It’s Not Easy Being Green

Last Spring, prior to his graduation from high school, my son went on a senior trip to Disney World. When he returned, he presented each family member with a small souvenir gift. (Given that he is a teen-aged boy, this in itself is a small miracle, but sometimes all those lectures about common courtesy and thoughtfulness bear fruit in the most unexpected ways.) I bring this up because the gift he gave me was a small book about one of my favorite characters, the muppet, Kermit the frog. The book was titled “It’s Not Easy Being Green”. Over the years, Kermit has been right about a lot of things, and the expression “It’s not easy being green” is equally true when it comes to the way corporations portray their positions towards the environment.

Corporations are in a tough spot on this one. Corporations exist in order to maximize profits for shareholders. To the extent they divert corporate resources to fund social or environmental causes unrelated to their business, it represents a transfer of wealth from shareholders to a different constituency. Further, it is a transfer of wealth over which shareholders have little or no say. This is troublesome because corporations do not exist to redistribute wealth. We all know that governments exist to redistribute wealth.

This does not mean that corporations should not be concerned with the environment or the social context in which they operate. Rather, it means that corporations should be paying careful attention to those issues where they can have an impact and where the cost of ignoring them will have a detrimental effect on the company’s future prospects, image or share price. Spending money to make a difference in environmental and social issues that are part of how they operate is an acceptable corporate expenditure. Spending money to fund the chairman’s pet charity to save the Tibetan yak is usually not, unless you are in the business of mountain expeditions.

How does all of this fit into investor relations? In my twenty-five years of talking to investors, it has been rare that major institutional investors raise these types of issues. Institutional investors focus on your company’s future prospects, back-tested against your current performance. Unless your company’s future prospects are being impacted by environmental or social issues, they don’t care. There are a few “socially responsible’ investment firms, but I’ve never really seen them have much more than a gadfly effect.

So does this mean corporations should just ignore the issue? You probably can, but I would hope not. Your company is probably doing things that you can point to as responsible corporate citizenship. Most companies are constantly testing ways to save money by eliminating waste and inefficiencies. The best of these ideas often result in both costs savings and benefits for the environment. Here’s an example from the book The Wal-Mart Effect, by Charles Fishman: in the 1990s, Wal-Mart came to the conclusion that there was no need for deodorants to come in a separate box. The cardboard box added cost, took up shelf space and required trees to be cut down to make the cardboard. Yet the box didn’t add anything to the customer experience and surrounded what was already a perfectly good container. So Wal-Mart worked with manufacturers to get rid of the boxes. As a result, the product cost less to produce, some of which was passed along to consumers and the environment benefited because the demand to cut down trees for cardboard was reduced. (One can only hope that they are working on the same thing with respect to blister packs.)

Good companies undertake these types of projects all the time. A good investor relations practice is to make a list of all the projects your company does to eliminate waste and inefficiencies or to make the work environment safer. The next time you’re questioned about your company’s commitment to the environment, pull out your list and discuss it along with the comment “Look, we can’t be all things to all people – our resources, just like everyone else’s are limited. But we do choose to try and change things for the better where we can have an impact.” Better yet, be proactive and talk about these things as part of your regular communications.

I am not enough of a Pollyanna to think that this will mollify activist investors with a militant agenda, but you’re not going to make them happy anyway. The objective here is to have a well-reasoned response that shows you are influencing things to benefit your customers and the environment in which you operate. And, like Wal-Mart, you probably shouldn’t expect to receive too much credit for what you do. After all, “It’s not easy being green”.

Keep Your Eyes on the Ball

The underlying premise of investor relations is simple: to the extent you can give investors a clear picture of what your company’s future earnings prospects are, the better they will be able to accurately assess the value of your firm and its stock price. This derives from the financial principle that the value of a firm is equal to the sum of its future cash flows, discounted back to a present value. Your past earnings history, even yesterday’s quarterly release, is germane only to the extent that it illuminates and gives confidence to estimates of future cash flows.

I bring this up because lately it seems to me that there are more distractions than ever to the discipline of investor relations. To start, it is the silly season in Washington and regulatory initiatives are in full swing. Every day seems to bring more news about SEC initiatives, whether it’s on flash trading or creating a new division of Risk, Strategy and Financial Innovation. They seem determined to prove that they can cure past ills by more regulations. Further, the industry association, NIRI, seems to be singularly focused on regulatory issues, which I guess makes sense as they are based in Washington and are creatures of their environment. Added to that we have whole new channels of communication opening up in the amorphous world of social media with twitter, facebook, linkedin and blogs. Then we have technical issues such as XBRL reporting and IFRS accounting to worry about. All of these are things that investor relations officers need to be aware of, have an opinion on and react to if it is their ox that is getting gored, but are not central to what they do.

With all of this going on, it’s very easy to forget the main function of investor relations: creating a clear and concise picture of what your firm’s prospects are and how you intend to get there. I will grant you that investor relations derives from regulation. Without specific regulatory guidelines most companies would be loath to tell investors anything, regardless of what the financial theory says. But the jumbled mess that we refer to as securities law regulation is a means to an end, not an end unto itself. Let the lawyers worry about the latest SEC staff interpretations; let the accountants worry about IFRS. What investor relations people should worry about is whether the market understands how what your company is doing leads to profits in the future. This means disclosing not only what happened in the past quarter; it also means helping investors gain insight into your markets, your industry and the trends, both long-term and short- term, that drive your business.

Likewise the social media that we are seeing today is nothing more than additional forms of communication. I’ve been around this business so long that I remember when conference calls were a novelty. Today conference calls are just another tool to get the company’s story to investors efficiently. Done well, they are helpful; done poorly they can be a disaster. Social media will eventually play out in a similar fashion.

So my advice is to let the hype and chatter pass you by. Keep your eyes on the goal of getting investors to understand your business and its prospects. Appropriate valuation in the form of stock price will follow.

A Dive Into Dark Pools

Earlier this week the luncheon topic for the NIRI Houston chapter was “Dark Pools”. This is a subject that has received much press lately, most of it with ominous overtones to accompany the rather sinister name, so I went with much anticipation, much like you’d go to a scary movie. I have to confess that I knew very little about all of this before I went, and when the luncheon was done, I was more confused than ever. So on the premise that I can’t be the only one who is confused, I decided to do a little more research and, at the expense of stretching a metaphor, try and shed some light on Dark Pools.

First, what are these things? As I understand it, a Dark Pool is an electronic crossing network that allows buyers and sellers of stock to place liquidity (an offer to buy or sell) into a pool anonomously and wait for execution while disclosing little, if any, information. Only when an order is executed is the information on the trade made public. To use a phrase from Bruce Springsteen, these market participants are “Dancing in the Dark”. This is in contrast to normal markets where public order flow allows market participants to judge supply and demand for a stock and adjust accordingly.

Second, are these things inherently good or bad? The ostensible purpose of Dark Pools is to allow holders of large blocks of stock to execute their buy or sell orders without indicating to the markets what they intend to do. Therefore Sellers can sell without driving the price down and buyers can buy without driving the price up. The pricing is done within the Best Bid or Offer context of the National Market System, so price discovery is occurring using normal market systems. This seems like a good thing if you are a large institution looking to move large blocks of stock. Additionally, if you are looking to buy or sell a relatively illiquid stock, dark pools can help you do so with a minimum of price disruption. If you are a company, it would seem that this balances itself out, especially when you consider that institutional investors trade approximately 80% of the stock volume in the U.S.

Third, why the big deal about all of this? Follow the money. The Exchanges – NYSE and NASDAQ, hate these things because they pull significant amounts of orders off the exchanges, which means less order flow and less earnings for them. Traders and specialists hate them because they obscure market information and eliminate trades that they would otherwise execute by putting it all into a machine. This eliminates both the lifeblood of traders – information – and jobs. So much volume has come off the floor of the NYSE that there are significantly fewer traders these days and they have been forced to close trading rooms.

Finally, are there things that should be of concern? If too much volume comes off of the visible Bid/Ask market system, the bids and offers shown on the publicly displayed market quotation system might not accurately reflect true supply and demand. This is why we are seeing rumblings by the SEC to regulate areas of dark pools if too much volume is traded in them. (The nature of regulators is to regulate.) While dark pools are good for large institutional investors moving large blocks of stocks and companies that trade using sophisticated algorithms, it is considerably less clear that they offer any benefit for anyone else.

I think what is happening here is that technology is opening up new channels for trading and moving things away from the old duopoly of the NYSE – NASDAQ. As they are the ones with the most to lose, they are also the ones that will yell loudest. At the end of it all, the lesson is that not all investors are equally suited to all markets. With the emergence of several new ways to trade stocks we are moving away from a “two markets fits all” approach to customized execution based upon the needs of the investor. Many permutations on order execution are bound to follow. The exchanges better figure out how they fit into all of this or they will be left behind.

More On Social Media and Investor Relations

My goodness gracious, but social media seems to bring out divergent opinions among investor relations professionals. My post last week elicited more responses, both in the form of comments on this blog and in emails, than anything I’ve written over the past two years. Interestingly, the opinions voiced were pretty evenly split; half of the people were proponents of the use of social media in investor relations and half didn’t see the point. Even more interestingly, the half that supported the use of social media were generally those that posted a comment on the blog, while the half that admitted that they, like me, didn’t get it, sent me a one-on-one email.

I thought it might be useful to distill down some of the things I’ve learned over the past week as I have dipped my toe into the waters of social media. In no particular order, here are some of the things I’ve found:

1. Sign up for things and people will start finding you.

In doing research on this topic, I set up accounts on facebook and twitter and worked on updating my linkedin profile. One thing I discovered is that all of a sudden, people started to ask to be my friend on facebook. I don’t know how they knew I was out there, but they found me. The same thing, to a lesser degree, happens on linkedin, but there I can at least see how it happens, as the site shows you how people are linked.

2. You may already be on Twitter.

After I signed up for twitter, I discovered that you can sign up to follow a link called IRbloggers. Lo and behold, when I went there, my latest blog post was listed with a link back to the blog site. Who knew? A close analysis of some of the statistics from my blog shows that for the last month, twitter is actually the fourth most frequent means by which people get to my blog. This is a recent phenomenon, as the same analysis over the past year shows twitter well down the rankings as a referral site.

3. Twitter can get your message out fast.

Perhaps the most common reason cited for the use of twitter is its ability to let people know quickly that more information is available elsewhere, with a link back to the full information set.

4. Twitter can let you know what’s going on in the virtual universe.

Assuming you subscribe to the right feeds, or follow the right people, twitter can give you fast insight into what people are thinking in the webosphere.

5. You can waste a lot of time on this stuff.

Following all the links and feeds takes time, which for most of us is a precious commodity. Robin Tooms, of Savage Design and a social media maven, during Q & A at her Social Media Boot Camp at this year’s NIRI Southwest Conference estimated that she spends an hour to an hour and one-half per day on social media. Personally, I don’t have that kind of extra time in my day and if I did have the extra time, I would want to be somewhere other than in front of my computer.

6. A lot of the stuff is irrelevant or garbage.

Even on a twitter follow site as targeted as IRbloggers, 90% – 95% of what comes across has no relevance to me. Do I really need another distraction in my day wading through the dross to find one or two relevant pieces of information?

7. The digital tsunami is descending on us and we might as well learn how and when to swim.

Where all this comes out no one really knows. The proper etiquette has yet to be figured out. There are certain to be fits and starts into how it comes out in the end, with plenty of unintended consequences along the way. Just because you can be connected 24/7 doesn’t mean that you should be. I’m always amazed when I see analysts who have flown thousands of miles to attend a meeting with management ignore the person in front of them, assume the “Blackberry crouch” and start dealing with emails and other items on the web. Not only is this incredibly rude, but it also makes you less effective for both tasks that you are undertaking. Maybe they’re trying to find the extra hour or two to deal with all the additional information they are being deluged with. In a counter reaction to this type of behavior, this year, for the first time, at the Jones Graduate School of Business, we have to include a statement in our course syllabus banning the use of laptops and cell phones during class because the preponderance of students were not using their laptops for note taking.

I could write more, but I have to go now and update my facebook wall…

Investor Relations and Social Media

Every generation has a point in the development of technology where they hit the wall. For my grandparents’ generation it was color TVs. My grandparents could never seem to be able to tune in their color TVs so that people looked normal – they always had a reddish or green tinge to their skins. For my parents’ generation, the people who were able to survive the Great Depression and World War II, cell phones have stopped them cold. Today’s seniors just don’t seem to be able to grasp what all those cool features on the phone are for – and why would you want a camera on your phone anyway? While I don’t claim to speak for my entire generation, for me, my technological Waterloo has been social media.

I don’t think of myself as a Luddite. After all, I write a blog, my business has a web site, I have an iPhone and I work on a computer most days. I’ve even learned how to send text messages on my phone, as it is the fastest way to get a response from my three college age children. But I confess that twitter and facebook have me stymied. I just don’t get it. Twitter because I’m incapable of saying anything in 140 characters or less and facebook because why would you want to put all that information out there in the public domain? And because I don’t get the social application of these services, I certainly don’t understand their application to investor relations.

First, let’s start with our friends at the Securities and Exchange Commission. The SEC has been very clear that all of the rules that apply to disclosure of information in other contexts also apply to social media. So I guess that means that if you inadvertently twitter a piece of material, non-public information, you must issue a press release as soon as possible thereafter. Of course, if you’ve taken the time to type out the information, I would question how “inadvertent” the disclosure was, which means that the press release should have been issued either before or simultaneously with the twitter. And how do you write a “Safe Harbor” disclaimer in less than 140 characters? These are the sorts of things that will drive your securities law lawyer to distraction, so they are quite possibly inclined to say that you would be better off not twittering about investor relations topics in the first place.

Secondly, who has the time? We all live days that are filled with lots of information flow, meetings, phone calls and other demands on our time. Do you really need another distraction, particularly one as unfiltered as social media tends to be? In a business context? I remember in the early days of email having a colleague extol the virtues of email because it bypassed all the filtering layers of a corporation, allowing anyone to communicate directly with you. These days I look at the constant stream of email that flows through my computer and sincerely wish for better filtering devices. And I don’t even work in a corporation, with its constant stream of emails from Human Resources, Security, IT, meeting and calendar reminders and notices of the annual golf outing, charity events and other odds and ends.

Finally, let’s not forget the primary mission of investor relations, which is relating to investors – making sure they understand your company and its prospects so that they can accurately value the company and its stock. Call me old fashioned, but I believe that this means that you actually have to talk to investors, listen to their questions and give them thoughtful responses. For that, the best, most efficient piece of technology that you have was invented in 1876. It’s called the telephone.

I suppose that over time social media will create a niche for itself in business, but for the present, to me, it seems over-hyped. I believe that truly sophisticated technology simplifies you life rather than adding more complications. And I don’t see how social media makes your life simpler.