A “Cultured” Approach to Investor Relations

Last week I had the pleasure of going up to Columbia Business School and giving a talk to some of the second year finance students about a case I helped Professor Laurie Hodrick write a number of years ago.  Professor Hodrick has been most generous over the years in allowing me to go into her class and spout off about what, in my view, the case really tells the students.  And, as readers of this blog will probably know, my opinions don’t always conform to the standard view.

The talk is an opportunity for me to expound on a subject that I am convinced is an important, but underdeveloped, line of inquiry on corporate behavior.  That is, what happens when corporate plans incorporate financial theory that runs counter to a company’s prevailing corporate culture?  It’s always fun to talk about this in a financial analysis class setting, because it’s one of those “soft” issues that drive finance people nuts.  You can’t quantify it very easily and usually wind up talking about it through the use of anecdotes.  But I’m convinced it is very real and contributes considerably to the success or failure of many corporate projects.  

In the case I help teach at Columbia, the subject matter revolves around Walgreens’ plans to generate cash through increasing inventory turns, running counter to their retailing culture of having lots of inventory on hand for their customers.  There are plenty of other examples from real life, including Hewlett Packard’s reorganization a few years back running smack dab into “the H-P way”, Home Depot’s centralization efforts wrestling with the famously decentralized culture of their store managers and Rite Aid drugstores attempts to change from a chain of small stores with tightly controlled expenses to larger, sales driven stores.  All of these proposed changes looked eminently reasonable and logical when they were proposed, but in retrospect, never came close to achieving what was planned for, as the unseen forces of corporate culture threw a monkey wrench into the finely tuned plans. 

Which brings me to the point I want to make as it relates to investor relations.  Corporate culture matters.  One of the principal jobs of an investor relations officer is to bring color, understanding and nuance to the basic information surrounding a company.  Probably the most important piece of nuance that you can help investors understand about your company is the culture in which it operates.  The numbers from the financial statements are there for everyone to see and you don’t bring much value if all you do is regurgitate the numbers.  Where value is added is when you help investors understand why the numbers are the way they are.  This involves the ability to explain a variety of factors, including industry trends and company specific actions.  Placing things in the context of your company’s values is an integral part of this.  For example, the income statement and balance sheet of a company that is sales driven will look very different from one that is expense minded, even if they operate in the same markets.  Engineering oriented firms take a different approach to business than firms that emphasize marketing.  It is the function of the investor relations officer to place how your firm approaches business into this context.

I will finish with the following thought:  One of the hardest edged institutions I know is the United States Military Academy at West Point.  Life there is tough – highly regimented and rigorous.  They are in the business of training combat officers capable of operating under extreme duress.  Further, the curriculum at the Academy is engineering focused.  Yet much of what the Academy stresses to the cadets is not the brutal calculus of war, but “soft issues” such as “Duty, Honor, Country” and leadership.  If you want to understand what motivates our military, you are well served to understand these values. Similarly, if you want investors to understand your company better so that their valuation will properly reflect the long-term value of your firm, you need to explain your operations in the context of your corporate culture.