in doubt, disclose.”

On the money side of today’s ruling, Rakoff wrote that the $150 million BofA will pay the SEC is “paltry” but added the settlement is better than a “vacuous” proposal of $33 million he rejected last August. The judge reluctantly approved the 150 mil.

“While better than nothing, this is half-baked justice at best,” the judge wrote. In the spirit of giving partial compensation to the “victims,” Rakoff ordered that the $150 million be distributed to “legacy” shareholders of BofA, not officers and directors and not former Merrill shareholders who got BofA shares.

While not judging what took place behind closed doors leading up to the BofA-Merrill merger, I do think IR people can take two lessons to heart: Don’t sell a pig in a poke and, following Rakoff’s advice, When in doubt, disclose.

© 2010 Johnson Strategic Communications Inc.

Toyota crisis should teach us

February 4, 2010

Poor Toyota. The crisis Toyota Motor Corp. faces over the safety of its cars is of epic importance – and they are struggling to get ahead of the reputational meltdown.

Investor relations professionals and corporate communicators should be taking notes on this story as it unfolds – and learning from Toyota’s woes – because sooner or later a crisis like this may strike your company.

A “Squawk Box” discussion on CNBC today highlights the reputational crisis Toyota faces – and the direct hit that the change in public perception will have on sales and profits going forward.

Particularly interesting to me are comments by Jeffrey Sonnenfeld, professor at the Yale School of Management, who grades Toyota’s response as “C-minus and falling” and adds, “They’ve lost the leadership moment.”

Asked what he would advise if he were in Toyota’s crisis management “war room,” Sonnenfeld says these actions would be his top priorities:

  • Put CEO Akio Toyoda front-and-center in the public responses to the crisis. “He should get out there like Jim Burke of Johnson & Johnson, Bob Eckert at Mattel more recently and David Neeleman at JetBlue. These guys controlled the story – with facts,” the prof says. “He’s new on the job. Well, this is trial by fire. He’s got to learn to articulate and reassure the public with facts.” I might add this is a time to communicate the right values – and facts.
  • Respond in the blogosphere and social media. It’s a tsunami of talk, and Toyota needs to be answering, giving its viewpoint, correcting errors, responding to rumors, expressing a caring approach. The “Recall Information” link on the Toyota homepage is hardly adequate. Toyota ought to speak out in words and on video – and it should be very proactive online. Of course, you have to learn to engage in social media before the crushing wave rolls over you.
  • Embrace the critics rather than hiding. Hard as it may be, Toyota management should be side-by-side with the regulators and opinion leaders (in Washington or elsewhere) to demonstrate its concern and active response, keep the facts in line, and be a part of the dialogue. “Rather than disparage them, let’s embrace them as part of the flow of communications,” Sonnenfeld says.
  • Share with competitors what’s going on as the crisis unfolds. Counter-intuitive, but Sonnenfeld points out other automakers aren’t above safety problems or recalls, and some may even share suppliers with Toyota. Good time to reach out and enlist competitors’ sympathy and perhaps help – because in the long run the automakers all face similar issues.

This isn’t just a product or branding issue – the crisis is a major financial and capital markets setback for Toyota. The stock has tanked 20 bucks or 22% (looking at the ADS) since the mid-January peak before the recall. When the core value of your only product becomes a target of late-night comedians, it’s trouble.

Of course, Washington is dealing out public floggings daily – and these will continue and increase. Given the prevailing populism, which thrives on attacking big business, companies need to get much sharper at reputation management. When someone like the Obama Administration’s secretary of transportation tells Americans who own Toyotas to stop driving them – he later “clarified” that he meant something else – it’s ugly. (Does the US government in 2010 have a conflict of interest as the majority shareholder of GM, Toyota’s biggest competitor?)

Out in the blogosphere, people are equally carried away. One post by a public relations guy who writes anonymously under his Twitter handle @PRdude asks: “Should Toyota change its name?” And suggesting a name change may be the nicest thing a blogger is saying about Toyota.

Unlike the Yale prof or the anonymous “dude,” I don’t have solutions to offer Toyota today. But my advice to all of us at other companies is to watch this one – and learn.

Any thoughts? Please share your comments below.

© 2010 Johnson Strategic Communications Inc.