Wednesday, August 13, 2008

What You Don’t Say Can Hurt You

Back when I was an attorney, I used to have to negotiate a fair number of documents.  When I was doing this, there was an unwritten rule that said that if you had the choice between drafting the document or reviewing it, you always elected to draft the document.  The reason for this was that in writing the document you could control what went in and what got left out.  The hardest thing in reviewing a document is figuring out what’s not in the document that should be there.  We always tend to focus on what’s said instead of what is not said. 


In the realm of investor relations, corporations start at an advantage over investors.  Corporations almost always control the flow of information, choosing what they will say and staying silent on many items that don’t favor them.  It then falls to investors to attempt to get the corporation to speak on those issues, if they are tuned in enough to realize that the corporation is staying silent.  Alternatively, investors can parse through oblique and obscure references contained in the company’s press releases, regulatory filings and other commentary to try and triangulate the data in order to figure out what’s going on.  Companies hate it when analysts do this and often claim the analyst has got the analysis wrong, but by trying to hide the data, companies get themselves into this pickle.


For example, let’s take a hypothetical example of a company that in a conference call talks about having “nearly 50,000 employees”.  Thinking this number sounds different, an analyst starts to dig back through records until he finds the next most recent reference to employee count, in a 10-K filing from a year ago, a reference to the company having 50,900 employees.  It would appear that the company has reduced their employee count by about 1,000 people over the course of the year, but have never mentioned layoffs, hiring freezes or reductions in force.  It may sound like a lot, something that the company should be forthcoming about, yet they have remained silent over the past year.  Have they fulfilled their obligation to disclose by the obscure reference to “nearly 50,000 employees”?  Maybe there is a good reason for the lower headcount – a facility or two may have been shut down or consolidated, more efficient operations, or something else, but the investors are purposely being kept in the dark, so the logical explanation is that the company is trying to hide something, and that something is bad news – layoffs and firings.


Now let’s have some more fun with this hypothetical and say that the company has recently opened a new distribution center in the last quarter, one of a series that is designed to change the manner that the company gets product to market.  But their quarterly press release doesn’t say anything about the new facility, which cost many millions of dollars, nor does it say anything about the remaining distribution centers to be built.  If an investor is savvy enough to notice this silence, how are they likely to interpret it?  That things are great, but the company just didn’t feel like talking about the project?  Possible, but not likely; it’s much more probable that an analyst will conclude that the company is hiding something they would rather not talk about.  Investors will assume that if the news was good, the company would naturally talk about it.  Even if the project is going great guns, the company, by remaining silent, puts a negative inference on it. 


Companies constantly accuse analysts and investors of having a short-term focus.  Yet companies themselves are extremely guilty of engaging in selective, short-term dissemination of information.  The process goes like this: “If it’s good news, we’re happy to talk about it until the cows come home.  If it’s bad news, you won’t hear a peep out of us unless someone is holding a gun to our heads and forcing us to disclose.”  In other words, good news is long term; bad news is short term.  I’ve written about this before in the context of Starbuck’s same –store sales; they didn’t stop disclosing them until they started to look weak. 


The investor relations profession needs to start thinking in terms of standards:  if something is important enough to talk about when the news is good, it is also important enough to talk about when the news is less than good.  If you have important projects or metrics by which you measure your business, then the only way to build credibility is to report on them when the news is both good and bad.  Silence is not golden.  It may be permissible within the cockamamie regulatory system we have, but it will not make the market more efficient, nor will it add to the long-term valuation of your firm.  

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