Archive for August, 2016

‘That’s not a strategy’

August 31, 2016

Henry_R._Kravis_verticalHenry R. Kravis, co-chair of KKR, in the July/August Bloomberg Markets, on interviewing CEOs of potential investments:

I compare their responses to the dot-com period around 2000. Back then I’d ask, ‘What’s your strategy?’ and people would tell me, ‘Go public.’ I’d say, ‘That’s not a strategy-that’s a way to raise money.’ ‘It’s all eyeballs,’ they’d say. ‘OK, eyeballs,’ I’d say. ‘You’re looking at your screen: How are you going to turn those eyeballs into money?’ And of course all of those people went away.

The arrogance during that time was staggering. I can’t tell you how many people told George [Roberts, Kravis’s cousin and partner in KKR] and me, ‘You don’t get it …’

In explaining our companies’ strategies, investor relations officers – and CEOs – should be wary of two traps: (1) hubris and (2) mistaking a near-term payday for a real strategy to build a profitable business.

© 2016 Johnson Strategic Communications Inc.

 

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IR webpage: connecting with investors

August 22, 2016

Mattel IR webpage

Looking at the IR page on Mattel’s website the other day, I saw something worthy of emulation. Not some fancy technology – the toy maker uses a standard back-end system with an automated feed. No beautiful graphics. Or even terribly unique content – just news releases, SEC filings, slide decks, stock quote … the basics seen on other IR sites.

What struck me was a brief introductory text. A welcome. Here it is:

INVESTORS

In addition to making great toys, the Mattel family of companies is proud to uphold our responsibility to investors and media by providing immediate access to the latest Mattel financial information and news. Delve into executive presentations, events, track stock history, and annual reports.

What I like is that this lead-in to the page makes a connection. Most IR webpages skip the pleasantries. Investors, after all, know what company they’re researching, and they can find links or tabs that lead to information they need. “Just the facts, ma’am” is the typical rule.

For me, Mattel’s little intro accomplishes three important things:

  1. Branding – reinforcing the feel-good identity of Mattel
  2. Bonding – expressing a commonality of interest that lets people know “We’re here to serve you”
  3. Calling to action – encouraging investors to use specific tools

At the bottom of Mattel’s IR webpage is the company’s boilerplate – reinforcing who the company is, in factual terms like names of its main toys and in feel-good terms like awards for ethics and corporate citizenship. And the page encourages linking to social media.

If a website is meant to be interactive – and it is – we ought to give more thought to how we connect with people. Maybe even tell them we are providing this information because we think they’re important.

© 2016 Johnson Strategic Communications Inc.

 

Mind the GAAP – and the perceptions

August 1, 2016

London, United Kingdom - October 30, 2013: Detail in the Metro with train in station. The door are open in on person is written "Mind the Gap". Inside the train is strong light and door on other side is closed. On right is woman, passenger sleeping in train.

One of many fond impressions London offers to visitors is the warning “Mind the gap” – a uniquely British way of cautioning subway riders not to trip over, or get their foot stuck in, that space between platform and railcar. Very polite and considerate. A stumble could be nasty.

The gap investor relations people must mind – pardon the pun – is the difference between earnings under Generally Accepted Accounting Principles and the measures that CEOs, as well as some investors, prefer for assessing the performance of businesses. The EBITDAs and Adjusted-Whatevers are so many and varied that investors and IR professionals must watch our footing.

A good primer on the issues is provided in “Where Financial Reporting Still Falls Short” in the July-August issue of Harvard Business Review. A couple of accounting profs look at GAAP and the gaps in terms of what investors should look out for, and to some extent what policy wonks might try to regulate next. For accounting is also all about regulation.

Issues they cover are disclosure matters that IR people need to “get”:

  • Universal standards, with GAAP and IFRS converging (or not)
  • Revenue recognition, especially for complicated products or services
  • Unofficial earnings measures, Adjusted-How-We-Look-At-Our-EPS
  • Fair value accounting vs. what you paid for an asset
  • Cooking the decisions, not the books

The writers call this last item “the more insidious – and perhaps more destructive – practice of manipulating not the numbers in financial reports but the operating decisions that affect those numbers in an effort to achieve short-term results.” So a CEO (or other execs) seeing indications of a revenue shortfall will cut prices to move more product before quarter-end, or to save earnings will delay a discretionary cost like an R&D project or ad buy. Voila! Suddenly EPS meets expectations.

I’m not sure that’s new, or always insidious. When you judge people by numbers, they strive to hit the numbers – teachers teach to the test, sales people sell what they have incentives to sell, and CEOs try to hit their numbers. If the market wants to encourage long-term thinking, boards and perhaps investors can start judging CEOs by the change in performance over years, not quarters. Short-termism is an issue. But I am skeptical of policy makers (or accounting profs) tinkering with regulations to alter how executives make decisions.

The perceptions behind this article are more concerning: Investors don’t trust, with good reason or not depending on the company, disclosures they receive. GAAP or non-GAAP, trust is absolutely critical. Perceptions matter.

What can investor relations people do about this gap?

  1. Understand our own companies’ GAAP and non-GAAP metrics, not just to provide the mandated reconciliations but to be able to work through the numbers and clearly explain the rationale.
  2. Ask investors what they like (or don’t) about our financial reporting.
  3. Benchmark peer companies for insightful metrics and best practices.
  4. Challenge our managements if metrics are confusing or misleading.
  5. Be an advocate for simplicity and clarity.

Being transparent means giving information that enables investors to see what’s going on in the business. That doesn’t just mean more pages of accounting boilerplate and reconciliation tables. Perspective is one of the greatest values IR people can give investors.

© 2016 Johnson Strategic Communications Inc.