How Not to Run a Conference Call

Yesterday Al Lord, the CEO of SLM Corporation (Sallie Mae) held a conference call to reintroduce himself to the analyst community (He had previously served as SLM’s CEO and CFO). The purported purpose of the call was to bring some transparency to his role as CEO and to talk about some broad issues and goals for SLM. He certainly brought transparency to his role as CEO. What the Street saw was an executive who was by turns vague, defensive, arrogant and profane. Investors’ reactions were what you might expect – the stock traded down 20%, the worst one-day drop in the company’s history. As this is an example that we can all learn from, I thought I would dissect the call in more detail for our edification.

There were many issues that needed to be addressed on the call – a failed buyout bid and ensuing litigation, lowered credit ratings and the need to shore up capital at the company, the CEO’s recent sale of 1.2 million shares and steps needed to return the company to a growth mode following the nine months the failed buyout bid was pending. To the CEO’s credit, he raised all the issues in his prepared remarks. Unfortunately, he didn’t clearly explain any of the issues or set out concrete steps to achieve his goals. Then he acted surprised and defensive when during the Q & A session analysts tried to get a bit more specificity out of him.

Take for example, the issue of shoring up capital. According to the transcript, Al Lord said: “My goal, first goal, probably my first goal and second goal, is to strengthen our balance sheet. The deal, the unfinished deal, cost us a single-A rating. We're now BBB. First objective is to solidify that BBB, next goal is to improve it from BBB to single-A. It is very much my first priority. In order to do that, obviously, we're going to add capital …” There was nothing said about how capital was going to be added. Predictably, the first question during the Q & A session was about how the capital was going to be raised. Here’s a portion of the exchange:

Analyst: “I wanted to ask -- you're going to shore up the balance sheet. Does that mean you're going to be selling equity?”
Al Lord: “The most preferred type of equity is common equity. At this point, I'm not going to get very precise with you. The idea is to strengthen the equity, the capital count with financing somewhere beneath the long-term credit line.”
Analyst: “Do you think you would need to raise to get back to the credit rating you would like? And what are your thoughts about the dividend?”
Al Lord: “This is the last question I answer that's more than one part. We will look at the dividend in the second half of the year.”
Analyst: “Okay. And you didn't mention how much equity you were going to need to get back up to the single-A rating.”
Al Lord: “You're talking to the wrong guy. I don't know that answer.”

This exchange is a microcosm of what went wrong with the call. The first answer is vague and indirect. A simple yes would have sufficed, as the answer seems to imply that SLM will be selling equity and would prefer to sell common equity. The answer to the last question is simply a stunner in its arrogance. Here the CEO has stated that his first (and second) priority is to add capital, yet he can’t be bothered with the details. This guy used to be the CFO, so it’s not as if he came out of sales and marketing and doesn’t know his way around a balance sheet. This is not the way to inspire confidence in the market place. There are lots of ways to answer that question without giving specifics, such as “We’ve just started studying the issue, so we’re not prepared to comment on exact amounts yet”, or “There as so many variables that can come into play as we work to improve our capital structure that it would be premature to comment on amounts of equity required just yet.”

I could go on, as there are plenty of other examples of what not to do in a conference call, from failed humor to profanity, but it’s a bit like shooting ducks in a barrel – it’s way too easy, and besides, this post would be too long. The fact that the market removed $3 billion from SLM’s market cap probably says more than I can.

So, it makes for great theater, but what can we learn from the call? Here are a few thoughts:
1. Broad, rambling statements of goals don’t cut it with an audience of equity analysts. These are people whose job is to parse the details to construct models of future earnings. General statements coupled with a refusal to go into specifics will drive them nuts. If you can’t be clear and concise, it’s better not to say anything at all.

2. Tone, attitude and preparation matter. Al Lord clearly did not want to answer questions from pesky analysts and wasn’t prepared. This sends a message that he doesn’t care about his investors and is a shoot from the hip sort of executive.

3. Never, ever, use an expletive on a conference call. Before this, Jeff Skilling of Enron fame held the award for dumbest thing ever said on a conference call when he called an analyst a particular body part. Al Lord has clearly taken the award from Skilling, by ending his conference call with “let’s get the [expletive] out of here.”

On that note, I will get the heck out of here.

Investor Relations Year in Review

Like Jimmy Buffet, I sat down last weekend just to try and recall the whole year; all of the faces and all of the places, wondering where they all disappeared. Unfortunately, unlike Jimmy, I didn’t run into a chum with a bottle of rum, so I wound up sitting right here. Writing this post, I may add. Herewith a quick review of some of the more notable things I noticed in the world of investor relations this year coupled with Palizza’s Predictions for 2008:

The World is Going Electronic: The SEC ushered in the era of more aggressive electronic delivery of proxy materials in 2007. Previously, shareholders could opt-in for electronic delivery of the proxy statement and annual report. Relatively few did. Now, companies can force them to opt out of electronic delivery. The first big annual report season for this new delivery method will occur in the Spring of 2008, and given the cost savings in printing and postage involved, most companies will make economically rational decisions and force shareholders to take action if they want to receive a paper copy of the annual report. After all, investor relations reports to the CFO, not marketing. Annual report printers everywhere have to be very concerned about the disappearance of the traditional printed annual report. Companies will like the cost savings and designers of annual reports should be neutral on the subject.

Hedge Funds and Activist Investors have a Bifurcated Year. The first half of the year saw lots of activity by hedge funds and activist investors. Deals were easy to come by and the credit markets were loose. Company managements were always looking over their shoulders to see who was sniffing around. All of this came to a screeching halt in the second half of the year as the sub-prime mortgage crisis caused the credit markets to lock up. Companies that have been underperforming or that are particularly subject to financial engineering because they have underleveraged balance sheets have gained a bit of breathing room. If they’re lucky, investor relations officers will be able to focus more on the longer term fundamentals and less on the short term trading trends in 2008.

A Corollary to the Credit Crunch: Look for the M & A pendulum to swing back in favor of strategic corporate purchasers over the next year or two, until the credit hangover eases. Of course, corporate purchasers will have to try and overcome the heightened price expectation of sellers who have seen the multiples financial buyers paid over the past few years. That should make for some interesting investor relations spiels from IROs as they attempt to justify the price being paid.

The U.S. Dollar weakened throughout the year against the British Pound and the Euro. U.S. equities must look like relative bargains to investors in Europe. On the other hand, whatever gains European investors had in U.S. equities this year were probably wiped out by currency conversions back into the Pound or the Euro. (The market giveth, and the market taketh away.) Look for more interest in U.S. equities from European investors in 2008 provided they start to think the U.S. dollar is at or near the end of its slide.

Four predictions is about all I can handle, so I will close out with best wishes for a happy holiday season for all and a prosperous new year. May the markets be kind to you in 2008!

What the World Equity Markets are Telling the U. S.

Last week I conducted a workshop on investor relations in Singapore for Asian companies. It has underscored for me the fact that we live in an increasingly global village. Yes, there are cultural differences. There are also time and distance differences that sometimes make communication difficult, but the process of transferring information from companies to investors seems to be remarkably similar worldwide.

We now have publicly listed companies in spots such as China and Vietnam. These are economies that did not even acknowledge the benefits of capitalism just a short time ago. I don’t know why, but it came as a revelation to me that companies in these countries worry about much the same things that investor relations officers do here in the U. S. – being undervalued relative to their peers and the index, managements that expect everyone to love their stock, how to measure the effectiveness of IR, and hedge funds, to name a few topics. There are differences – some of the companies I spoke with had relatively low levels of public float and a number of markets were heavily influenced by speculative individual investors, leading to volatile stock price movements. My impression, however, was that many of the differences related to the equity markets being younger, and that as the markets mature and deepen, with greater levels of liquidity and professional investors, most of the differences will work themselves out of the market.

One fact came through loud and clear however – none of the companies I spoke with were listed on a U. S. exchange, and further, none of them had any remote desire to list in the U. S. The reason universally cited was Sarbanes – Oxley. None of the companies wanted to voluntarily undertake the regulatory burden imposed by the legislation. Not so long ago, it used to be that listing in the U. S. was a sign that a company had truly arrived. Today, there are growing alternatives to the U. S. markets, including Hong Kong and London, which have more attractive regulatory environments. According to the Wall Street Journal last week, more IPOs have been filed this year in London than in the U.S. (although the U.S. is slightly ahead in dollar volume of deals).

I’m not in favor of a regulatory race to the bottom, but if seems to me that the U. S. has priced itself out of the equity listings market through the increased cost of compliance with our regulations. Clearly, the rest of the world is telling us that the increased security achieved through the oversight and controls required by Sarbanes – Oxley does not justify the increased cost. To put it another way, there would have to be a tangible benefit, shown by a premium to stock valuations for companies subject to Sarbanes - Oxley in order to justify the increased cost of complying with the regulations. Companies are not seeing it, and are taking their listings elsewhere. If the U.S. intends to remain a leader in the world equity markets, it needs to take a hard look at Sarbanes – Oxley.

Road Shows and Hedge Funds

I had the pleasure last week of attending a meeting of The Conference Board’s Global Council of Investor Relations Executives. It is an organization I used to belong to when I was on the corporate side of the equation and I think they do a good job of focusing on areas of concern for large cap corporations. The meetings are a great opportunity to hear what your peers are working on, network and listen to some interesting presentations. It is in this latter role that I was attending, having arranged to have Christopher Middleton, CEO of Atlantic Equities, discuss the merits of European roadshows for U.S. companies. Atlantic Equities is the only European based sell side shop covering U.S. equities exclusively and as a result each year they also wind up arranging a fair number of European roadshows for U.S. companies. Chris did a great job laying out the rationale for going to Europe, and every large and mid cap U. S. company should give thought to visiting with European investors as a way of broadening their shareholder base and getting away from the hedge fund merry go round that so many U.S. roadshows have turned into. (Disclosure note: the author has a relationship with Atlantic Equities and therefore is not an entirely disinterested observer.)

All of this prompted me to start thinking about why it has become such a fight to see long only investors on U. S. roadshows lately. After a moderate amount of thought (you don’t want to overdo these things), my thesis is as follows: 1. The funding for sell side research has changed, 2. You (the company) are not the client of the sell side, and 3. Follow the money.

1. The funding for sell side research has changed. It used to be that investment banking paid for much of the budget of sell side research departments. When that was happening, there was every incentive for the research analyst to maintain a good relationship with the potential investment banking client and to help facilitate meetings with the type of investors the company wants to see – long only, low turnover investors. If it didn’t result in many shares being bought or sold, well, investment banking was picking up the tab, and commission structures were higher then. Of course, Elliot Spitzer has changed all that and eliminated the inherent conflicts of interest. He’s also eliminated a strong incentive for sell side analysts to help you see the kind of investors you want to see.

2. The Company is not the client of the sell side. I think corporate IR officers often lose sight of this one. The sell side has placed more emphasis than ever before on getting management access for the buy side. The major sell side shops have entire departments that can set up road shows for you, soup to nuts, on very short notice, with only a phone call from you. As a result it feels as if you are their client. After all, they’re doing all this nice stuff for you and eliminating a major administrative headache. But you, the company, are not the client, but merely a means to an end. That end is commission flow, coming from the true client, the buy side.

3. Follow the money. Today, sell side research budgets are heavily dependant upon commission flow. And because commission rates keep falling, the most important clients of the sell side are the ones that trade the most – the hedge funds. Think about it this way – if you are visiting a city for one day, you have at most, 6 one hour time slots to see investors. When the analyst and the sales desk start to talk about which investors to see, their interest is in making their 6 biggest commission generating clients happy. You might have a top 20 investor in the city that has held the stock forever, but if they don’t generate a lot of commissions they won’t be getting a call from the sell side unless you insist upon it.

So what’s a poor investor relations officer to do? There are some things that a company can do to that can make things work for both sides. First, know the investors you clearly want to see on any give roadshow, especially if they are existing shareholders, and make your desires known at the outset. Second, recognize that the sell side will have some clients they will want you to see, and reach a happy medium. Remember, the sell side is not going to the trouble to arrange the roadshow for you without the expectation of some form of compensation, which is coming from the buy side. Third, pray that the hedge funds you do agree to see do not include the obnoxious, 30 year old who thinks he can tell your CEO how run the company.

Or, alternatively, you can go to Europe, where there are far fewer hedge funds. (For more on this topic, see my article in the September, 2007 National Investor Relations Institute Update magazine entitled “Things to Consider When Contemplating a European Investor Relations Roadshow”.)

The Academic Side (or Lack Thereof) of Investor Relations

I’m happy to report that I have recently been appointed a lecturer in management to teach a class on investor relations at the Jones Graduate School of Management at Rice University. Teaching is something I’ve wanted to do since leaving the corporate world about eight months ago, so I’m delighted to have this opportunity, especially at an institution of the caliber of Rice.

Once the first blush of enthusiasm wore off, I started thinking about how to teach the class. Naturally, I immediately decided to do what all investor relations people do, which is to engage in peer comparisons. (Gale Wiley, the teacher of this class at Rice in previous years, has been generous in his advice, but I also wanted to try to get a larger picture.) I freely admit that if I could find good classroom materials and case studies, I would use them, as I had no desire to recreate the wheel. (I prefer to think of this as good research, not copying or plagiarism.) It turns out that the course on investor relations taught at Rice is the only class taught to MBA students that I could find. Northwestern, where I went to business school, chooses to teach investor relations out of the Medill School of Journalism, but beyond that I have found no other graduate school programs. There are certificate programs at several universities and a number of stand alone seminars in the subject, but no other graduate school programs that I could find.

Naturally, this started me thinking, why does this subject sit in academic limbo? Every publicly traded company has to deal with investors and is intimately concerned with its stock price, yet most business schools assume that if you just sort of throw the accounting numbers out there, the market will price the stock efficiently. What this ignores is that the stock price is a discount of future cash flows, and much of the future depends on management and their plans for the future. It is very difficult to figure much of that out without seeing management, hearing what they have to say and placing it in context. To put it another way, past performance coupled with the perception of future performance translates into stock price. The role of investor relations is to provide information both about why past performance was the way it was and what the expectations are for the future. Any finance professor will tell you that lack of information or asymmetric information leads to inefficient markets, so to put an academic spin on it, the role of investor relations is to make the market operate more efficiently by providing more information.

So perhaps this is the start of a campaign to bring more academic respectability to investor relations. When you think about the total value of stocks traded every day, it might make sense to pay a bit more attention to how information gets from companies to investors and the effect that has on investor behavior. On the other hand, it just might be the start for me of a long slide into academically obscure topics. Perhaps “Multidimensional Aspects of Asymmetric Information Flows Between Companies and Investors in the Equity Markets” would be a starting point.

WAG the Investor

A few years back there was a film called “Wag the Dog” starring Robert De Niro and Dustin Hoffman that was all about using misinformation to distract people from the real issues. I was reminded of it last week when Walgreen Co. (WAG) announced that it was reporting a down quarter. (A note of disclosure here – by virtue of having worked at Walgreens for 23 years, Walgreen stock forms a significant portion of my net worth. I am not a disinterested observer here; in fact, I am quite interested.) Walgreens reporting a down quarter is big news. You have to go back to the November, 1997 quarter to find a down quarter, and that was for a change in accounting. My data base only goes back to 1994, so I have to rely upon memory and some old notes, but in 1993, there was a down quarter caused by a charge for early prepayment of debt. It is possible that the last down quarter Walgreens reported for operating reasons was in fiscal 1987, the year the company acquired 88 Medimart drugstores in New England, and I only say that because EPS was only up $.01 for the year and it stands to reason that one or more of the quarters reported was down. You would think I would remember, as I was the investor relations officer back then, but it’s been twenty years. The point here is not my memory, however, but that it has been a very long time since Walgreens reported a down quarter for operating reasons – at least twenty years.

To further compound the bad news, it wasn’t a small miss; the Street was expecting EPS of $.47 and Walgreens reported EPS of $.40 (actually $39.65, but it rounds up to $.40). At $9.125 million per penny of EPS, that means that Walgreens missed the Street’s profit expectation by $69.39 million. Wall Street reacted in a predictable manner by trashing the stock, sending it down 15% over 3 days. So I thought that I would use this as a case study from an investor relations viewpoint: what did Walgreens publicly say, was it intelligible and could it have been done better.

Investor relations is like exercise or writing – the more you do of it, the better you get at it. Walgreens has had lots of practice talking about good news, but sad to say, they are sorely out of practice when it comes to handling bad quarterly results. Uniformly, the analysts and investors of Walgreens that I have spoken to express puzzlement and frustration with the information provided about the quarter. I also had trouble trying to understand what they were trying to say and I used to work there.

The lead statement by the Chairman concerning the problems in the quarter was: “This quarter was negatively impacted by lower generic reimbursements, combined with higher salary and store expenses, and higher advertising costs.” The release then discusses lower generic reimbursements in five of the first six paragraphs of the release, specifically using simvastatin (generic Zocor) as an example. A quick read seems to suggest that simvastatin was the chief culprit for the down quarter. After I’d spent some time working my way through the numbers, I think the generics discussion obscures the real issue.

Interestingly, when you look at the press release for the third quarter, Walgreens cites generics as having a negative 3.4% effect on total sales, more than the 3.1% they call out in the fourth quarter. So the overall impact on sales is not new. If you assume that reimbursement rates are what is being recorded as the sales price of the drug, this is an issue that existed in the third quarter, but does not appear to have affected profits. Additionally, my estimates, based upon publicly available information, of percentage of total prescription sales dollars at Walgreens represented by simvastatin is that they are less than 1.5%. So my conclusion is that this is the lesser issue, although it gets much more ink in the press release.

The second part of the statement seems to imply that higher salary, store expense and advertising were confined to the fourth quarter, but if you look at Walgreens fiscal year, growth in expense dollars has outpaced growth in sales dollars in 3 of the last 4 quarters. Clearly, that’s something they don’t want to direct you attention to in the release, but it would go a long way to explain what happened if they did. In essence, what has been happening is that over the course of the past year, Walgreen has been benefiting from a surge in prescriptions due to Medicare and a surge in gross profits per prescription as some “blockbuster” drugs have come off patent. They have been using that surge to mask the fact that they have gotten away from their traditional expense controls. Now the tide has gone out and they find themselves somewhat exposed.

Many analysts have chosen to characterize this as an expense issue and on the surface it is. But further down, this is also a management issue. Let’s consider the following: 1.) This was not the first generic drug to come off patent and become available to multiple manufacturers. Walgreens is the nation’s largest pharmacy chain and has been dealing with this issue for decades. They should have seen this coming, and been ready for it. 2.) Salary schedules are approved at the very top in this organization. If salaries have risen, it’s because that directive came from the top. 3.) Store expense is something that is reviewed at least weekly at the district level and monthly at the corporate level. If store expense was going up, people knew about it well in advance of the end of the quarter, yet it looks like nothing was done about it. 4.) Advertising dollars are not spent in a vacuum at Walgreens. The overall spend is approved right at the top by senior management.

So overall my conclusion is that full and accurate disclosure was not achieved in the Fourth Quarter earnings release. I’m not saying that Walgreens is intentionally attempting to mislead investors; it’s just that it is always easier to focus the blame on external issues than to point the finger at yourself.

The Road Show Blues

Last week’s post about the essential life skills of the investor relations professional put me in mind of roadshows, another of the great travails of anyone who has to speak with investors on a regular basis, be it sell side analysts or investor relations officers. (Believe it or not, the sell side is actually going to get some sympathy here, so read on.) The public in general, and my children in particular, tend to think of a career on Wall Street as being glamorous and exciting, but when it comes to the process of transferring information to investors, the reality is far grittier. To paraphrase Bob Dylan, I’ve often felt as if “I’m stuck in New York with the road show blues again”.

Consider the following as it relates to investor roadshows:

1. A schedule only a marathon runner could love. Your typical roadshow day may involve a breakfast meeting, 3 – 4 morning meetings, a luncheon meeting and 3 meetings in the afternoon. This is followed either by dinner (possibly a meeting) or a sprint for the airport to get to the next city. Drag yourself into your hotel room by 10:00PM. Get up the next morning and do it again. Repeat as necessary.

2. Mind numbing repetition. All road shows revolve around either a powerpoint presentation, a pitch book or a set of talking points. This means that after the first two, or at most, three meetings you’ve got your routine down and there’s not a lot going on to hold your interest as you speak. Presentations go into autopilot mode after that. I’ve done presentations where I get to the end and I honestly don’t remember much about the middle part of the presentation. Fortunately, no one was giving me a funny look at the end, so I must have stuck to the prepared remarks.

3. Answering the same questions multiple times. I talked about this in the last post, but it bears repeating: 95% – 98% of all questions asked by investors are the same, whether you are at Fidelity or a small specialty research shop. During road shows, I have, on more than one occasion, found myself beginning to answer a question only to stop and ask the investor, “Have I said this before?” That’s because, less than an hour earlier, I actually was giving exactly the same answer, only to a different investor.

4. Incredible boredom. Take all of the above and add to it the fact that you’re escorting senior management around to visit investors. That means that you don’t get to talk, because investors are there to hear the big kahuna, not some investor relations officer. So you sit there and you listen to the same presentation and the same questions over and over. If you’re lucky, you might get to answer one or two questions on topics that senior management doesn’t like to handle, such as pension accounting. They don’t make coffee strong enough for this process.

So, is there a better way? Unfortunately, probably not. In spite of the advances of technology, investors still want to have the personal touch; they want to look you in the eye and judge the integrity and veracity of what you are saying. Teleconferencing and conference calls just don’t accomplish the same thing. Institutional investors are committing millions of dollars with each investment decision and their duty to their clients demands that they meet personally with management. They just shouldn’t expect the meeting to be particularly original.

Essential Life Skills for the Investor Relations Professional

My last blog post on principle based disclosure for investors was somewhat on the serious side, so in the interest of balance, I’ve decided to write a lighter piece this time about the things an investor relations professional needs to master to be successful. Forget knowledge of securities laws or finance or marketing, these are the essential skills that will set you apart as a true professional.

1. The ability to talk with your mouth full without embarrassing yourself. Many investor relations meetings take place during meals and investors will pepper you with questions throughout the meal. If you can’t answer questions with your mouth full, you will either never get to eat or your investors won’t get their questions answered. Neither is a happy prospect, so you need to learn how to talk with your mouth full. As I say to my children, “This should only be done by trained professionals”. I’m told that the proper training for this is to fill up your mouth with marbles and practice talking. Then you start removing the marbles as you learn to speak clearly with them in your mouth. Finally, when you’ve lost all your marbles, you are ready to become an investor relations officer.

2. You must have a high capacity for repetition. Every securities analyst prides themselves on their analytic work and their unique approach to figuring out your company. Many won’t attend meetings with other analysts because they don’t want to reveal the questions they ask management. The dirty little secret to all of this is that between 95% - 98% of all the questions asked are exactly the same, no matter who’s asking the question. This means that investor relations professionals hear the same questions over and over and over. There have been times in my career when I’ve said to myself, “If I have to explain that project one more time, I’m going to throw up”. (Fortunately, I’ve never followed through on the threat.) A true professional needs to answer the questions with the same enthusiasm on the twentieth time as the first time. This is where your carefully cultivated veneer of being really, really interested in the meeting will carry you through, even though you’re bored out of your skull.

3. You must be able to sit placidly by while others take credit for your work. Let’s face it, senior management doesn’t have time to coin catchy phrases or do interesting analysis. That’s your job - they’re too busy going to meetings. But when it comes time to look good in front of investors, all those careful, clever talking points prepared by you will be used by management and you have to sit there and let them take the credit. The first dozen or so times this happens it’s no big deal, but after that it starts to feel like a stone in your shoe. Get used to it.

4. You must be willing to let others make multiple edits to your deathless prose. When you write something, everyone will want to make sure you conform to their agendas. Accountants are fussy about certain phrases, lawyers want you to stay within the strict confines of the regulatory requirements, the business divisions want to make sure they get equal billing and there are always hidden agendas to deal with. It’s a wonder that a simple declaratory sentence ever gets written, much less an entire page of intelligent prose. One of the skills you need to mastered is learning to watch without flinching as your well written press releases get disassembled for reasons that are not entirely clear to you. The professional must then pick up the pieces and reassemble them into a reasonably coherent whole. The polite phrase for this is “when someone hands you lemons, make lemonade.”

That’s enough for today. I’d love to hear from others as to their views on essential life skills for investor relations officers. Alternatively, I could write about essential life skills for investment analysts, but that would assume they had a life.

Principle Based Disclosure for Investors

I’ve been thinking lately about the relationship between shareholders and company managements. The owners of a company are the shareholders. In a large publicly held company these shareholders are widely disbursed and do not have the capacity to manage the business. Company managers, on the other hand, are on the spot, relatively few in number and charged with running the company for the benefit of shareholders, although they own only a very small fraction of the company. In business school they refer to this as agency theory – management will act as agents for the benefit of the shareholders by running the company for them.

All of this is fine in theory, but unfortunately things seem to get muddled in practice. In reality, management tends to think of the corporation as “Mine” and shareholders who don’t like it can sell their shares and look for investments elsewhere. How else can you explain the outsized pay packages you see among America’s corporations today? Do you really think that multimillion-dollar compensation schemes unrelated to corporate performance are in the best interest of the owners? Or would it be more realistic to say that such pay packages are for the benefit of management?

Now, at about this point you may be asking, “What has this got to do with investor relations?” Well, I think there is a connection between the way management thinks and acts towards its owners and how they disclose information to their investors. If company managements think of the company as their own, they tend to view disclosure as simply a bothersome regulatory requirement. Management divulges exactly what the laws and regulations require, and not a single iota more. Given the standards of materiality outlined in current case law, this can leave an awful lot to the imagination.

On the other hand, what would be the outcome if management were to think of those pesky shareholders as owners? Perhaps they would be more forthcoming with information above and beyond the requirements of the regulations. A willingness to report on and continuously disclose information (either good or bad) about operations and initiatives would help the owners understand their investment with more clarity.

Here’s a quick example: Companies track their sales in a variety of ways, by customer type, geographically and by product type to name a few. Yet there is often a strong reluctance to share any of that information with shareholders. You hear a variety of excuses – proprietary information, don’t want competitors to know, if we discuss it the SEC will make us always disclose it, etc., but the fact of the matter is that companies don’t disclose such information because they’re not required to by regulation. Yet the managers sure want to know, so why wouldn’t the owners also want to know? You can bet that if the company were owned by private equity, the information would be available to the owners.

The point here is that disclosure of information should be principle based, not simply governed by regulation. The principle should be “The company will endeavor to continuously present all significant information to shareholders to enable them to make informed decisions regarding ownership of the securities of the company.” There are two concepts of note embedded in the principle: continuous and significant. Continuous should mean something more timely than quarterly, perhaps monthly. Every company I have known has a series of key metrics they track frequently, if not daily. Frequent updates of such information would be of great value to shareholders. Secondly. I would make the definition of “significant” considerably lower than materiality is today. There are many things going on at companies today which don’t by themselves rise to the level of materiality, but which have the potential to greatly affect the future profitability of the company. Shareholders should know about both the successes and the failures so they can make informed decisions.

The accounting rules and the regulatory scheme in place today are too complex and allow companies to hide behind the complexity. We need the emergence of some very simple principles to guide the disclosure of information. Just as in the old Federal Express commercials, those principles need to be simple enough so that even the CEO can understand them.

What is Investor Relations Worth?

Last week I attended and was privileged to speak at the National Investor Relations Institute Southwest Regional Conference in Austin, Texas. This was the second time I have attended the Southwest regional conference and I like it a whole lot better than the National conference. The scale of the conference - 150 attendees versus 1,400 at the National conference – is much more manageable. You can get around and talk to most people. In addition, the scope of the conference – 1½ versus 2 ½ days at the National conference – causes it to be much more focused. I found the subject matter and the quality of the speakers uniformly better at the Southwest regional than at the National conference.

It is about one of those speeches that I want to share an interesting statistic. Brian Rivel of Rivel Research Group gave a speech discussing a study his firm completed earlier in the year entitled “Perspectives From the Buy Side”. In the study members of the buy side were asked to give their opinion as to the impact good or bad investor relations has on the valuation of a company. As this is a subject that every investor relations officer struggles with (particularly around annual review time), I perked up when Brian trotted out this statistic.

It turns out that members of the buy side say that good investor relations can add 10% to a firm’s valuation, while bad investor relations can subtract as much as 15% from a firm’s valuation. These are startling numbers. If your firm has a $10 billion market capitalization, by doing investor relations right you can add $1 billion of shareholder value to the owners of the firm. On the other hand, if you consistently get your investor relations efforts wrong, you can destroy $1.5 billion of share value.

At first blush this seems to go against what I was taught in business school: that markets are efficient at valuing future cash streams. After all, the regulatory and disclosure requirements are the same for all firms, so the way that they speak to the markets shouldn’t result in a 25% difference between the best and the worst. Then I got to thinking about it and I think it makes perfect sense. My recollection of the efficient markets hypothesis is that the market rapidly incorporates all available information about a firm into the price of its stock. The key here is all available information. The best firms go beyond the requirements of the regulations to add context, clarity and confidence in management to the reported results. This additional information is then incorporated into the firm’s value. On the other hand, the worst firms in terms of investor relations view the disclosure regulations as the maximum amount of information they will disclose. By using the securities regulations as a shield rather than a guide, companies create uncertainties about future earnings causing investors to discount the value of the company.

What this suggests is that investor relations is an underutilized function. After all, how much more effort would be required to raise a firm’s valuation by 10% through additional sales and earnings compared to presenting the firm’s earnings and prospects with clarity, candor and consistency? Every investor relations officer should take this statistic and show it to their management. It may help you get more time, attention and resources devoted to the function. More importantly, it may help get managements thinking about dealing with their shareholders proactively rather than reactively.

Alternatively, investor relations officers could take a page from the hedge fund managers and ask for a percentage of the valuation increase caused by their management of the function over the average for their industry. That would get some attention.

What Was He Thinking? (Whole Foods Version)

It’s been several weeks now since the revelation that Whole Foods CEO John Mackey was anonymously posting comments about Whole Foods, Wild Oats and himself on an Internet message board. Long enough for things to have played out a bit and for me to avoid the charge of instant analysis. So I thought I would take a look at how all of this plays out in an investor relations setting.

First, lets start with a very basic premise: this never should have happened. Every public company should have a policy on internet message boards and that policy should be: “The company and its employees do not participate in or respond to internet message boards or chat rooms except under very limited circumstances and then only by authorized company personnel on a fully disclosed basis.”

Message boards are not new phenomena and people should have figured this out by now. The area of electronic comment and response will continue to evolve as blogs and electronic newsletters continue to proliferate, but message boards and chat rooms are not a good forum for companies. If you’ve ever read message boards, the level of discourse is similar to what you might hear in a sports bar. It’s not a platform where you can have a very intelligent exchange of views. Most of what I’ve read is about one step above Yo’ Mamma jokes. A company, and especially its CEO, is not going to look very dignified rolling around in that mud.

Secondly, if you just can’t help yourself and feel that it is important not to let those idiots get away with saying what they do, don’t do it anonymously. Hiding your identity makes it look as if you have something to conceal and just makes matters worse.

Third, as witnessed by the actions of the Federal Trade Commission in using Mackey’s comments about Wild Oats, everything you write can be used against you, so choose your words carefully.

I mean, “What was he thinking?” The risk/reward profile here is not very good, and that’s just from a public relations standpoint. From a securities law viewpoint, the picture is murkier, but the potential consequences more dire. Here we have the ultimate insider, the CEO, engaged in discussions about where he thinks the stock price is going. He’s also saying that Wild Oats is worth far less than the company winds up bidding to buy it for. It sure looks manipulative. It probably skirts on the edge of a technical violation of the securities laws, but is that the image you want to project? Especially if, as in the case of Whole Foods, part of your corporate persona is as a customer friendly good citizen, do you want people to think you are satisfied with mere technical compliance when it comes to your owners?

On the other hand, the market seems to have reacted with a collective yawn. The stock is trading today at about where it was when the news about the postings broke. Part of this may be Mackey’s profile with investors. By dint of having worked at a couple of growth companies in the same sector, I know a fair number of the investors in Whole Foods stock. When I talk to them about this incident, what I hear is “Oh, that’s just John Mackey” or “Well, he’s crazy anyway.” Part of it may also be that although Mackey’s comments may have made completing the merger with Wild Oats more difficult, investors are sort of indifferent to the merger, viewing it as a distraction at a time when same store sales seem to be slowing in the core Whole Foods Stores. And probably the biggest factor is that none of this affects basic store operations.

So what conclusions can we draw from all of this? I’ll offer up three:
1. Every company should think hard about its policy surrounding Internet communications. Certainly anonymous posting should be prohibited, and that means that electronic Internet communications are subject to all of the constraints of every other form of corporate communications. It’s not the Wild West out there and companies and their employees need to be circumspect about what they write on the Internet.
2. People who are in a position to represent the company should keep that in mind at all times and act accordingly. There is no separation between a CEO’s public life and their private life. You have to walk the talk at all times. John Mackey’s personal image is part of Whole Foods and vice versa. In any sort of a public forum, a CEO does not speak as an individual, even if hidden by the anonymity of the Internet.
3. CEOs get more slack than your average employee. If it had been any other employee making these posts to a message board, (say an investor relations officer) they would have been fired, disowned and their offices cleaned out weeks ago.

Such is life in corporate America…

The Da Vinci Code (Securities Analyst Version)

The job of a securities analyst has been likened to that of a person assembling a mosaic of information to come up with an investment thesis, or as I like to think of it, cracking a code. Indeed, the Securities and Exchange Commission, in their adoption of the final rules for Regulation Fair Disclosure stated:
“[A]n issuer is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a ‘mosaic’ of information that, taken together, is material. …Analysts can provide a valuable service in sifting through and extracting information that would not be significant to the ordinary investor to reach material conclusions.”

While it’s nice to know that the Securities and Exchange Commission thinks that analysts can provide a valuable service, the key point here is the recognition that information comes from multiple sources. When you are involved in the corporate side of investor relations, as I was for over twenty years, you sometimes lose sight of this fact because you are striving to be the sole source of information not only on your company, but also on the industry. My mental picture of what analysts do, built up over a number of years, is that they talk to the companies under their coverage and in their industries, work on their models and come to an investment decision based upon that work. There seems to be precious little time devoted to alternate sources of information.

But, in fact, alternate sources of information have become ever more important since the adoption of Reg. FD. The reason for this is that corporate disclosures have become increasingly bland since the regulations came into effect in October of 2000. I can’t cite any statistic on this other than the fact that ever more lawyers have become involved in corporate disclosure. This point was driven home when, in an enforcement action in 2003, the SEC noted that Schering-Plough violated Reg. FD "through a combination of spoken language, tone, emphasis, and demeanor. In other words, you can’t look or act depressed when talking to investors. What corporate lawyers will tell you now is that unless things are on an even keel, it is dangerous to engage in one on one meetings and discussions with analysts. Of course, when things are not on an even keel is exactly when analysts want increased information flow.

Capitalism being the wonderful thing that it is, (and what’s more capitalistic than Wall Street?) the market has reacted to provide alternate sources of information for investors. There is a whole new sub-industry, the so-called expert networks that can get information about any company, product or trend you are looking at. There has been an increase in research shops that concentrate almost solely on channel checking with suppliers, customers, franchisees and, if they can get them to talk, employees. Of course, corporate investor relations officers dislike most of the alternative information sources because they can’t control the message and they often don’t know the source.

So what’s the best way to crack the code? If you are an analyst the thing to keep in mind is that when you talk to the company you will be told that the Mona Lisa is in fact a picture of a very nice lady. Because they answer questions about the picture all the time, they will be very good at describing everything in the picture that favors the company. They certainly won’t tell you where the code is hidden in the picture. Just as in the book, if you find information in the picture that indicates there is something more there than meets the eye, it will require considerable effort and multiple sources to figure the darn thing out. Oh, and the keepers of the picture won’t be happy with you, although it’s highly unlikely anyone will shoot at you.

If you are a corporate investor relations officer, the thing to keep in mind is that the more you stick to “the message” the more likely you are to drive your audience to alternate sources of information. There is room for nuance and difference of opinion about corporate performance. But, you have to admit; it is a very nice picture of a lady…

What Was He Thinking?

Occasionally during my career in investor relations I have run across a situation that so surprised me my only reaction was amazement and the thought “What was he thinking?” I thought it might be instructive to share a few of these war stories in the hope that people will learn from what I saw.

In the late 1990s, I was working in New York for a money management firm when we hosted a on-on-one meeting for the CEO of a large grocery store chain. In the room were 5 - 6 portfolio managers, the analyst following the company, the CEO and one other company representative. During the course of the meeting the CEO went to great lengths to describe how he and his management team were constantly out looking at their stores and the competition. After a detailed description of what they went through during the course of visiting stores, the CEO casually said, “After a long day we all go to Hooters to sit down and compare notes.”

I remember looking across the table at the analyst who followed the company, who was a woman, and watching her face turn to stone. I mean, “What was this guy thinking?” Did he really think that a professional New York woman would think highly of him for going to a place like Hooters? It was a superfluous detail that completely sank this man’s credibility.

A second incident also occurred while I was working at the money management firm. In this case, the CEO of a major fast food chain was doing a one-on-one conference and was describing their new initiatives to better prepare meals that would be to fresher and more appealing. During the course of all of this he came out with the statement “You know, we were so involved with our promotions and product placements that we forgot we were a food company.”

Now this is a very honest and forthright thought and I’m sure the CEO was being sincere when he said it, but “What was this guy thinking?” In internal company meetings you might discuss having lost sight of your core competency, but not to a room full of portfolio managers who hold millions of shares of your stock. I remember thinking at the time, “Why do we own this stock?”

So what conclusions can you draw from these two examples, other than CEOs occasionally suffer from foot in mouth disease? Start with the premise that there are no throwaway lines. Virtually everything you say may be held against you. This is also true when an analyst is visiting you. From the time they start to make the appointment for the visit, to the appearance of your offices to what kind of cars are in the parking lot, it is all being assessed. So what you are saying had better match up to the reality the analyst is seeing. If you are preaching cost controls, you had better not have lavish artwork in your offices or lots of Mercedes and BMWs in the parking lot. If your company mantra is customer service, then the process of making an appointment should be handled with efficiency and courtesy and you darn well better return all phone calls promptly.

Secondly, you always need to be aware of your audience. Most New Yorkers wouldn’t bat an eye if it somehow came out that your sexual orientation was not completely hetero, but would be aghast at the thought that anyone would patronize a place like Hooters. Of course, the foregoing is not necessarily true in other parts of the country, so discretion is advised.

Finally, you can be too honest or candid. I know because I’ve found myself in this position from time to time. A person talking to investors needs to keep clear in their mind the difference between and inside audience and an outside audience. Sometimes this can be difficult if you have a long-standing relationship with an analyst and you want to explain something in the context of a company’s culture. It is compounded by the fact that an IRO’s job is to provide context and color to the financial results. In the end it requires good business judgment. And luck…

As always, your comments are welcome. Please let me know of other war stories where CEOs have shot themselves in the foot. We will keep everything anonymous to protect the guilty.

Fear And Loathing On The Conference Call (Part 1)

Perhaps those of you in the analyst community have wondered what really goes on leading up to and during quarterly conference calls. Well, I am here to fill you in.

Let’s start with a basic premise – nobody at the company likes doing the calls. It’s perhaps not as bad as having a root canal, but it’s close. Remember explaining your report card to your parents? Well, conference calls are much the same feeling, except there are over 100 parents on the telephone line. And they vote with their money. Further, everyone in the conference call room has a large financial interest, in the form of company stock, vested in the outcome of the call. Meanwhile, the upside is limited – you’ve already released the numbers and because of Reg FD, without a press release you can’t say anything material. On the other hand, the downside, caused by a misstep: a wrong answer, a hesitation before answering or just the wrong tone, can be quite damaging. Oh, and one more thing – I know this will come as a shock to many analysts, but management really doesn’t like dealing with Wall Street and all their pesky questions in the first place. So usually there is a fair amount of tension in the room.

So how do companies deal with this? Mostly by staying “on message” as much as possible. The prepared remarks section of any conference call has usually been edited by at least four areas of the company – the I R/ communications area, the CFO/Accounting area, the General Counsel/legal area and the CEO. By the time this camel is designed, any new News has been removed.

So the fun part is the Q and A, where potentially interesting tidbits can be garnered from the answers to unscripted questions. Senior managements don’t like unscripted situations, so they try to stack the deck in their favor. They start with a built in advantage because they have way more facts than the analysts do. It’s not unusual for management teams to have a three-inch binder full of information going into the conference call. Meanwhile the analysts just saw the numbers that morning. And you can be assured that whatever information comes out of the binder will be displayed in the light most favorable to the company. Next, they manage the question queue. Virtually all conference call providers today offer a service that allows management to see who has called in for a question and to re-order the list of questioners. This means that analysts who have a favorable view of the company (usually because they have a buy rating on the stock) will get to ask their questions first. You can bet that those will not be the tough questions. (Note to sell side analysts: Don’t make your junior associates wait on the question queue from the very start of the call – it’s a waste of time.)

So what can analysts hope to get out of conference calls? I think that it boils down to two things: the occasional interesting fact that slips out in response to a question, and the tenor and tone of management. Everything else is too “on message” to be meaningful.

How Many Investor Relations Officers Does It Take To Change a Light Blub?

I’ve just returned from the National Investor Relations Institute annual conference in Orlando Florida. The annual meeting brought together 1,400 investor relations officers from all over the U.S. and 26 countries together with the associated service providers ranging from the NYSE to annual report design firms to investor tracking, targeting and information firms. I thought I would share some observations from the conference, but first, seeing so many investor relations people in one spot spurred me to a couple of variants on the old light bulb joke:

Q: How many investor relations officers does it take to change a light bulb?
A: Five – one to hold the ladder, one to screw in the light bulb, one to get from accounting the exact number of revolutions the bulb was turned, one to consult with the general counsel to make sure that the act of putting the bulb in the socket and all related activities will not expose the company to any additional liability and one to issue a press release about the increase in luminosity over light bulbs in last year’s reporting period.

Or alternatively:
Q: How many investor relations officers does it take to change a light bulb?
A: None. Management prefers to keep investors in the dark.

On a more serious note, one of the things that struck me at the conference is the broad spectrum of information investor relations officers are expected to know if they are to do their job right. You start with having to be an expert on your own company. To that you layer on an expectation that you should have a detailed knowledge of the industry and the macro trends that affect it. Then you have to be good at financial analysis and have a passing familiarity with the relevant accounting and tax issues that may impact your company. Then you have to understand the financial markets and how they work. And finally, the coup de grace, you are expected to know how the federal securities laws affect everything you do. And you have to do all of this on the fly, in conversations with analysts who are hoping to get an investment edge out of what you say.

What this says to me is that investor relations should not be a 2 – 3 year rotational position within a corporation. There is a detailed body of knowledge that needs to be mastered before a company’s message and outlook can be delivered with confidence. One book available for purchase at the conference covered the topic of informal disclosure of information. It ran 362 pages (of course, it was written by two lawyers, so what can you expect). This is not stuff that can be mastered in 6 months. There should be a commitment by companies to keep people in the position for at least 5 years. You wouldn’t put someone in charge of relations with your most important customer and say, “This is a learning experience for you until we move you on to more important things.” Yet this is what we see time and again with respect to investors, the owners of the company.

Companies try to game the system by schooling their people to “stay on message” and to not stray beyond approved statements. The thinking is that if you stay on the reservation, you can’t get in trouble. Of course, you can’t add value either. One of the prime roles of an investor relations officer is to add detail and context to the reported numbers. You can’t do that if all you’re doing is repeating the press release. Knowledge and experience are required to handle information requests within the context of Reg FD and everything else the securities laws impose.

As always, your comments are welcome, especially if you have additional variants on the light bulb joke. Who knows, we could collect them into a book.

An Investor Relations Fable

Many years ago a young man from a rich and prosperous family was charged with safeguarding the jewels of the family. He thought long and hard about the best way to preserve the jewels and finally came up with what he thought was a clever solution. He went out and packaged the jewels in a beautiful box. Then he dug a hole in the ground and put the box with the jewels in it and covered it up. On top of the spot where the jewels were, the industrious young man planted a flowering bush. Whenever he was asked about the jewels he described how beautiful they were and how well packaged they were in their box without actually taking the jewels out to show anyone.

Over the years the man, through all types of weather and storms, watered and fertilized the bush, being sure to use plenty of organic manure. The bush grew tall and wide until it was a hedge stretching from one end of the family property to the other. People came from all around to view it and sit in its shade.

Finally, one day many years later, the man came back to retrieve the jewels in order to pay off family debts. In the course of trying to dig out the jewels the man found that the roots of the hedge had grown tightly around the jewel box. While yanking and cutting at the roots, the hedge fell over on the man and crushed him to death.

Moral: The care, feeding and removal of hedge funds is a risky business.

The Death of Investor Relations?

The Death of Investor Relations?

The basic premise of investor relations is simple and works in conjunction with the efficient market hypothesis. In short, good investor relations helps to bring clarity to how a company makes its profits and its future prospects for earnings. The market assimilates this information, together with all other information and arrives at an appropriate valuation for the company’s stock. In short, the more information available, the better the value of the company is reflected in its stock.

There is however a curious phenomenon occurring at least with respect to one company; Sears Holding Corporation is saying less and being rewarded for it. I call it the Mies van der Rohe school of investor relations. (For those not blessed with a liberal arts education, van der Rohe was one of the founders of the modern school of archtecture and one of his more famous sayings is “less is more”.) If you look at Sears’ public disclosures, they file a press release and a 10 Q or 10 K. And they post a lengthy letter from the chairman on their web site. That’s it. No conference call. No PowerPoint slides. Not even (heaven forbid) an investor relations contact person. It’s as if Sears is saying, “It is what it is – figure it out for yourselves”.

And how has the market reacted to this lack of detail? In the past year the stock has gone from $145.43 to $178.31, a gain of 22.6% on operating earnings that are up 18.8%. In short, the lack of detail appears not to have harmed the stock at all.

Now, I’d be the first to tell you that one company does not a trend make, but consider that Sears Holdings’ chairman is Eddie Lampert. Mr. Lampert has a history of being on the cutting edge of things: his hedge fund, ESL Investments, was one of the early hedge funds and was also one of the first hedge funds to become an activist investor, first with Auto Zone, then Kmart and now Sears.

Investor relations officers, watch out. Could it be the smart money is saying that more transparency is a sucker’s game?

Dealing with Know-it-all Management

Most analysts have encountered “Managementus Imperialis”, the member of company management who knows everything. Not only do they know everything, but they expect you, the analyst, to take everything at face value without further pesky questions. I don’t think this type of person knowingly sets out to mislead or frustrate the investment community. It is a somewhat drawn out and subtle process that gets them to the point where they believe that they are the fount of all wisdom regarding their company.

The process is self-selecting. Unless you are in a severely depressed industry, only optimists get promoted in corporate America. Being optimists, they naturally only look on the sunny side of the street. People who work for them recognize this and also tend to emphasize the good developments over the bad. This is compounded by people not wanting to argue with, or bring bad news to, their boss. By the time a person gets to a “C” level position in a major corporation in America, people have been saying yes to them for a very long period of time. From there it’s a small step to believing that if everyone says yes to your ideas, you must always be right.

My wife, who once practiced law in a large law firm, referred to this as “Partner’s Syndrome” – once a person made it up the greasy pole to partner, they assume that everything they say is right and shouldn’t be questioned. (My wife, much to her credit, has long since left the practice of law and now works as a pastry chef, doing what she loves.) I’ve seen it play out numerous times in investor disclosure. A member of management will make an assertion about a program, a plan or a fact and expect that to be the end of it. Who can forget “The seven breakaway strategies to grow sales” that were floated a few years back even though management refused to identify any of the strategies. Often there will be an assertion of fact about a trend that contains just enough truth to sound plausible, but upon closer examination doesn’t merit being called a broad based trend. Years back, I heard an assertion that “the primary drawing area of a store is a ½ mile radius”. I even repeated it myself many times. When I finally got around to checking the source for this statistic, I found that there was none other than the CEO’s gut instinct. By that time it was an industry standard.

So how does an analyst approach the problem, recognizing that management has a lot more facts about the business at their disposal than the analyst? My best advice is to remember that it is your job to question everything. If a statement is not backed up by hard facts, it’s an assertion, not a fact. To modify an old saying, “There are lies, damned lies, statistics and CEO facts”.

I would love to hear if other people have encountered this phenomenon.

What Kind of an Analyst Are You Dealing With?

What Kind of an Analyst are You Dealing With? (Part 2)

Today’s discussion of analysts relates to a type I refer to as “The Elephant Hunter”. This is a person who is searching for “the next big thing”, a killer investment idea that will overwhelm mere fundamental research.

The elephant hunter is really not interested in seriously looking at your company unless you have a reason to significantly stand out from the crowd. In a sense, this analyst is the ultimate believer in the efficient market – all pertinent information about your company to date, earnings, press releases, type and quality of your management, has been incorporated into your stock price. The only thing that matters is the very new, very different project that you are about to embark upon and that the analyst sees as a game changer. In other words, the elephant peeking out from behind the bushes. Only upon discovering this amazing new prospect will the analyst bestir themselves to change their opinion about you or recommend your company to their portfolio managers. They want to bag the big game, or to mix my metaphors, hit the home run by recognizing when the company is doing something new and different before anyone else does.

So what’s a poor IR person to do? (Except sing in a rock & roll band – oops, sorry, occasionally old rock lyrics will pop into my head.) Well, the first thing to do is to try and control your blood pressure. Just because earnings are up 15% is not enough to merit a change of opinion with this type of analyst. Then, see if there is a “hook” to your story. There has to be a hook for this person to get excited about. “Earnings are up because of good expense control” won’t do it. However, “Earnings are up because we installed industry leading software to better track and control our expenses which represents a quantum leap over the competition” might do the trick. Secondly, remember that elephants don’t happen along every day. If there is no big, new opportunity, then as they say in New York, “Fugetaboutit.”

Hope you enjoyed this piece. For all you analysts reading this, rest assured that in my next post I intend to take company managements to task by discussing the species, “Managentus Imperialis”.

What Kind of an Analyst Are You Dealing With?

Welcome to my blog devoted to investor relations. I’ve done some searching on the web and can find very little devoted to the profession of investor relations and so I can only conclude that this one of the first blogs devoted to the arcane art/science of conducting a dialog between corporate management and the investing public. My goal is to bring some sense and clarity, together with some opinion and hopefully some fun, to investor relations.

This site is not devoted to “how to” articles, although from time to time I may write about best practices. It’s much more likely that the articles here will be “how not to” pieces, pointing out things that in my opinion can be done better. Better yet, from time to time, I hope to get inspired and give people a new way of thinking about things. We’re all busy, so typical posts will be short, 3 – 4 paragraphs at most with one or two ideas to chew on.

With that, here’s my first entry:

What Kind of an Analyst Are You Dealing With? (Part 1)

Securities analysts come in all sizes, shapes, genders and ages (although most tend to look distressingly young to me these days), but I’ve found that they break down into several subspecies that are readily identifiable. Herewith the first:
Vampirus Informatious (Information vampire) This particular type of analyst just can’t get enough information. All analysts crave information, but this analyst takes it to the extreme. If you have a meeting with them, their goal is to literally suck you dry of all information remotely related to your company, industry and economic sector. No detail is too small. Cauliflower ear from their phone calls is a common occurrence. Time limits on meetings are merely advisory. They have a unique ability to make you feel guilty if you have another meeting and need to end your session with them. One question and a related follow-up on the conference call are never enough; 5 – 6 questions are barely enough: if they had their way they would prefer to ask all the questions on the call. They will follow you down the hall, down the elevator, out to your car, all in the name of getting those last few questions in. I’ve never had one follow me into the men’s room, but it is not beyond the realm of possibility.
If you stop and think for a minute about the role of corporate investor relations, where the object, within prescribed limits, is to limit and channel the flow of information to things the company wants to talk about, you can see that there is an inherent conflict of interests here. This is not a match made in heaven. There are probably some things you can do to ease the conflicts. Set and keep time limits, which should help the analyst set priorities in the questions they ask. Feed the beast – within reason. A lot of details just aren’t worth sweating about. In fact, sometimes it’s the little factoids that people remember. It is the odd fact or figure that may help this type of analyst get remembered by their clients or portfolio managers. Structure meetings so that you can clear away minor informational points before the analyst meets senior management, either by a phone call beforehand or a list of major topics they want to cover when they meet management. Best of all, keep a sense of humor about it all. These are usually type A personalities you're dealing with, and you can't change the stripes on the zebra.
This post is the first in a series curious animals that inhabit the investor relations landscape. I have many more, but I'd love to hear from others as to their favorite IR species.