Archive for the ‘Messages & writing’ Category

In 2012, embrace the uncertainty?

January 2, 2012

Happy new year. A chatty column in the Financial Times, “Three cheers for new year trepidation,” touches on a central issue for investor relations in 2012: How should companies communicate with shareholders about what we can’t foresee?

Citing the obvious risks in trying to predict what will happen in a fragile global economy, FT management editor Andrew Hill notes that many companies are simply waiting, hoarding cash, holding off from embracing any particular scenario. But, he adds, mere expressions of caution don’t do much for their investors:

As executives’ reluctance to commit themselves grows, so the appetite of outsiders to know about their future plans increases. Investors are now far more interested in the “outlook” section of the company report than in the backward-looking summary of the historic results. But in their public statements, most chief executives hide behind a “lack of visibility”, adding to the general nervousness.

Hill says CEOs should “embrace uncertainty” in 2012 while at the same time communicating what they can see in the current situation:

Business leaders need to count on their ability to be the one-eyed man in the land of the blind – a proverb recently recast by Richard Rumelt in his book Good Strategy/Bad Strategy: “If you can peer into the fog of change and see 10 per cent more clearly than others see, then you may gain an edge.”

So we should acknowledge to investors our uncertainty but then discuss what we do know: data on changes in our customers’ behavior, qualitative trends in the business, our own strategies for surviving and thriving in what could be difficult times. This may be the biggest messaging challenge for investor relations in 2012.
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So how are you communicating in this environment of uncertainty?
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© 2012 Johnson Strategic Communications Inc.
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Things could be worse

September 27, 2011

In the “things could be worse” category: Unless you work for Hewlett-Packard, Yahoo! or News Corporation, your company isn’t discussed in “The Worst Board in America,” a video by Thomson Reuters tech correspondent Peter Lauria.

“There’s basically a race to the bottom. They’re all dysfunctional in their own way,” Lauria says of the trio of companies that have been generating negative headlines. He reviews the CEO firings, shifting strategies and downward-moving stock graphs and then names “the worst board” – well, I won’t spoil it. You can watch the video.

No doubt H-P, Yahoo! and News Corp. might respond, “Who is Peter Lauria? What qualifies him to judge the merit of our boards of directors?” And they’d be right. He’s just a journalist who covers media, technology and telecom for Reuters.

On the other hand, he’s not alone in his assessment.

The positive side of this: If you’re doing investor relations for a company that does have a long-term, consistent strategy and high-quality board and management, you’ve got some very attractive selling points for long-term investors.

Focus your IR messages on the track record of your strategy and how it’s paying off, the quality and experience of management, and the expertise of your board. The long-term investors will be with you.

© 2011 Johnson Strategic Communications Inc.

What’s wrong with this company?

May 31, 2011

A contrarian approach to messaging for investor relations is to ask yourself, “What’s wrong with this company?” Then, in IR reports and presentations, address the weak points of your business – what causes investors to turn up their noses – along with your solutions.

This offbeat idea was prompted by an interview with Anne Gudefin, a stock picker involved in Pimco’s growing presence in the equity markets, in Fortune‘s May 23, 2011, issue. She is a value investor, and like many I’ve talked to Gudefin is looking for stocks that are beaten down – but have upside potential.

“How do you decide a stock is cheap?” Fortune asks. Gudefin says she likes good business models, high barriers to entry and free cash flow. Then she adds:

I also want to see things that aren’t operating perfectly at the moment, so there’s a margin for improvement. I look for there to be a number of catalysts for value to be unlocked. … During the second quarter of last year we bought BP. Because everyone was so negative about it, we were able to buy very good assets at a very cheap price.

Like many on the buy side, Gudefin is looking for companies with a “catalyst for change.” If something’s wrong, the value-oriented investor sees upside potential.

Sure, IR usually focuses on a company’s strengths – great products, competitive advantages, 24-carat gold balance sheet, smart management. We love bar graphs that show a powerful uptrend. We recite accomplishments of each quarter or year.

Maybe IR should look for vulnerabilities. Good investors will find them, anyway. How about bringing issues out in the open? Of course, we won’t title our roadshow presentation “3 Reasons Not to Invest.” But let’s discuss that catalyst for change:

  • Spell out the challenge. Describe the problem objectively, as investors and analysts are likely to see it. Show a capacity for humility, even self-criticism.
  • Define a solution. Emphasize your strategy for solving the problem. The more tangible the actions you lay out, the more you overcome investors’ doubt.
  • Track your progress. Check off actions as you take them. Quantify the progress. Investors will be convinced after a quarter or two of positive results.

Being transparent about problems has drawbacks, of course. Some challenges are tough, they may stretch over several quarters, and you may report a disappointing lack of progress at some stage – or even have to change the strategy.

Think of the really good questions investors sometimes ask. Why are sales flat in your XYZ division? Your gross margin is underperforming these peer companies – how are you addressing that? What business issue keeps you awake at night?

What’s important is that you recognize what is holding back your company’s value and explain to investors that you are implementing a plan to solve that problem. The goal is improving performance that unlock the value for shareholders.

What do you think? Any tips on IR reporting on business problems?

© 2011 Johnson Strategic Communications Inc.

Annual report in two pieces

April 13, 2011

As an investor relations person, I love this time of year. I enjoy working on clients’ year-end reporting, of course – but it’s also a time when I get to experience IR from the other side, as a member of the audience.

Believe me when I say I am a small shareholder of a few companies (not of any clients, by the way – a separate issue). But when the mail brings an annual report, proxy statement and voting materials, I love it! I dive into those reports, to review companies’ performance and see what they’ve done in the way of presentation. And I vote my proxies, as a believer in letting management know where I stand.

Let me share an example: the annual report in two pieces.

One of my reports came from Shore Bancshares, Inc., a smallish bank holding company based in Maryland and listed on Nasdaq. What made it different was the two pieces: a front section with shareholder letter, financial highlights and marketing stuff like bank locations, and a black & white 10-K. (Results were uninspiring – not the point here.)

Not dramatic or unique … but offering two pieces strikes me as a good solution.

The Shore “marketing” annual report, 8 bound pages all on cover stock, has one page of financial highlights and graphs, a 2-page shareholder letter, a page of locations with maps of the market, board and officer lists and an large photo of the board arranged around antique furniture, and contact info for the banks and insurance offices. The cover says Presence. Stability. Strength. Knowledge. Well, OK.

The 10-K, of course, provides data on competitive position in each of the markets, six and a half pages on risks, revenue and expense breakouts, detail on the assets and issues in the loan portfolio, and so on. It’s red meat for the shareholders.

The marketing version is perfect for a coffee table in a bank branch, another accessory to make customers feel comfortable banking there. The 10-K is not so reassuring for the lay person but useful for investors deciding to buy, hold or sell.

Banks are classic examples of companies whose annual reports have at least two audiences: shareholders or potential investors on the one hand, and customers on the other. Bank customers may see the annual report as an assurance of security for their money, though we might hope the FDIC provides even more solid backing.

The other day I walked into my own bank, in Kansas City, and there was a stack of glossy new 2010 annual reports. I picked one up, of course. But this one, a front section and 10-K bound together, ran 160 pages – really overkill for my needs as a depositor. As a bank customer, if I see assets are substantial and the bank has earnings – and maybe a photo assures me the officers or board members are not motorcycle gang members – I’m OK with leaving my money in that bank.

An investor needs the details. So here’s an idea: If your annual report is serving two different audiences, one approach is to print it in two pieces – send both to shareholders, and give the summary version to customers, vendors and employees.

© 2011 Johnson Strategic Communications Inc.

Explaining your secret sauce

February 27, 2011

Warren Buffett’s latest letter to shareholders of Berkshire Hathaway, posted Saturday, rewards the reader with pithy quotes on nearly everything in business, as have so many of his annual reports in the past (a 34-year archive is here).

Most of us wouldn’t suggest that our CEOs write a 25-page shareholder letter, but neither do we work for a cultural icon nicknamed “the oracle of Omaha.” Most of the time I think Buffett speaks more from self-interest than from revelation, but what he says – and how – bear examination by everyone engaged in investor relations.

Explaining the business is at the core of Buffett’s 2010 Chairman’s Letter, just as explaining the business should be the heart of every IR presentation or report.

But not just the business – this letter works to explain the “secret sauce” that makes Berkshire Hathaway Berkshire Hathaway. The secret sauce isn’t secret, of course. It’s what makes a company different from – better than – anyone else around. This is not likely to be obvious from a glance at the income statement and balance sheet. But in Berkshire Hathaway’s case it is really a financial story, which Buffett lays out in between those quotable quips on everything else.

Let me see if I can capture the essence of it (summarizing the sage):

  • Berkshire Hathaway is basically an investment company. It held $158 billion worth of stocks, bonds and cash instruments at year-end. The secret sauce, apart from the legendary instincts of Buffett and Charlie Munger, is the interest-free financing for more than one-third of those investments. Buffett explains: “Insurance float – money we temporarily hold in our insurance operations that does not belong to us – funds $66 billion of our investments. This float is ‘free’ as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur.” Figure the income on $66 billion, and investing the cash for those insurance companies becomes very profitable.
  • Second, Berkshire Hathaway owns 68 non-insurance companies – businesses Buffett and Munger have fallen in love with and decided to marry – and these operating companies generate earnings. Over 40 years, the pretax earnings of those companies has grown at a compounded 21% rate; the value of those earnings is quantifiable. Buffett explains, somewhat persuasively, that the operating companies benefit from good managers who love running those businesses and from a pervasive owner-oriented culture. The secret sauce? The operating businesses aren’t limited in reinvesting the cash they generate – they’re part of Berkshire Hathaway. A typical furniture store chain, let’s say, would feel compelled to plow earnings back into the furniture biz. But Berkshire Hathaway can allocate cash thrown off by Nebraska Furniture Mart into a railroad … or the stock market, or T-bills … whatever looks promising.
  • Finally, Buffett cites a more subjective source of value: the company’s ability to deploy today’s retained earnings into investments that earn good returns in the future. While nearly every company accumulates retained earnings, he says, “some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.” And the secret sauce? Well, it comes back to Buffett and Munger, plus some younger investment guys they’ve brought in to carry on after Warren and Charlie are no longer around. I assume shareholders will increasingly ask for tastes of these newer versions of the investment sauce.

We should each think about our companies’ secret sauce. Is our financial structure geared to create higher ROE? Are assets minimized to boost ROA? Do we get 2 cents per transaction, times a billion transactions, with volume growing daily? Do we have a brand or intellectual property that can’t be matched for years to come?

We need to have our CEOs analyze – and explain over and over – our secret sauce.

Meanwhile, the Omaha oracle and his long-time partner are carrying on. The letter defines growing book value as a metric for success, a proxy for Benjamin Graham-type intrinsic value. It walks shareholders through what’s happening in each of the key businesses. Explains the rationale for the big M&A deal of 2010: BSNF Railway. And comments on the business environment and stock market. All worth reading.

Buffett lays out the near-term expectation: “Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

The 2010 annual report of Berkshire Hathaway, of course, has financial tables and footnotes and an MD&A – even a cover. But every year, the way Buffett explains the business makes his shareholder letter the star of this show.

© 2011 Johnson Strategic Communications Inc.

Winter weather, Super Bowls & other excuses

February 9, 2011

While shoveling snow this morning – yet again! – I was thinking about how quick the media are quick to hype the latest “blizzard” or “worst winter since the Ice Age.”

But should investor relations blame weather for missed earnings or a chill in sales? It’s not an easy question, but IR people (like the investors we serve) should at least ask skeptical questions when confronted with a claim that rain or hail or snow or dark of night kept the company from delivering earnings.

If you haven’t seen it, warm up your day with this entertaining video of Barry Ritholz discussing earnings excuses. Speaking on “Tech Ticker,” the economic commentator, investment strategist and keeper of the Big Picture blog excoriates “these pinhead PR guys” for foisting weather on investors as an excuse:

We’ve had God knows how many feet of snow, but IT’S JANUARY! And you know what? It snows in the north in the winter. … Look, if it was 120 degrees in January – hey, that’s why winter coats aren’t selling -that’s a legitimate issue. But snow and sleet and ice in January and February? This is not a surprise.

And in case you hear another seasonal excuse, Ritholz says don’t go there:

There was, I don’t remember which restaurant chain it was, that blamed a bad quarter last year because few people went out to dinner during the Super Bowl Sunday. And I said, ‘Did you not know the Super Bowl was coming? I think it’s scheduled for the next hundred years.’

Of course, icy weather may in fact keep consumers home for a time. Or delay our trucks from running. Or even shut down a plant or office. But let’s not be too quick to write or say weather is the reason for sales and earnings falling short.

CEOs, CFOs and, yes, IROs should apply the same disclosure disciplines to weather as to other factors affecting the business. In internal discussions we should probe a little deeper: Can we quantify how bad the weather was compared to last year? How many days did we lose? What exactly was the impact, and how can we back that up?

Being just a bit skeptical up-front may help us answer our investors’ questions.

© 2011 Johnson Strategic Communications Inc.

The balance sheet & all the rest

October 30, 2010

Legendary value investor Marty Whitman gives a good interview on investing in the October 30 Barron’s. It’s a fun read, if you like to gather wisdom from folks who have been around Wall Street for more than a few bull – and bear – markets.

The 86-year-old founder (and still chairman) of Third Avenue Management talks about value investing, the need for transparency in markets, short sellers, lessons from the latest financial crisis, and academic theories (he doesn’t much like them).

Investor relations people may benefit from Whitman’s No.1 lesson from the 2008 financial meltdown: the importance of the balance sheet, which IR messaging often skimps on or ignores. And his No. 2 lesson: the importance of management in protecting investors from getting clobbered by something like the ’08 crisis.

Both should be themes for investor communications, especially now.

Whitman’s advice to other investors also has applications to IR:

You have to be gestaltist. Every accounting number is important, and is derived from other accounting numbers. So you have to understand the whole accounting cycle. If I want to estimate earnings, and I only have one tool, I would pick the current balance sheet.

As a value investor, what you are interested in is whether the company is creating wealth. There are four ways to create wealth; it is not just cash flow. They are [bullets added]:

  • One, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities or distribute the money to shareholders, either by paying dividends or buying back stock.
  • Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn’t, sooner or later, it will to run out of cash.
  • The third—and very, very important—value-creation method is resource conversion. … Mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc.
  • The fourth wealth-creation method … is having extremely attractive access to capital markets.

Food for thought as we develop messages for annual reports, presentations and financial releases. Many companies give a nod to “creating shareholder value” but fail to spell out the strategy for doing so.

Investors in most companies would benefit from management doing a better job of showing shareholders how business results – and changes in business strategy – work through the income statement, balance sheet and cash flows. Basic IR.

© 2010 Johnson Strategic Communications Inc.

Clarity, clarity, clarity

August 10, 2010

They don’t give Pulitzer prizes for earnings releases. Or annual reports. Or conference call scripts. But if public companies were to be judged on efforts to communicate with investors, the judges’ list of criteria would surely include clarity. The top three standards might be accuracy, timeliness and clarity.

This is the stuff of investor relations. And after all, investors do judge companies’ efforts to communicate – in the market.

I was reminded of this core mission for IR by a collection of articles on CEOs in the third-quarter issue of NYSE Magazine. In one piece Bill McNabb, Chairman and CEO of Vanguard Group, is asked what today’s shareholders want most.

McNabb talks about the nexus between governance and financial performance. Institutional investors want structures that keep management accountable, he says, because they want companies to execute well. And then he adds:

Shareholders are looking for CEOs to have an increased focus on clarity; they want to be able to understand the numbers and put them into perspective.

A lack of clear disclosure means higher risk for the investor, McNabb says:

The less clarity around off-balance-sheet activity, the higher the hurdle rate for the investment manager to get comfortable with what’s going on at a company.

As an IR practitioner, I would say our job is to be clear rather than to bury people in numbers or legalisms or “sunshine in a bottle” optimism. The goal is for investors to understand the business, its performance and market position.

Clarity – I like that!

© 2010 Johnson Strategic Communications Inc.

What’s your investment identity?

August 9, 2010

The CEO of Abbott Laboratories, Miles White, comments on the interplay between corporate strategy and long-term investor relationships in an August 6 interview with Investors Business Daily.

Asked about ABT’s record of increasing dividends each year for 38 years, cultivating a diversified medical product line that lacks “pure pharma” sizzle, and following the slow-but-steady approach to growth, White says this about his shareholders:

The company’s had an investment identity of reliable growth with dividends, a combination of growth and income.

It used to be called a stock for widows and orphans. Those things became a hallmark that investors seek.

If you want to maintain investor allegiance to your management philosophy, you have to pay attention to the identity that attracts investors to your stock.

Our identity attracts long-term investors who want reliable growth and reliable income: The dividend is part of that.

My point isn’t that every company’s investment identity should be the same as Abbott’s. But gathering intelligence about who our shareholders are and what they value makes sense. Aligning strategy at the CEO and board level to serve these shareholders, whether their style is to bet on tortoises or hares, makes sense.

I like White’s statement that he is expanding Abbott’s presence in emerging markets to provide growth to continue to raise the dividend each year, because widows-and-orphans style investors value that. (Note that 68% of ABT shareholders are institutional widows and orphans – they need care and feeding, too.)

For investor relations people, the mission is to communicate core messages that align with the strategy – so IR attracts investors who like our investment identity.

© 2010 Johnson Strategic Communications Inc.

Open mouth, insert … No, wait!

July 8, 2010

“Keeping Your Foot Away From Your Mouth”

This headline in yesterday’s Wall Street Journal piece (p.D1) highlights a common human frailty. Citing gaffes from business leaders, politicians and entertainers, the WSJ says words do matter – and verbal errors can cause lasting damage.

In investor relations, of course, foot-in-mouth syndrome is one of our worst fears. We go to great lengths to avoid selective disclosure, much less erroneous disclosure, of financial information or strategic plans not yet ready for broadcast.

This is why we brainstorm key messages on quarterly earnings or strategic transactions in advance (and put them in writing to use as a reference) … why we write and review drafts of news releases and comments for investor meetings … why we create Q&As for conference calls and corporate events … why we try to make CEOs, CFOs and other spokesmen rehearse speeches and Q&A times.

The gatekeeper role is mission-critical in IR. We exist partly to create a process for orderly disclosure – helping our companies think before they speak.

Of course, some CEOs just are who they are. Most veteran IR people can tell horror stories – on more than one occasion, I’ve rolled my eyes at something coming out of the boss’s mouth. “Did he really say that?” Once the blurting is done, it’s too late for anything but damage control – which often doesn’t work too well.

Maybe one of the key performance indicators in an IR person’s annual goals should read: “Get through the year without anyone in top management sticking their foot in their mouth (at least around our investors).”

Any success stories or tips?

© 2010 Johnson Strategic Communications Inc.