Posts Tagged ‘Short-termism’

Attracting like-minded investors

April 6, 2015

How do we bring in long-term investors? By disdaining short-termism and managing the business for results over the long haul. That, at least, is the short answer in an interview of Tim Cook, CEO of Apple Inc., for the “World’s 50 Greatest Leaders” feature April 1 in Fortune:

“The kind of investors we seek are long term because that’s how we make our decisions,” he says. “If you’re a short-term investor, obviously you’ve got the right to buy the stock and trade it the way you want. It’s your decision. But I want everyone to know that’s not how we run the company.”

Seems like the ultimate free-market view: Investors and companies self-selecting, with short-termers attracted to companies that behave like momentum plays, and long-term investors drawn to companies that manage for the long haul and communicate as much.

So, can we get that done by next week?

© 2015 Johnson Strategic Communications Inc.

Can companies think & act long-term?

September 26, 2014

CEO at windowWhen former Merck & Co. CEO Ray Gilmartin sat down with a governance guru to reflect on “The Board’s Role in Strategy” for the National Association of Corporate Directors’ Directorship magazine, the topic turned to the conflict between short-termism and the sustained commitment that executing a strategy demands.

Gilmartin waxed philosophical when asked about encouraging CEOs to act strategically, even under pressure from short-termist investors:

What’s happened is that there is confusion between stock price and creating firm value. I don’t believe investors are short term-oriented, but boards and management can be. Investors will reward investments in R&D, for example, because they recognize it will create long-term value. Therefore, if you’re lowering your earnings growth or you missed a quarter because you don’t want to cut back on R&D, if you have good relationships with your investors and they have confidence in your operating capability and your ability to deliver, then even though you’re falling short on the quarter or you’re going to lower your earnings to invest in research, they will still reward you for that.

Well, OK. This seems a bit theoretical. The ex-CEO is nearly 10 years out from the corner office, having taught at Harvard Business School and served as an outside board member in the intervening time. It’s been awhile since he sweated Merck’s stock price dropping 12% in two days, or its blockbuster drug going off-patent. Maybe it’s more accurate to say investors will eventually reward investments in R&D, but they may deliver a thrashing in the quarter(s) when EPS falls short. So get ready.

For the here-and-now, I would add two things to Gilmartin’s opinion that boards and CEOs can think and act strategically for the long term:

  • Communicating clearly is essential. A big part of the CEO’s job, as well as the CFO and IRO’s, is to explain that the wheels are not falling off the bus – we’re investing in the future. Then we must show concrete evidence of progress, step by step, in R&D or gross margins or whatever.
  • It takes guts to think and act for the long term. When earnings go the wrong way, the whole team needs to toughen up and be bold about interfacing with investors. Hiding doesn’t help, it hurts.

That’s my two-cents’ worth. What do you think?

 © 2014 Johnson Strategic Communications Inc.

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.

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.

Trading at the speed of light

August 10, 2012

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

The public markets’ competitor

May 11, 2012

Q: Do you ever wish you were publicly traded?

A: Oh God, no. I have the greatest job in the world, because I work for a guy who runs the company for the next 20 years, not the next 90 days. It’s tough being a public company, and I wouldn’t wish that on anyone.

 –  Steve Feilmeier, executive VP & CFO
Koch Industries, Inc.

As investor relations people, we rub elbows mostly with publicly traded companies. We think about how to get our message out to the capital markets in competition with other public companies, especially our peers within narrow industry sectors.

But a whole other class of competitors exists in a parallel universe – competitors for capital and, in our businesses, for customers. Maybe we ought to pay attention.

What started me thinking was Steve Feilmeier, CFO of Koch Industries, who spoke this morning to the Kansas City chapter of Association for Corporate Growth. Known to outsiders mostly for media attention in political controversies, on the business side Koch is a $125 billion company with 67,000 employees – the No. 2 privately held business in America. No. 1 in profitability, Feilmeier hastens to add.

Right at the start, Feilmeier says being privately held is a competitive advantage:

We benefit from not having to report earnings every 90 days. All of our decisions are based on, How is this going to work out in the next 10 years?

And it’s working out just fine for Koch (sounds like “coke”). The firm is doubling revenue every five or six years with a dozen operating companies in agriculture, energy and manufacturing. Although Koch doesn’t report publicly, Feilmeier makes it clear those businesses are delivering even better growth in EBITDA (slides here).

An example of Koch’s presence: AngelSoft, its toilet tissue brand, is the No. 1 SKU in Walmart stores. No. 1. Feilmeier says 60 truckloads a day leave Koch’s Georgia-Pacific subsidiary loaded just with AngelSoft four-packs bound for Walmarts.

The ongoing shift in institutional investor preferences among asset classes is the other thing that got me thinking. I keep hearing about pension funds, endowments and real people putting more money into alternative investments – capital that isn’t flowing to publicly held companies represented by IR pros.

Consider these stats: In 2001 U.S. pension funds held 65% of assets in equities, but that dropped to 44% by 2011, according to the Towers Watson Global Pension Assets Study 2012. in those 10 years, the “Other” category in asset allocation – real estate, private equity and hedge funds – quintupled from 5% to 25%. Apply those changes to $16 trillion in U.S. pension assets and you’re talking real money.

Without getting in over my head further on macro views of the capital markets, my point is that public companies ought to think strategically about their investors. Institutions and individuals don’t have to invest in any particular public company. They might even flee the stock market, with some of their funds, for “alternatives.”

And this brings me back to Koch. Feilmeier’s description of why Koch keeps growing at the top line – and especially the bottom line – holds lessons that public companies and IR people might take to heart. A few interesting ideas:

  • Do investors see management-by-quarterly-numbers, or something like Koch’s “patient & disciplined” creation of wealth? How do we discuss performance?
  • Can we demonstrate how our incentive pay turns managers into entrepreneurs, who get paid when they deliver (and not when they don’t)?
  • Do we have real accountability? Koch doesn’t believe in subsidizing any of its businesses, so operating execs are responsible for balance sheets and P&Ls.
  • How do we make decisions? Koch demands rigorous comparison of every capital project with alternatives – will this investment deliver the best return?

Koch, of course, is a giant company. There are well-managed and poorly managed firms of every size in both the public and private arenas. But the principles Feilmeier discussed are common private-equity approaches to driving performance.

Private vs. public is a common debate among CEOs and finance folks. Some private companies long for public status – and a fortunate few make it through the IPO process to get listed. On the other hand some micro-cap and even mid-cap public companies wish they were private, to escape the hassles of quarterly reporting.

Whether public or private, maybe we need to get back to basics of running companies by rigorous disciplines of wealth creation. And public companies need to communicate how those disciplines create real shareholder value.

What do you think?

© 2012 Johnson Strategic Communications Inc.

Shareholders & ‘the ADD society’

October 14, 2011

Andrew Ross Sorkin, the New York Times M&A columnist, CNBC “Squawk Box” co-host and author of Too Big to Fail, says we’re kidding ourselves when we say we want corporate leaders to think long-term. The problem, he says, is all of us.

“We are the ultimate ADD society,” Sorkin said today in a speech to the Association for Corporate Growth Kansas City chapter. Patience is nowhere to be found, and that goes for the stock market and demands it places on managements, he said:

We keep saying we want more shareholder democracy because we want executives to think long-term. The problem is not that the people in power are short-termists, it’s that we are short-term thinkers.

As Exhibit A, Sorkin cited the statistic that the average shareholder holds onto a stock for only 2.8 months. Less than one quarter. Of course, high-frequency automated trading turns stocks over in milliseconds, and multiple times every day. But even individual investors can be fast-moving and fickle:

I would love to find a way to get our country back to being an investing society, not a trading society.

Sorkin acknowledged there’s no sign of that happening anytime soon. (Coverage of the rest of what Sorkin had to say is here or here.)

The investor relations person in search of a patient investor, in this environment, is something like a mythical but tragic hero. Solutions, anyone?

© 2011 Johnson Strategic Communications Inc.

IR is still about the long term

May 12, 2011

Among several bits of wisdom shared by Jane McCahon last night at a NIRI Kansas City meeting is the idea that investor relations, at its core, still has the mission of building a base of long-term investors who believe in your company and its future.

McCahon is VP of corporate relations for Chicago-based Telephone and Data Systems and its publicly traded subsidiary U.S. Cellular. She is a longtime IRO with experience in several industries and is a former chair of the NIRI national board.

Measuring the success of IR isn’t about this quarter, McCahon says. Success develops over several years as you develop a group of long-term investors who understand and support the company’s story.

You can do perception studies to evaluate how the relationships are going. But the ultimate measure will come in a moment, sometime in the future, when you need your shareholders – when management needs a critical proxy vote, support in an M&A situation or buy-in for a follow-on offering.

In that moment, if you’ve been doing your job well, you’ll approach those investors and the answer will come: “We’re with you.”

As for the near term, McCahon says, make an annual IR plan and put it into practice. Focus on what you can control or influence, not what you can’t change.

One IRO asked how you deal with high-frequency trading and the daily gyrations of stocks in today’s hyper-short-term market. McCahon’s advice:

You can’t. What’s your title? Investor relations – not trader relations. Yes, you have to be aware of what it is and be explaining these events to people. But there’s nothing you can do about it – move on.

McCahon says one of the best things an IR professional can do is spend 50% to 70% of your time focusing internally: educating management about investors’ feelings, preparing execs to meet with analysts and shareholders, coming up with Q&As and drilling managers, sharing the IR plan and managing internal expectations.

“What’s changed in IR?” someone asked. Well, this led to a big discussion about fax machines. Too many of us in the room remember when fax machines were the coolest new technology for rapid communication with the market. We punched in fax numbers and waited for it to send. Today, who still owns a fax machine?

McCahon suggests, though, that the heart of IR hasn’t changed: It’s finding and cultivating long-term investors for that moment in the future when you need them.

© 2011 Johnson Strategic Communications Inc.

Say it ain’t so, Jack

March 13, 2009

Jack Welch, the longtime CEO of General Electric whose personal and corporate brands were synonymous with growing shareholder value in the Eighties and Nineties, is backpedaling now … big-time. There he is on Page 1 of today’s Financial Times.

The newspaper quotes Welch in a series on the future of capitalism:

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.”

Well. Not shareholders? The dumbest idea? We’re all wondering …

Was Welch drugged or tortured by Soviet agents? No, wait a minute, the evil empire fell long ago while Welch was still delivering regular-as-clockwork increases in profits – to the delight of GE shareholders.

So what has come over Welch? The Financial Times positions his blast at shareholder value as an executive spurning short-termism. FT lumps a quarterly earnings obsession together  the drive to improve share price.

Surely Welch is right that strategy is long-term and has to do with a company’s customers, product mix, competitive approach, investment in the future, etc.

But preserving and building value seems fundamental to the mission, aspiration, even raison d’être of a company. A corporation is essentially a trust between owners and their stewards. Shareholder value is part of most CEOs’ pay structure. And rightly so, I believe.

Of course, companies usually emphasize pursuit of long-term shareholder value. Investor relations is largely about explaining that pursuit to investors. OK, we can talk about fighting short-termism.

But, Jack Welch or not, I wouldn’t recommend adding “Shareholder value is the dumbest idea in the world” as a message point in your annual report or road-show presentation. Not today, not ever.

Anyone want to venture a comment on Welch’s statement?

Reputation lasts more than a quarter

August 12, 2008

Winding up another earnings season that’s been a little rough for many, it may help to remember what’s important in the long run. This quarter, too, shall pass. A few years ago Warren Buffett, legendary CEO of the Berkshire Hathaway portfolio of companies, reminded his senior managers:

We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation.

 – Warren Buffett, August 2, 2000, memo to CEOs
of portfolio companies, quoted in Warren Buffett CEO:
Lessons from the Berkshire Hathaway Managers

by Robert P. Miles (New York: John Wiley & Sons, 2002)