Posts Tagged ‘CEOs’

Do we focus on the long term?

March 17, 2014

We often hear CEOs complain about the short-termism of Wall Street, but a commentary by value investor Francois Ticart in this week’s Barron’s questions whether most companies really focus on long-term value. Let’s include investor relations in that question. Ticart, founder & chairman of Tocqueville Asset Management, says:

Listed companies, the analysts who follow them, and the executives who run them have become increasingly short-term minded in recent years. Stocks now routinely respond to whether they “beat” or “miss” quarterly consensus estimates of sales and earnings, and much of the stock trading takes place on that basis. Needless to say, quarterly earnings have very little to do with long-term strategies or other fundamental factors. By focusing on them, financial analysis has become nearly useless to long-term, fundamental investors.

So think about IR: We say we want long-term investors, but how much energy do we focus on quarterly results and short-term fluctuations, and how much effort do we devote to communicating strategic drivers of our business over a 3-year to 5-year time horizon like the one Ticart favors? Are our own IR efforts part of the problem?

© 2014 Johnson Strategic Communications Inc.

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What’s your creation story?

February 11, 2014

As investor relations people, we often hear or talk about stocks that have a great “story” – by which we mean a memorable explanation of how the business generates value. Stockbrokers and the buy side like a good story.

So I was intrigued by “How to Tell Your Company’s Story” in Inc. magazine’s February 2014 issue, which highlights entrepreneurial CEOs and their corporate offpsring. Writer Adam Bluestein says:

Before it has investors, customers, profits, press coverage, or even a perfected product, every startup has at least one valuable asset: its story. So you might want to ask yourself: Who are you? Where did you come from? Why are you doing this? … your company’s origin story has more power than you might imagine.

Inc. focuses on the sizzle of young entrepreneurial stories, of course, but the power of how and why your business got started applies to corporate old-timers as well. Even decades into a company’s history – sometimes a century or more – the values, initiative and focus of a founder can influence the culture and brand appeal of a business:

The creation myth is not an asset just for startups. As those businesses grow into established firms and individual founders figure less prominently, the origin story can serve as both a road map and moral compass. Keeping that story alive, keeping it true, and keeping it relevant–these are the challenges more mature businesses must contend with.

What’s the significance for investor relations? Well, investing ultimately is a bet on a company, a group of people trying to accomplish something in the bigger world around us. In IR, we hope to connect with investors whose perspective extends beyond the current quarter.

If we can show that creativity and drive are embedded in a company’s DNA, that business is probably a good bet over the long haul. Think about great companies, and you’ll realize they are also great stocks.

What’s your creation story? Have you researched it, defined the distinguishing characteristics, set out the strategic essentials that fuel your business today and will continue to do so in the future?

© 2014 Johnson Strategic Communications Inc.

It’s the CEO

January 31, 2014

When it comes to interacting with the investment community, Numero Uno is still No. 1. According to a global survey of more than 1,200 investor relations officers by IR Magazine, nearly two out of three IROs (64%) say the Chief Executive Officer is more important than the Chief Financial Officer in relationships with investors.

At least in terms of CEOs’ primary role in investor relations, customs aren’t that different around the globe, according to a story in IR Magazine‘s December 2013-January 2014 issue.

Among small-cap companies, even more IROs (76%) say the CEO is preferred over the finance chief by investors seeking access, while 61% of mid-cap and 59% of mega-cap IROs agree.

According to one European small-cap IRO quoted in the survey:

Investors want to believe in the vision, not in the quarterly figures.

I’ve seen it both ways: companies whose CEOs “own” the story and are the best salespeople for it, and others whose investors would rather talk with the CFO while the CEO stays home to run the business. What’s your experience?

© 2014 Johnson Strategic Communications Inc.

Crisis rules

July 16, 2013

When a company gets into a crisis – a real crisis with the mob at the gates wanting to tear the place down – management can call a lawyer. Or a politician. Or a PR person. Lanny Davis, a Washington lawyer who served in Bill Clinton’s White House when the Prez got caught with his pants down, is a player in all three realms. He’s a guy people call when it all hits the fan.

Now Davis has a book, Crisis Tales (Threshold Editions, 2013), laying out five rules for how to survive a crisis. War stories from many crises in business and government illustrate these rules. Says Davis:

My work in crisis management has taught me a series of rules and one overall guiding principle. The guiding principle: Tell it all, tell it early, tell it yourself.

The core idea of the book is to take control of a story – a narrative, as the pundits say – by becoming the person who tells the story. This is a valuable lesson for companies and CEOs whose business blows up, literally or figuratively, in the harsh light of media or public attention. And it’s a good guideline for us as investor relations professionals.

A top-line look at Davis’ five rules of crisis management:

  1. Get all the facts out.
  2. Put the facts into simple messages.
  3. Get ahead of the story.
  4. Fight for the truth using law, media and politics.
  5. Never represent yourself in a crisis.

This is a crisis communications guide worth perusing. I’m uncomfortable in the swampland we call politics, even cynical about anyone whose address ends in “DC.” But Davis’ examples of damaged reputations – and the process of damage control – are instructive.

In a public company, it’s well worth considering the strategy for handling a crisis before something blows up. What’s your crisis plan?

© 2013 Johnson Strategic Communications Inc.

The intangibles investors like

July 1, 2013

Conversations with investors often focus on the numbers, but we also need to give thought to the “soft information” – intangibles. The cover story in this week’s Barron’s, “World’s Most Respected Companies,” provides a pretty good tutorial on which qualitative issues gain the respect of institutional investors. Respect doesn’t always mean a buy decision, but it opens doors.

The direct point of the article is a ranking: Berkshire Hathaway is #1 in a survey comparing institutional investors’ esteem for the world’s 100 largest companies, Walt Disney #2, Apple #3 (down from #1 last year), Google #4 and Coca-Cola #5. No surprises there.

More interesting to me are the comments institutional investors make about intangibles they consider important. The top three qualities that inspire respect, according to the Barron’s investor group, are sound strategy, strong management and ethical practices:

Barrons respect

Those three are followed by other qualities like innovation, competitive edge and growth. In this survey “the numbers” are secondary: Growth in revenue and profit is key for just 5%, strong balance sheet for 1%.

A few of the institutional investors’ comments:

[On Berkshire] “It’s a well-conceived business model, owning good basic businesses, bought at good prices, and managed by great people. A company much to be respected.” …

Does the firm have a defensible long-term business model, and is it built to innovate, compete, and grow? And how good is management, particularly when it comes to capital allocation? …

[On JPMorgan, #45, best of the disrespected megabanks] “How many CEOs would have come out front and center and said, ‘This is my fault?’ … If he weren’t at the helm, you have to think long and hard whether you want to be in this stock …”

“There is value in investing in companies with high integrity. The likelihood is that they won’t do bad things, very bad things, that will affect their stock prices.”

For the investor relations professional, the question is: Are we communicating these intangibles to our investor audiences?

We ought to be thinking about the intangible value-creating qualities as we approach second-quarter earnings (or any season). The message isn’t just this period’s earnings. It is the strategy guiding the company’s business for the coming years, the leadership team’s experience and performance, and whether investors can trust management to deliver on promises.

What’s your opinion?

© 2013 Johnson Strategic Communications Inc.

Are stock buybacks overhyped?

June 19, 2013

Share repurchases aren’t the magic potions some investors and corporate managements think, according to an analysis of Standard & Poor’s 500 companies in the June 2013 Institutional Investor. Stock buybacks can create value, but they can also destroy value – and the actual results suggest some humility in talking up the advantages.

Cash stackSome institutional investors love financial wizardry. Share repurchases automatically increase EPS by reducing shares outstanding – and send a message of confidence in a company’s stock. So financial engineering fans press the idea on a CEO or CFO more than any business strategy, such as investing corporate cash in growth or new product creation.

And some companies love share repurchases. Now Institutional Investor, working with Fortuna Advisors, has begun publishing a quarterly scorecard of how effective stock buybacks actually are, at least in the large cap world. Based on S&P 500 companies that repurchase more than $1 billion in stock or at least 4% of their market cap, the magazine reports rolling two-year ROI for buyback programs.

You can get the overview in “Corporate Share Repurchases Often Disappoint Investors” or dive into raw data in a table detailing ROI for S&P 500 companies with big repurchase programs. (A majority – 268 of the 488 index members that were public for the whole two-year period – bought back at least $1 billion or 4% of their market value.)

The II-Fortuna analysis calculates ROI as an internal rate of return to evaluate investment performance of cash spent on buybacks over two years, including share value increases/decreases and savings on dividends avoided.

Results suggest investor relations people – and CEOs – may want to be more modest in discussing share repurchase plans. The accounting effects of buybacks are assured, but benefits to shareholder value aren’t:

Returning cash to shareholders is supposed to benefit everybody – at least, that’s how the theory goes. Investors who want cash get plenty; shareholders who prefer to stay the course see higher earnings and cash flow per share …

The fanfare that typically accompanies buyback announcements never hints that poor execution can torpedo more value than accounting-based bumps in earnings or cash flow can produce on their own.

Apple is the magazine’s poster child for the disparity between  theory and reality. The magazine dings Apple CEO Tim Cook for his $60 billion repurchase program, the biggest authorization in history, which he enthusiastically called “an attractive use of our capital”:

Buyback ROI reveals a less ebullient story at Apple than Cook described. The company’s -56.7 percent return on buybacks trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. …

Trouble is, companies often buy back shares when the price is high – and as we know, stocks go up and down. Timing is everything, at least for returns over a typical investment horizon of two years. Often the timing is wrong:

“During the downturn in 2008 and 2009, even companies with good cash balances didn’t buy back stock, and now they are buying back shares,” says Adam Parker, Morgan Stanley’s top U.S. equity strategist. “A lot of companies have not done a particularly good job of buying low.”

If you’re interested in more analysis, Fortuna Advisors CEO Gregory Milano offers companies some direct advice on how to approach share repurchases in “What’s Your Return on Buybacks?”

I’d love to hear your feedback on buybacks.

© 2013 Johnson Strategic Communications Inc.

A pile of dirt and a vision

June 10, 2013

Pile of Dirt2

Sometimes progress looks like a pile of dirt. It’s true of the big construction project starting to take shape. And the biotech company laboring through long years of development to get to market. And the out-of-favor, battered management putting in place a new strategy.

Caught in the snapshot of today’s pervasively short-term thinking, progress often looks like a pile of dirt. When the current financial results aren’t pretty, investors can see an ugly mess – or something entirely different. This brings us to our role in investor relations.

One of our tasks in IR is to communicate the vision to investors – to show the prospective owners the architect’s rendering and give form to what today may seem like a pile of dirt. That vision must begin with the CEO, of course. But the IRO is one of the primary messengers to ensure that others see and understand the picture of the future.

Here are a few thought-starters on how we can do it:

  • Acknowledge the present state. If the past six quarters have been ugly, say so. If the development project has moved more slowly than hoped, admit it. People will give a company credit for recognizing the same pile of dirt they see – and having a plan to get beyond it.
  • Focus on the future state. Any presentation, report or web content should talk more about what is coming than what just happened. I’m referring to  emphasis, not the number of words, because of course we need to give ’em the facts about the company and its performance. Clear accounting results are essential to disclosure and IR – point is, we can’t leave it there. Even past accomplishments are data points for talking about where we are heading, because investing is about the future.
  • Lay out the plan. Executives building a great enterprise – whether developing a medical breakthrough or transforming operations or rolling up an industry through M&A – sometimes don’t clearly explain what they’re doing to those outside. In IR we should be laying out the process so investors know the steps involved in building value. And, of course, then we will tell them each time we complete a step along the way.
  • Give the microphone to the CEO. It’s his or her vision, so challenge the boss to paint the picture of the future. A CEO speaking to investors about nothing but quarterly results seems like a wasted opportunity. Since most CEOs are giving the best part of their lives to a company, they need to share with others the vision that drives their enthusiasm.

What about you – do you have any favorite ways of showing how the company is building value when current results may look like a pile of dirt?

© 2013 Johnson Strategic Communications Inc.

What’s your theory?

June 7, 2013

THEORYThe classic question “What builds value for a company?” often finds its answer in a strategy. But that’s the wrong answer, Todd Zenger, a professor of business strategy at Washington University, argues in the June 2013 Harvard Business Review. The right answer, he says, is the corporate theory. The distinction matters to IR professionals who influence messaging on shareholder value.

In “What Is the Theory of Your Firm?” Zenger says value does not come from strategy, at least not military-style plans for targeting attractive markets and conquering your rivals (“competitive advantage”):

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices.

What Zenger calls the theory of your firm is a view of life that runs deeper than any particular strategy:

Essentially, a leaders’ most vexing strategic challenge is not how to obtain or sustain competitive advantage – which has been the field of strategy’s primary focus – but, rather, how to keep finding new, unexpected ways to create value. [The corporate theory] reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position – it is a guide to the selection of strategies.

Three kinds of “sight” go into a corporate theory, Zenger says:

  • Foresight: beliefs and expectations for the future of an industry or its customers
  • Insight: deep understanding of what is rare, distinctive and value in your company’s assets and activities
  • Cross-sight: ability to spot complementary skills or assets that will fit together to create something new

Apple is one example Zenger cites. With PC makers chasing cheaper, faster and bigger computers that basically were interchangeable, Steve Jobs took a different view of how to create value. It was a theory:

… essentially it held that consumers would pay a premium for ease of use, reliability, and elegance in computing and other digital devices, and that the best means for delivering these was relatively closed systems …

This theory guided Apple into a wide range of markets:

Apple was not the first to design a digital music library, manufacture an MP3 player, or market a smartphone. But it was the first to craft and configure those devices and their user environment with elegant, easy-to-use devices and with tight control of complementary products, infrastructure and market image.

So what’s your firm’s theory? One way to find out is to often ask, Why?

Why this, and not that? Is a particular view of the future driving your CEO’s choice of strategy? Does a unique set of assets or skills energize success, across products or markets? Is a novel perspective leading your company to build or acquire new skills and assets to drive growth?

As Zenger suggests, a good theory not only guides a business; it gives power to the value creation story. And if investors buy your theory – well, they buy. We investor relations people should always seek to better understand – and better explain – how our companies are creating value.

© 2013 Johnson Strategic Communications Inc.

Guiding expectations: Of course we do

May 9, 2013

It’s as close as possible to unanimous: 97% of investor relations professionals say their companies attempt to manage expectations of shareholders, according to a survey of corporate members of the National Investor Relations Institute (NIRI).

No surprise, really. The results published today by NIRI just affirm the definition of IR as cultivating accurate understanding among investors of a company’s business, performance and prospects – communicating all that goes into valuing a stock.

IROs said the biggest focus (61%) is on guiding expectations for the current year, with smaller numbers of companies focusing on longer-term expectations.

What approach do companies use to manage expectations? Some 70% release financial metrics such as goals for revenue, margin or earnings; 27% offer “micro” industry-level metrics; and 22% give “macro” business-environment expectations.

Most CEOs and CFOs know instinctively that their job includes painting the clearest possible picture of the direction and prospects of the business. Exactly how to manage  expectations varies greatly from company to company – and executive to executive. You’ll find details and examples in the NIRI survey – and other sources.

As to the imperative of communicating with the market, it’s unanimous: We all do.

© 2013 Johnson Strategic Communications Inc.

3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.