Archive for April, 2010

PowerPoint goes berserk

April 30, 2010

As investor relations professionals, we’ve all seen PowerPoint slides that get just a little bit out of control. Too many bullets, too many words, too many pictures – the CEO makes one more addition – and a visual aid turns into a visual Frankenstein.

For your weekend enjoyment, I thought I’d share this slide – from a consultant’s presentation to a group of US generals – as reported by the UK’s Daily Mail:

Yes, someone got a little carried away. “When we understand that slide, we’ll have won the war,” quipped Gen. Stanley McChrystal, US and NATO force commander.

This slide has nothing to do with IR – as far as I can tell – but I have seen graphic concoctions at brokerage conferences that come close to this level of complexity. The spaghetti bowl above reminds me of one “business model” slide I saw.

In our eagerness to tell everyone everything, we can become indecipherable. We must remember that IR is about getting people to quickly grasp our story – to understand, not to be wowed by management’s quantum mechanics-style thinking.

Some quick tips on PowerPoint slides:

  • Consider doing without. Some CEOs tell a more compelling story by simply talking. Depending on the setting, no slides can be very effective.
  • Limit the overall number. Fifty is settle-in-for-a-nap time (sorry if I offend). Twenty is a more palatable presentation for already distracted investors. The marathon analysts’ day is a different story – but, still, don’t get carried away, and build in some breaks from the daylong visual bombardment.
  • Each slide should make a point. It should have a single purpose. The point may be “Our 5-point strategy aims to drive EBITDA,” but the takeaway for an investor is the outcome, more than the 5 individual priorities.
  • Use the 6 by 6 rule. That is, 6 bullets of 6 words each – as a maximum per slide. Even that’s a lot of words.
  • Consider the magic of 3. Some experts swear by the psychological appeal of 3 things – 3 points, 3 bullets, 3 whatever – to make a memorable impression.
  • Graphics or pictures must serve the content. It’s not about eye candy. Visuals must help the listener understand – your finances, customers, markets, strategies or science. Illustrate for clarity.

I recognize the culture in some countries – hello, European IR folks – favors more complex slides. Mine is a US-centric view. But the core message still applies.

Take two steps back and look at your slides. Use that “View Slide Show” command in PP and imagine you’re a member of the audience watching and trying to listen.

Bottom line: Clear and simple tell the story.

Here are a few previous ideas on good slides, bad slides and surprises in presentations. What’s your pet peeve or best practice for slides?


The “all lawsuit” channel

April 29, 2010

Browsing a litigation magazine borrowed from my favorite legal beagle – as a non-lawyer, I’m a little put off even by the idea of a litigation magazine – I ran across a neat online resource from Stanford Law School on shareholder lawsuits.

Stanford’s Securities Class Action Clearinghouse, in collaboration with litigation consultant Cornerstone Research, tracks shareholder lawsuits, reports recent filings and settlements, and slices and dices data on different kinds of cases. The website is like a special cable TV channel: all securities lawsuits, and nothing but.

Professor Joseph Grundfest of Stanford Law and John Gould of Cornerstone offer analysis that will interest many investor relations people and corporate lawyers.

For example:

  • Not so many securities class actions were filed in 2009, after 2008 gave plaintiffs’ attorneys a robust year via the financial crisis. In 2009, the lawyers just about ran out of financial institutions to sue, and some even went back to file suits based on older issues, Stanford says. The high point was 2001, when the dot com bubble turned into a litigation bubble related to IPO allocations. We’re off to a so-so start in 2010.
  • More securities class actions were settled in 2009, on the other hand. This reflects lawsuits filed 3 to 5 years earlier, since it usually takes awhile for both sides to get down to settling. Median settlement was $8 million, but the total was $3.8 billion.
  • The biggest settlements tend to involve alleged accounting violations, especially if there is a parallel SEC action. Also, when the plaintiffs are public pension funds rather than individual investors, settlements are typically higher.
  • Stanford also provides articles and papers on topics like D&O insurance and litigation outcomes and a page of links to news stories and releases.

So, for those of you who are intrigued – or scared stiff – by securities litigation, happy browsing!

© 2010 Johnson Strategic Communications Inc.

Analysts “still too bullish”

April 21, 2010

Most of us remember a decade ago, when the stock market bubble of the 1990s finished inflating and began to spring leaks. Nasty stories were everywhere of Wall Street analysts overselling the stocks they were paid to peddle to investors.

The bear market of 2000-02 led to legislative and regulatory efforts to “fix” equity research, separate the sell side from – well, selling – and bring trust back into the markets. Alas, that’s probably not something new laws can accomplish.

New evidence from McKinsey & Co. suggests the sell side is “still too bullish,” based on a study of earnings estimates for S&P 500 companies from 1985 to 2009. Somewhere in the DNA of the sell side, it seems, lurks a gene for salemanship.

Only two times over the 25-year period did actual earnings on the S&P 500 beat analyst estimates, three McKinsey consultants write in the Spring 2010 issue of The McKinsey Quarterly. Analysts have been “persistently overoptimistic,” typically forecasting S&P earnings growth of 10-12% a year, nearly twice the actual 6% growth. McKinsey concludes:

Exceptions to the long pattern of excessively optimistic forecasts are rare …. Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught  up with earlier predictions, do forecasts actually hit the mark.

There’s an obvious caveat emptor for investors in data like this. In fact, the market as a whole doesn’t believe the sell side: Actual price-earnings ratios on the S&P 500 are almost always lower than the implied P/E based on analysts’ forecasts, the consultants note.

McKinsey also sounds a cautionary note for corporate staffs: Don’t put too much confidence in the sell side when formulating your own company outlook. Base your outlook on what’s really happening in your business, not so much on Wall Street’s view from a distance:

Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

Easier said than done, of course. But investor relations professionals ought to keep this advice in mind when serving as a conduit for communications between Wall Street and senior management.

We’re Goldman Sachs. Trust us.

April 19, 2010

The Securities and Exchange Commission lawsuit against Goldman Sachs strikes deeply at the issue of trust in the capital markets. Both the firm and the markets as a whole suffered yet another blow in the SEC suit. And it will not be the last.

My Monday-morning question on this latest Wall Street scandal: If you managed billions of dollars for a big pension fund or cash-rich Asian or Middle Eastern government, what’s your reaction the next time a Goldman Sachs institutional rep comes in with a deal that can’t miss? Attractive yield, triple-A rating, assets assembled by the smartest guys on Wall Street, selected just for you?

Well, you will think twice. You’ll remember caveat emptor. You will wonder what toxic dregs the packagers of this deal have chosen to sell to you – and whether they’ve already lined up short sellers to bet against you. Maybe the shorts actually designed the deal. You will think about i-bankers’ commissions and bonuses.

You will not trust.

This is the upshot of the financial crisis, particularly the episodes when someone has failed to disclose what later proved important – when transparency has been lacking and people we assumed were trustworthy proved not to be.

The “Heard on the Street” column in today’s Wall Street Journal makes this point about trust waning in the marketplace. It goes on to note that, beyond the details of the 2007 CDO sale, Goldman Sachs did not disclose the SEC subpoenas in August 2008 or the July 2009 Wells notice of a potential SEC enforcement action. Were these items not material, not worthy of disclosing to Goldman Sachs shareholders? When the suit became public Friday, shareholders lost $12 billion.

I won’t try to dissect the controversy over who knew what about the original CDO. Goldman says it did nothing wrong, the investors were sophisticated and should have known another client was betting on the failure of those securities. Maybe caveat emptor is always the rule. Maybe Goldman is just like everyone else, hustling to make a buck (or a billion).

What I will say is that the financial crisis – and the ongoing collapse of trust in capital markets – should drive every company to rethink what it values.

In investor relations, we understand how valuable it is for a company to have earned the confidence of the capital markets. Trust is a long time coming – built by doing what you say, being open, disclosing problems, addressing issues head-on, underpromising and overdelivering, and doing it over and over – for years.

Trust is lost in a moment.

To be clear, the SEC isn’t the one that destroyed trust in this case. Goldman Sachs, if in fact it assembled the junk of the market for hedge funds that were betting against that junk – and then peddled those deals as jewels – destroyed trust.

The pundits think the SEC’s slap at Goldman Sachs will add momentum to the push in Congress for tougher regulation of Wall Street. No doubt. Ever since the market’s collapse in 2008, “transparency” has become the popular buzzword.

In my experience, trust isn’t legislated. Transparency doesn’t come about because lawyers cite chapter and verse of some law, and companies say well, OK. The laws cited in the SEC complaint against Goldman have been on the books all along.

Rather, trust grows out of an impulse for honesty among people making decisions. In investor communication, trust is built upon CEOs, CFOs and IROs asking what information matters, what do investors want to know? What do we know that the investors need to know in order to make informed decisions? And acting upon it.

Every company going into the capital markets now lives with the loss of trust created by failures of transparency over the years. We must rebuild, step by step.

The job of IR is, above all, to provide the transparency that leads to that trust.

What’s your take on Goldman Sachs, transparency – or regulatory reform?

© 2010 Johnson Strategic Communications Inc.

While we’re thinking about taxes

April 16, 2010

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

Shareholders don’t own companies?

April 1, 2010

The Harvard Business Review offers a provocative thought in its April 2010 issue: According to two professors at overseas universities (which may be relevant), shareholders are not the owners of corporations – and boards of directors shouldn’t feel so compelled to make decisions in the shareholders’ interest.

No, this isn’t an April Fool’s Day joke – at least, I’m pretty sure it’s not.

Citing the recent Kraft Foods takeover of Cadbury, a case of M&A not welcomed on the British side of the Atlantic, the article asks whether the Cadbury board could have said no – or said it more emphatically – and stood its ground.

Loizos Heracleous, a professor of strategy and organization at the University of Warwick, UK, and Luh Luh Lan, associate professor of law at the National University of Singapore, offer companies what has to be a contrary opinion:

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person.

The two go on to say that boards can put their own judgment ahead of shareholder interests in making decisions such as whether to be acquired:

What’s more, when directors go against shareholder wishes – even when a loss of value is documented – courts side with directors the vast majority of the time.

Directors are mostly misinformed about their obligations, the profs write.

As an investor relations practitioner (and small shareholder of a few companies), I disagree with the academics. My core philosophy of IR is that management and boards should treat shareowners as exactly that – the owners of the company.

In the cultural funk that seems to follow the pain of each recession or financial crisis, we are once again hearing voices that declare our companies should lay aside the self-interest of shareholders and pursue the greater good.

Harvard and other universities seem to be advocating on this issue: In an HBR article last summer, a Stanford business prof made a similar point, arguing that stakeholders, rather than shareholders, should come first in corporate decision making.

What do you think? Share your comments by clicking below, or vote in this poll:

© 2010 Johnson Strategic Communications Inc.