Where’s the Beef?

Way back in 1984, Wendy’s, the hamburger chain, ran a commercial that featured a little old lady, played by actress Clara Peller, and the tag line “Where’s the beef?” The commercial became an instant classic because it played to the common sense of the audience to look past marketing hype to try and find the substance of the product. You can find a video of the commercial here: http://www.youtube.com/watch?v=Ug75diEyiA0

I bring this up because I often feel the same way when I hear about the benefits of corporate restructuring programs. These programs are often announced to great fanfare by corporations when they take massive one-time write-downs. The benefits are then discussed in diminishing amounts as the ensuing years unfold and we are left to take the company’s word that they in fact achieved the benefits claimed. So I thought I would go back and look at an example of one of these programs to see if I could understand the savings claimed.

Here, for example, is Walgreens President, Greg Wasson, as quoted by StreetInsider.com on January 8, 2009:

"Our Rewiring effort is finding ways for Walgreens to be more effective and efficient so that our growth strategy can move forward"

In its entirety, Rewiring for Growth targets $1 billion in annual savings by fiscal 2011. The company will achieve savings through:

• strategic sourcing on indirect spend (all goods not for resale),

• reduction in overhead and labor,

• and the POWER project, which is designed to enhance patient-pharmacist interaction while reducing costs.

Walgreens expects to incur costs of $300-$400 million over FY09 and FY10 as it implements Rewiring for Growth. 50% of the project’s benefits are expected to accrue beginning in FY10, with the full $1 billion in targeted annual savings beginning in FY11.”

This sounds like great stuff. If Walgreens could take $1 billion out of its expenses, with 2011 sales of $72.184 billion, they should reduce their expense ratio by 1.38%, which presumably should go straight to the bottom line. So I went and looked at what has happened to expense ratios since 2008, the base year of the announced “Rewiring for Growth” program. When I looked at the S, G & A expense ratio for the company here’s what I found:

2008 (base year) 22.36%

2009 22.68%

2010 23.02%

2011 22.94%

In other words, not only has the expense ratio not gone down, it has gone up in two of the three years since the program was announced and the ratio is 58 basis points higher now than when they started. In fact, if Walgreens had just maintained the same expense ratio that it had in 2008 before the program began, expenses would have been $476.4 million lower than they were in 2011. So I have to ask: “Where’s the beef?” How can you have an expense reduction program that results in rising expense ratios?

In their 2011 Annual Report, Walgreens states way back on page 19: “We have realized total savings related to Rewiring for Growth of approximately $1.1 billion compared to our base year of 2008. Selling, general and administrative expenses realized total savings of $953 million, while cost of sales benefited by approximately $122 million.” If you go and look at some of the company presentations they go to great lengths to try and justify their calculations, but when I read it I find myself in a time warp back to the late 1990s where companies routinely issued press releases about “earnings without the bad stuff”. There must be a method to their calculations – but it’s a little too subtle for me and I always worry about how they decided what to leave in and what to take out. (And let’s not forget that they said they would be getting $1 billion per year savings by now, not over the life of the program.) I mean, they’ve got sophisticated accounting systems and I’m just one guy with a calculator, but I really would like to see it in the income statement numbers, because what they’re saying doesn’t make sense to me. It’s not a successful expense reduction program if you don’t lower expenses.

From an investor relations standpoint, this stuff certainly doesn’t help management’s credibility. Maybe this is just the way things are done, but it’s quit frustrating for your average investor. When I get frustrated, I tend to take it out with food, so I think I’ll go fix myself a hamburger… and find some real beef.

Practicing Safe Presentations

How many times have you been at a conference and seen a corporate investor presentation that begins something like this:

“Good morning. I’m Joe Terrific, CEO of Godzilla Industries, and I’m here to bring you up to date on all the great things we’re doing. (Pause while he moves rapidly from the title slide, past the safe harbor slide to the beginning slide describing the business.) Here at Godzilla Industries…”

In other words, the safe harbor statement slide is up on the screen fleetingly, but not referred to verbally. The thinking being that they’ve shown the disclaimer about forward-looking statements, all the investors in the room are sophisticated institutional investors and know that when a company makes projections and statements about the future things don’t always turn out the way the company thinks they will. The requirements of the Private Securities Litigation Act of 1995 have been met, right?

Well, maybe not.

A recent ruling by a federal trial court for the Western District of Washington has underlined the need for companies to make sure they verbally reference the safe harbor disclaimer. The case is In re Coinstar Securities Litigation, Case No. C11-133 MJP (W.D. Washington Oct. 6, 2011) and all practitioners of investor relations should take notice of it.

The case involved allegations that on various occasions the management of Coinstar made projections and statements about future expectations that did not come to fruition. As happens in these cases, the lawyers for Coinstar made a motion to dismiss the complaint. This is a motion made early in the proceedings that has the effect of cutting off the litigation before the really big legal bills start to pile up. It is done before pre-trial discovery takes place, which is when a plaintiff can drive a company to distraction by forcing it to produce thousands of pages of documents and produce members of management for time-consuming depositions. Once discovery starts, the chances of the plaintiff wringing a settlement out of the company go way up, as it is often cheaper to settle than to pay hefty lawyers fees for several years running while lawyers pore over boxcar loads of documents in the hope of turning up a smoking gun, with the Russian roulette of a jury trial lurking in the background.

In the Coinstar case, one of the allegations made in the complaint was that forward- looking statements made by company management at an investor conference were false or misleading. In making the allegation, the plaintiffs relied upon a transcript of the presentation, and because the transcript contained no reference to the cautionary language on the company’s presentation slides, the court ruled that for purposes of a motion to dismiss, they could not take notice of something that wasn’t in the record and therefore the lawsuit could proceed on those allegations.

This does not mean that Coinstar lost the lawsuit, but it does mean that the lawsuit can continue and move into the pretrial discovery phase, which is almost as bad as losing. Coinstar did not accompany their safe harbor slide with a simple statement such as, “Statements made in the course of today’s presentation may contain forward-looking information and actual results may differ materially from what we are presenting today. The slide you now see gives you more information on the assumptions and factors we consider in making those forward looking statements and where to go to get more information on our risk factors.” As a result, they have subjected themselves to, at a minimum, additional and unnecessary legal bills, and at worst, the potential of a large settlement or jury award.

So today’s lesson is, just because the safe harbor slide is in every presentation, and everyone has heard it dozens of times before, doesn’t mean that a trial judge will assume investors have heard about it. Practice safe presentations - always refer to the safe harbor statement and slide.

Do You Think You Could Make That More Boring?

Who ever said that an investor presentation has to be boring? (I exclude from this question the lawyers, who as a default position, always feel that boring and incomprehensible is safer than exciting and interesting.)

I was at an investor conference last month and took the opportunity to sit in on several presentations. I think that most of the company presenters must have been listening to their lawyers. After about two presentations I began to tune out because most of what I heard was pretty bland and uninteresting. It was as if the presenters had all gone to the Sgt. Joe Friday school of public speaking. They were determined to give “just the facts” in the most humdrum fashion possible. (For those of you too young to remember, Sgt. Joe Friday was the principal character in the TV drama Dragnet who gave new meaning to the term poker-faced.)

Honestly, how can you expect an investor to get excited about a stock if the company CEO doesn’t show some enthusiasm when talking about the company? Yet that is exactly what I saw at the conference. This was especially true at the beginning of most presentations, when the speaker should be working the hardest to capture the interest of the audience, yet what I often heard was the recitation of bare bones facts about the company without a lot of context to help investors understand the company’s products and position within the industry.

The other major bone I have to pick about what I heard was that most companies thought their job was done when they had explained what their past activities had been. The implication of such a presentation is “Here’s what we’ve done in the past, now you can go ahead and make your own judgment about what we will do in the future without any help from us.” This is like saying that markets are static, conditions are not going to change and we are not working on any new products or markets. This, of course, is nonsense, as American companies and markets are predicated on growth and conditions change all the time. Further, financial theory 101 teaches that investors are buying your stock based upon the value of FUTURE cash flows, so why not give them some guidance about where you are going in the future? Hey, there’s a safe harbor statement about forward-looking statements in every presentation. Why not put it to good use?

All was not terrible, however. There were several successful and engaging speakers I saw at the conference. Generally, these successful speakers seemed to have two things in common. First, they got a little worked up about what their company was doing and what made their products and services unique. Secondly, they allowed some of their personality to come through. This is important because if you’ve ever read any of the surveys of investors and what they care about, quality of management is always high up the list. Yet if management is nothing more than a bland talking head, how can an investor be expected to make a qualitative judgment about them?

After all, who ever said, “I liked your presentation, but you could have been a bit more boring”?

Stand a Little Closer to the Podium… Coaching and Investor Relations

A short while ago a friend sent me a copy of an article in the New Yorker about coaching. We’re not talking here about improving your golf swing. Rather, the author of the article suggests that people in business could stand to benefit from having someone who is an expert observe and offer constructive criticism on how they perform routine tasks. The article can be found here: http://www.newyorker.com/reporting/2011/10/03/111003fa_fact_gawande

I was intrigued by the article, not only because I spend considerable time coaching first year MBA students on how to give business presentations, but also on the concept’s potential for improving investor relations activities. By its nature, investor relations involves repetitious activities that revolve around everything from how you talk on the phone, to investor presentations and quarterly earnings reporting. These are the exact type of activities that can benefit from coaching. And yet, in all my years of business, I have rarely seen anything that approaches coaching done outside of a seminar environment.

Take for example, your typical investor relations presentation given by a CEO. I’ve sat through literally hundreds of these throughout my career and most were less than memorable. Just a few things that we talk about with our students touching upon delivery, content and visuals could be pointed out to many CEOs:

Delivery – was the speaker enthusiastic when speaking to the investors? After all, if the CEO isn’t enthusiastic about the company, how can you expect investors to get excited?

Content – is the speaker able to place the company into an understandable framework that helps investors understand the value his company brings to the marketplace? I have seen any number of presentations where software and tech companies get so wrapped up in the technological aspects of their products that they fail to bring it down to the level where an investor can see how they can make money on the technology.

Visuals – how many times have you seen a screen full of bullet points that the speaker feels compelled to read? Worse yet, how about a balance sheet in 8 point type?

Business leaders of today have to be communicators, yet many of them could stand some improvement in their delivery. This is where coaching should come in, but rarely does. My guess is that most investor relations officers are loath to criticize their superiors. Which is too bad, because we can all stand some improvement. I know I’ve been practicing public speaking for over thirty years and there are still things I need to improve.

So here’s today’s practical tip: if IROs don’t want to tread on thin ice by critiquing executives, videotape them and let them review themselves. It helps if you give them a list of common errors to watch and listen for, such as vocal fillers, repetitive phrases, body language and eye contact. Then tell them to watch/ listen to the presentation four times:

First, listen and don’t watch. This lets the speaker focus on vocal qualities such as pitch, tone, speed, ums and ahhs, and if he was using his voice to tell listeners what was important.

Second, watch with no sound. This will draw attention to body language, eye contact and the annoying things the speaker may be doing with their hands.

Third, listen and watch the presentation to see if it all comes together in a coherent whole.

Fourth (for the brave), watch the presentation at double speed. This will really bring to the fore any annoying or quirky things the speaker tends to do, such as looking up at the ceiling, or performing a little dance step as he speaks.

Who knows, after watching themselves a few times, CEOs might get a little bit humbler.

Can’t This Gang Shoot Straight?

The Securities and Exchange Commission used to be one of the most respected federal agencies in Washington. Some would argue that this is a low barrier to overcome, but nevertheless, the SEC was for many years considered a well run agency that, by and large, did what it was supposed to, and helped to give the United States the best and most transparent capital markets in the world. Alas, things have changed and now it seems that the SEC is the agency that can’t seem to get it right.

The most recent stumbles have come over the fact that the SEC Chairwoman, Mary Shapiro, who was given a mandate by President Obama to strengthen enforcement, failed to disclose to her fellow commissioners a conflict of interest involving the agency’s former top lawyer, David Becker. According to the SEC Inspector General’s report, it seems that Mr. Becker stood to have a financial interest in the settlement of the Bernie Madoff fraud case, and although he disclosed the potential conflict, Ms. Shapiro stayed silent on it, even allowing her fellow commissioners to vote on how to divide up the Madoff assets without telling them how their top lawyer might potentially benefit from the decision.

Not only that, but the Inspector General’s report also brings to light the fact that the SEC decided not to have Mr. Becker testify before Congress for fear that his conflict of interest would come to light. And this is from the agency that is charged with “full and fair disclosure” for investors.

This is bad enough, but it come after a series of other blunders over recent years that make you wonder if the agency has lost its way. Most notably, this is the agency, charged with protecting investors, that actively ignored the pleas of Harry Markopolos to investigate the returns being generated by Bernie Madoff, which turned out to be the biggest ponzi scheme in history.

More recently, and somewhat more mundanely, proxy access, a pet SEC project that would allow shareholders the ability to nominate directors using a company’s own proxy materials, was struck down by the Federal Appeals Court for the District of Columbia. According to the appeals court, the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.” Further, the court said there is “good reason to believe that institutional investors with special interests” – such as unions and pension funds -- would use the proxy access rules to advance their own issues and chided the SEC for “ducking serious evaluation of the costs that could be imposed” by shareholders representing special interests. It certainly doesn’t sound as if the Court of Appeals thought the SEC was taking a fair and balanced approach towards rule making in this instance.

And finally, how about the $557 million lease the SEC entered into without competitive bidding, which the agency can’t afford and doesn’t need because the underlying assumptions for the space were incorrect. Never mind that Commissioner Shapiro approved the lease in a 10 minute unscheduled meeting and later said that “The agency made a terrible mistake here,” and “I view myself as being ultimately responsible.” In most corporations if you were responsible for a $557 million mistake, you’d be fired, or maybe the SEC would investigate you…

Crisis Communication

Last week I had the pleasure of attending the National Investor Relations Institute (NIRI) Southwest Regional Conference in San Antonio. I’m on record as having said this before, but I like to repeat it: I believe that the Southwest Regional Conference is a better learning experience for investor relations professionals than the National Conference. I say this because the Southwest Regional Conference is shorter – a day and one-half as opposed to two and one-half days and thus more focused and, with a smaller number of people in attendance, you actually feel as if you have a chance to get around and talk to everybody.

This year, under the leadership of Lee Ahlstrom and Scott Winters of the Houston NIRI chapter, the Conference once again took an interesting departure from the usual lineup of talking heads you normally get at these conferences. The first morning saw everyone engaged in a case study examining a crisis communication situation. The case required everyone to participate, as each table of eight assumed the role of the investor relations/corporate communications professional. They soon found themselves barraged with information in the form of management meetings, memorandums, twitter feeds, media inquiries and videos of the plant explosion in question. In the middle of trying to parse through the data, they found themselves being interviewed by a reporter and asked questions by a sell side analyst. While all of this was going on they found themselves having to recommend media and disclosure strategies to management.

Everyone I talked to said that the exercise was one of the best simulations they had seen on crisis communications. While that’s nice to hear, when I do case studies in my class, I always like to wind up with some key takeaways from the experience, so for the benefit of both the people who were at the conference and those that may wish to learn a little something about crisis communications, so here are the points to remember from the exercise:

1. 1. To quote Dwight Eisenhower, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” In other words, the crisis you wind up with rarely looks like the one you planned for, but the exercise of planning for a crisis causes you to think through the process. This planning process is what helps you to deal with the crisis you do get.

2. 2. There is always somebody important you can’t reach when the crisis breaks. This may seem surprising in this age of interconnectedness, but people go on vacation to remote areas, cell phone coverage tends to break down under the stress of a crisis and there is always someone who is just out of pocket for some random reason or another. Having a clear chain of command as to who acts in the absence of others is important.

3. 3. The need for speed. People have to meet on short notice. Large amounts of data have to be absorbed quickly. Investors want answers right away and if you don’t respond to the press they will come up with their own version of events. There is no time for multiple editing rounds of your press release.

4. 4. You almost never have all the facts you need when you need them. In a crisis information is often garbled, late and sometimes just wrong. This means that the best messages you can send to your audiences are based on simple factual statements.

5. 5. Differing people have different agendas. The corporate counsel may not want to disclose anything at all. Business managers may not want certain facts to come out so that customers, suppliers and creditors don’t get upset. The reporters want to sell newspapers and get good video footage. Analysts care about how the event will affect the company’s stock and what collateral damage there may be to other companies. Good crisis communications has to deal with all of this.

In the end, there is no set formula for how to deal with a crisis, as each situation brings its own unique set of facts. Practice and planning can help however, which is why this year’s NIRI Southwest Conference was so well received.

Before I finish, I have to relate an interesting story from the conference. This year I decided to participate in the golf outing at the conference. I was out on the golf range practicing before the event (I need a lot of practice) when the person on the next practice tee looked at me and asked, “Are you the blogging professor?” I guess there are worse things you can be known as – it even has a sort of ring to it –“The blogging professor.” Maybe I’ll have it put on my business cards.