Posts Tagged ‘Recession’

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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‘The new normal’ for IR

September 20, 2010

Chatting with colleagues last week, someone tossed out the phrase “the new normal.” And a co-worker shot back: “What is the new normal, anyway?”

Ever so conveniently, then, on Thursday and Friday I attended the client conference of DeMarche Associates, a Kansas City-based investment consultant. The theme: “The New Normal and How It Affects Investment Strategy.” DeMarche’s audience of pension fund managers and other institutional investors came seeking to divine the outlook for their portfolios – and to get ideas on long-term investing strategies.

But the concept has important implications for investor relations people, too.

What is the new normal, anyway?

The “new normal” is a buzzword current in business and economic discussions. It embraces the outlook that things are not going to get better, at least not much better, for some time. Maybe three, five, eight years. We’ll all come to realize, the narrative goes, that a difficult economic environment has become normal. And if a rapid recovery isn’t going to appear and solve our problems, we need to adapt to hard times and learn to live with lower expectations.

Not everyone believes in the new normal. Pundits seem split 50-50 between those who see a recovery launching us skyward into the upside of a U-shaped cycle and those who see us slogging across the bottom of a flatter, more prolonged U. My intention isn’t to take either side – just to beware of the implications.

DeMarche is in the “new normal” camp. While bullish market gurus pointed the audience to positive signs, DeMarche consultants outlined six “supercycles” since 1890: periods of 15 to 30 years when the market trended strongly up – or down.

Data indicate we’re now in a negative or neutral supercycle that began in 2000, after that lovely 1980 to 2000 period when the Dow soared 1,400%, DeMarche says. The past 10 years have treated long-term equity investors roughly: two bear markets, two bull markets, a lot of pain, volatility and – overall – no gain.

Welcome to the new normal. DeMarche expects this malaise for the stock market and other investments to continue for the next 3 to 5 years. DeMarche analysts list five trends as defining the new normal:

  • Slow economic growth – a weak recovery with GDP rising 1% to 3% a year, lacking the oomph to support robust sales and earnings growth
  • Consumer angst and frugality – consumers, who make up 70% of the economy, remaining cautious while struggling with debt and job fears
  • Declining corporate profit estimates – earnings tending to disappoint if market expectations are based on a strong recovery that doesn’t appear
  • Sideway grinding market for years – stocks trading up or down, not unlike the past decade, but without “a rising tide that lifts all boats”
  • Volatile bull and bear cycles – within a broader overall trend, markets still experiencing bull/bear cycles and recessions

Bob Marchesi, chairman & CEO of DeMarche, said the market today reflects an expectation of stronger recovery with no fear of a double-dip recession. Equity prices haven’t factored in a slow-growth scenario with a challenged consumer sector, he said. That leads him to expect a near-term correction, followed by lower average returns for equities over the next several years.

Why should IR care? What should we do?

Taking DeMarche’s prognostications for institutional investors and viewing the implications from a corporate perspective, here’s a new normal primer for IR. (Blame me for these ideas, not DeMarche, as they weren’t discussing IR.)

  • “Buy and hold” will be less common as an investment strategy. IR has to get used to it. Speaking to an audience of mostly pension fund managers, with very long investment horizons of the kind IR people love, DeMarche is recommending “dynamic” strategies and “tactical asset allocation.” Instead of buying a stock forever, investors may shift money in and out of asset classes based on valuation and changing investment characteristics. IR needs to think tactically, as well, adjusting to changing investor outlooks.
  • Hedge funds won’t be fading from the investment scene – probably the opposite. As institutions look to protect assets and wring some return out of up or down markets, DeMarche has dropped the “Alternative investments” label on hedge funds and the like. Institutions may de-emphasize the stigma and allocate more money to managers with nimble market strategies. Hedge funds come in all shapes and sizes, but we shouldn’t exclude them from IR.
  • Expect drama, up and down. In the 1930s, the US experienced three bear markets – and three of the best years of the stock market. In a negative or neutral supercycle, DeMarch says, equities may be “churning sideways” for a few years but it may feel like a rough roller coaster. When the market goes up (2009-10?) we shouldn’t break out the champagne and sing “Let the good times roll.” The new normal calls for a restrained tone in IR.
  • Consumers may not drive economic expansion of the kind we saw in the post-World War II era. The aging of Baby Boomers, pullback in spending and slowing of population growth will be a demographic drag on the economy for the next 20 years or so, DeMarche believes. One question for IR: What do demographics say about your products and markets?
  • No one has a crystal ball – so IR should communicate both the risks and our strategies for thriving in up or down times. If GDP grows 4%, revenue and earnings may boom … but what if GDP grows 1%? What if the economy goes negative and we get that double-dip?  While DeMarche’s prediction of disappointing earnings focuses on the S&P 500 as an aggregate, it’s a cautionary note for IR at individual companies.
  • Political winds are blowing in a direction more favorable to business – for the moment. But public opinion shifts rapidly. Even a “pro-business” outcome in this fall’s Congressional elections would leave a government facing high debt, on the prowl for tax revenues, and prone to regulatory solutions. The financial consequences may not seem like a tea party.

There’s a somber set of thoughts. I hope we’re not in the new normal – but we all need to prepare for that possibility in communicating with the capital markets.

What’s your view?

© 2010 Johnson Strategic Communications Inc.

The American way

July 2, 2010

Going into Fourth of July weekend, a friend who has helped raise capital for privately owned businesses – and a couple of public companies – offered his theory about why capital isn’t flowing into enterprises that could reignite our economy.

There’s “plenty of money” sitting in private equity funds and other investors’ stashes, this serial CXO and strategic thinker suggests. But people with the wherewithal to fund growth companies, mostly, aren’t taking the plunge right now.

The reason is the way investors feel about Washington, he opines. Not the place, but the US government’s massive extension of its legislative and regulatory reach. Government is seeking to govern so much more: new rules to prevent the next bubble or flash crash or oil spill, new agencies, health care mandates, too-big-to-fail bailouts, tougher penalties, stronger stimulus … public-sector stimulus.

And higher taxes to pay for it all. Bush-era tax rates will yield to higher rates. Revenue enhancement is in vogue. We’re even looking at the value-added tax.

But the worst part? “It’s the uncertainty” – not knowing what the rules of the game will be in one, two or three years. Washington is pressing its ongoing expansion of control in all areas of business – at a time when the economy is fragile.

So investing in a long-term way today means taking on risks of yet-unwritten mandates and so-far-incalculable costs from tomorrow’s “hope and change.”

Before long, this discussion begins to sound uniquely American: complaints from independent-minded business people against an overly ambitious government.

Which brings me around to one of my annual rituals: re-reading the Declaration of Independence around the Fourth of July. The words soar to rhetorical heights:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.

It’s a reminder of why we’re here – in America. And, apropos of my lunchtime conversation about the uncertainties of government on steroids, this time my eye catches on another line, one of the founders’ grievances against King George III:

He has erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance.

No doubt some CEOs, CFOs and even investors feel a bit like that. We’re wondering how much this reform or that Act will eat out “our substance,” how ramped-up regulation will hinder access to credit and raise costs of capital, or what new taxes will come unbidden out of the Beltway.

Not suggesting a revolution – only that we need to give thought to capital formation, to investing and a climate that enhances confidence in the American system. We need investors to resume funding the small and mid-sized firms that, after all, must hire those unemployed workers and create real, sustainable growth.

The American way isn’t negotiated by politicians or codified in 2,000-page bills. It’s not put out for public comment in the Federal Register. Instead, it is thrashed out in the competitive, pressurized, sometimes Wild West openness of the market. The market-driven approach is what, once, put US business on top of the world.

Let’s keep in mind that the American way – still – is about freedom.

Have a great Fourth of July!

© 2010 Johnson Strategic Communications Inc.

Macro rap

January 28, 2010

The late economist John Maynard Keynes has been mentioned more than once in the news coverage of President Obama’s State of the Union speech.

For a little comic relief from all the analysis of Washington and our economy, here’s a fun video – OK, so maybe fun is in the eye of the beholder – let’s call it an educational video on opposing approaches to macroeconomics.

Imagine fiscal policy theorist J.M. Keynes vs. free market capitalist F.A. von Hayek dueling in a music video. They’re rapping – yes, rapping – on the financial crisis, recession, monetary and fiscal policy, and all that:

This clip is the work of EconStories.tv, a newly launched educational venture of Russell Roberts, professor of Economics at George Mason University; John Papola, a producer-director; and a crew of dozens.

Good for a chuckle. And we might as well chuckle. If the news from Washington is any indication, Keynes already won this rap contest and Hayek has gone silent.

If you’re feeling more serious about the dismal science and economic policy’s impact on all of our companies, National Public Radio offers this view of Obama the Keynesian. Talk back by offering a comment – or a rap of your own.

© 2010 Johnson Strategic Communications Inc.

Substance over style

November 13, 2009

The CFO of a local company made a good point today during a panel discussion on the state of the capital markets: It’s the substance of a company’s story that matters to investors, more than style or charisma – especially in tough times.

Ryan VanWinkle, senior VP and CFO of NYSE-listed Ferrellgas Partners LP, was asked at the Kansas City chapter of Association for Corporate Growth to explain the company’s success in raising funds in both debt and equity markets in 2009.

“In the end it’s not any one person. If you have a good story to tell, it doesn’t matter who tells it,” VanWinkle said. For a good company with a track record and a good transaction, he said, “the capital markets are wide open.”

This is a change from late 2008, when even good companies couldn’t raise money, he said. And the day may come again when the doors all slam shut, so VanWinkle suggests that companies add some liquidity to protect against that contingency.

Just thought this was a worthwhile insight on investor relations: The reality of the story makes the difference, more than the marketing flair we show in telling it.

Mission accomplished?

October 29, 2009

I’m getting a mental picture: The confident commander-in-chief strides across the flight deck of the USS Economy and addresses the aircraft carrier’s crew as a MISSION ACCOMPLISHED banner flies overhead. “The recession is over!”

Well, maybe we should hold off on photo ops.

The good news on third-quarter GDP rising, breaking the recessionary streak, doesn’t mean we’re finished with tough times. The other good news may be that the Obama Administration does not seem ready to declare victory just yet.

Although a recovery may be taking hold, investors remain plenty nervous. The “U” and “W” and “L” scenarios are still too plausible to declare it’s over.

Not that we should get mired in doom and gloom – but, in telling our story to investors, we ought to keep our feet on solid ground.

For sure, companies and investor relations people should be explaining our strategies for the recovery phase, providing perspective and industry insights. An earlier post offers some ideas on IR for the coming recovery. In this transitional time, we should present a view of the business based on data, not wishful thinking.

Feel free to share your thoughts … Where are we in the economic cycle? And how can IROs best tell the story while the macro picture remains uncertain?

IR & the coming recovery

July 28, 2009

Newsweek-It'sOverThe cover of the latest Newsweek shouts “The Recession Is Over!” A balloon and an exclamation point add emphasis, although writer Daniel Gross layers on the qualifications – making it clear the economy, even if it is at a turning point, remains in turmoil.

For my money, it’s a little premature to celebrate. I’m skeptical of newsweekly covers. And too much pain seems to be lingering – for consumers, workers, capital markets and companies. The sunshine hasn’t broken through enough to banish the dark clouds in favor of sunny days.

Yet a glimmer does shine through, here and there. Recovery will come, maybe soon. And my sense is that investors are looking for signs, seeking each ray of light, asking if good news is coming next quarter, or the next after that.

So investor relations people need to be asking: What’s our recovery strategy? How do we offer forward-looking perspective? What do we say in an uncertain time when we see hope but can’t be sure? And when do we declare recovery has arrived?

Some ideas for you to consider (feel free to add your own as comments):

… Explain the recovery strategy. Our job in IR, any time, is to help investors understand our companies’ strategies for creating value. Right now, shareholders are battered but very much looking forward and wondering what’s next. With more than a little nervousness, they want to know where we go from here.

In a piece called “Beyond Challenging Markets,” the consulting firm Deloitte says shareholder returns vary much more among companies around a recession than in good economic times – that is, some emerge as winners that outperform for investors, while others survive but never quite lift off for shareholders.

Deloitte outlines four stages of strategy for recession and recovery: strengthening the balance sheet, optimizing performance, building confidence and positioning for the future. Most companies have addressed the first two by working to reduce debt and cut costs; now we’re looking forward.

Building confidence as a basis for outperforming in a recovery, Deloitte suggests, may include improving corporate governance; demonstrating a strong approach to anticipating and managing risk; creating realistic expectations and delivering on promises; and responding proactively to the prospect of increasing regulation.

Deloitte says positioning for the future means developing a strategy for achieving near- and intermediate-term growth in existing businesses; changing the business model where markets or conditions have changed (e.g., ongoing credit limitations or sluggish consumer spending); and expanding through M&A or new products.

The consultants’ emphasis is that CEOs and senior management should be doing the work of strategy formation for the next phase of the economy. But IROs, equally, should be taking on the job of explaining strategy for what’s coming next.

… Give historical perspective. One of the best ways to talk about the future is to talk about the past. In today’s Wall Street Journal, Justin Lahart analyzes “the Great Recession” in comparison to eight decades of economic slumps (with cool interactive graphs online, if you’re an Econ nut). Most companies can draw upon experience with past recessions – and the recoveries that followed. So we can speak factually about how recovery tends to work its way through our business.

… Share specialized knowledge. Companies can add value for investors and nurture lasting relationships by sharing industry-specific insights. That means helping investors, especially generalists, understand how the business cycle works its way through your sector, how the competitive landscape is changing, and what special risks or opportunities you see. Your view of the business in which you compete is a valuable perspective to add to the investors’ mosaic.

… Don’t be overly optimistic. A realistic tone, infused with humility, seems to fit the times. Most of us didn’t predict the economic turmoil would be this severe, so we have reason to be cautious about forecasting the strength or timing of recovery.

There are positive signs. Floyd Norris of The New York Times notes: “The index of leading indicators, which signals turning points in the economy, is rising at a rate that has accurately indicated the end of every recession since the index began to be compiled in 1959.” And various industry-specific indicators show upticks.

We could truly be at the bottom, although some business people sound more like they just can’t imagine things getting any worse. The recovery may already be underway. Or, as Norris says, we may be entering the first upstroke in a W-shaped recovery, only to face a second downturn of unknown severity.

To be clear, I’m not trying to call an economic recovery – or deny it. My point is that as IR people we need to be thinking and communicating about the coming recovery, probably without predicting the timing.

When should we declare that recovery has arrived? Personally, I favor a factual approach that keeps investors current on company or industry-specific indicators, including third-party economic data. And then I would suggest waiting to break out the champagne until actual results start to show improving sales and profits.

That’s when investors will start breathing easier.

© Copyright 2009 Johnson Strategic Communications Inc.

Stakeholders vs. stockholders?

July 14, 2009

A Stanford University business professor, Jeffrey Pfeffer, takes on “shareholder capitalism” in an article in the July-August issue of Harvard Business Review.

Pfeffer argues in “Shareholders First? No So Fast …” that the pendulum is swinging from stockholders toward stakeholders. Noting the recent political changes and populist backlash after the carnage in financial and credit markets, he says CEOs and the rest of us need to get away from shareholder-driven decision making.

I’m not sure I buy the stakeholder-stockholder dichotomy. But we certainly do need to study the mood of our society as we work out corporate strategies – and craft messages for investor relations and corporate communications.

Pfeffer says companies used to be run (in the 1950s and 1960s) for employees, customers, suppliers and communities, as well as shareholders. In the 1970s and 1980s, he says, faith in the wisdom of financial markets became pre-eminent.

He describes the current shift back to stakeholders:

Now opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder value is rightfully under fire. Given the political realignment occurring in many countries, and the residue of the worst economic meltdown and destruction of wealth since the Great Depression, the chances are pretty good that stakeholder interests will remain at the top of the list a bit longer this time.

Even while stockholders were king, some of the most successful companies like Southwest Airlines put employees first, customers second and shareholders third, Pfeffer notes. The people who most influence a company’s success – employees and customers – don’t really get fired up by shareholder value, he suggests. Employees want to be valued (and paid), and customers want quality, price and service.

To me, there’s an element of “straw man” in the stakeholder vs. stockholder debate. Most companies I’ve worked with see shareholder value as a long-term outcome of working to motivate employees and excel in meeting the needs of customers. To the extent that any CEOs actually do fit the image of greed-crazed robber barons, I don’t see their behavior as having anything to do with the interests of shareholders.

Pfeffer even suggests that shareholder capitalism contributes to causing recessions. In that, I think he goes beyond economic evidence and joins the political hordes. Not much good can come from taking up torches to burn CEOs at the stake for our current woes. I doubt that shareholders’ interests led to this or any recession.

But stakeholders are the people our companies serve – shareholders, employees, customers, suppliers and communities – whatever order you list them in.

Our message has to do with what leads to business success. So, yes: stakeholders … and stockholders. What’s your view?

‘Macro’ drives ‘micro’

July 1, 2009

The headline of the day, in my book, comes in a post on the Wall Street Journal Real Time Economics blog marking the arrival of July 1:

It’s The Second Half — So Where’s The Recovery?

Investor relations professionals may feel the same ambivalence today, as we enter the back half of the year wondering about macroeconomic trends and seeing the big picture’s influence on our companies’ fundamentals (and stock prices).

Investors are trying awfully hard to be there waiting on the dock when the good ship Recovery pulls in. So the market rallies … when Ford’s sales drop only 11% (the best of the automakers) … when manufacturing shrinks, but less than it has been declining for the past year … when unemployment keeps rising but probably at a slower pace. In a market eager to be hopeful, exuberance seems to come cheaply.

Anyway, the second half has arrived – and  let’s hope recovery really is at hand.

One of the challenges of investor communication is to explain how the business cycle works its way through industry and company-specific performance. We need to offer insight into how our P&Ls are affected by changes in product demand, sales volumes, pricing power, cost of materials and so on – and the timing of these changes within the economic cycle. Part of this is saying which “macro” metrics matter to our businesses – and providing the data for our shareholders.

IR people should be students of the macro environment (among other things). Three good sources on the dismal science are blogs that aggregate and report the daily economic news: Calculated Risk, The Big Picture and WSJ’s Real Time Economics. Following all three, of course, could be too dismal for most of us.

Another challenge for IR is to understand how our companies diverge from the economy as a whole. We must explain actions we’re taking to outperform, smooth the cycles or propel the recovery of our P&Ls beyond the macro trend.

The next couple of quarters promise to be interesting. Happy H2!

M&A clichés don’t ring true

June 15, 2009

Examples abound of acquisitions that ultimately fail to benefit shareholders, and the wipeout in market values since 2007 has provided lots of new case studies. Exposure of deals-gone-bad serves as a cautionary tale for people who write merger announcements: Too often, standard M&A clichés don’t ring true.

One case in point – the 2006 acquisition of apparel retailer J. Jill by Talbots – is Michelle Leder’s subject in “On M&A Math,” published June 9 at Footnoted.org, a blog dedicated to digging up and highlighting glitches in company disclosures. Talbot’s bought J. Jill for $517 million three years ago. Last week, Talbots said it was selling J. Jill to a private equity group for just $75 million, about 85% less.

Leder writes:

Whenever a deal is announced — and a bunch of them have been lately — there’s the inevitable press release that talks about synergies and how the deal is going to enhance shareholder value. Indeed, that’s pretty much a mandatory sentence. But things don’t always turn out as planned when it comes to M&A, or, quite frankly a lot of other things …

In the February 2006 release on the retailers linking up, the Talbots CEO used several M&A bromides:

Working together, we expect to capture the significant growth potential of the J. Jill brand and enhance shareholder value. We believe our proven expertise in managing a complex multi-channel operation will enable us to maximize the cost synergies of our similar business models, particularly in back-office functions.

In the June 2009 exit announcement, a different Talbots CEO declares:

This is a significant strategic step forward for Talbots as it enables us to focus our time, resources and attention exclusively on rejuvenating our core Talbots brand and return to profitable growth.

Synergy. Shareholder value. Growth potential. Expertise in managing complex operations. It’s too bad when these things come to naught. Of course, the financial crisis and recession have overcome many companies that didn’t merge, too.

But it seems to me that investor relations professionals should learn something from witnessing the wreckage of various mergers in recent years. We should anchor our statements about M&A transactions in specifics, not the traditional broad-brush claims of reaping synergies and enhancing shareholder value.