Posts Tagged ‘Transparency’

Mind the GAAP – and the perceptions

August 1, 2016

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

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

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

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

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

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

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

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

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

What can investor relations people do about this gap?

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

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

© 2016 Johnson Strategic Communications Inc.

REIT disclosures help broader market

October 25, 2010

Most investor relations people are champions of disclosure – believers in the value of transparency for shareholders, as well as investors who might buy our stocks.

Now an article on the 50th anniversary of Real Estate Investment Trusts in National Real Estate Investor says the entire market – private and public – has gained from the emergence of publicly traded REITs and reliable financial data:

Thanks to Wall Street and a wave of IPOs [in the 1990s], modern REITs have not only provided liquidity to the commercial real estate industry, they have also upped the level of sophistication of financial reporting.

Ralph Block, a REIT investor and author of The Essential REIT, says the data in public disclosure makes a big difference from real estate investing years ago:

There has been an absolute revolution in disclosure and that’s true for most public companies. There is a lot more information available about not only the company, but also the properties.

Adam Markman, managing director of the independent real estate research firm Green Street Advisors, adds:

We think that the amount of information you can pull out of these publicly traded companies is helpful for the whole industry.

The benefit of “comps,” or comparative data on asset values and returns, probably carries over in many industries beyond real estate. Private equity investors and investment bankers often look to SEC filings of the public companies in a sector, as well as private information, to evaluate deals or valuations of companies.

The real estate industry also benefits from an education-minded trade group, the National Association of Real Estate Investment Trusts (NAREIT), that collects a wealth of data on real estate assets and returns – and puts the numbers out there on its website for investors (public or private) to track and use. Many trade groups keep data they gather close to the vest – to the detriment of their industries.

Of course, REITs haven’t had an easy go of it during the recent global meltdown-collapse-crisis-whatever-alarmist-name-you-want-to-call-it. For a typical REIT investor, these stocks are all about dividends – and generating the earnings or funds from operations to keep those dividends flowing is a challenge these days.

Referring to the three dividend cuts by mall owner CBL & Associates, REIT analyst Christopher Lucas of Robert W. Baird & Co., says:

That was a significant hit to the individual investor’s trust in the vehicle and in the operations, and it’s going to take some time to earn that trust back. … Now they have to rebuild the trust that investors placed in them to manage their balance sheet and their dividend much more consistently.

Managing performance to rebuild trust, of course, is what many companies in all industries are seeking to do as the economy bounces along in what seems to be an extended trough. Robust disclosure of results will aid in winning back that trust.

© 2010 Johnson Strategic Communications Inc.

We’re Goldman Sachs. Trust us.

April 19, 2010

The Securities and Exchange Commission lawsuit against Goldman Sachs strikes deeply at the issue of trust in the capital markets. Both the firm and the markets as a whole suffered yet another blow in the SEC suit. And it will not be the last.

My Monday-morning question on this latest Wall Street scandal: If you managed billions of dollars for a big pension fund or cash-rich Asian or Middle Eastern government, what’s your reaction the next time a Goldman Sachs institutional rep comes in with a deal that can’t miss? Attractive yield, triple-A rating, assets assembled by the smartest guys on Wall Street, selected just for you?

Well, you will think twice. You’ll remember caveat emptor. You will wonder what toxic dregs the packagers of this deal have chosen to sell to you – and whether they’ve already lined up short sellers to bet against you. Maybe the shorts actually designed the deal. You will think about i-bankers’ commissions and bonuses.

You will not trust.

This is the upshot of the financial crisis, particularly the episodes when someone has failed to disclose what later proved important – when transparency has been lacking and people we assumed were trustworthy proved not to be.

The “Heard on the Street” column in today’s Wall Street Journal makes this point about trust waning in the marketplace. It goes on to note that, beyond the details of the 2007 CDO sale, Goldman Sachs did not disclose the SEC subpoenas in August 2008 or the July 2009 Wells notice of a potential SEC enforcement action. Were these items not material, not worthy of disclosing to Goldman Sachs shareholders? When the suit became public Friday, shareholders lost $12 billion.

I won’t try to dissect the controversy over who knew what about the original CDO. Goldman says it did nothing wrong, the investors were sophisticated and should have known another client was betting on the failure of those securities. Maybe caveat emptor is always the rule. Maybe Goldman is just like everyone else, hustling to make a buck (or a billion).

What I will say is that the financial crisis – and the ongoing collapse of trust in capital markets – should drive every company to rethink what it values.

In investor relations, we understand how valuable it is for a company to have earned the confidence of the capital markets. Trust is a long time coming – built by doing what you say, being open, disclosing problems, addressing issues head-on, underpromising and overdelivering, and doing it over and over – for years.

Trust is lost in a moment.

To be clear, the SEC isn’t the one that destroyed trust in this case. Goldman Sachs, if in fact it assembled the junk of the market for hedge funds that were betting against that junk – and then peddled those deals as jewels – destroyed trust.

The pundits think the SEC’s slap at Goldman Sachs will add momentum to the push in Congress for tougher regulation of Wall Street. No doubt. Ever since the market’s collapse in 2008, “transparency” has become the popular buzzword.

In my experience, trust isn’t legislated. Transparency doesn’t come about because lawyers cite chapter and verse of some law, and companies say well, OK. The laws cited in the SEC complaint against Goldman have been on the books all along.

Rather, trust grows out of an impulse for honesty among people making decisions. In investor communication, trust is built upon CEOs, CFOs and IROs asking what information matters, what do investors want to know? What do we know that the investors need to know in order to make informed decisions? And acting upon it.

Every company going into the capital markets now lives with the loss of trust created by failures of transparency over the years. We must rebuild, step by step.

The job of IR is, above all, to provide the transparency that leads to that trust.

What’s your take on Goldman Sachs, transparency – or regulatory reform?

© 2010 Johnson Strategic Communications Inc.

Quote, unquote – Reputation

September 25, 2009

Suffering the slings and arrows of public distrust for the pharmaceutical industry, Merck & Co. is becoming more accessible to various stakeholders – and changing its business model based on what it hears – CEO Dick Clark says in the Q3 2009 issue of NYSE Magazine. Clark says restoring trust is about doing and saying:

At the end of the day, reputation is grounded in actions, accompanied by candid, timely and transparent communication.

Sounds like a motto for the practice of investor relations.

Schoolmarm & the three Rs

September 14, 2009

FederalHall-GovtPhotoPresident Obama commemorated today’s anniversary of the collapse of Lehman Brothers and the ensuing financial panic by going to the Wall Street playground and delivering a schoolmarm’s lecture to the boys who’ve been acting up. (News story here, text of speech here.)

Like many a grammar school teacher, Mr. O lectured all the kids without differentiating much between those who actually misbehaved and those who followed the rules. For example, the president said:

I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

The president retold the brief history of the financial crisis since September ’08. Not delving much into root causes or the cyclical nature of markets, he focused on the misdeeds of Wall Street. He reminded us (twice) that the crisis was already raging when his administration walked in the door. In this lecture, he made it clear that the schoolboys have failed to learn the three R’s.

The first “R” word is risk. And risk, we gathered from the president, is bad. At least, it’s bad when Wall Street fails to properly anticipate or control it – he spoke of risky loans, risky behavior, reckless risk. These may be seen more easily in hindsight, perhaps, but the president definitely wants financial markets to take less risk.

The president also invoked responsibility. We heard the second “R” word 20 times in its various forms. Mostly, he chastised the giants of the financial world for not acting responsibly … and urged them to grow up and embrace responsibility.

Most of all, Mr. O lectured on regulation. He said the financial crisis came about, essentially, because of a lack of adequate regulation from Washington. And he promised the errant schoolboys more regulation – much more – and by the end of this year if he and Vice Principal Barney Frank have anything to say about it.

Don’t get me wrong. I’m not defending executives on Wall Street, or elsewhere, who failed to disclose risks to investors, dodged responsibility for their actions, or found ways to exploit loopholes in regulation. The wreckage of shareholder value is producing recriminations – and malefactors deserve what they get, you might say.

Mr. O offered one admonition to corporate leaders that I think is correct:

The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before — and you don’t have to wait for a new law to do that.  You don’t have to wait to use plain language in your dealings with consumers.  You don’t have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote.  You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

Those are actions CEOs and boards of directors could begin taking, and if they demonstrate responsibility maybe the powers in Washington will feel less need for severity in imposing all manner of new regulation. Maybe.

President Obama had all the rhetoric right today at Federal Hall. His speech, of course, was short on detail and long on generalities. He really was speaking to people outside the financial markets, those who deeply resent the bailouts and bonuses and (especially) both happening at the same banks. The symbolism of going to Wall Street to deliver the lecture was the main point today.

Whether the new rules that the financial markets eventually do get will actually improve things – or merely shift risks into different forms and sectors while stifling the flexibility (and discipline) of the free market – we will see in time.

Transparency in troubled times

August 7, 2009

Devoting more time to investors and communicating data to support what you’re saying are among the take-home messages McKinsey & Company consultants heard when they interviewed CEOs of 14 major companies recently for a report on Leadership Lessons for Hard Times.

Jay Fishman, Chairman and CEO of Travelers, weighs in on both the commitment and the content for investor relations in a challenging time:

If I’ve learned anything in the last 18 months, it’s that transparency in troubled times really matters. …

If asked to describe this or that exposure, the advice from many IR departments is to use some formulation that basically says don’t worry. I’ve tried to resist that. Now is not the time to tell people not to worry. If you’re in the financial services industry, you ought to be able to quantify. I try to be specific, and weve gained credibility as a result.

“Not the time to tell people not to worry” – I like that. Instead, give investors the data that leads you to your outlook. And let them decide whether to worry.

DC to IR: “Here we come”

June 8, 2009

NIRI09 advocacy panelPublic companies will face tougher laws and increasing regulatory scrutiny from Washington in the coming year, warns Jeff Morgan, president and CEO of the National Investor Relations Institute (NIRI).

In a panel on advocacy at the NIRI 2009 Annual Conference today, Morgan said the Securities and Exchange Commission (SEC) is pursuing three priorities for 2009:

  1. Enforcement of existing rules such as Regulation FD
  2. Investor protection & corporate governance
  3. Transparency of financial markets & products

“The landscape is changing and will continue to change … It’s a whole new world,” Morgan said. With the change agenda of the Obama Administration influencing all areas of regulation, companies should evaluate their IR practices with care – and join in advocating for balanced, sensible policies – he said.

From the SEC, Morgan said, we can expect to see enforcement cases in the next year centered on Regulation FD issues of selective vs. broad disclosure.

“We’ve been in an environment where we’ve never seen a lot of Reg FD cases come against companies,” Morgan said. The rapid growth of social media poses a challenge to traditional controls on corporate disclosures, he noted. “If we start to see [Reg FD enforcement actions], I think it’s going to cause all of us in a corporate environment to be asking how do we manage that better.”

Change is coming in the proxy area, too. Both the SEC “proxy access” proposal and elimination of broker voting for passive shares are likely to give more power to activist shareholders and pose challenges for companies, he said.

Morgan said the SEC also is looking at requiring enhanced disclosures on board of directors’ leadership approach, board nominations, compensation philosophy and practices, and perhaps nonfinancial factors such as climate-change impacts.

Transparency has been a theme for President Obama from the start. As the idea takes shape in legislation and new regulations, it may benefit IR people looking for more insight into hedge funds and less-regulated areas of the investment markets, but it will mean more demands on public companies, too, Morgan said.

“Corporate transparency is big on Congress’s agenda,” the NIRI president said.

So DC is saying to IR, “Here we come!” And I would add, “Watch out!”

Gag rule for bankers

April 10, 2009

Well, so much for transparency and all that. Now it seems the Federal Reserve is telling 19 of the nation’s largest banks not to disclose how they’ve done on the Obama administration’s vaunted “stress tests” (read AP story or Bloomberg).

With earnings season and conference calls upon us, bank CEOs and CFOs might face questions from investors: Does the government think you’re going to survive – or not? Does a rigorous look by regulators show the bank is healthy, or heading back to the Bailout Window?

Mum’s the word, the Fed decrees. Only the government is allowed to disclose the outcome of the stress tests – which it is supposed to do by the end of April.

As AP tells it, the Fed is protecting weak banks against panic if executives of the healthy institutions let the cat out of the bag:

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

After Wells Fargo surprised investors with good earnings on Thursday, CFO Howard Atkins declined to talk about the government’s tests. “We haven’t commented on regulatory matters and we won’t start now,” Atkins said [to Bloomberg]. “We don’t comment on the process.”

The gag rule seems a little Orwellian coming from folks who champion “transparency.” For those of us brought up on efficient markets, open disclosure and so on, it’s an ethical imperative to tell investors about material information in a timely way.

But, then, if the government is going to control the big banks, the big banks are going to be – well, controlled by the government. Sssshhhhhh!