Monday, August 20, 2007

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.

Monday, August 6, 2007

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…