Tell Me a Story

I wrote in October about the importance of using a variety of delivery methods in order to help your audience learn from and retain what you are saying. Because this is a blog about investor relations (mostly, although I confess to straying from the topic from time to time), today I want to expand upon this idea in one way that can help companies better get their message to Wall Street. In short, stop thinking of investor relations as simply a conduit of information and start thinking of it as a way to also tell a story about your company.

The meat and potatoes of any investor relations program is the ability to convey to investors basic financial information that relates to the company. There is no getting around this - it forms the core of all subsequent discussions. Yet this information often falls into the boring, but important category. Additionally, there are at least two problems with this data. First, unless you are among the lucky few companies that are showing outstanding growth and financial performance, it’s easy to get lost in the shuffle. As they say in the entertainment business, there’s no hook. Secondly, information about past performance does not always give investors a good idea of where the company is going in the future, nor does it give a sense of the way the company operates. This is where making it memorable by telling your story becomes important.

Building upon basic financial information is a critical factor in helping a company stand out from the crowd. When you combine this with the fact that most people learn and retain information better when they get it from a variety of sources, you can begin to appreciate why investor relations should be more than drafting the next press release. Being able to place your company into context in terms of your industry by telling the story of your company is an example. People remember stories. If your company relies on product development, being able to tell the story of how a product was developed can bring context to the bare fact of how much you spent on research and development. This concept can be transferred to almost any industry, be it oil and gas development, retail or consumer goods, to name a few. 

After all, companies are a collection of people, and where you have people you have stories to tell about how those people create unique approaches to the way they do business. How those people set your company apart from other operators and cause it to be unique are integral parts of the story that mere financial numbers can’t tell. It is in providing this context in a memorable fashion that investor relations can add value.

Are You Talking About What You Want to Say or What Your Investors Want to Know?

I confess that I’m not an avid reader of much of what gets churned out in the business press by the so-called experts. I readily admit that this is somewhat of a contradiction in me, because I want people to read what I write about in my area of expertise, but let’s face it, there’s a lot of crud out there. Most business writers seem to approach their subject as if it were the key component to business success. If their readers would simply follow their cookbook formula, everything would be peachy. If only life were so simple. So I tend to restrict my reading to The Wall Street Journal, The New York Times, The Economist and a few other assorted publications.

One of the other assorted publications I tend to pay attention to is the McKinsey Quarterly, and it is an article there that spurs me to write today. The article, which was published early in October, 2013, is entitled “How B2B companies talk past their customers” and it examines the gap between the messages that suppliers send to their customers and what their customers really want to know. The article struck me as particularly germane to investor relations because, stripped to its bare essentials, IR is a business-to-business marketing effort where companies present the reasons to own their stock to sophisticated purchasing managers who are interested in buying a commodity that will benefit their customers, such as mutual fund investors or pension managers.

The article, which is available at http://www.mckinsey.com/insights, looked at how companies in the business-to-business sector positioned their brands and came up with a list of 13 broad themes and topic areas ranging from the practical (low prices) to the lofty (corporate social responsibility). Then the authors turned around and asked customers how important they thought each theme was in evaluating the brand. What they found was that there was an almost complete mismatch between what companies were saying and what customers thought was important.

This piece of research is instructive to investor relations because IR departments are formulating brand messages all the time, whether it’s in an investor presentation or an annual report, yet in my experience, the vast majority of all such messages are put together based upon what the company wants to say, not what investors want to hear.

So here’s a radical thought. The next time you put together a presentation, stop and think about what investors want and need to hear. This shouldn’t be terribly difficult, as IR departments are constantly bombarded by questions from analysts and good investor relations practice dictates that you should track the types of questions being asked. The data should be there – you simply have to integrate it into your message.

At the end of the day, it comes down to a relatively simple rule of communications – know your audience. Unfortunately, it is a rule that is often overlooked when polishing IR presentations and annual reports.

Make It Memorable

One thing I have learned from teaching over the past six years is that if you want your audience to not only learn, but also remember what they learn, you have to make it memorable.  There are many ways to do this – you can speak with passion, you can use humor, you can have catchy phrases and acronyms, you can even (heaven forbid) have a catchy PowerPoint presentation – but what you are saying and doing has to catch and hold the audience’s attention. In a way, it is education as theater, and it is particularly effective in an adult education setting where the distractions of emails and messages from the office are a constant challenge.

Last week I attended the NIRI Southwest regional conference in Ft. Worth and it reinforced my opinion that the Southwest regional conference is a better overall learning experience than the NIRI national conference. I have a variety of reasons for saying this, but for today I want to focus on the educational aspect of the Southwest regional conference. The national conference seems to be locked into a format that is heavily dependent upon panel discussions featuring panelists that are long on narrow technical expertise and short on speaking skills. This was true a year ago when I attended in Seattle and a quick review of the 2013 National conference agenda reveals that the vast majority of the sessions continue to be panel discussions. The result of many panel discussions viewed in quick succession is the verbal equivalent of Chinese water torture – many words delivered in a monotone, leading to eventual brain damage. 

The Southwest regional conference, in the years when it has been organized by the Houston chapter, has broken from this mold. In 2010 and 2012 the conference featured a case study that forced attendees to work together and make decisions. They went beyond that and introduced several new formats to the conference this year. (Full and fair disclosure: I was on the conference planning committee, but due to my move back to Chicago, cannot claim much credit for the work of the planning committee.) In addition to the usual speakers and panel discussions, the conference introduced an interactive case study based on a real life example (featuring yours truly), a point - counterpoint style debate featuring practitioners discussing current hot topics in IR, an IR version of the dating game where IR officers try to convince an analyst to cover their company’s stock, and my favorite, three short (20 minute) TED style talks where people addressed issues near and dear to their hearts with passion and conviction. The result was a mix of information delivered in memorable fashion that consistently engaged the audience.

When you are in investor relations, a key element to what you do is communication. I can only hope that the National Investor Relations Institute takes note of how the Southwest regional conference is expanding the communication boundaries in order to help people remember what they learn at conferences and become better practitioners of investor relations. After all, isn’t what these conferences are all about?

Lights! Camera! Earnings Call!!

Lets face it – earnings calls are boring. Lawyers will tell you that this is a good thing because you are far less likely to get sued or have regulators come down on you if you don’t do anything splashy. So for most companies the earnings conference call has evolved into an elaborate kabuki theater consisting of 20 – 25 minutes of prepared remarks followed by 25 – 30 minutes of questions from analysts.

The prepared remarks are the worst – many times all you get is a regurgitation of the earnings press release, proving only that the CEO and CFO can read. This is because lawyers, ever fearful of Reg. FD, are reluctant to allow even the smallest snippets of information to vary from what has been “broadly disseminated” in a press release format. So you wind up with a highly paid executive reading dishwater dull financial information to analysts and investors who have already read the press release and put the numbers in their models. My guess is that with earnings season being notoriously busy, most analysts are only listening with half an ear to the prepared remarks while they multi-task on other things.

The question and answer sessions are a bit more interesting, if only because there is some uncertainty at work, both in the questions that are asked and the answers given by executives. Keep in mind however, that companies have a system for controlling who gets to ask questions, and when on the call the questioner will appear. Thus invariably, the company’s favorite analyst (read “biggest booster”) will get the cherished first question position, and the question is likely to be one that management has no difficulty answering. Thus analysts are often reduced to the role of the old Kremlin watchers, where  more information is to be gleaned from nuance, voice tone and innuendo than in the party line answers executives spout.

Now, however, the earnings call may be starting to evolve. Last week Yahoo’s CEO and CFO presented a live webcast of its second quarter earnings call. In most respects, their webcast was just like an earnings call, except you could see the executives. Thus, in addition to voice tone and inflection, analysts and investors could also judge body language. This also means that, unless it was done off camera, no one could surreptitiously slip answers to the executives. This is perhaps a small step, but it does add a few more points that investors can use in judging management.

A few days later, Netflix also broke with the typical earnings call with a slightly different format. In their presentation, which was conducted on Google Hangout via webcam and posted to YouTube, Netflix dispensed with the prepared remarks entirely and went directly to questions and answers. This is probably a good development, as it avoids needless repetition of financial information. The questions were compiled beforehand and posed to management by a reporter and an analyst. This may be a less salutary development, as it favors a single analyst and reporter, and while the company says that it did not see the questions beforehand, this process may be open to manipulation. In addition, because many of the questions were composites, there was no attribution of questions to any particular analyst, which I’m sure did not please the sell side community.

In general, both presentations were well received as bringing something new to the staid conference call format. I can only hope that more companies start to push the envelope in order to make things more interesting and to stand out from the crowd. Because, with disclosure to investors, as with classical economics, more is better - at least until you get to the point of disutility…

The Application of Greek Mythology to Investor Relations

Having received a degree in history from a small liberal arts college, I periodically feel the need to justify all the obscure, unrelated and mostly useless knowledge I picked up in the course of my education. This actually comes in handy from time to time if you are in the business of communicating, which, of course, we all are in investor relations. 
When I teach or give a public talk, I like to bring in a variety of arcane sources in order to keep the audience engaged. I find that introducing something interesting, which, at first blush has no connection to the topic, helps to get people thinking about what you’re saying. Of course, sometimes it’s the only thing they remember from your talk, but I’m happy if they remember anything at all from my talks.
For example, a number of years ago I was given the task of explaining executive benefits at a 7:00 AM meeting. This is about as bad as it gets – a dull topic at a miserable time of day.  The strategy I hit upon to liven things up enough to keep people awake was to use song lyrics to illustrate my points. (I freely admit that I stole this idea from a Bar exam prep teacher I had many years ago, but the best ideas are often stolen.) I had to work at it – not many songs mention stock options or long term disability insurance – and eventually references ranged from Gershwin to 1960s Motown to Pink Floyd, but I kept the audience interested in what I was saying. 
I bring this up because one of the obscure references I like to mention when I discuss the role of communications in investor relations is Sisyphus. Those of you that were blessed with a proper grounding in Greek mythology will recall that Sisyphus was the Greek King who incurred the displeasure of Zeus and was sentenced to roll a huge bolder up a steep hill, only to have the bolder roll back down to the bottom of the hill before he arrived at the summit, forcing Sisyphus to begin all over again. This ceaseless effort very concisely describes the process of communications in investor relations.
When you are communicating with investors, as they used to say in an old Nike ad, “There is no finish line”. The company is constantly moving towards its next reporting date. You are either just reporting results or getting ready to report results. The company and its strategy are continually evolving, requiring you to refresh your message. The composition of your investor base is also routinely changing as the stock is bought and sold, causing you to have to regularly educate an entirely new set of investors. In short, it never stops.
Nor should it. Good investor relations requires continual communication with investors and potential investors. The more you communicate in a transparent manner, the fewer surprises will confront investors and the less volatile your stock will be. When more information that is routinely transmitted to the Street it also means that there is less opportunity for insider trading. In short, as in economics, more is generally better until you arrive at the point of disutility. What constitutes disutility of information is a discussion for another day. For now, I will leave you to roll the rock up the hill.

(For those of you who are interested in classical Greek analogies, you may also be interested to read my post from October, 2008 “Greek Classics Revisited” comparing the financial crisis to the Iliad.)

The Slippery Slope of “Adjusted” Earnings

I’m just a simple guy. I tend to like my food without fancy sauces, and when it comes to ice cream, I favor simple flavors such as chocolate and vanilla. And when it comes to reading earnings reports, I prefer a simple, understandable description of what the earnings were in accordance with generally accepted accounting principles. 

I have a simple rule of thumb – the more “adjustments” that a company makes in reporting its earnings, the less I believe them. I’m not so unsophisticated that I won’t concede that there are times when special circumstances have occurred and reporting the effects of those special circumstances is helpful for investors. In fact, I am a proponent of more disclosure rather than less. But the fact of the matter is that companies have a large amount of discretion about what goes into and out of accounting reserves and adjustments. And when there is discretion, there is always the temptation to make the numbers look better by playing with the adjustments. 

So it was with some interest that I read Walgreens third quarter earnings report yesterday. (Disclosure – I own Walgreen Co. stock.) The first thing that caught my eye was that the release led with a statement that adjusted earnings per share increased by 18.1%, compared to a 4.8% increase in GAAP EPS. This is a pretty large discrepancy, so I naturally I went looking for the reasons. And to their credit, in the third paragraph of the release, Walgreens details all the adjustments they make in arriving at their adjusted earnings number. The paragraph goes on for a bit, and it will never win a prize for clear expository prose, but when you add things up, Walgreens adjusts their earnings in the third quarter for six items, adding back $.20 to GAAP earnings of $.65. In other words, Walgreens wants you to believe that earnings were a full 30% better than generally accepted accounting principles require them to report. 

Thirty percent is a bit of a stretch, but if it helps you to understand the basic business, then it could be helpful. So I went through all of the adjustments and applied a simple rule of thumb; if the adjustment related to something outside of Walgreens control, meaning that the charge didn’t result from something management elected to do, then it was a legitimate adjustment. When you do that, then only one item, a settlement with the DEA, was really from an outside agency. Everything else, related to acquisition costs, a LIFO charge, a tax related to Alliance Boots, and the change in value of warrants, was caused by decisions management made in entering into transactions or electing an accounting treatment. If we are to judge a company not only on their earnings, but on the quality of decision that management makes, then these are charges that the company is responsible for and should be reported as such. 

Back in the height of the internet bubble, you had a lot of companies reporting in this manner. People referred to it as “earnings without the bad stuff” and it gave the impression that management was trying to divert investors’ attention from problematic performance. I can only hope that Walgreens, a company long known for its integrity, is not going down that slippery slope.

Social Media, the SEC and Corporate Disclosure – a Wobbly Three Legged Stool

I’m always surprised by it, but it turns out that some people actually read what I write. In my last post I wrote about the practical implications of the SEC’s recent Netflix social media investigation. In a nutshell, here’s what I said:

“…the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do.”

Shortly thereafter I received an email from Broc Romanek at TheCorporateCounsel.net (www.thecorporatecounsel.net) explaining his take on the issues at hand. I have a great deal of respect for Broc and will readily admit that he knows more about the ins and outs of how the Securities and Exchange Commission works and thinks about issues than I do. On the other hand, I’ve spent the bulk of my career inside public corporations and have a pretty good feel for that particular viewpoint.  I’ve reproduced (with Broc’s permission) the email exchange below because I think it is a good illustration of the two points of view on this subject.

John – on your blog about the SEC’s guidance, the CYA approach actually is problematic. As borne out on my webcast on this topic last week, I hear that the SEC Staff is not happy with those companies announcing a bevy of SM channels for which they have no real intention of using them as investor communication venues. And investors probably don’t want to be forced to track a bevy of channels for which the company doesn’t intend to provide useful info for them. It’s a loser on both fronts.

thx, broc

Broc:

I recognize that it's problematic, but it is a problem the SEC created. If I was a general counsel, and I had the opportunity to create one more layer of insulation from Reg FD claims, I would grab it. Fear of Reg FD retroactive enforcement is a giant bugaboo for many companies, so doing everything you can to lower the chance that the SEC will open an investigation makes sense.

From an investor's standpoint it is a real headache to follow multiple feeds, but most investor relations departments will take the view that it is not their job to make the analysts' job easier.

I think the CYA approach only works if the social media site is widely followed and qualifies as a recognized channel of distribution, but as more companies use social media, and CEOs become more comfortable with blogging & posting, there has got to be a way to facilitate open communication without constant fear that you will wander into the Reg FD quagmire.

John

John: I believe there is way too much paranoia about Reg FD compliance. Just because a statement may be Reg FD compliant – because a CYA channel was created – it isn’t insulated from a 10b-5 claim that the statement was misleading or omitted something, which will be the more likely result – and much more serious result – when something “material” is posted on a SM channel, particularly Twitter since it is limited to just 140 characters.

Broc

I’m not sure what all the implications of this social media stuff are, but this is probably a good illustration of the law of unintended consequences relating to governmental regulation. The SEC says its OK to use social media to disclose material non-public information if it qualifies as a “recognized channel of distribution” for communicating with their investors, but then is not happy when companies announce they intend to use them. Companies on the other hand, see this as a way to add a layer of protection so they don’t wind up in the SEC’s crosshairs when their CEO either gets carried away when writing a blog or Facebook post or writes something that they genuinely believe is not material as Reed Hastings of Netflix did.

The point of all of this should be to enhance and facilitate the flow of information to investors and allowing social media to serve as a recognized channel of distribution will help accomplish this. 

The Practical Implication of the SEC’s Netflix Social Media Investigation

Investor relations Musings has been on hiatus over the past five months as various items from my personal life – selling a house, moving back to the Chicago area, buying a new house, finishing my teaching at the Jones Graduate School of Business at Rice University – have conspired to keep me from doing much writing. However, now I’m back to add my two cents to whatever investor relations topics catch my fancy.

In the period during which I’ve been silent, perhaps the most interesting investor relations development has been the SEC’s report of investigation regarding Netflix. You may recall that Reed Hastings, the CEO of Netflix, used of his personal Facebook page to disclose that Netflix had exceeded 1 billion hours of viewing during a single month and the SEC investigated whether this constituted a violation of Regulation Fair Disclosure. The case presented a number of interesting issues. First, there was the  threshold question of whether an internal company metric such as viewing hours should be considered material, when company revenue was based on fixed subscriber fees, not viewing hours. Second, the case presented a great example of how a company, by talking about an internal company metric such as viewing hours in both public documents such as press releases and shareholder letters, and in less public documents such as blogs and Facebook pages, builds a case for the SEC that the information is in fact material. (This is a great example of how trying to be transparent can get you into trouble with regulators, but that is a topic for another day.) 

However, the SEC sidestepped these issues by giving Reed Hastings and Netflix a pass on any regulatory sanctions and using the investigation to issue guidelines on the dissemination of material non-public information through social media sites. In a nutshell, the SEC said you can do it, as long as you tell investors where to look and your social media sites qualify as a “recognized channel of distribution” for communicating with their investors. 

From my point of view, the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do. For example, here’s what General Electric said in its first quarter 2013 earnings release: 

“GE’s Investor Relations website at www.ge.com/investor and our corporate blog at www.gereports.com, as well as GE’s Facebook page and Twitter accounts, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted.”

For most companies the point of this statement would not be to establish social media as their principal points of disclosure, but rather to insulate them in the event some important piece of information slips out in a twitter, Facebook or blog post. Remember, what is considered material, non-public information is determined with the benefit of 20/20 hindsight.