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.
Thursday, June 28, 2007
Friday, June 8, 2007
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.
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.
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