Investor Relations Musings

Do You Think You Could Make That More Boring?

2011-12-01T14:55:00.000-06:00

Who ever said that an investor presentation has to be boring? (I exclude from this question the lawyers, who as a default position, always feel that boring and incomprehensible is safer than exciting and interesting.)

I was at an investor conference last month and took the opportunity to sit in on several presentations. I think that most of the company presenters must have been listening to their lawyers. After about two presentations I began to tune out because most of what I heard was pretty bland and uninteresting. It was as if the presenters had all gone to the Sgt. Joe Friday school of public speaking. They were determined to give “just the facts” in the most humdrum fashion possible. (For those of you too young to remember, Sgt. Joe Friday was the principal character in the TV drama Dragnet who gave new meaning to the term poker-faced.)

Honestly, how can you expect an investor to get excited about a stock if the company CEO doesn’t show some enthusiasm when talking about the company? Yet that is exactly what I saw at the conference. This was especially true at the beginning of most presentations, when the speaker should be working the hardest to capture the interest of the audience, yet what I often heard was the recitation of bare bones facts about the company without a lot of context to help investors understand the company’s products and position within the industry.

The other major bone I have to pick about what I heard was that most companies thought their job was done when they had explained what their past activities had been. The implication of such a presentation is “Here’s what we’ve done in the past, now you can go ahead and make your own judgment about what we will do in the future without any help from us.” This is like saying that markets are static, conditions are not going to change and we are not working on any new products or markets. This, of course, is nonsense, as American companies and markets are predicated on growth and conditions change all the time. Further, financial theory 101 teaches that investors are buying your stock based upon the value of FUTURE cash flows, so why not give them some guidance about where you are going in the future? Hey, there’s a safe harbor statement about forward-looking statements in every presentation. Why not put it to good use?

All was not terrible, however. There were several successful and engaging speakers I saw at the conference. Generally, these successful speakers seemed to have two things in common. First, they got a little worked up about what their company was doing and what made their products and services unique. Secondly, they allowed some of their personality to come through. This is important because if you’ve ever read any of the surveys of investors and what they care about, quality of management is always high up the list. Yet if management is nothing more than a bland talking head, how can an investor be expected to make a qualitative judgment about them?

After all, who ever said, “I liked your presentation, but you could have been a bit more boring”?

Stand a Little Closer to the Podium… Coaching and Investor Relations

2011-10-31T16:05:00.000-05:00

A short while ago a friend sent me a copy of an article in the New Yorker about coaching. We’re not talking here about improving your golf swing. Rather, the author of the article suggests that people in business could stand to benefit from having someone who is an expert observe and offer constructive criticism on how they perform routine tasks. The article can be found here: http://www.newyorker.com/reporting/2011/10/03/111003fa_fact_gawande

I was intrigued by the article, not only because I spend considerable time coaching first year MBA students on how to give business presentations, but also on the concept’s potential for improving investor relations activities. By its nature, investor relations involves repetitious activities that revolve around everything from how you talk on the phone, to investor presentations and quarterly earnings reporting. These are the exact type of activities that can benefit from coaching. And yet, in all my years of business, I have rarely seen anything that approaches coaching done outside of a seminar environment.

Take for example, your typical investor relations presentation given by a CEO. I’ve sat through literally hundreds of these throughout my career and most were less than memorable. Just a few things that we talk about with our students touching upon delivery, content and visuals could be pointed out to many CEOs:

Delivery – was the speaker enthusiastic when speaking to the investors? After all, if the CEO isn’t enthusiastic about the company, how can you expect investors to get excited?

Content – is the speaker able to place the company into an understandable framework that helps investors understand the value his company brings to the marketplace? I have seen any number of presentations where software and tech companies get so wrapped up in the technological aspects of their products that they fail to bring it down to the level where an investor can see how they can make money on the technology.

Visuals – how many times have you seen a screen full of bullet points that the speaker feels compelled to read? Worse yet, how about a balance sheet in 8 point type?

Business leaders of today have to be communicators, yet many of them could stand some improvement in their delivery. This is where coaching should come in, but rarely does. My guess is that most investor relations officers are loath to criticize their superiors. Which is too bad, because we can all stand some improvement. I know I’ve been practicing public speaking for over thirty years and there are still things I need to improve.

So here’s today’s practical tip: if IROs don’t want to tread on thin ice by critiquing executives, videotape them and let them review themselves. It helps if you give them a list of common errors to watch and listen for, such as vocal fillers, repetitive phrases, body language and eye contact. Then tell them to watch/ listen to the presentation four times:

First, listen and don’t watch. This lets the speaker focus on vocal qualities such as pitch, tone, speed, ums and ahhs, and if he was using his voice to tell listeners what was important.

Second, watch with no sound. This will draw attention to body language, eye contact and the annoying things the speaker may be doing with their hands.

Third, listen and watch the presentation to see if it all comes together in a coherent whole.

Fourth (for the brave), watch the presentation at double speed. This will really bring to the fore any annoying or quirky things the speaker tends to do, such as looking up at the ceiling, or performing a little dance step as he speaks.

Who knows, after watching themselves a few times, CEOs might get a little bit humbler.

Can’t This Gang Shoot Straight?

2011-09-23T14:50:00.003-05:00

The Securities and Exchange Commission used to be one of the most respected federal agencies in Washington. Some would argue that this is a low barrier to overcome, but nevertheless, the SEC was for many years considered a well run agency that, by and large, did what it was supposed to, and helped to give the United States the best and most transparent capital markets in the world. Alas, things have changed and now it seems that the SEC is the agency that can’t seem to get it right.

The most recent stumbles have come over the fact that the SEC Chairwoman, Mary Shapiro, who was given a mandate by President Obama to strengthen enforcement, failed to disclose to her fellow commissioners a conflict of interest involving the agency’s former top lawyer, David Becker. According to the SEC Inspector General’s report, it seems that Mr. Becker stood to have a financial interest in the settlement of the Bernie Madoff fraud case, and although he disclosed the potential conflict, Ms. Shapiro stayed silent on it, even allowing her fellow commissioners to vote on how to divide up the Madoff assets without telling them how their top lawyer might potentially benefit from the decision.

Not only that, but the Inspector General’s report also brings to light the fact that the SEC decided not to have Mr. Becker testify before Congress for fear that his conflict of interest would come to light. And this is from the agency that is charged with “full and fair disclosure” for investors.

This is bad enough, but it come after a series of other blunders over recent years that make you wonder if the agency has lost its way. Most notably, this is the agency, charged with protecting investors, that actively ignored the pleas of Harry Markopolos to investigate the returns being generated by Bernie Madoff, which turned out to be the biggest ponzi scheme in history.

More recently, and somewhat more mundanely, proxy access, a pet SEC project that would allow shareholders the ability to nominate directors using a company’s own proxy materials, was struck down by the Federal Appeals Court for the District of Columbia. According to the appeals court, the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.” Further, the court said there is “good reason to believe that institutional investors with special interests” – such as unions and pension funds -- would use the proxy access rules to advance their own issues and chided the SEC for “ducking serious evaluation of the costs that could be imposed” by shareholders representing special interests. It certainly doesn’t sound as if the Court of Appeals thought the SEC was taking a fair and balanced approach towards rule making in this instance.

And finally, how about the $557 million lease the SEC entered into without competitive bidding, which the agency can’t afford and doesn’t need because the underlying assumptions for the space were incorrect. Never mind that Commissioner Shapiro approved the lease in a 10 minute unscheduled meeting and later said that “The agency made a terrible mistake here,” and “I view myself as being ultimately responsible.” In most corporations if you were responsible for a $557 million mistake, you’d be fired, or maybe the SEC would investigate you…

Crisis Communication

2011-08-25T10:07:00.003-05:00

Last week I had the pleasure of attending the National Investor Relations Institute (NIRI) Southwest Regional Conference in San Antonio. I’m on record as having said this before, but I like to repeat it: I believe that the Southwest Regional Conference is a better learning experience for investor relations professionals than the National Conference. I say this because the Southwest Regional Conference is shorter – a day and one-half as opposed to two and one-half days and thus more focused and, with a smaller number of people in attendance, you actually feel as if you have a chance to get around and talk to everybody.

This year, under the leadership of Lee Ahlstrom and Scott Winters of the Houston NIRI chapter, the Conference once again took an interesting departure from the usual lineup of talking heads you normally get at these conferences. The first morning saw everyone engaged in a case study examining a crisis communication situation. The case required everyone to participate, as each table of eight assumed the role of the investor relations/corporate communications professional. They soon found themselves barraged with information in the form of management meetings, memorandums, twitter feeds, media inquiries and videos of the plant explosion in question. In the middle of trying to parse through the data, they found themselves being interviewed by a reporter and asked questions by a sell side analyst. While all of this was going on they found themselves having to recommend media and disclosure strategies to management.

Everyone I talked to said that the exercise was one of the best simulations they had seen on crisis communications. While that’s nice to hear, when I do case studies in my class, I always like to wind up with some key takeaways from the experience, so for the benefit of both the people who were at the conference and those that may wish to learn a little something about crisis communications, so here are the points to remember from the exercise:

1. 1. To quote Dwight Eisenhower, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” In other words, the crisis you wind up with rarely looks like the one you planned for, but the exercise of planning for a crisis causes you to think through the process. This planning process is what helps you to deal with the crisis you do get.

2. 2. There is always somebody important you can’t reach when the crisis breaks. This may seem surprising in this age of interconnectedness, but people go on vacation to remote areas, cell phone coverage tends to break down under the stress of a crisis and there is always someone who is just out of pocket for some random reason or another. Having a clear chain of command as to who acts in the absence of others is important.

3. 3. The need for speed. People have to meet on short notice. Large amounts of data have to be absorbed quickly. Investors want answers right away and if you don’t respond to the press they will come up with their own version of events. There is no time for multiple editing rounds of your press release.

4. 4. You almost never have all the facts you need when you need them. In a crisis information is often garbled, late and sometimes just wrong. This means that the best messages you can send to your audiences are based on simple factual statements.

5. 5. Differing people have different agendas. The corporate counsel may not want to disclose anything at all. Business managers may not want certain facts to come out so that customers, suppliers and creditors don’t get upset. The reporters want to sell newspapers and get good video footage. Analysts care about how the event will affect the company’s stock and what collateral damage there may be to other companies. Good crisis communications has to deal with all of this.

In the end, there is no set formula for how to deal with a crisis, as each situation brings its own unique set of facts. Practice and planning can help however, which is why this year’s NIRI Southwest Conference was so well received.

Before I finish, I have to relate an interesting story from the conference. This year I decided to participate in the golf outing at the conference. I was out on the golf range practicing before the event (I need a lot of practice) when the person on the next practice tee looked at me and asked, “Are you the blogging professor?” I guess there are worse things you can be known as – it even has a sort of ring to it –“The blogging professor.” Maybe I’ll have it put on my business cards.

Building a Good Investor Presentation

2011-07-18T13:23:00.001-05:00

The company presentation to analysts is a staple of investor relations, yet it doesn’t get the type of analysis it deserves. I’m not talking here about whether or not your slides are any good or how well your chairman speaks in public. Rather, I’m talking here about the basic structure of how you convey the information about what your company is and how it operates. A good presentation can generate interest in your company, whereas a bad presentation may very well turn off investors. Presentations are further complicated by the fact that at any given conference, a company executive will be speaking to a spectrum of investors, ranging from those that know the company well to those who may never have heard of it before.

There are many ways to create a well thought out overview of company information for investors and I don’t claim to hold a patent on the only way to do things. What follows is my approach, worked out over thirty years of presenting to investors. It is designed to organize the flow of information you need to convey.

First, start with a structure that borrows from a common investor relations framework:

Past Performance + Perception of Future Performance = Stock Price.

In other words, investors analyze the value of a company’s stock by trying to project what it will do in the future, using what it has been able to accomplish in the past as a reality check. From this framework, it becomes clear that when speaking to investors, a company needs to address both where it’s been and where it’s going. While this may seem obvious, I have seen many presentations totally ignore one side or the other of the equation.

In order to impose some logical flow to the requirements of such a formula, it makes sense to break down the presentation into three basic building blocks of information: Who we are, What we’re currently doing and Where we’re going in the future. This format helps to keep the story on track while still retaining enough flexibility to be creative.

Who We Are: This is the foundation of the presentation. It should include basics on the company’s industry, position within the industry, market share, operating locations, history and culture. The art to doing this section correctly is to provide enough basic information so that someone new to the stock has a good grasp of what your business is, while providing sufficient new information to keep those familiar with your story interested. For example, if you are in the oil exploration business, the basic information you give out should not only include the basics of the segment of your industry, but would also include updated information on the number of rigs you might have in operation and new exploration sites.

What We Do: This is the section of the presentation where companies can talk about what makes them unique. Most companies have an overriding operating philosophy which drives them forward; for some, such as Wal-Mart, it is being the low cost operator, while for others, such as Apple, it’s an obsession with design excellence. As important in this section as the “what we do” is the “why we do it”. If you can convey to investors not only what you are good at doing, but also the driving force behind what you do, you begin to put some informational meat on the presentation.

Finally, Where We’re Going: This is probably the most crucial part of the presentation. Critical information areas include giving investors some insight into how your company plans to compete; opportunities for growth and profitability; how you view the future of your industry; and the unique products or service offerings you plan to use to set your company apart going forward. This should be where the good investor presentation distinguishes its company from other possible investments in an investor’s mind. Remember, sophisticated investors are looking at an investment in your company as a claim on the future cash flows of the company, so they have to have a good sense of where those cash flows may be coming from.

Interwoven into all of this, Dave Mossberg, my colleague at Three Part Advisors, would add, “The presentation should give the investor three compelling reasons to own the stock”. Investor relations being a consultative sale, rather than a hard sell, the art here is to make the compelling reasons obvious enough for a reasonably astute investor to grasp without hitting them between the eyes with a two by four. So if, at the end of the presentation, the investor can sum things up by saying something along the lines of: they have a great track record, industry leading technology and are growing rapidly in an industry segment that is poised for expansion, you will have accomplished your presentation objectives.

Golf and Investor Relations

2011-06-24T17:06:00.000-05:00

Mark Twain famously called golf “A good walk spoiled”. I was reminded of this because last weekend I returned to playing golf after a ten-year hiatus. In between swings of the golf club (of which there were many), I got to thinking about what investor relations practitioners can learn from the game of golf. So, hard on the heels of a discussion of the infield fly rule and IR (May 25, 2011), here are some of the thoughts that popped into my head about how golf resembles IR.

First, the more people you have, the longer the process takes. A twosome in golf plays more quickly than a foursome. In investor relations, if you are drafting documents, a large group takes much more time writing, editing and revising than a small group. While in a normal quarterly release process, this doesn’t matter too much, except to raise the blood pressure of the investor relations officer that has to try and write clear concise prose after the securities lawyer, the accountants, the general counsel, the CEO and the operations people have had their say, it becomes much more important when faced with a crisis situation when speed is essential. So when you need to get a release or a response out quickly, have a smaller designated group lined up for those exceptional circumstances. To many businessmen, this is counter-intuitive, as they are used to solving issues by throwing more bodies at the problem.

A corollary to this is that you are only as speedy as your slowest player. If you are out on the course and have one player who is constantly searching for their ball, or taking eight or nine practice swings before hitting the ball, everyone has to wait. Similarly, in the editing process, if you have one person who is consistently late in sending in edits, the entire process slows down.

Both golf and investor relations have their own coded clichés designed to blunt the impact of bad news that we can pull out at a moment’s notice. For example, in golf, when you say, “You’re on the beach”, it refers to your having landed in the sand trap; not to taking a quick refreshing break at the seaside. Similarly, in business, the phrase, “He left to spend more time with his family” does not really mean that the person in question wants to become more of a family person; rather it means he was fired and the company does not want to tell you the real reason the executive was let go.

Finally, both golf and investor relations are governed by sets of complicated and arcane rules that can get you into trouble if you’re not careful. It’s important to know the rules and abide by them – in golf, no one wants to play with a cheater, whereas in investor relations, your reputation for honesty and integrity are of paramount importance. Interestingly, in both golf and investor relations, the primary means of enforcement is self policing, although there are notable exceptions. Golf pros are bedeviled by people watching on TV who will call the PGA if they think there has been the slightest rules infraction, and in investor relations the plaintiff’s bar is always willing to second guess disclosure issues if the company’s stock price goes down.

Well, that’s it for now – you don’t want to overdo these analogies. Besides, I need to go practice my swing – it could be that I will play another round before ten years is up.

Small Cap Companies and Efficient Markets

2011-06-09T17:14:00.000-05:00

One of my favorite quotes about the capital markets comes from Fischer Black, the financial mastermind who helped invent the Black-Scholes option-pricing model. Black, who had been a Professor at MIT, situated on the Charles River in Cambridge, left the world of academia to work for Goldman Sachs, which sits near the Hudson River in Manhattan. After experiencing finance from both the academic and practitioner viewpoints, Black commented, “Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.”

I bring this up because last week I was involved in the East Coast IDEAS Conference in Boston at which most of the presenting companies were small capitalization firms. My background is primarily in large capitalization firms, so the conference was an opportunity to see the other end of the spectrum and learn a few things. The most surprising thing I learned as a result of speaking to company managements was how difficult it is for good small cap companies to get noticed by investors. It seems that finding a good match between underfollowed companies and investors can be a daunting challenge.

Part of this can be ascribed to much less sell side coverage available to small cap stocks. The name of the game with sell side coverage is commission flow, and small cap stocks have a lot less of it than larger cap stocks do. Without the distribution of information available from the sell side sales force, small cap companies are forced to try and bring themselves to the attention of investors through their own efforts. Similarly, investors have a hard time finding the good companies through all of the “ground clutter” on their radar screens. Add to this the fact that many smaller companies do not have full time investor relations officers, relying instead upon their CFOs to speak to investors and you have a combination of factors that can lead to companies just not finding the right investors. The result is that the markets seem a lot less efficient in the small cap space.

In theory, (from the banks of the Charles) the efficient market theory would say that as long as your company information is public, investors will find you and properly value your firm. So filing required reports with the SEC and having a web site should be sufficient. In reality (from the banks of the Hudson) this rarely seems to be the case for small cap stocks. What is required of smaller companies is what I refer to as “retail institutional marketing”. They have got to go out and actively bring themselves to the attention of potential investors because they are competing with so many other small cap companies for attention and investment dollars. And it seems as though those investors are not easy to find.

There is a solution for this, and that is for investor relations firms with knowledge of the capital markets for small cap companies to bring companies and investors together. One way to think of this is that IR consulting firms step into the role of the sell side sales force in terms of their knowledge of what investors may be interested in, introducing their client companies to interested investors. The difference is in the method of payment. The sell side is paid for via commissions from the buy side, whereas IR firms are paid by the company. When done correctly, a good IR firm can add to the efficiency of the markets by helping to match the right investors to the right companies, helping them achieve better liquidity and proper valuations

(Full and fair disclosure: The author consults for Three Part Advisors, an investor relations consulting firm and a sponsor of the East Coast IDEAS Conference.)

The Infield Fly Rule and Disclosure

2011-05-25T16:37:00.000-05:00

With the advent of Memorial Day and warm weather (down here in Houston we define warm weather by temperatures being above 90 degrees, where they will stay until late September), my thoughts have turned to baseball and what we in the investor relations profession can learn from it. After all, baseball is a deceptively simple game consisting of throwing a ball, hitting it with a stick and then catching the ball. This compares to investor relations, which on the surface is also deceptively simple, as it’s really just about talking to people about your company and how it’s doing.

In both instances however, what starts out to be simple, rapidly get complex as the result of rules. For example, in baseball, consider the infield fly rule. The infield fly rule is designed to eliminate a situation where a base runner might be damned if he does and damned if he doesn’t. That is, the purpose of the infield fly rule is to prevent the defensive team from turning a double play by intentionally dropping or not catching a fly ball hit to the infield. The rules of baseball define an infield fly as the following:

An INFIELD FLY is a fair fly ball (not including a line drive nor an attempted bunt) which can be caught by an infielder with ordinary effort, when first and second, or first, second and third bases are occupied, before two are out. The pitcher, catcher and any outfielder who stations himself in the infield on the play shall be considered infielders for the purpose of this rule.  When it seems apparent that a batted ball will be an Infield Fly, the umpire shall immediately declare ”Infield Fly” for the benefit of the runners. If the ball is near the baselines, the umpire shall declare “Infield Fly, if Fair.” The ball is alive and runners may advance at the risk of the ball being caught, or retouch and advance after the ball is touched, the same as on any fly ball.

There are several interesting aspects to the rule, such as it requires the judgment of the umpire that the ball can be caught with ordinary effort, an outfielder can be an infielder for purposes of the rule, and it has exceptions for line drives and attempted bunts. And, in true regulatory fashion, this is just the definition. You have to go to another rule to discover the effect of the rule, which is that the batter is out. This is a rule that only a lawyer can love.

Next consider the rules and regulations surrounding disclosure of material non-public information. The rule here appears to be a little less complex than the infield fly rule (although technically speaking, it’s not a rule at all as it came out of court decisions), and goes as follows:

“Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.” And “There must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total” mix of information made available.” (TSC Industries, Inc. v. Northway and Basic v. Levinson.)

There are several striking similarities between the disclosure of material information and the infield fly rule. First, the judgment of the umpire, or in this case the arbiter of fact such as a judge, jury or your securities law lawyer, is called for to figure out what is important and what a reasonable shareholder would think. Next, if you think about the cases handed down about people who have been caught using insider tips, you know that outsiders can be considered insiders. Also, just as with the infield fly rule, there are clear exceptions to the application of the rule. Just as base runners cannot be forced to leave their base in the case of an infield fly, companies can’t be forced to disclose if the disclosure would interfere with sensitive negotiations (for example, in the event of merger negotiations) or if the issue isn’t ripe (due to facts still being discovered). Finally, just as with the infield fly rule, you have to go to a different rule, in this case Rule 10 b-5, to learn that failure to disclose a material fact is unlawful. Coincidence? You decide. It’s enough to make me think that Casey Stengel would have made a great securities law lawyer.

So the next time you’re confronted with a disclosure issue, think of the infield fly rule and take comfort in the fact that very few people truly understand the way these things work, and even fewer can make the right calls under the pressure of the moment.

Expert Networks Following the Rajaratnam Verdict

2011-05-13T14:02:00.001-05:00

There was a front page article in today’s New York times as part of the coverage of the guilty verdicts against Raj Rajaratnam, that was titled, “Next Up: A Crackdown on Expert Networks”. The gist of the article is that federal prosecutors were now going to focus their insider trading crackdown on the use of expert networks. In fact, there have already been a number of indictments and guilty pleas resulting from the government’s investigation.

Expert networks, in a classic example of the law of unintended consequences, sprang into being following the enactment of Regulation Fair Disclosure. The theory was Reg. FD was forcing companies to stick to a plain vanilla disclosure script, telling everybody at the same time, whereas investors would pay to get something more than plain vanilla before everyone else. It proved to be a good theory, as on Wall Street, time and information are money, and expert networks could help investors with both. If an investor needed to get up to speed on a new industry, a new drug or a new technology, paying an expert for an hour or two of their time could be much more efficient than spending a week researching the topic. And presumably the investor could get the information free of corporate spin with some insights into the topic that corporate management might be unwilling to discuss.

Alas, like all good ideas, abuses soon appeared. Some expert networks solicited people to act as experts on the companies they worked for, with the implied marketing pitch to investors that they would be able to get an insider’s perspective. And lo and behold, some of the experts actually gave out material, non-public information about their companies. Many of these “experts” were in technical fields, such as medicine or technology, and it would be easy to say that they might not be expected to know technical SEC regulations. However, when someone is paying a person large sums of money to tell them about things that are not generally known about their company, it’s fair to say that person knows he’s doing something wrong. At the very least they are violating their duty of confidentiality to their employer, at the worst, they are violating the federal securities laws.

So now that people are beginning to be sentenced, what does it mean for expert networks?First, they’re not going away. The desire of Wall Street for fast information that may give them an investment edge will insure that the expert networks will continue to be around. Costs will go up as more compliance is layered into the process, both by investors and the networks, but the demand for the product will not go away. Second, companies will strengthen their disclosure policies to prohibit employees from acting as experts. As I write this I am sure there are securities lawyers all over the country drafting memos advising their clients to update their disclosure policies to prohibit all employees from participating in expert networks. Third, maybe, perhaps, we hope, the bad actors will be forced out of the business.

I hate to sound like a cynic about the last point, but when you’ve hung around the industry as long as I have and witnessed Michael Milken, Dennis Levine, Martin Siegel, Ivan Boesky, R. Foster Winans (The “Heard on the Street” columnist from the Wall Street Journal), James McDermott (the former CEO of Keefe, Bruyette & Woods who gave tips to his adult movie star mistress) and Martha Stewart, you get just a bit jaded about the ability of regulations and compliance programs to overcome the lure of making a quick buck.

Sell Side Coverage, Part 2

2011-04-26T09:36:00.000-05:00

A couple of weeks ago, I wrote about the relationship between Sell Side Coverage and a company’s ability to generate commissions. The long and the short of the article was that the sell side is paid via commissions and therefore, the more trading volume your stock has, the greater the likelihood a sell side analyst will cover your company. This is bad news if you are a small capitalization company, as the volume of commissions generated by your average daily trading volume will not make you a high probability candidate for coverage.

So if you are a small cap company, the question becomes, can you achieve any meaningful sell side coverage? The answer to this is yes, but like so much in life, in order to achieve your goal, you must be willing to spend a good deal of time and effort in order to get where you want to be.

There are a number of approaches to this, but in the end, they all come down to doing things that make you more attractive to the sell side. First, you can institute a marketing campaign to make your company more known to the sell side. This means reviewing who covers your peers and others in your industry and contacting them regarding your company’s investment thesis. While this alone is unlikely to result in sell side coverage, it does get you on the radar screen and raises your profile with the sell side. It also helps if you can present the sell side with a compelling reason to follow your company, such as a unique market niche, product or approach your company has that will enable the sell side analyst to be more knowledgeable about the industry than his competitors.

Second, you can make yourself more known to the sell side’s clients, the buy side. This involves the somewhat labor-intensive task of segmenting, targeting and positioning the company’s message to the buy side community followed by lots and lots of mostly fruitless phone calls. The result of this can be two things that will get the sell side’s interest: more trading in the stock and more questions about the company from the buy side. In this process it is wise not to ignore the IR officer’s anathema, hedge funds, as that is where a significant portion of today’s stock trading volume resides.

Next, you can make your management more accessible to the sell side. This may help sell side analysts fill in gaps in their knowledge about the industry and your company’s position in it, or may give them more product knowledge. As the sell side is expected to be experts in all aspects of the industry they cover, helping them gain more knowledge will put you on their radar screen. Additionally, doing a sell side analyst’s conference or using them to help arrange non-deal road shows allows them to show the buy side that they have management access, something they do get compensated for by the buy side.

One thing to keep in mind about this process is that it takes time and commitment from company management to raise the profile with the sell side. If a company has a dedicated investor relations officer and that person has a good working knowledge of how the Street operates, and the willingness to spend the time, then it can be done in-house. If, however, like many small cap companies, the CFO is filling the role of principle spokesperson to the Street, then it makes a lot of sense to hire an outside IR advisory firm to do the heavy lifting described above.

(Full and fair disclosure: the author is a consultant for Three Part Advisors, an investor relations strategic communications and consulting firm.)

Not Too Hot, Not Too Cold, But Just Right

2011-04-18T16:40:00.004-05:00

I had the privilege of speaking last week before the Austin- San Antonio chapter of NIRI. The topic was one of my favorites, Insights from Academia, or What I’ve Learned About Investor Relations by Teaching in a Business School. Every time I give the talk, it’s a chance to step back from the day-to-day activities that comprise investor relations and think about the process as a whole. This time when I gave the talk, I was struck by the need to achieve balance in what we do.

Those that are involved in investor relations recognize that in order to do it right, you need to combine skills from the disciplines of finance, marketing, law and communications. So there are a lot of factors at play. If one chooses to emphasize one factor over another the entire message can suffer. For example, if a press release is written where legal factors and accounting dominate, the result is a stilted document that tends to read like a SEC Form 10-K filing or a lawyer’s brief. In other words, something that’s deathly dull and uses language to obfuscate rather than clarify. Similarly, if the marketing and communications disciplines dominate, what you wind up with is a document that is more hype than substance and is bound to turn off your audience of sophisticated investors. The key to getting the message right is to balance the various factors.

One of the things I have learned from combing through business textbooks in preparing for my class on investor relations is that a catchy graphic helps to explain complex relationships. Couple that with the fact you almost can’t give a talk without powerpoint slides and I simply had to create a graphic to illustrate this point. So here it is – my attempt at capturing the need to combine all four disciplines in your investor relations message.

Of course, it’s one thing to understand the theory, it’s another thing entirely when you are trying to incorporate comments to your press release by the CFO, the General Counsel, the outside auditors and the communications department. This is where investor relations officers should think back to the Goldilocks story and say to themselves, “Not too much law, not too much marketing, but just right…” It’s at times like that I recommend you pull out the graphic to remind yourself what it is you are trying to achieve.

The Relationship Between Sell Side Coverage and Commissions

2011-04-04T11:12:00.000-05:00

Go to almost any gathering of investor relations officers and you are likely to hear them bemoaning the decline in the number of sell side analysts that follow their companies and publish earnings estimates. And if you are talking to small and even mid cap company IROs, you may hear them complaining that they are having trouble attracting sell side coverage at all. So I thought I would spend some time this week explaining why this might be so.

The answer is simple, really, and like many things in life, it boils down to “that’s the way the math works”. My children would always roll their eyes whenever I said that, so before I get to the quantitative part, a bit of historical perspective is in order. In the old days, before Elliott Spitzer, research departments received much of their budget funding from their bank’s investment banking departments and there was more coverage of companies because investment bankers wanted potential clients to get coverage from the firm. Of course, there were also quite a few conflicts of interest, as investment bankers only wanted the research department to have buys on potential clients. In addition, there was a lot of pressure from investment bankers for stock analysts to give generous recommendations to companies they were taking public. All of this culminated in the 1999 – 2000 dot com bubble when many highly touted internet company IPOs foundered on the shoals of reality.

Enter Elliott Spitzer, who, before he became Client 9, was Attorney General for the state of New York. Sensing that political hay was there to be made, Mr. Spitzer demanded that the conflicts of interest arising from the intersection of investment banking and research be eliminated. Using the bully pulpit of the Attorney General’s office, Mr. Spitzer was able to extract settlements from the investment banks that basically separated investment banking and research. No longer could investment banking departments contribute to the research budgets of their firms. In fact, investment bankers couldn’t even talk to research analysts unless an attorney was in the room to insure that no insidious conflicts reared their ugly heads.

This meant that research departments now needed to justify their existence based upon their only revenue source, which was commissions. And commission rates, due to a number of factors, were declining and continue to decline to this day.

This is where the math comes in, because for research departments, it all comes down to how many commission dollars covering your company can generate for their firm, and that in turn is heavily dependant on the average daily trading volume of the company in question. If you look at a mega-cap company such as Wal-Mart, they trade in excess of 14 million shares per day. Assuming an average institutional commission rate of $.04 per share, this means that on an average day, trading in Wal-Mart shares generates $560,000 in commissions. Even if you are a mid-tier analyst covering Wal-Mart, and you figure you can get credit for 5% of the commission flow, this means that potentially you have available to your firm $28,000 per day.

On the other hand, a small cap stock with average daily trading volume of 100,000 shares, generates commissions of $4,000 per day. Even if you figure the very top, go-to analyst on the stock can get credit for 25% of the commissions, the potential dollars available total $1,000 per day.

Wall Street firms are economically rational, and they will naturally gravitate to where the most money is to be made. And the long and the short of it is that it is a lot better to be a middle of the pack analyst following a mega cap stock than it is to be the number one analyst following a small cap stock.

So the next time you hear someone bemoan lack of sell side coverage, ask them what their daily trading volume is.

Because that’s the way the math works.

Take the Time to Say Thank You

2011-03-30T11:18:00.000-05:00

I’m going to take a break this week from investor relations and instead talk about personal relations. After all, it’s my blog and I can write about what I want to.

The other day I had one of those “What ever happened to?” moments. In this case, I was wondering what had happened to my old track and cross-country coach. He had only coached me for two years in high school before moving on to a different school, but he was a great coach and had given me a love of running that lasts to this day. The Internet is a wonderful tool that allows you to reach out to people that in the old days you would simply have lost track of, so I gave it a try. I wasn’t real hopeful of finding anything, as it has been forty years since my high school track days, but lo and behold, after about five minutes with Google, I had an email address.

Then I did something that I should have done many years before: I wrote him, thanking him for the time, effort and consideration he had put into coaching a young and inexperienced runner many years ago. A couple of days went by and I was beginning to think perhaps I had a bad email address when I received a short email from my old coach saying “You made my day – I will call you”.

Several hours later, I got a call from him and I must say that it was one of the most enjoyable conversations I have had in a long time. Not only did my old coach remember me all these years later, but he even remembered some of my track times from my sophomore year in high school.

In our lives we all have people who have been important influences on who we are and what we have achieved. They may be teachers, coaches, scoutmasters, professors, relatives or even friends of the family. They are people who have taken the time and effort to help young men and women understand who they are and how to use the talents they have to move forward with their lives. They teach fundamental disciplines, help nurture young talent and often give considerable amounts of their own time.

Because the people being helped are young, they often don’t realize how they are benefiting. I used to think that my track coach was good because he made me a better runner. It was only many years later that I realized that as good as he was at making me a better runner, he was just as good at instilling in me disciplines such as hard work and attention to detail that were to benefit me long after I stopped running competitively. But this realization didn’t come until later. When I was young, I was busy getting on with my life, and so I moved on and didn’t give it, or the influencers in my life, a whole lot of thought.

So here’s the thought for the day: take ten minutes and thank someone who has been an influence on you life. I doesn’t matter if it’s an email or a phone call or you stop and chat when you see them in the grocery store. The important thing is to just say thank you. It’s a simple thing to do, but too often we put it off until it’s too late, so do it now. Not only will it make the day of the person you thank, but I guarantee that you will get a big benefit from it as well.

One Generation’s “Nice to Have” is the Next Generation’s Essential

2011-03-25T09:52:00.000-05:00

In our mind’s eye, we never age. We remain slim, dark haired and up to the moment in developments. However, every now and then something happens that reminds us that our view of the world is different than those younger than ourselves.

Just such a moment happened to me the other day when I was teaching my class in investor relations. We were discussing a case in class that revolved around how to improve a company’s visibility with investors. One of my students suggested that one thing the company could do was to improve its web site. As the case occurs in 1993, I said that most companies did not have web sites back then. My student looked at me as if I were from Mars. The concept of a company not having a web site was utterly foreign to her.

The reason I find this interesting is that it points out how quickly something can go from being almost non-existent to becoming an essential part of the information mix of a company. For those of us with a little (or in my case a lot) gray hair, we tend to think of web sites as a secondary means of transmitting information, following real information, which is imparted via pieces of paper and speaking to people. However, if you have grown up in the Internet age, information is first gleaned from the web, and then secondarily refined through other means. For example, if I want to find a good quote for use in writing, I am likely to turn to my trusty volume of Bartlett’s Quotations. My children, on the other hand, would not dream of pulling down a book, but would immediately do an Internet search.

One of the ways this intersects with investor relations is in the way companies treat their IR web sites. Older investor relations officers tend to think of IR sites as “adjunct” or “supplementary” information backing up the annual report, press releases, conference presentations and one-on-one meetings that are the grist of the daily IR mill. Yet with each passing day, more and more analysts are coming out of graduate school with the viewpoint that the Internet is the primary source of information. Just as another data point, it is not unusual for me to see papers from MBA students where all citations are to internet sources, with not a single book cited.

What this means for IR practitioners is that the content of their investor relations web site is increasingly important. The design, information content and logic of the IR site are things that should be given considerable thought. Further, given the pace of change for web sites, the IR site should be thoroughly reviewed at least once a year. This means that delegating maintenance of the IR site to the junior member of the IR department and forgetting about it isn’t an option any longer. Just as the senior member of the IR department wouldn’t dream of letting the junior member of the department do one-on-one meetings with the company’s most important investors, they shouldn’t delegate or outsource the web site. Investor relations sites are rapidly becoming the primary source of information about companies and they need to be accorded a high level of attention.

Otherwise, the likely scenario going forward is that investors, rather than contacting the company, will go elsewhere on the web to get their primary information.

Motive Doesn’t Matter

2011-03-16T09:28:00.002-05:00

The insider trading trial of the century has started in Manhattan featuring Raj Rajaratnam, his Galleon hedge fund and a diverse set of characters ranging from a former Goldman Sachs director to consultants and naturally, other hedge fund managers. The trial is providing plenty of grist for the mill, but I wanted to focus on one interesting article that appeared the other day in the Wall Street Journal entitled “Motive for Stock Leak Can Be Respect, Love”. The story looks at the motivations for some of the people that leaked inside information to hedge fund manager Raj Rajaratnam and others involved with the Galleon hedge fund. It turns out that not all of them did it for the money.

Mind you, the ultimate recipient of the information appears to have been in it for the money, profiting handsomely from the information given to him by his network of informants. And filthy lucre also appears to have been a part of one of the initial witnesses at the trial who testified to being paid $2 million. (As an aside, it’s kind of hard to argue that you don’t know you were doing something wrong when you’re being paid in an offshore account in your housekeeper’s name.)

However, others appear not to have been motivated by money or to even have profited by their leaks. In the case of one Intel executive, friendship appears to be the motivating factor. In the case of an IBM executive, a desire to impress a woman with whom he had become intimate was the reason cited by the executive in explaining himself the judge in his case.

But here’s the thing that any prosecutor worth his salt will tell you when you start to trot out non-monetary motivations: IT DOESN’T MATTER. Knowingly passing along inside information is a crime and it makes not a whit of difference if you made millions as a result of the information or you did it for the love of mankind. There might be some distinction made by the judge between the two when you get sentenced, but make no mistake, if someone has acted on inside information that you knowingly passed along, the government has the obligation to track you down, take you to trial and convict you.

So here’s the point, from an investor relations and compliance viewpoint: A good IR Disclosure Policy and program will drive home the point that it is the disclosure of non-public information that can get you in trouble, not being paid for it. Most people can easily understand that if someone offers to pay them for confidential information, it is probably illegal. Harder for them to understand is that if they pass along the information because they wanted to impress their friend, or were out in a social situation and wanted to appear important, or they had a long standing friendship with the person they gave the information to, they can just as easily get into trouble.

So find a way to get people with access to inside information to understand that they don’t have to profit from passing along inside information in order to break the law. And just to drive the point home, remind them that whatever friend they pass the information to will not be serving jail time for them when everything unravels.

Whistle While You Work

2011-02-28T14:12:00.001-06:00

If you look at the history of financial regulation in the United States, one of the things you notice is that almost all regulation of financial activity at the federal level comes as a result of some form of financial scandal or abuse. This goes all the way back to the Securities Act of 1933, which resulted from the stock market shenanigans brought to light by the Pecora hearings following the stock market crash of 1929. In more modern times, this trend has continued with the enactment of the Sarbanes-Oxley Act of 2002 in the wake of Enron, Tyco, and others, and the Dodd Frank Financial Reform Act of 2010 that was spawned by the housing and mortgage crisis.

These laws are usually enacted quickly, as legislators are anxious to demonstrate that they are doing something, but the resulting legislation lingers on for many years. Companies are left to deal with and adjust to murky legislative language and often burdensome regulations resulting from laws that are designed to prevent the last crisis. Often these laws have unintended consequences, such as the effect of Sarbanes-Oxley on the number of companies choosing to file their IPOs in the United States.

Now we have at least one provision tucked away in the Dodd-Frank law which may come back and bite public companies. I am referring here to the whistleblower provision in the financial reform act. Under this provision of the new law, if a whistleblower provides independent information of fraud to the SEC that results in a successful enforcement action that recovers at least $1 million in sanctions, the whistleblower is entitled to recover at least 10% and up to 30% of the recovered funds.

There are a couple of interesting twists to this legislation. The first is that the independent information regarding the fraud can come from independent analysis of public information. Thus, an outside analyst without any inside knowledge of the company’s books and records can blow the whistle on a company if their analysis shows that the company must be acting fraudulently. This was precisely what happened in the Madoff scandal, when Harry Markopolos went to the SEC with an analysis that showed the returns shown by Madoff were impossible to achieve. It doesn’t take a great leap of imagination to foresee a new subgroup of analysts devoted to looking for financial fraud with the thought of collecting a reward from the SEC.

It also doesn’t take a great deal of imagination to think that the plaintiff’s bar would be very interested in the new whistle blower rules. Now, instead of trolling through Form 4 filings to look for Section 16(b) short swing profits violations by insiders, aggressive attorneys can cultivate relationships with short sellers in the hopes of joining together to find companies engaged in fraudulent activities. Given that short sellers are almost always convinced that companies are defrauding the public and plaintiff’s lawyers never pass up an opportunity to turn a new legal provision into a revenue stream, this is a match made in heaven.

If nothing else, people involved in the disclosure of company information pursuant to the securities laws needs to take a close look at the whistleblower provisions of the Dodd Frank law. Under the current SEC proposed regulations, whistleblowers do not even have to first go through company channels before blowing the whistle. So the company needs to get their disclosures right on the first try, because if they don’t, there may not be a chance to remedy things before the SEC is notified. And the possibility of $100,000 or more in reward money can make it very tempting for whistleblowers to accuse first and verify later.

Social Media and Investor Relations Redux

2011-02-17T10:52:00.001-06:00

Readers of this blog will know that I am somewhat of a skeptic when it comes to the use of social media in investor relations (and yes, I recognize the irony of that statement when written in a blog). It’s not that I think there is no use for twitter, linkedin and the other social media services, it just that they strike me as being over-hyped compared to the nitty gritty job of getting the basic message right. But I am here to report that even I can be convinced of the ways that social media can be helpful.

Earlier this week I was privileged to give a speech to the NIRI Houston chapter on my favorite topic, the intersection of academic disciplines and real world investor relations. Before the speech I was introduced to Catherine Crofton of Q4 Web Systems. It turns out that Q4 Web systems had agreed to sponsor the luncheon and Catherine was going to introduce me. As we chatted about investor relations issues before lunch, Catherine told me about a success story of one of their clients in using social media. It turns out their client, TVI Pacific Inc., launched a campaign to use social media in their investor relations program that, coupled with a good story, helped to raise the firm’s visibility with investors, resulting in improved trading volumes and stock price performance. Q4 Web Systems has written about the program on their blog, which can be found at

http://www.q4blog.com/2010/01/11/tvi-pacific-shares-roi-of-using-social-media-for-ir/.

As I thought through this example, it occurred to me that the company in question, TVI Pacific, was a micro cap company, and one of the big issues facing small cap companies is simply one of visibility. If you are a Fortune 500 company, visibility is not an issue; many sell side analysts cover you, you have a large established base of institutional shareholders and the media is focused on you. However, if you are a small cap company, just getting on the radar screen of many investors presents a problem: the sell side may not cover you at all, very few institutions may own you and you are thinly traded. In short, the markets are a whole lot less efficient when it comes to small caps, mostly it seems because the information does not get in front of the right investors.

There is actually some interesting academic research on this topic. The title of the paper is “Investor Relations, Firm Visibility and Investor Following” and was written by Brian Bushee of Wharton and Gregory Miller of the Harvard Business School. The paper finds that investor relations efforts to improve a small cap firm’s visibility result in better trading volumes and increases in institutional ownership and better valuations.

The interesting thing about the TVI Pacific case is that they used social media in the form of postings on Twitter, Facebook, Fliker, YouTube and Slideshare and links on their website. Slideshare is a new one on me, but it turns out there is a site that allows you to post and share your slide presentations. (For those of us who have had to sit through endless boring powerpoint presentations during meetings, this may seem a bit masochistic, but it seems to be a popular site. Who’d of thunk?)

So if you are a small cap stock in need of visibility, social media may be an additional set of tools an IR officer can use at very low cost, assuming you can get the company’s general counsel to sign off on the use of them.

And it also seems as though a certain cranky IR observer may have to wind up eating his words.

Yowzer! Step Right Up and Hear the Professor!

2011-02-01T13:52:00.002-06:00

I’m happy to report that I will be speaking on February 15^th at the Houston NIRI chapter on the topic of “IR Insights from Academia: Does Any of That Fancy Theory Apply in a Real World Context?” This will be the second time I’ve given this talk, having successfully addressed the Dallas NIRI chapter last November (at least they said it was successful). For those interested in attending, details can be found on the NIRI Houston web site, http://www.niri-houston.org/Luncheon--1.html?ModKey=mk$clsc&LayoutID=7&EventID=95

I find the topic fascinating because it gives me a chance to talk about the intersection of theory and practice. Since leaving the corporate practice of IR and developing my investor relations class at Rice University, I’ve had the opportunity to step back from the day-to-day pressures of IR and really think about what it is IR practitioners do and how all of that fits into things that are taught in business school.

When you think about the discipline of investor relations, it incorporates aspects of marketing, communications, finance, law and the capital markets. Further, the audiences it affects go far beyond just investors to encompass employees, customers, suppliers, creditors, bond holders and governmental entities to name a few. When you throw into the mix that there are some schools of academic theory that hold that active investing and investor relations activities add no value, there’s quite a bit that can be discussed.

Just by way of a teaser for some of the topics I cover in the talk, here’s some of the theory versus real world that I cover:

Finance – most valuation models are constructed using discounted cash flow techniques and how they work has a significant impact on your company’s stock price. Beyond the modeling technique however, there lies a significant takeaway to think about.

Marketing – a lot of investor relations literature talks about targeting investors, but that is only one-third of the three crucial steps to marketing.

Communications – there is a lot of really bad IR communications out there, much of it in the form of PowerPoint slides. I look at examples from some of the biggest corporations in the U. S. (This section is the most fun.)

Law – lawyers are taught to think in a particular way, and regulatory lawyers have a unique take on that. As someone who practiced law for ten years, I attempt to bridge the communications gap between lawyers and IR practitioners.

If you are in the Houston area, I hope you can join me. If you are not in the Houston area, but are interested in having me come to a local NIRI chapter, please give me a call. I’m somewhat of an evangelist on bringing more academic rigor to investor relations, so there is no charge for the talk other than travel expenses.

When is a CEO’s Illness Material?

2011-01-25T10:37:00.000-06:00

There was an article in yesterday’s Wall Street Journal entitled “Investors Want Right to Know” which uses the recent announcement of Steve Job’s latest medical leave of absence to advance the argument that Boards of Directors need to disclose more about the health of their chief executive officer. I’ve written about Steve Job’s illness and the lack of disclosure surrounding it on a number of occasions before (see “The Weighty Issue at Apple”, Jan. 6, 2009 and “Maybe Things Were Not So Simple and Straightforward” Jan. 15, 2009) and I stick by what I wrote then. In short, this is a sensitive area where the privacy of an individual bumps up against the disclosure of material events.

Surprisingly, in light of the numerous other items executives must disclose, there is no SEC rule requiring that a company disclose or discuss the health of its CEO. On the other hand, there is no right to privacy under the federal disclosure laws and regulations, either. So what it boils down to, as it does in so many investor relations situations, is the materiality of the issue. If the fact that your CEO has a life threatening disease would be enough to create “a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision” then you had better disclose it.

There are probably two lines of inquiry a Board needs to think about in considering disclosure; the corporate side and the health side of the issue. Factors to consider on the corporate side in making such a disclosure would include:

How irreplaceable is the CEO perceived to be? People such as Sam Walton of Wal-Mart and Steve Jobs of Apple score highly on this test. Less visible CEOs might not be considered as important to the future of the company, particularly if there is a well publicized succession plan in place and the CEO is nearing retirement age.
How much is the company paying the CEO compared to everyone else on the proxy compensation list? One of the most visible measures of how much the Board of Directors thinks the CEO is worth is how much they are paying him compared to the other important executives. If he’s making several multiples of the compensation of the next person on the list, then the logical assumption is that the Board views him as almost irreplaceable.
Does the company have a risk factor in their 10-K report that talks about how unique and important their CEO is to their future? Obviously it’s difficult to argue that a life threatening illness to the CEO is not material if your risk factors say he’s very important to your future. (Apple in fact did this, but it sure doesn’t look good.)
What is the fact situation surrounding the CEO? Does he portray himself as the sole identity of the firm or does he showcase other executives in public appearances, relations to investors, suppliers and customers?

On the health side of the equation, not to put too fine a point on it, we can all agree that the death of a CEO would be material. So the question Boards must wrestle with is how incapacitating, short of death, must an illness be before a Board has an obligation to disclose. Some commentators have been calling for more regulation by the SEC in these cases, but I think that is likely to be difficult, as hard and fast rules when dealing with health issues can prove a very slippery slope.

All of this sounds good in theory and it would work, except for one thing: Boards usually choose not to disclose a CEO’s illness. I can understand this from a couple of perspectives: the need for privacy in a very stressful situation and the Board’s sense of loyalty to the CEO. Further, when you go through the type of analysis I’ve outlined above, you can often find reasons not to disclose. So investors need to understand, and I think most do, that disclosure in these situations will be slower and more guarded than in a typical corporate situation.

As for the situation at Apple, I have very little sympathy for those who are now crying for more disclosure. If, after all the publicity surrounding Steve Job’s illness during the previous two episodes, an investor hasn’t gotten comfortable with an Apple after Steve Jobs, then they have been asleep at the switch.

Maybe We Have Things Backwards

2011-01-19T11:21:00.001-06:00

I’ve been reading an interesting book lately. Normally I stay away from business books, particularly ones that sound like they want to solve business problems with touchy-feely quick fixes. But in this case I listened to the author get interviewed on the Harvard Business Review podcast and I was hooked. The title of the book is “The Happiness Advantage” by Shawn Achor and its basic premise is that we have things backwards when it comes to success and happiness.

If you are like me, you probably grew up thinking that if I can just be successful, then I’ll be happy. What this type of thinking leads to is a continual round of striving, only to discover that the goalposts keep getting moved. For example, you start out thinking, if I study hard and get good grades, I’ll get into a good school and then I’ll be happy. So you get into a good school and instead of being happy, you discover that now you have to study even harder so you can get the job or graduate school admission that will make you happy. Then when you land the job you think will make you happy, you discover that you need to really buckle down and start your career so that you can achieve true happiness when you get the big promotion. And so it goes, and we never really feel as if we’re happy, because there’s always more out there that we need to achieve in order to think we’re happy.

Mr. Achor turns things around and, based upon research, shows that happy people are more successful. Further, he demonstrates that you can learn to do a lot of small things in your everyday life that will increase your ability to feel positive about things, basically making happiness a habit. I’m still reading the book, so I can’t speak to everything Mr. Achor claims can be achieved, but the way I think about it is, if some of these things make you feel better about life and increase the probability of your success, why not give it a try?

In the field of investor relations, one way to look at it in this context involves the flow of information: many times IR officers are placed in a situation where analysts want more information than our companies want to provide. For example analysts may want to follow the inflation rate in your product category and your company only releases that information in its earnings release. There are two potential ways to handle the situation. One is to simply say the information is not available intraquarter (as Oddball, played by Donald Southerland in the classic movie Kelly’s Heroes says, “Negative waves, Moriarty”). Or you can choose to be helpful by pointing them to a government inflation index that closely tracks your own internal inflation that will help the analysts without divulging your number. I guarantee that the analyst will think more highly of you and your firm if you choose the latter course.

When all is said and done, a large part of investor relations is based on relationships that you build with investors over time. If those interactions that you have with investors are positive in nature, the investors are more likely to have a good impression of your firm and its prospects. And that’s a big part of the battle.

Focus on the Fundamentals

2011-01-03T11:32:00.000-06:00

I spend a fair amount of time listening to business experts on the Harvard Ideacast and Knowledge@Wharton podcasts. I choose to listen to the podcasts as opposed to read the scholarly articles they are based upon for two reasons: First I find that authors are much more likely to speak in plain English than they are to write it. Second, I spend a fair amount of time cycling to stay fit and listening to podcasts beats hearing my playlist of oldies for the 2,000^th time (and I can hear traffic over the sound of the spoken voice whereas Bruce Springsteen tends to drown out the sound of approaching cars).

One thing I’ve noticed about business experts, whether their field is human resources, finance or management, is that they are all convinced that the insights they bring and the field they are working in are the most important and critical applications for the modern corporation. Almost every expert comes across as being convinced that if company managements would only sit up and take notice of the expert’s crucial insights, companies could solve all of their ills and rake in the profits.

And so it is with investor relations experts as well. Over the past several years as I have observed and commented upon the field of investor relations, I have seen a parade of experts inform us how our lives were going to be radically changed by the latest topic du jour, and that we had better get on the train because it was leaving the station and those that were not on board were doomed to extinction.

Let’s start with XBRL. I first wrote about this topic in January 2009, so almost two years have gone by since I confessed that I didn’t understand the revolution. Guess what? I still don’t understand what all the fuss was about. XBRL sure hasn’t changed my life, and I look at company filings and websites all the time. It may have changed the lives of some programmers that had to map all that data, but to me it just seems like another government mandate that has had little to no impact in the real world.

And how about social media? Has it totally changed your IR program yet, the way all the experts claimed it would? I think the only change social media has made to IR is to give rise to an entire set of new experts that will get you prepared for the revolution they say is coming.

The point here is not that these issues don’t have an impact – they do, albeit a minor one in the scheme of things. These relatively new technologies will grow in importance over time, just as the use of the web and email have, although each new technology brings about its own dangers (see my June 10, 2009 post “Email is Not Your Friend”). The point I am trying to make is that IR practitioners should not let the latest fad overshadow the fundamentals of what we do. And what we do is to ensure that investors have sufficient information to make reasoned investment decisions about our company’s stock. This is accomplished by making sure the information our companies disclose is clear and understandable and presents a complete picture so that investors can make an informed investment decision. Clear and understandable generally comes in two parts: how we plan to make money in the future, back-tested against what the company has accomplished in the past.

The medium of how information gets delivered, whether it is in the form of paper, telephone, fax, email, text messages or social media, is just a tool – the important part is the information itself. So as we move into a new year, let’s focus on the important stuff and make sure that we make sure the basics are covered before we start chasing the stuff at the margin.

Proxy Advisory Services Regulation: What’s Good For the Goose…

2010-12-17T10:14:00.000-06:00

As a commentator, one of the best things you can find to write about is when you come across someone being totally disingenuous; it’s almost as good as when companies do something really stupid (for which see “How Not to Run a Conference Call” December, 2007 and “What Was He Thinking, Whole Foods Version”, August 2007).

Which brings me to this week’s subject, the possibility of the Securities and Exchange Commission imposing regulations upon proxy advisory firms. Proxy advisory firms have grown in size and influence over the last twenty years. Their positions on corporate governance, compensation and proposed mergers and acquisitions have become important to both investors and corporations, creating in effect, de facto standards. Yet the manner in which the proxy advisory firms reach their recommendations and ratings, the formulas they use when looking at compensation and equity plans, and the process by which they make recommendations regarding merger and acquisition activity are considerably less than transparent. Further, the amount of research available to support their positions on corporate governance is less than overwhelming and far from conclusive. Finally, some firms, such as ISS, have actively worked both sides of the street, advising institutions how to vote and selling their consulting services to corporations to tell them how to structure things in order to get approval and high ratings from ISS.

So when the Securities and Exchange Commission asked for comments on the proxy process earlier this year it is not surprising that a number of comments came back suggesting that proxy advisory firms be subject to some regulation from the SEC, namely that proxy advisory firms should be subject to proxy rules and regulated as investment advisers, including mandated disclosure of specific conflicts of interest, transparency on how they develop their ratings and recommendations, and that they adopt procedures ensuring the accuracy of their reports and voting recommendations.

It seems as though the proxy advisory firms, which like more regulation for corporations, are not so happy when the shoe is on the other foot. Here’s Nell Minow, Chair of The Corporate Library and former general counsel and CEO of ISS in a comment letter to the SEC: “I would like to object in the strongest possible terms to the possible regulation of proxy advisory services.” Later in her comment letter, she goes on to explain how market forces will keep the proxy advisory services honest.

In other words, if we just let competition work without government getting in the way, everything should be fine. Of course this is exactly what they say doesn’t work for corporations when they want more regulation on say on pay, proxy access, compensation disclosure and a whole host of other corporate governance issues.

It does seem to make sense that these firms, which have a great deal of influence in how investment firms vote should at least be required to disclose the methodology by which they come to their ratings and recommendations, disclose any potential conflicts of interest (or better yet, be prohibited from conflicts of interest) and show they have stringent procedures in place to prevent inaccurate reports and recommendations.

After all, if increased disclosure and regulation is good for the goose (corporations), then it is certainly also good for the gander (proxy advisory firms).

Lawyers Gone Wild

2010-12-06T18:12:00.001-06:00

To a certain degree, we are all governed by our experiences. In the case of Wal-Mart, that experience seems to include getting sued – a lot. While I was unable to get exact, recent numbers, a 2001 USA Today report had Wal-Mart stating that they were sued 4,851 times during the year 2000. Another source on the web reported that Wal-Mart was sued 845 times in federal court alone during 1999. The point here is not the preciseness of the numbers, but rather the magnitude, and the simple fact is that Wal-Mart finds itself on the receiving end of lawsuits with great regularity.

Having to deal with plaintiff’s lawyers on such a regular basis would warp the sensibilities of almost anyone and it appears that a bunker mentality regarding being prepared for lawsuits has crept into Wal-Mart’s investor relations pronouncements. How else can you explain the safe harbor language for forward-looking statements contained in their most recent earnings call?

A transcript of Wal-Mart’s third quarter earnings call shows that their safe harbor statement runs 1,316 words, or about 4 1/2 pages of dense, lawyer drafted prose. By my calculations using the transcript available on Seeking Alpha, this was slightly more than 10% of all the words spoken during the call. Interestingly, this was almost 300 words longer that their second quarter safe harbor statement, which came in at a mere 1,038 words. To get an idea of how things have escalated, their fourth quarter 2005 earnings call used a safe harbor statement containing 455 words. At this rate, pretty soon Wal-Mart’s entire earnings call will consist solely of a safe harbor statement.

I am fortunate enough that I don’t get sued with great regularity, so I may not be as sensitized to this issue as Wal-Mart is, but to me it seems like lawyerly overkill. Here’s an example:

“This call will contain statements that Wal-Mart believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally are identified by the use of the words or phrases anticipate, are anticipating, are expecting, assume, could be, expect, forecasting, goal, guidance, guided, is expected, is planning, may affect, plan, will accelerate, will add, will be, could save, will drive, will ring, will be growing, will come, will continue, will cost, will experience, will generate, will grow, will improve, will not continue, will remodel, will see, will spend, will take, would represent , or a variation of one of those words or phrases in those statements or by the use of words and phrases of similar import. Similarly, descriptions of our objectives, plans, goals, targets, or expectations are forward-looking statements.”

The lawyer seems to have parsed through every verb that was going to be used in the call and labeled anything that could possibly be construed as future tense as forward looking. Of course, then for good measure, they throw in the phrase “or a variation of one of those words or phrases in those statements or by the use of words and phrases of similar import” which is legalese for “I can’t think of anything else, but if you can that’s excluded too”. Similarly, it appears as though a lawyer was determined to parse through every statement that Wal-Mart proposed to make during its earnings call, call out anything that could be deemed even slightly a forward looking statement, and specifically disclaim liability for it if things didn’t turn out as represented. That goes on for almost four pages. This is deadly stuff, and I don’t mean that in a positive way. I can’t image what Wal-Mart’s lawyers would do if the company actually took questions from analysts during the call.

All of this points out one of the central tensions of investor relations; the desire of IR practitioners to point out the road the company intends to pursue in order to earn future profits, versus the desire of lawyers to insulate the company from liability in a dangerous world where securities class action attorneys wait to pounce on any slight misstep. I’m not sure where the proper balance exists between these two desires, but management needs to recognize when lawyers are getting in the way of the message and tell them to cut back on the excess verbiage.

Certainly, if the lawyers are taking up over 10% of the message, things have gone too far.

Insider Trading – The More Things Change…

2010-11-30T11:52:00.000-06:00

There’s an old French proverb, “plus ça change, plus c’est la même chose”, which translates into “the more things change, the more they stay the same” and that’s the way I feel about insider trading. Every few years, the topic seems to rear its ugly head long enough for prosecutors to make some headlines before moving on to other offenses.

In the past few weeks insider trading has come back into the news. Federal prosecutors recently unveiled a sweeping investigation centered upon the use of so called “expert networks” and involving subpoenas to SAC Capital, Janus Mutual funds, Fidelity Investments and Wellington Management. The current round follows about a year after the indictments announced in connection with the investigation of Galleon Hedge Fund and there appear to be a number of links between the two cases.

Insider trading issues are always going to be part of Wall Street as there is an inherent conflict of interests between our regulatory scheme and what motivates professional investors. The regulations seek to ensure fair and honest markets where all investors play on an even field. On the other hand, investors seek to gain an “investment edge” either through superior analysis or by figuring out insights to what may be happening at the company in question by piecing together disparate snippets of information. Given that there are significant amounts of money involved, Wall Street analysts are always going to push as hard as they can to gain an investment edge, up to, and sometimes over, the ethical line.

It doesn’t help matters that the current regulations and case law regarding insider information are not crystal clear. To greatly oversimplify things: If you are in possession of material, nonpublic information and you received it as a result of a duty to the corporation, or from someone who has such a duty, or if you have misappropriated the information in violation of a fiduciary duty, you can’t buy or sell the securities of that company. However, the mosaic theory, first enunciated by the federal courts in Elkind v. Liggitt & Myers, Inc., holds that analysts can assemble seemingly disparate non-material information into a material piece of information; that is, information that leads to a decision to buy or sell the stock. Of course, if some of the mosaic of information was obtained as a result of violations of duty to the company discussed above, things become somewhat less clear.

And there we have what I believe to be the crux of the current crop of insider trading cases. If you listen to the defendant’s attorneys you hear a constant drumbeat of mosaic this and mosaic that, portraying their clients as simple analysts who gain insight into companies by dint of digging harder than anyone else. If you listen to the prosecutors, what you hear is a tale of misappropriation of information that was known to be from sources that had a duty not to disclose the information, even if the piece of information was not material in and of itself. To my knowledge, there is no clear case law that governs in such a situation. Judges and juries are going to have to figure this one out, followed by inevitable appeals.

If we’re lucky, there eventually may be some clarifying language that will help people understand what they can and cannot do - what lawyers like to refer to as a “bright line” test. If we’re really lucky, the courts will give it a handy catch phrase such as “fruit of the poisonous tree” or “clean hands doctrine” that will help investors know what they can and cannot do.

Goodness knows, the securities laws could use some simple, clear rules that everyone can understand.

Reg. FD - There’s a New Sheriff in Town

2010-11-15T13:35:00.001-06:00

Regulation Fair Disclosure has had an up and down history in terms of enforcement. It would appear that we are currently in an up cycle and investor relations officers need to have an enhanced sense of awareness about Reg. FD so that they don’t find themselves in the SEC Enforcement Division’s crosshairs.

A bit of history is in order at this point. Reg. FD was enacted by the SEC in August, 2000 in order to prohibit companies from selectively disclosing material nonpublic information to market professionals under circumstances in which it would be reasonably foreseeable that the market professionals would trade on such information. In enacting the regulation, the SEC was attempting to level the investment playing field by assuring that all investors receive material nonpublic information at the same time. Of course, given that investors are constantly looking for an investment edge, usually in the form of information, there were bound to be some built in conflicts in the actual operation of the rule.

In the first years following the adoption of Reg. FD, the SEC brought a number of successful enforcement actions, as if to drive home their point. In these cases, companies had their knuckles rapped because they: told analysts (i) that earnings estimates were “too high” or “aggressive” (In re Raytheon Co., SEC Release No. 34-46897 (Nov. 25, 2002)), (ii) they were entering into a new material supply agreement (In re Secure Computing Corp., SEC Release No. 34-46895 (Nov. 25, 2002)), (iii) through a “combination of words, tone, emphasis and demeanor” indicated that next year’s earnings would decline significantly” (In re Schering-Plough Corporation, SEC Release No. 34-48461 (Sept. 9, 2003)).

During this period the SEC also brought not one, but two enforcement actions against Siebel Systems. After acquiescing in the first enforcement action, Siebel got their back up in the second enforcement action and litigated the issue in Federal District Court, where the SEC met their Waterloo. Basically, the District Court ruled that the SEC was being too aggressive on how they enforced selective disclosure and that companies could make statements in private conversations with analysts that vary from their public statements, so long as the statements were “equivalent in substance” (SEC v. Siebel Systems, Inc., 384 F.Supp.2d 694 (2005)). And there the matter stayed, with the SEC bringing no further enforcement actions.

Until recently, that is. Since September 2009, the SEC has brought three enforcement actions for Reg. FD. In addition to the high profile case against Office Depot which I wrote about several weeks ago (Nudge, nudge, wink, wink – Office Depot and Reg. FD, October 25, 2010), American Commercial Lines and Presstek have been taken to the regulatory woodshed. In September 2009 the SEC settled a civil action against Christopher Black, former CFO of American Commercial Lines for emailing 8 sell side analysts from his home on a Saturday, adding "additional color" to a previous company press release that had stated "2007 second quarter results to look similar to the first quarter". Black's email said that "EPS for the second quarter will likely be in the neighborhood of about a dime below that of the first quarter", which effectively cut in half the previously given guidance. That email cost Mr. Black $25,000, payable to the SEC.

In March of 2010, the SEC settled a Reg. FD enforcement action against Presstek, Inc. for selectively disclosing its poor earnings outlook to a single investment advisor in a phone conversation, who then sold his holdings of approximately 500,000 shares. Although Presstek issued a public announcement about 12 hours later, they still wound up paying a $400,000 fine.

I have no special insights into the inner workings of the SEC, but it appears to me that for whatever reason – new political administration, new head of the enforcement division of the SEC, desire to nail some scalps on the wall following a number of highly publicized enforcement failures – the SEC has decided that Reg. FD will receive renewed enforcement attention. In reality, the underlying reason doesn’t matter. Investor relations officers need to sit up and take notice that the SEC is once again taking a close look at fair disclosure situations. After all, receiving a Wells Notice letter can really ruin your day.

What Warren Buffett Can Teach Us About Investor Relations

2010-11-01T09:32:00.002-05:00

In October, Jeff Matthews, the author of “Pilgrimage to Warren Buffett’s Omaha” came to our local Houston National Investor Relations Institute chapter meeting to talk about his book and to make observations about Warren Buffett and Berkshire Hathaway. It was an interesting talk and the Houston chapter gave everyone who attended copies of the book.

Normally I don’t read a lot of business books, as by the end of the work day I’m on information overload and prefer to pick up something kinder and gentler, such as a murder mystery. But in this case I already had the book and it looked as if it might be interesting, so I started to read it. I was pleasantly surprised. It’s an easy read and has more nuggets than the usual business book written by consultants or business school professors. (As someone who fills both roles, I am qualified to make that statement.) If you get a chance it’s worth the read.

The book itself is written around two visits Jeff Matthews made to the Berkshire Hathaway annual meetings in 2007 and 2008 and the bulk of the book is devoted to what was revealed through questions and answers at those sessions. But Matthews, a professional investor, is not content with merely acting as a reporter and uses the visits as springboards to examine a little bit about Buffett himself and a bit more about the businesses that make up Berkshire Hathaway.

There are a number of trenchant observations in the book, including the fact that most of Berkshire’s operating companies seem to prefer high profitability with okay growth to high growth with okay profitability, so that they can send all of their excess cash back to Omaha for further investment by Buffett. However, this is a blog about investor relations, so I want to focus on what I consider to be the most important IR takeaways from the book.

First, the bad news: Berkshire Hathaway does not have an investor relations department, nor do they have a fancy IR web site. Instead what they have is Warren Buffett and his annual letters to shareholders and appearances at the annual meeting. But this is more than enough. What Buffett tries to do is to get investors to understand the philosophy and culture of Berkshire Hathaway. He figures that if they understand what he is trying to do, he will get “high quality” investors that will stick with Berkshire Hathaway over the long term. Jeff Matthews illustrates this early in the book with a quote from the 1983 Chairman’s letter:

“We feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy – along with no other conflicting messages – and then let self selection follow its course.”

In investor relations we all want to have “high quality” investors, but most of us spend our time discussing the latest 5 basis points of change in last quarter’s gross profit margins. As a result we tend to self-select towards those types of investors that are interested in the latest minute quarterly change as opposed to where the company is going to be five years down the road. So the first takeaway is that we get the shareholders we cater to. Focus on the long term and how you propose to increase value over time and you will be rewarded (assuming you execute well against your plans) with shareholders that are more patient and willing to overlook short-term bumps in the road. Focus on the current quarter and the short term and you will get investors that think that’s what’s important.

The second item for investor relations practitioners from the book is the immense amount of importance Buffett places on culture and reputation. I’ve written about this before in the context of investor relations (see “A “Cultured” Approach to Investor Relations” February 24, 2009) but it’s always nice to see that the world’s greatest investor agrees with you. In short, corporate culture and reputation matter, and it is important that investors understand these intangibles if they are going to understand how to value your company. And finally, and most importantly, it’s crucial that the actions of management conform to the culture that supports the reputation of your firm. To take another quote from Buffett in the book:

“We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation. Let’s be sure that everything we do in business can be reported on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

A short way to sum up these two key IR points is that you get the investors you deserve as a result of what you do and say. This is very typical of the way Buffett boils things down into powerful insights into the obvious that we often overlook.

Nudge, Nudge, Wink, Wink: Office Depot and Reg. FD

2010-10-25T11:59:00.000-05:00

Last week the Securities and Exchange Commission announced enforcement actions against Office Depot, its CEO and former CFO for violation of Regulation Fair Disclosure. After a four year quiet period following its Federal District Court loss in its second enforcement action against Siebel Systems, new leadership in a new administration seem to have resurrected Regulation Fair Disclosure from the regulatory dustbin, with three actions in the past year.

In the case of Office Depot it seems that management was concerned about analysts’ estimates for the second quarter of 2007 being too high. The CEO and the CFO directed people in the investor relations department to conduct calls with 18 analysts designed to remind the analysts of statements Office Depot made earlier in the quarter and that Office Depot’s competitors were having a tough time of it. The talking points used by the investor relations department were along the following lines:

"Haven't spoken in a while, just want to touch base.

At beg. of Qtr we've talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end.

I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting.

On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters.

[Company C] mentioned economic conditions as a reason for their slowed growth.

Some have pointed to better conditions in the second half of the year – however who knows?

Remind you that economic model contemplates stable economic conditions – that is mid-teens growth"

In other words, Office Depot was attempting to imply that the economy was lousy, just as they had previously warned it might be and that their competitors had all been impacted by it. The logical inference then (nudge, nudge, wink, wink) is that Office Depot’s operations were also suffering. As might be expected, following the calls, analysts began to lower their estimates and the price of Office Depot shares began to fall. Six days after the calls began Office Depot filed a Form 8-K Report announcing that its sales and earnings would be negatively impacted by the softening economy.

This is the sort of thing that drives the Enforcement crowd at the SEC nuts and they went after Office Depot with a vengeance, eventually winning an agreement from the company to pay a $1,000,000 fine and $50,000 fines against both the CEO and former CFO.

The good news here is that the people actually making the calls, the investor relations staff, were not fined. Either the defense of “I was just following orders” works with the SEC or they figured that, given the salaries of most investor relations officers, there just wasn’t enough there to make fines worthwhile.

There are a number of lesson that can be drawn from all of this, the most obvious being that you shouldn’t try to do indirectly what the regulations do not allow you to do directly. This enforcement action will send shivers through any investor relations officer that has wrestled with an analyst over their estimates being out of line, as many of the same techniques are used to bring estimates into line.

But what I’m interested in is what did the management of Office Depot think they were going to accomplish? They clearly wanted to signal that business was not as robust as analysts were expecting, but to what purpose? So that the stock wouldn’t trade down when the earnings were announced? Surely they must have known that the stock would trade down when they began to contact analysts. So is it better to have the stock go down earlier? I don’t get it.

This is classic short term corporate thinking, worrying about the stock price over a period of a few weeks. Over the long haul, the stock price will reflect the intrinsic value of the stock, and management should be worried about how to drive that intrinsic value higher, not where the stock price is going over the next few weeks due to short term economic conditions.

Maybe They Thought It Wasn’t Important

2010-10-19T17:33:00.002-05:00

There are several scenarios that are a company's publicity and investor relations nightmare. One of them is if a senior executive is arrested for drunk driving. That’s just the situation Walgreens found itself in recently when its CFO was arrested, not once, but for the second time in a little over a year for driving under the influence of alcohol. According to press reports, Wade Miquelon, Walgreens CFO, was first arrested in September of 2009 for having a blood alcohol level that was unacceptable under Illinois law. As a result of the first arrest, Miquelon paid a hefty fine and was placed under Court supervision. In September 2010 he was again stopped and charged with driving under the influence and driving on a suspended or revoked license. At the time of his second arrest he refused to submit to a breathalyzer test, resulting in an automatic suspension of his driving license for three years.

Walgreens response to all of this has been to have a company spokesman state, “We are aware of the situation. It's a personal matter, and we don't comment on personal matters related to our employees.”

This is a perfect example of adopting a regulatory approach to investor disclosure. If you just read the regulations, there is no requirement to make a disclosure under any of the filings. The instructions for filing a Form 8-K state that a company need only file a Form 8-K if someone like the CFO either resigns or is removed, not if he has done something criminal. Regulation S-K, which governs disclosures for periodic filings and proxy statements, states that with respect to certain legal proceedings, a company must disclose events during the past five years “that are material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the registrant:…

(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);”

Driving under the influence of alcohol, even if it is a second arrest, would seem to fall under the exception for traffic violations, so that there is no specific requirement to file a disclosure of the event. So what one is left with is a standard materiality test, not unlike the situation when Steve Jobs of Apple was ill and the company was faced with a disclosure decision. (See my posts “The Weighty Issue at Apple", Jan. 6, 2009 and "Maybe Things Were Not So Simple and Straightforward", Jan. 15, 2009.) The legal analysis revolves around whether Mr. Miquelon, the Chief Financial Officer of the company who was specifically hired in to lead a restructuring effort called “Rewiring for Growth” was considered so key that effort that investors would deem it important to a decision to either buy or (more probably) sell the stock if he was shown to have a drinking problem. On this point, reasonable minds can differ, and when the subject of making a disclosure that might prove embarrassing to senior officers is concerned, it’s easy to see how a company might be able to get an opinion from counsel that you need not disclose.

The more interesting question is whether the company should have said something voluntarily. Clearly they have an officer, one of the most important in the company, who is either suffering from an illness or is exhibiting extremely poor judgment. According to reports in the press, if convicted for the second offence, Mr. Miquelon faces a high probability of doing some jail time, which will remove him from the company for a period of time. Additionally, I’m sure the questions crossed the minds of investors along the lines of “If Mr. Miquelon thinks so little of laws that affect him personally in the most direct way possible, what are we to think about the way he will choose to deal with the myriad laws and regulations that surround the accounting and investor disclosures he is in charge of for his company?” Yet Walgreens did not make any disclosure until the incident came to light. Wouldn’t it have been better to be proactive, acknowledge the problem and how they were addressing it?

You can’t tell me that the CEO and Board of Directors don’t think this series of incidents is not important. So it should be considered important to investors as well. Some well thought out disclosures should have been made for the benefit of the shareholders, the owners of the company.

Stand Up and Take It Like a Man

2010-09-29T13:41:00.001-05:00

There’s been a bit of a kerfuffle lately about virtual, online annual shareholders meetings. It seems that Symantic Corporation recently held an audio only, virtual meeting where they took only two questions from shareholders. This angered a number of shareholders and Symantic came out of the process looking as if they lacked transparency, rather than looking as if they are on the cutting edge of technology. Gretchen Morgenson, the financial columnist for The New York Times, did a good job summarizing the meeting and the anger it engendered in its shareholders in her column on September 25^th.

The issue however, is not the efficacy of online annual meetings. There are some obvious efficiency and cost savings benefits to be realized by enabling people to link electronically rather than forcing everyone to come to a single physical location. With today’s technology there are ways that will enable shareholders to actively ask questions and see management’s responses in real time. In other words, companies can structure transparent online annual meetings if they want to; it’s just that many of them are less concerned with transparency than they are with controlling the agenda and message.

To be fair, corporations have reason to be concerned about controlling the agenda. Many special interest groups, if given the chance, would monopolize the question and answer sessions of annual meetings in order to promote their own agendas. In order to combat this, corporations put in place all sorts of limitations and devices to filter out dissenting voices, from the requirement to submit questions beforehand, to time limits, to limits on the number of questions, to arbitrarily cutting off questioners. The result is that usually management ends up looking arbitrary and controlling rather than open to the owners of the company. And when the controlling is done remotely and electronically it looks even worse that it does in person.

So the issue to me is not whether shareholder meetings occur virtually, in person or a combination of the two: the issue is how does management treat the shareholders, even if they don’t like the shareholders’ point of view. For this I take a page from Cork Walgreen, the former CEO of Walgreens.

One of my duties when I was working at Walgreens was to organize the Annual Shareholders Meeting. Attendance at the meeting during the time I ran it grew from around 400 people to over 3,000, and as you can imagine, the number and type of people attending ranged from retirees and employees to sophisticated investors and special interest groups. Questions at the meetings from shareholders at the meeting could be anything and often ranged from complaints about stores being out of merchandise to expansion plans in the State of Alaska to the use of non-union labor in certain construction sites.

The interesting thing about all of these questions was how Cork Walgreen handled them. First, let me say that public speaking was not one of Mr. Walgreen’s favorite things. In fact, he disliked it intensely and rarely appeared in public. But when it came to the annual meeting, he stood up there and took all the questions that time permitted. His attitude was that the shareholders paid him to be in charge and that included answering questions at the shareholders meeting, in good times and bad, no matter how uncomfortable that may have been. He may not have given everybody the answers they wanted – in a forum like the annual meeting you can’t please everyone – but he always gave them the courtesy of listening and responding to their questions. And the shareholders respected him for it.

So the takeaway from all of this is that when you’re conducting your next annual meeting, be it virtual, in person or a combination of the two, take the time to listen to and respond honestly to the shareholders’ questions. In short, “Stand up and take it like a man”. The pain may be intense, but it’s brief. And no one will write stories about how rude you were to shareholders in The New York Times the next day.

What Motivates Your Analyst?

2010-09-14T14:22:00.001-05:00

The United States Court of Appeals for the Second Circuit once characterized the exchange of information between corporations and investment analysts as “a fencing match conducted on a tightrope”. If investor relations officers are going to be successful in such a treacherous environment, it helps to understand the analyst on the other side of the conversation and what motivates them. Different analysts have different approaches, and early on in this blog I wrote about “information vampires” (March 2007), “elephant hunters” (April 2007), and “channel checkers” (July 2007) as prime examples of the way some analysts approach things. Now comes a New York Times article published on September 12, 2010, entitled “The Loneliest Analyst” about Richard Bove, a banking analyst that offers some good insights about the way another type of analyst works.

The bulk of the article concerns the lawsuit brought by BankAtlantic, a Florida bank, against Bove for a report he issued about the banking industry in 2008, which ranked the bank’s holding company as among the most risky financial institutions based on financial ratios. The lawsuit was eventually settled without liability to Bove, but it left him the poorer by $800,000 in legal fees. While the drama surrounding the lawsuit is interesting to anyone who has ever listened to a CEO fume about what he thinks is unfair or inaccurate in an analyst’s report, the more interesting part of the article occurs when Bove speaks about his work.

The lead in the article talks about how Bove likes to take “extreme positions” which can occasionally move the markets, gaining him prestige and notoriety. It then cites as an example a recent opinion issued by Bove that government rules would curb mortgage profits and by implication, bank profits. When the share price of Wells Fargo, a large mortgage lender, begin to drop following the report, Mr. Bove’s phone lights up with calls and he states, “That’s what makes the game fun, right?”

According to the article, Bove’s work tends to focus on the big picture, because, as he puts it, “What’s the reason to pay me to be the 14^th guy to tell you what is going to happen in the second quarter at Citigroup? There’s just no utility for a guy at a boutique that operates pretty much on his own to replicate the work of other analysts.”

So one of the takeaways from the article come from learning that analysts at boutique firms may have an entirely different motivation in how they approach research. Without the resources of some of the bigger shops, their focus may be on hitting the home run as opposed to maintenance research, or on big picture, macro stories. Understanding if the analyst you are speaking with takes a differentiated approach will help you as an investor relations officer have a more meaningful discussion with that analyst.

In another interesting portion of the article, Andy Kessler, a former Wall Street analyst, is quoted as saying that it’s common for analysts to change their opinion styles in order to cater to their clients: “If your clients are mostly hedge funds, you’re going to give mostly short-term analysis”. Given that a large percentage of trading volume these days comes from hedge funds, it’s no wonder that we get mostly short-term analysis.

So two quick takeaways from the article: understand what motivates the analyst, and know who his clients are will help you understand his research approach. Sounds a lot like the old broker rule of “Know your client”, but this time reversed.

Proxy Access - Who Benefits?

2010-09-07T13:42:00.002-05:00

There is a famous Latin saying, “Cui bono?” that was used in Roman trials to help determine the underlying truth of a matter. The phrase translates into “To whose benefit?” and is meant to suggest the possibility of a hidden motive or that the party responsible may not be who it appears to be at first. And so it is with proxy access, recently adopted by the Securities and Exchange Commission.

The thinking behind proxy access appears pure at first – to promote shareholder democracy by letting shareholders utilize the corporate proxy statement rather than go through the expense of mounting a proxy campaign of their own. But over the years, I’ve come to be suspicious of anything that drapes itself in motherhood and apple pie, whether it comes from the right or left side of the political spectrum, and so I started to think about who really benefits from proxy access.

As I understand the new rule, shareholders who have held at least 3% of a company’s stock for at least 3 years will be able to nominate up to 25% of a company’s board of directors using the company’s own proxy statement. So I guess this is a move to open up corporate boards to shareholders, but I wonder, which shareholders?

Retail? Certainly not retail shareholders; for the most part they don’t reach the 3% threshold.

Hedge Funds? Unlikely, as the turnover in their portfolios means that it is doubtful they will hold stock for 3 years.

What about activist investors – might this new rule inure to their benefit? Possibly, but not to a large extent. A paper entitled “Hedge Fund Activism, Corporate Governance and Firm Performance” suggests that the median holding period for activist hedge funds is 556 days, or 18.5 months. While this might be longer than you thought, it is still only half the time required by the new rule.

Mutual Funds? I suppose mutual funds might be a beneficiary of the new rule, but I’ve never known them to take an interest in nominating directors.

So who’s left? What entities have the financial muscle to hold 3% of a company’s stock for 3 years? What entities have exhibited a desire to use the proxy system to agitate for their own agendas? The answer is: Foundations and Pension Plans. Of these the bulk of the money is represented by pension plans. Add to that the fact that, according to The Wall Street Journal, four out of five for profit corporations have moved away from pension plans, while unionized employees both in the private sector and government, have fought to retain their fixed benefit pensions and the picture of who benefits starts to become clearer.

Least you were in doubt on the issue, consider also that the SEC adopted the rule in a party line vote, 3 democrats for and 2 republicans against. Suffice it to say that republicans don’t get many campaign contributions (or votes) from union members. Finally, consider two of SEC Chairwoman Shapiro’s key appointments to the Commission staff: senior advisor Kayla Gillian, former general counsel at Calpers, the California state workers pension fund, and Richard Ferlauto, former pension director at AFSCME, the union representing state and local government employees nationwide to the investor advocacy office.

Add it all up and it becomes clear that who benefits under the guise of shareholder democracy for all is really a limited number of unions. Now instead of spending union member’s dues in proxy contests they can lay that cost off on the corporations. It’s a nice deal if you can get it.

And Now for Something Completely Different

2010-08-17T14:07:00.001-05:00

In the early part of the twenty-first century we all seem to lead time stressed lives. The press of business competes with the demands of ever increasing amounts of information that need to be absorbed. There never seems to enough time in the day to read everything that seems as if it might be important. So the question becomes, “How does one stay current with business thinking, or better yet, get ideas from some of the latest research?” Fortunately, technology has provided a solution.

Most people that work today spend significant time in commuting and this provides anywhere from thirty minutes to two hours a day when time is available to listen to podcasts. For those people who are not familiar with podcasts, they are electronic files that you can download to your computer, iphone and ipod and listen to anywhere, be it in the car or working out. There are an amazing variety of podcasts available, but here is a sampling of some of the better ones that that I have found that deal with business issues. Almost everything I list here is available through ITunes, and in the style of the ITunes store, I will sort them into Basics, Next Steps and Deep Cuts.

The Basics

HBR Ideacasts: Put together by the editors of the Harvard Business Review, I find this series particularly well done, with interesting topics that make me stop and think.

Freakonomics Radio: Produced by the authors of the Freakonomics books, these podcasts put an interesting spin on the dismal science.

Knowledge@Wharton Interviews: I’ve listened to relatively fewer of these as they have not been as well done as the HBR series, but there are occasional interesting interviews.

Wall Street Journal Editors Picks: Didn’t have time to read that interesting article in the Journal you saw at breakfast? You can usually get it here as the WSJ editors interview the authors of the article.

Next Steps

TED Talks: While not strictly speaking business podcasts, these speakers are engaging enough and knowledgeable enough on their subjects to get you thinking about things in a different light. Everyone engaged in business should occasionally be subject to new perspectives and these podcasts will give them to you.

BBC World Weekly with Gideon Rachman: A good way to get a non-U.S. perspective on the news events of the week, which often involve the world of business.

Stanford University Business Management: There are currently only 12 podcasts available in this series, but the ones available are quite good. (Stanford University also has a series on Business Leaders and Entrepreneurs which I have just begun listening to, which looks to be as good, but I haven’t heard enough to officially place it on the list.)

Deep Cuts

Yale Business & Management: Many of the podcasts in this series focus on very narrow topics, so you really have to hunt for what you think may be relevant to your situation, but when you find it, the speakers are quite good.

The Economist: Find the magazine too dense to read? Try the podcast.

The Bowery Boys History of New York: If you are going to deal with Wall Street, you need to understand New York and this delightful series gives you New York City history in bite-sized chunks.

And just to prove that it’s not all about business, here are some of my other favorites from my ipod.

A Prairie Home Companion’s News from Lake Wobegon: Comic genius (in a Midwestern sort of way) from Garrison Keillor.

The History of Rome: Want to know if the sex, sand and sandals in the HBO series are accurate? Listen to this podcast and catch up on your classical history.

Car Talk: Who doesn’t love Click and Clack, the Tappet brothers?

BBC In Our Time with Melvyn Bragg: Features erudite scholars being forced to speak in plain English about a variety of (sometimes) obscure topics.

Oxford Biographies: Catch up on your British history by hearing about people you’ve been told were important, but you don’t know why.

NPR Columns – Driveway Moments: Features the best human-interest stories from National Public Radio’s programming.

While everyone will have different tastes in what they want to listen to, the main point is that you don’t have to listen to that classical rock song for the 200^th time, you can actually put your brain to use and learn something useful.

Using Computers to Predict If a CEO is Lying

2010-08-12T15:19:00.000-05:00

There is an interesting article in today’s Wall Street Journal discussing an academic paper by a couple of Stanford University Graduate School of Business professors. The article is entitled, “For Lying CEO’s, ‘Team’ Not ‘I’” and refers to a Paper entitled “Detecting Deceptive Conference Calls” available at http://www.gsb.stanford.edu/cldr/cgrp/documents/SSRN-id1572705.pdf. Obviously, for anyone involved in conference calls, either on the corporate or the investing side, this is required reading.

What the professors did was interesting: they examined the Question and Answer sessions of 29,663 earnings conference call transcripts between 2003 and 2007 for language features that predict “deceptive” reporting of financial statements. (Note that they were smart enough to ignore the carefully scripted section of the call.) In the professors’ words, “Our primary assumption is that CEOs and CFOs know whether financial statements have been manipulated, and their spontaneous and (hopefully) unrehearsed narratives provide cues that can be used to identify lying or deceitful behavior.” They then compared their predictive results to whether or not there was a later material financial restatement. And what they found was that their methodology had correctly predicted between 50% – 65% of the conference calls as “deceptive” by virtue of their having later resulted in an earnings restatement.

For those of you who want (or need) to know what the linguistic hot buttons are, here are some of the things to watch out for:

CEOs that speak in terms of third person plural pronouns or impersonal pronouns are more likely to be deceptive. It seems in this case, honest CEOs tend to speak of I and me while dishonest CEOs prefer to refer to the company or team.
Expressing extreme positive emotions with words such as fantastic is more likely while making a deceptive claim.
Longer answers also are more likely to indicate that they are deceptive.
Lack of hesitation – if a CEO is quick off the mark, the authors hypothesize that the answer is more likely one that he has rehearsed and wishes to answer quickly and move on.
References to general knowledge such as “you know” also appear more frequently in deceptive responses.
Lack of mention of shareholder value or value creation are also tip offs.

It will be interesting to see if investors pick up on any of this while parsing conference call answers. The Q & A session is already the portion of the call that gets the most scrutiny, and this research will only help to bring more focus to the area.

Where Did You Say You Were Going?

2010-08-04T09:56:00.000-05:00

I’ve said it before, but it bears saying again: investors buy a company’s stock because they believe they will receive a stream of cash flows in the future from the company. They only care about past performance of the company in so far as it gives them faith that the company will perform as they expect it to perform into the future. Analysts build their valuation models based upon future earnings, not past performance. So it’s surprising to me that companies don’t say more about what their plans are for the future – how they intend to make those future cash flows.

I would not want to make a general assertion about lack of forward looking information without any data, so I decided to do a quick sample of company presentations to see how much, on average, those presentations spoke to future plans. My search took me to the Internet to look for good examples of that staple of corporate communications, the PowerPoint slide show. If you go to investor conferences, almost every presenting company will accompany its speech with a slide deck illustrating their main points. What better way to quantify what companies are saying about their outlook for the future than by counting the number of slides they have shown to investors that contain points discussing the company’s future outlook. I thought it would be a relatively easy thing to go out and pull up the presentations of the various companies and analyze what I was interested in.

To my surprise, I found that it’s not quite so easy to go out on the Internet and find a representative sample of corporate investor presentations. In fact, what I found was that in a random sample of 20 large cap U. S. companies, only five companies (25%) posted their investor presentations from conferences. (I will admit that this is a small sample size, but you get what you pay for, and you’re getting this for free.)

In examining the presentations that I did find, it became obvious that companies were much more concerned with talking about past performance than future opportunity. My methodology was simple – I counted the total number of slides in a presentation and then counted the total number of slides that contained information concerning future operations. I tried to be overly generous in what I counted as a slide concerning the future, and any slide that had even a little bit of information about what a company intended to do going forward or the outlook for their products and markets was counted as being about the future.

What I found was that the percentage of forward looking slides in presentations ranged from a low of 6% to a high of 35%, with the average for all presentations being 20%. If we assume that the information being discussed generally follows in proportion to the slides in the presentation, this means that, on average, four-fifths of all information in presentations is about current or past activities. This is the equivalent of saying, “Not much new here; we’ll just make our money by continuing to do what we’ve always done”.

Now I will be the first to tell you that the bulk of all corporate profits come from continuing operations, but that doesn’t mean that those operations remain static. We operate in a dynamic economy - markets change; competitors react; new products are introduced; the economy impacts demand for the company’s products and services; and a host of other things mean that the future will not be the same as the past. Company presentations need to take these issues into account in order to give investors a clearer picture of where the company is headed.

In short, companies should spend a little bit more time and effort talking about where they’re going as opposed to where they have been. Because those future cash flows are a crucial component that investors use to value the stock.

Tell Them Why

2010-07-21T11:53:00.001-05:00

Following on to last week’s post about what investor relations presentations can learn from jazz, this week I take my inspiration from a different pod cast, Ted Talks. Anyone who is interested in communications should listen (the pod casts are available on ITunes) or watch Ted Talks (http://www.ted.com/), where you can find some of the best and most passionate speakers on a wide variety of topics. The TED Talks speakers have the ability to grab and hold their audiences, and if you are in the business of communicating ideas, there is no better way to learn about the process than to watch speakers such as these.

The talk that caught my attention and which I think can be instructive for people trying to get their story across to investors was one by Simon Sinek, the author of a book entitled “Start With Why”. The talk, which I gather distills the main idea of his book, offered one overarching thought, which is “People don’t buy what you do, they buy why you do it”. In a world where there are many competing products and services, the thing that distinguishes the winners and makes them appealing is the underlying passion that forms the core of their product or service. The example Sinek talked about is Apple and how they inform everything they do with a passion for combining technology, design and ease of use, but there are plenty of other examples out there. Everything Wal-Mart does is designed to deliver products to their customers at the lowest price possible. Toyota sells Lexus automobiles based upon a relentless pursuit of excellence. Whole Foods wants to deliver better and more wholesome foods.

When you start to think about this in the context of investors, who are purchasing the future stream of cash flows of your company, it starts to make eminent sense to bring to the fore the why of your company. Products, markets and service offerings change over time. Who your company is and why they do things in the manner they do changes far less often. Investors need to know what informs your basic philosophy and culture, because that is part of what they are buying: it goes into everything your company does.

Yet if you look at most investor presentations, what you find is that companies are good at telling what they do, but not why they do it. What they do is something that can be quantified or visualized. Why they do what they do is much less easy to explain. So my thought for the day is: the next time you are putting together an investor presentation about your company, stop and think about the why of your company. Is your motivation to be the very best at providing customer service, are you experts at solving technical engineering issues or perhaps you want to deliver the best combination of value and product offerings to consumers? Every company has a motivating factor and good investor relations dictates that it should be placed on display for investors to make a judgment about.

As for me, I’m passionate (and opinionated) about getting people to understand the principles of good investor relations.

What IR Presentations Can Learn from Jazz

2010-07-14T10:19:00.001-05:00

I was working out the other day and listening to one of my new favorite podcasts, NPR’s Driveway Moments. The particular segment I was listening to featured an interview with the jazz musician Wynton Marsalis, who was explaining jazz to the uninitiated. I definitely fall into that category, as I don’t “get” most jazz. Several of the things Wynton Marsalis said caught my attention and made me think that there are some interesting parallels between some things we see in music and investor relations presentations.

Most investor presentations are set pieces: you’ve got a speaker, a set of PowerPoint slides and a bunch of information that gets disseminated over the course of 30 minutes. In this they resemble classical music. They follow a prescribed score and they don’t deviate. The speaker covers every last bullet point, just as the musicians play every note, and everyone feels safe and secure because they are on familiar ground. The speakers, similar to orchestral players, are almost interchangeable and it’s very hard to see any individuality or emotion.

This approach has some merit in that everyone navigates the treacherous shoals of regulation and potential litigation and (usually) nobody gets fired. The problem with the approach is that it’s boring and it’s not very good at getting investors excited about your company’s prospects. And investors are buying the future stream of earnings of your company, not its past deeds. Next time you’re at an investor conference, sit and listen to three or four presentations in a row. I guarantee that you will be numb at the end of the last speaker.

Contrast this with jazz. There is a structure with rhythm and melody, but there is also room for some improvisations and solos. The improvisations and solos have to fit within the framework – they don’t work if they don’t fit into the structure of the piece, but they also allow for the expression of talent and passion for the subject matter.

More passion is needed at investor presentations. Speakers should be allowed to get excited about their companies and what they’re doing. They should have a passion and a pride in their products and people and it should show through to the investing public. This is very hard to do if what you’re saying is highly scripted.

One of the masters of conveying the excitement about what he was doing was a guy I used to work with at Walgreens, Dan Jorndt. He never worked with a script, but he always knew what he wanted to say. He put things in his words and allowed his passion and pride in the company to show. Investors loved him. Another master of the art is Howard Schultz at Starbucks. Not only can he convey the romance of a cup of coffee, he is passionate about what his company stands for, from the product to the entire customer experience. If you’re ever at an investor conference and he’s speaking, take the time to go and listen to him.

Now, I can sense that many IR officers out there are squirming and thinking, “We can’t do that with our guys, they’ll go right off the rails and into the ditch”. And perhaps the approach is not for everyone. Some speakers need more structure than others, but all speakers should be allowed to exhibit what they think makes their company great. And that doesn’t come from reading a bunch of bullet points off a slide. At the very least there should be a point within a presentation where a speaker can speak from the heart, whether it’s to tell a story about an employee or a customer, or the great new product the company has developed. To put it in a jazz context, a riff or solo within the structure of the piece that serves as an exclamation point to the entire presentation. Try it – you just might acquire a taste for it.

Who Are You Going to Believe – Me or Your Lying Eyes?

2010-07-07T15:04:00.001-05:00

Trial lawyers have a cheap, but effective trick when they catch a witness in an inconsistency. They simply ask, “Well, are you lying now or were you lying then?” I sometimes get the same feeling when I compare management statements with the risk factors disclosed in SEC filings.

For example, there was a recent blog post at Footnoted (http://www.footnoted.com/pr-spin/spinning-hidden-meanings-at-walgreen/JUNE 29, 2010) that pointed out exactly just such a discrepancy between management and the lawyers over the impact of Walgreens’ participation in prescription drug plans administered by CVS, a rival drugstore chain.

Walgreens and CVS, bitter rivals, also do business together by virtue of the fact that CVS owns Caremark, a large pharmacy benefit management company. Many prescription takers are in plans administered by Caremark, but choose to get their prescriptions filled at Walgreen retail stores. This, of course, was bound to be a troubled relationship, and sure enough, earlier this summer, Walgreens announced that it would no longer take new prescription plans administered by Caremark. After CVS, in a fit of pique then announced that it was terminating Walgreens participation in all pharmacy benefit plans, Walgreens released a statement by Kermit Crawford, executive vice president of pharmacy stating: “Regardless of CVS Caremark’s decision, we are confident of our ability to continue to grow our business as a provider in hundreds of other pharmacy benefit networks and as a direct provider to employers.”

Walgreens and CVS subsequently reached a new agreement and that was that until Walgreens filed its most recent 10-Q where, out of the blue, a new and previously undisclosed risk factor was discussed. In what seems to be a direct acknowledgement of the potential impact of losing the Caremark plans, the risk disclosure states:

“We derive a significant portion of our sales from prescription drug sales reimbursed through prescription drug plans administered by pharmacy benefit management (PBM) companies. … If our participation in the prescription drug programs administered by one or more of the large PBM companies is terminated, we expect that our sales would be adversely affected, at least in the short term. If we are unable to replace any such lost sales, either through an increase in other sales or through a resumption of participation in those plans, our operating results may be materially adversely affected.”

Now, I suppose you could say that Walgreens was merely posturing in saying that they were confident they could continue to grow their business in spite of losing the Caremark business, but that’s the sort of thing you do at the negotiating table, not in a press release. Investors expect and deserve consistency. The original statement is patently at odds with the risk statement, so I’m left with the basic question: Should I believe what you say now or what you said then?

(Full and fair disclosure: by virtue of having worked at Walgreens for over twenty years, the author has a significant financial interest in the company. I want them to get it right, which is why I get so upset when they screw up.)

Make Your Financials Easier to Understand

2010-06-16T11:02:00.002-05:00

In my opinion, most companies do a lousy job presenting their financials on their websites. It’s not that the information is not there; it’s just that companies don’t make it easy for investors to work with the data. I find this surprising given that financial information is the lifeblood of understanding how a company is doing, but it’s probably part of the regulatory mindset of investor relations. Many companies will disclose their financials to the extent and in the form regulations require it, but no more than that.

Computers and the web give us lots of innovative ways to present financial information in an interactive and easy to use manner. Yet most financials I see on the web are static and limited in scope, with little to no interactivity. This means that companies are forcing investors to laboriously build spreadsheets by copying over information and then creating formulas to calculate ratios. We’re starting to see this change a bit as you can now copy and paste the basic numbers with the use of XBRL, but it’s still not that easy to deal with, and the time periods are limited to those set out in the 10-Q and 10-K formats. And don’t even get me started about the pain and suffering involved in creating useful graphs.

Just to prove my point, I went out and looked at the web sites of four major players in the discount store sector, Wal-Mart, Costco, Target and BJ’s Warehouse Club. Here’s what I found:

Wal-Mart: provides quarterly press release financials, SEC filings and their Annual Report. The financials from the Annual report are in pdf format with three years of income statement and cash flow data and two years of balance sheet data, as you would find in a 10-K.

Costco: same as Wal-Mart.

Target: In addition to the same information provided by Wal-Mart and Costco, Target also provides Summary financial information in pdf format for their consolidated financials, retail segment and credit card segment for varying periods of time.

BJ’s Warehouse Club: The smallest of the four companies mentioned here, BJ’s actually goes one better than everyone else by providing, in addition to press releases and annual reports, an excel download capability for their 10-Q and 10-K filings, based on XBRL technology. (This information is also available for the other three companies, but you have to go to the SEC website to get it.)

In this day and age, there ought to be a better way to present the financials so that investors can get to the information they want quickly and with a minimum of effort.

And there is. A company by the name of Virtua Research (http://www.virtuaresearch.com/) has created a product, which they call Interactive Analyst Center, which allows investors to go in and look at multiple years worth of data, ratios and charts, in an easily accessible format. I’ve spent some time looking at the product and I like what I see.

The product allows companies to set up their sites to provide financial information to investors that they can use quickly and easily. For example, on the site I reviewed, there were five years of annual and quarterly financial data available. There was also a page that computed over 40 different financial ratios and even included some non-financial operational ratios that the company considered important. Finally, the part that I thought was the slickest, a charts page allows the viewer to go in and create charts with only one or two clicks.

I think many company websites could benefit from this product, as it compiles financial data about a company into a single easy to use package. In short, it allows investors to analyze instead of spending their time gathering data and crunching numbers. In this day and age of time stressed investors and short attention spans, anything a company can do to help investors get a handle on their financials should be worth a look.

(Full and fair disclosure: I have a potential financial interest in this product if sales result from referrals, so feel free to mention my name. It would be the first time I’ve made money from this blog.)

Say on Pay and Proxy Access – Start Thinking Now About Talking to Investors

2010-06-03T11:30:00.000-05:00

The history of legislative and regulatory reform relating to Wall Street is one of egregious excess, followed by financial distress, resulting in laws and regulations being enacted. It first played out with the boom and bust of the Great Stock Market Crash of 1929, which gave us the Securities Act of 1933 and the Securities and Exchange Act of 1934. We saw a replay following the Enron/Adelphia/Worldcom/Tyco frauds in 2000, which resulted in the Sarbanes/Oxley Act. And now we are seeing the same scenario following the financial crisis of 2008 – 2009 as Congress is feverishly putting together a financial reform package.

I generally try not to pay too much attention to the legislative process, as things change frequently and the process is not pretty to watch. However, there are a couple of things that will likely be included in the current bill relating to corporate governance – proxy access and say on pay - that investor relations officers should be thinking about.

Corporate governance issues have traditionally been an area that falls within the purview of the Corporate Secretary or General Counsel with investor relations only becoming involved if the vote doesn’t look good or if some form of a contest is looming. As activist investors have increasingly turned to proxy proposals to agitate for corporate change, investor relations has gradually become more involved in the process because they are the ones that know the investors. If proxy access and say on pay are going to open up corporate governance to more public scrutiny, it behooves investor relations practitioners to start to get more engaged with the people who vote the proxies.

Of course, when you take a hard look at who does the voting, you realize that IR people have their work cut out for them. You can generally break down investor voting blocs into three categories: active long-term investors, passive investors and active short-term investors.

Active long-term investors usually don’t want to be bothered by this stuff. Portfolio managers and analysts want to analysis stocks, not get involved in corporate governance. Their compensation is benchmarked against their performance relative to an index, not against good corporate governance and they spend their time accordingly. The result is that these decisions are handled by either subscribing to one of the services such as ISS/Riskmetrics, handing it off to an internal committee if the firm is large enough, or by voting with their feet and selling the shares if they don’t like what management is doing. As a result, the typical investor relations officer usually doesn’t talk to the person casting the proxy vote.

Passive index investors can’t vote with their feet by selling the stock as long as a company is in an index, so they all have committees and policies regarding how to vote on governance items. From an investor relations perspective however, you never talk to these passive shareholders, so you don’t know anything about their committees.

Active short term investors are here today and gone tomorrow, so by the time they appear on a 13 D report, they may have well sold the shares and moved on.

I would suggest that investor relations departments need to be proactive in discussing potential vote issues with the people who actually vote the shares. I’ve written about this before (see my post of February 10, 2010), but here are a couple of suggestions to bridge this gap: First, well in advance of proxy season, investor relations officers, together with their securities law counsel, should schedule a number of calls to key investors (both active and passive long-term investors) to discuss current disclosure issues in areas such as compensation and governance. The calls should be designed as a dialogue to discover how these investors view the topics, not as advocacy. as you can’t solicit votes without a proxy statement. What investors are interested in can then be incorporated into your compensation and governance disclosures. Secondly, when you’re out on non-deal road shows, ask to spend five minutes at the end of a visit discussing the firm’s views on disclosure issues, whether they be compensation, governance or social responsibility. This actually makes for a nice break in the road show meeting rat race as it introduces a new topic into the discussion. In the larger firms this will mean that they will have to bring in someone at the end of the meeting, as there is usually a separate person that deals with proxy voting, but it is well worth the effort as it gives upper management an opportunity to hear investors’ concerns and thinking.

This doesn’t solve all issues, as sometimes the interests of investors about compensation and governance structures are different from management’s, but at least you’ll know prior to the vote being cast and can do more accurate predictions at proxy time.

Corporate Governance Ratings – What Are They Good For?

2010-05-11T13:29:00.002-05:00

Way back in 1970, there was a Motown record that had as its catch phrase, “War, what is it good for? Absolutely nothin’!” Today, there is research that suggests that the same can be said about corporate governance ratings.

For the past ten years or so, investor relations practitioners have been drawn into the debate on corporate governance. It’s not that IR practitioners have a special expertise in corporate governance, or that many of them really want to become experts. It’s just that Boards of Directors have been under increasing scrutiny to comply with a list of “best practices” compiled by groups such as Institutional Shareholder Services (“ISS”), Governance Metrics International (“GMI”) and The Corporate Library. Directors do not like it when shareholders withhold their proxy votes for failure to meet minimum corporate governance scores. And it’s investor relations that talks to the shareholders, so IR people find themselves working with the Corporate Secretary and the General Counsel to find out how they can achieve the highest possible corporate governance scores to present to shareholders while actually changing corporate practices as little as possible.

The underlying premise of the governance rating services is simple, yet compelling on its surface: companies that focus on corporate governance as indicated by high ratings will, over time, generate superior returns and economic performance and lower their cost of capital. Conversely, companies weak in corporate governance as shown by low governance scores represent increased investment risks that should be penalized by a higher cost of capital.

But did you ever take a step back and wonder whether the corporate governance ratings have any value in actually predicting poor corporate governance or performance? I certainly have. And so too, it seems, have Professors Robert Daines of Stanford, Ian Gow of Kellogg and David Larker of Stanford. In a recent scholarly article, “Rating the Ratings: How Good Are Commercial Governance Ratings?” which is to be published in a forthcoming issue of the Journal of Financial Economics they look at how effective corporate governance ratings are in helping shareholders figure out if companies with high corporate governance scores are actually better governed. The findings are so startling and unequivocal that I am going to quote the article abstract in its entirety:

Proxy advisory and corporate governance rating firms (such as RiskMetrics/Institutional Shareholder Services, GovernanceMetrics International, and The Corporate Library) play an increasingly important role in U.S. public markets. They rank the quality of firm corporate governance, advise shareholders how to vote, and sometimes press for governance changes. We examine whether commercially available corporate governance rankings provide useful information for shareholders. Our results suggest that they do not. Commercial ratings do not predict governance-related outcomes with the precision or strength necessary to support the bold claims made by most of these firms. Moreover, we find little or no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.

Inside the article the language is even stronger. Here’s my favorite quote: “One especially interesting result is that CGQ (perhaps the most visible governance rating) [Corporate Governance Quotient, a measure devised by RiskMetrics/ISS] exhibits virtually no predictive ability, and when CGQ is significant, more often than not it has an unexpected sign (e.g., higher CGQ seems to be associated with lower Tobin’s Q, and in some models more class-action lawsuits).” In other words, high governance scores have virtually no value, and companies that put in all of the so called best practices are actually more likely to be worth less and get sued more often.

What all of this suggests to me is that good oversight by the Board of Directors and good management of the shareholders’ assets is not a function of a formula or a list of practices. Rather, the way Boards and managements function needs to be examined by investors on a case-by-case basis in relation to their cultures and their track records. How Boards function does need more transparency so that investors can judge for themselves if they are practicing good stewardship. But those that think that good governance can be boiled down to a single number score are just kidding themselves. And if you are paying to get advice on how to increase your governance scores, you’re wasting corporate assets.

Corporate Life Cycles and Investor Relations, Part 2

2010-04-30T11:28:00.004-05:00

In my last post I wrote about the commonality between the product life cycle chart and corporate life cycles and some of the implications this has for investor relations. To recap, where you are in terms of your corporate life cycle is a large determinant in whether you get Growth, GARP, Value or Deep Value investors. As each of these different styles of investors is willing to pay differing amounts for your future earnings, the valuation you get in the stock market will in no small degree be influenced by where investors view you in your life cycle. To carry this one step further, in this post we will look at how companies seek to avoid the point at which they transition into a mature, and then declining company and how successful this is in avoiding a declining P/E ratio.

In product development, when a product threatens to become mature, the marketing people move in and try to rejuvenate and refresh the brand by introducing new product features and formulations or market applications. The idea is to boost sales volume and market penetration. Nobody wants to get to the point where a product is mature, verging on stale, and headed for inevitable decline. In graphical terms, what they do looks like this:

Companies do the same thing. A great example of a company continually reinventing itself via new products and markets is Apple. First Apple was a computer company. Then they introduced the iPod and iTunes. This was followed by the iPhone, Apps and now, the iPad. Apple has been incredibly successful in this approach, helped by great design and engineering, creating a tightly integrated suite of products that customers love. And the stock market has richly rewarded them for this. As of this writing, Apple stock is trading at a P/E ratio of 23.8, placing it in very exclusive territory for companies with over $100 billion in market cap.

Companies do not do this with just new products, however. Companies attempt to extend their progress up the growth curve through acquisitions, entering new markets, entering new territories, going global, reengineering their work processes, expense initiatives and a raft of other things too numerous to mention. In doing this they hope to extend their growth and the premium investors will pay for their future earnings. The problem with all of this, from an investor’s viewpoint, is that the new products, programs and initiatives don’t have a track record. Therefore, the certainty with which future earnings from these programs can be predicted is less than it is for existing operations and the willingness of investors to pay up for the incremental earnings is less. Unless and until a company can establish a track record for successful entry into new products or markets or initiatives, investors will discount the future earnings at a greater rate than the old familiar type of earnings. Investors just don’t like uncertainty. So revenues may go up; earnings may in fact also go up, but P/Es will fall until a company can demonstrate that it has as one of its core competencies the ability to extend its growth with new initiatives.

Again, if we look at Apple, the first Ipod was introduced on October 23, 2001. Following the announcement of the new product, one that turned out to be revolutionary, Apple’s stock price didn’t do much for the next couple of years. Investors had a wait and see attitude.

This, of course, drives corporate management nuts. They have invested millions of dollars in a new initiative through design and engineering, consulting fees and countless meetings and studies. They are embarking on a bold new strategy to push their company forward for the next millennium. And yet, in their view, the market doesn’t get it.

Investor relations professionals should learn to recognize this type of fact pattern and be ready to explain to management why the stock didn’t jump when the CEO’s latest initiative was announced. Much heartburn can be avoided if companies take a realistic approach to how the market values new corporate actions. There is no real way around this – companies have to prove themselves to investors on new initiatives to a far greater extent than for existing operations. But as witnessed by Apple, it can be done.

Corporate Life Cycles and Investor Relations

2010-04-12T10:53:00.003-05:00

I’ve written before on some of the relationships between marketing and investor relations and I’m at it again today. In marketing there is a well-known graph known as the Product Lifecycle Curve, which I’ve set out below.

The graph points out how products are first brought to market and purchased by early adopters, then go through a phase (if they are lucky) of rapid takeoff and growth. Once the product has achieved wide spread acceptance, the growth cycle slows down, and after a period of maturity, decline inevitably sets in. The speed at which all of this occurs depends in large part on the nature of the industry and the aggressiveness of competitors. Tech gadgets, for example, have much shorter product life cycles than say, breakfast cereals.

The interesting thing about the product lifecycle is that it has applicability to a number of other things, corporate lifecycles included. Stop thinking about products and substitute corporate development and the graph doesn’t change. Where this is of interest to investor relations professionals is in the type of investors each phase of the cycle attracts. Set out below is the same graph with investor segments sketched in.

One of the interesting things about the graph is that as you move on the life cycle line from left to right, the price/earnings ratio that investors are willing to pay for a stock declines. This is because investors perceive that the rate at which future earnings will accrue to the company is slowing and they are therefore willing to pay less for that future stream of lessened earnings.

Companies often struggle with this, particularly at the inflection points between stages. Company executives will say, “We’re a growth company – look at our record. The market is undervaluing us.” Investors, on the other hand, will look forward and say, “Nope, you’re a mature company. Your big gains are over and we’re not going to pay a premium for a company that is going to grow at the rate of the market.” Many an antagonistic relationship has been fostered based on this differing view of the world.

There’s more that can be said about this (and I will in later posts), but if I don’t run out now and buy an iPad, I will lose my status as an early adopter…

Bells Are Ringing

2010-03-29T16:03:00.004-05:00

If you ever get the chance to participate in a bell ringing ceremony for the New York Stock Exchange, grab it. It’s a lot of fun. Recently, the Jones Graduate School of Business at Rice University held a panel discussion on the Future of the Capital Markets. One of the panelists was Duncan Niederauer, the CEO of NYSE Euronext, and as part of the program, the Jones School was honored by being allowed to remotely ring the closing bell on the New York Stock Exchange for the close of trading on March 29, 2010.

For those interested in the actual mechanics, the bell actually starts to ring 15 seconds before the close of trading and trading stops when the gavel comes down. The interval between the start of the bell ringing and the gavel coming down is to allow traders to complete their trades. Given that we are talking about professional traders and New Yorkers to boot, it’s never a problem completing trades in that last 15 seconds.

When you ring the bell at the New York stock Exchange, the only one who has a challenging role is the CEO, who has to simultaneously depress a button and remember to bring down the gavel 15 seconds later. This is the corporate equivalent of walking and chewing gum at the same time. As most CEOs are used to having someone else perform such complex tasks, it can sometimes be a challenge. Everyone else on the podium simply has to clap and look engaged.

Doing it remotely is a lot more fun. You get these cute little commemorative cowbells and you get to ring them and shout like mad for 15 seconds. Everything else gets taken care of back in New York. At Rice last Thursday, it seemed as if the entire school was in attendance. We rang our bells and shouted like mad and it was great. And yes, I’m in that picture somewhere.

Know Thine Enemy

2010-03-10T13:39:00.002-06:00

As a matter of self-defense, one should always try to understand their enemies. For those of us that are in the business of dealing with the equity markets, this would include trying to understand class action securities lawyers. These are the people who bring lawsuits against companies alleging fraud and seeking to recover the lost value of stock for shareholders following some event that has caused the stock price to go down, while simultaneously collecting large fees for their firms. If you want some insight into the mindset of these plaintiff’s lawyers, I suggest you get a copy of the book, “Circle of Greed” by Patrick Dillon and Carl M. Cannon.

The book tells the story of the rise and fall of Bill Lerach and his firm, Milberg Weiss Bershad Hynes & Lerach. In its day, the firm was perhaps the most feared and reviled securities class action law firm around, bringing cases against a veritable who’s who of corporate America, from Fortune 500 companies to Silicon Valley high tech pioneers. One of the key insights of the book is that the mindset of a plaintiff’s lawyer is to immediately assume fraud on the part of a corporation when something unusual happens and the stock price goes down. It doesn’t matter that the process of running a complex corporation in a highly competitive environment is fraught with difficulties that mean that things don’t always go as planned and that the markets are unforgiving in such a case. In the minds of lawyers like Bill Lerach, if a stock has been going up and suddenly declines, the company has clearly been hiding something and defrauding shareholders. If this was compounded by management making optimistic comments and selling stock, the company was clearly guilty and large settlements could be extracted. My own personal experience confirms this: Many years ago I was on a continuing legal education panel with a lawyer from the firm of Milberg Weiss and he told me that the best research tool for new lawsuits he had was that day’s edition of The Wall Street Journal. He would read it every day and look for stocks that had taken a large decline in the previous day’s trading and assume that company was ripe for a lawsuit.

After reading the book, I want to add securities class action lawsuits to the old saying that legislation and sausages are things you don’t want to watch being made. In the old days, before the Private Securities Litigation Reform Act of 1995, securities class action lawsuits were little more than a legalized form of corporate extortion. A company’s stock price would go down, a lawsuit would be filed and, faced with the prospect of producing boxcars full of documents, tying up management’s time and attention with depositions and trial strategy, and a hostile jury willing to vote for the small shareholder against big corporations, most companies made the economically rational decision to settle. All you needed to do was file a lawsuit and you had a gun pointed at the head of the company. The 1995 Act has changed things a bit in that plaintiffs have to actually allege specific acts of fraudulent behavior before they can get certified by the court to lead the class action suit. But importantly, it hasn’t changed their mindsets – they still believe corporations are guilty – they just have to work harder to prove it.

“Circle of Greed” tells a compelling story, the Greek drama of how one person rose to the peak of his chosen profession, but was ultimately undone by his own seeds of fraud sown early in his career. While Lerach was publicly taking a high moral tone, claiming to recover money for the little shareholder, he and his firm were engaged in an ongoing scheme to pay illegal kickbacks, covered up by perjury, to people who agreed to act as named plaintiffs in their cases. Having a ready stable of plaintiffs meant that Milberg Weiss could get to the courthouse first and capture the lion’s share of the attorney’s fees. In the end, disbarment, jail time and significant fines were the fruit reaped by their actions.

While engrossing, the book is not perfect. It’s probably about 100 pages too long, with so much detail that you start to think the authors are trying to prove how thorough they were. It’s really not necessary to tell the reader where every one of the many lawyers in the book went to law school. More disturbing to me is the fact that the authors can’t seem to make up their minds about who the bad actors are. At one point they seem to point at the plaintiff’s bar, at others they seem to think almost all of corporate America is corrupt and the securities law plaintiffs are serving a useful enforcement purpose. At the end of the book I came away with the feeling that the authors believe the whole system is corrupt, but their sympathies lie much more with people like Lerach than corporate America.

(Author’s note: I received a free copy of this book from the publisher. No promises were made about reviewing the book in return, but after reading the book I thought readers of this blog might be interested.)

Sales, Marketing, Relationships and Investor Relations

2010-03-02T13:56:00.001-06:00

There is an old saying that goes, “When the only tool you have is a hammer, everything looks like a nail”. So those of us who went to Kellogg Graduate School of Management are often accused of seeing everything as a marketing problem, because that’s what Kellogg is best known for. But in getting ready for this year’s investor relations class at Rice, I pulled out Philip Kotler’s “Marketing Management” and was quite surprised by how many of the principles of marketing apply to investor relations, so maybe there is some truth in the old saying.

For example: Boiled down to its essence, investor relations is consultative selling. You want the right type of customers (investors) to buy a piece of your company (stock) and to have a good ownership experience (own the stock for a long period of time). The purchase and sale decisions regarding your product (stock) are, for institutional investors, done in a complex, multiparty transaction involving sell side analysts, salesmen, buy side analysts, portfolio managers and traders, with information about your company being judged against a competing universe of offerings.

Marketing fundamentals tell us that any time you have complexity in the way a purchase decision is made with lots of competing choices, the process takes a longer period of time to analyze the pertinent data and come to a decision. Rivel Research has stated in one of their studies on the buy side that it can take 3 – 5 “touches” with management before a purchase decision is made. I have personally known investors who took 4 – 5 years of following a company before they made a significant investment decision. Yes, there have also been occasions where investors make a purchase after a single visit, but usually there has been significant research done before the visit.

Marketing also tells us that complex purchase decisions require more upfront effort by all parties involved. This is why it is important to realize that investor relations is a relationship business. It is much harder to sell a product if you do not have rapport with the customer. On the IR side of the fence, this means treating analysts fairly and consistently, helping them understand your company and industry, chasing down the details that help fill in the picture for the customer and eliminating some of the informational uncertainties that go with buying stocks.

Often managements have an “us or them” mentality when it comes to investors. You are either in the boat pulling on the oars and helping the stock price go up, or you are out in the water circling the boat awaiting an opportunity. It doesn’t have to be that way. As a partner at Goldman Sachs once said to me, “There are good companies and there are good stocks – they’re not always the same.” Stock prices fluctuate, and not always because the firm’s underlying intrinsic value has changed. This is where relationships come in. Patient, long-term investors may follow you for a long time before they find the right entry point. If you have built a relationship with them, they may be more likely to pull the trigger when the opportunity presents itself. Similarly, in times of market turmoil, investors are much more likely to stick with your company if they know you, believe that you are telling a straight story, respect your work and have been treated fairly by you in the past.

Of course, if you are completely owned by index funds, quants, quick buck hedge funds and day traders all this goes right out the window…

Talking to Investors Before They Vote Their Proxy

2010-02-10T10:37:00.002-06:00

I recently had the pleasure of being interviewed for a podcast by Broc Romanek who writes the blog The Corporate Counsel (www.thecorporatecounsel.net/blog). Broc’s blog is one of the best around for digging into the technical requirements surrounding dealing with the SEC. Sometimes the stuff is way too technical for me (and I used to practice securities law), but other times the information is really useful. Just to take and example, with Washington buried under two successive snowstorms that have shut down federal government offices, you might wonder how that affects your SEC filings that may be due or that you might wish to file. Broc knows and you can find out on his blog.

Broc’s interview was on one of my favorite topics, trying to place a value on investor relations. For those of you who want a quick overview (the whole podcast is only 8 ½ minutes long) on what the research says about the value of IR, you can find it here: http://www.thecorporatecounsel.net/nonMember/InsideTrack/2010/02_10_Palizza.htm

If you want fuller treatments about the research, see my blog post of July 7, 2008. Broc was even kind enough to put in a plug for my upcoming seminar, “Fundamentals of Investor Relations”, February 24^th at The Houstonian Hotel, Club and Spa in Houston.

For more information go to http://www.palizzapartners.com/Palizza_Partners/Seminars.html

During the interview, something that Broc said struck me as interesting and I thought it was worthy of commentary. Specifically, Broc mentioned that with all of the changes to proxy rules, disclosures and the way issues are voted, there needs to be more communication between IR and the legal team. I think that Broc is right. Too often, specific, mandated disclosures such as proxy compensation discussions get compartmentalized. Lawyers read the rules, write disclosures to conform to the rules and present them in draft form to IR and management. Anybody that’s not a lawyer hates to read this stuff – it’s technical, dry and reads like a lawyer wrote it. So there are usually minimal revisions and the dense, dusty verbiage gets plunked down into the proxy statement. It’s the great irony of this type of disclosure – the more you have of it, the less likely it is to get read.

Now if you think about this process, there is a crucial link missing. Nobody talks to the investors who actually vote the shares. This is somewhat akin to politicians running for office without doing any polling. So when corporate proxy votes come in and there are large withholds on certain issues, companies have only themselves to blame. Actually, that’s not quite true, because portfolio managers in general hate spending time on corporate governance issues. It distracts from what they see as their main mission – making money on stocks.

Here’s a couple of suggestions to bridge this gap: First, well in advance of proxy season, investor relations officers, together with their securities law counsel, should schedule a number of calls to key investors to discuss current disclosure issues in areas such as compensation and governance. The calls should be designed as a dialogue to discover how investors view the topics and not as advocacy. Remember, you can’t solicit votes without a proxy statement. What investors want to hear can then be incorporated into your disclosures. Similarly, when you’re out on non-deal road shows, ask to spend five minutes at the end of a visit discussing the firm’s views on disclosure issues, whether they be compensation, governance or social responsibility. In the larger firms this will mean that they will have to bring in someone at the end of the meeting, as there is usually a separate person that deals with proxy voting, but it is well worth the effort as it gives upper management an opportunity to hear investors’ concerns and thinking.

This is not a cure-all, as sometimes investors want to hear things that management doesn’t want to disclose or they want governance structures that management is unwilling to implement, but at least you’ll know prior to the vote being cast.

The SEC and Climate Change – What Are These Guys Thinking?

2010-02-02T11:10:00.001-06:00

First, a brief reminder that my seminar “Fundamentals of Investor Relations” will be held February 24^th in Houston. The seminar blends real world experience with some of the tools we teach in business school such as valuation, decision tree analysis and efficient markets as they interact with the finance, capital markets, legal and communications issues of investor relations. If you’re interested, go to my website, www.palizzapartners.com and click on the seminars tab.

The Securities and Exchange Commission faces a daunting array of issues that need attention - we’re just recovering from the most severe financial crisis our country has faced since the Great Depression which severely tested the structure of our capital markets, credit rating agencies face a crisis of confidence based upon their performance in rating complex mortgage backed bonds and the inherent conflict of interest they face in being paid by the issuers of the bonds they rate, the proper regulation of derivative instruments needs to be addressed, and their enforcement division wasn’t able to identify the billions of dollars being stolen by Bernie Madoff in spite of receiving complaints against him on at least two occasions. So what pressing issue does the SEC choose to tackle first? CLIMATE CHANGE! In the words of Commissioner Kathleen Casey (a Republican who voted against adoption of the release) “our consideration of this release today sends a curious signal to the investment community about what we view as the most pressing issues facing the Commission”.

The interpretive release, which the SEC commissioners adopted in a 3 – 2 party line vote (guess which party voted in favor of the climate change release) and which as of this writing still hasn’t seen the light of day (how’s that for timely disclosure of a material event?) purports not to change disclosure requirements. The last time I checked the definition of materiality as set out by the Supreme Court in Basic v. Levinson, it was “Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision”. In over thirty years of working in the field of investor relations I have never had an investor who owns, or is interested in owning shares, ask a climate change question. Could I have been dealing with unreasonable investors all these years? I have had questions from advocacy groups, but they are not investors, which is a crucial difference as far as disclosure requirements go.

Previous SEC interpretive releases have focused on areas such as analysis of long and short-term liquidity and capital resources, segment analysis, the effects of federal financial assistance on the operations of financial institutions, and the disclosure of preliminary merger negotiations. It seems to me that these are proper areas for the Commission to be concerned with; they are concrete, defined in scope and fairly immediate. Now we have a release, which according to the speeches of the SEC commissioners, requires companies to consider the reputational damage and its effect on their financial condition caused by their greenhouse gas emissions and requires them to disclose if their operations may be at material risk from the physical effects of climate change. So here are a couple of questions: How do you measure reputational risk in a meaningful and defined way? How do you know if your operations are at risk from climate change as opposed to normal weather shifts? Last time I checked hurricanes didn’t come with tags that say, “climate change related”. This is just bad regulation, requiring companies to engage in speculation about future events. In most other instances the SEC discourages speculation and requires you to make disclaimers about how the events may not come to pass, but this is an issue that is on the political agenda for the party with the majority of Commissioners on the SEC and so speculation is okay.

And just to remind you, the SEC also put out an interpretive release requiring companies to discuss Y2K issues, and we all know how material they turned out to be.

Efficient Markets and Investor Relations

2010-01-27T15:46:00.003-06:00

There is still time to sign up for my seminar "Fundamentals of Investor Relations" on February 24th in Houston. Just go to my website, www.palizzapartners.com and click on the seminars tab for more details.

One of the things you learn about in finance class during the first year of business school is the efficient market hypothesis. In its simplest form, the efficient market hypothesis states that security prices fully reflect all available information. The implications of this seemingly simple statement are profound, because if current stock prices reflect all relevant information, then prices will change only when new information arrives. New information, by its definition, cannot be predicted ahead of time, and therefore stock prices cannot be predicted ahead of time and will be random.

The efficient market hypothesis gave rise to an entirely new investment vehicle, the index fund, as numerous studies were done showing that active investing could not beat the market over the long term, after taking into account transaction costs and overhead.

There are actually three versions of the hypothesis: The strong form, which posits that ALL information, both public and private, is embedded in a security’s price; the Semi-strong form, which holds that all publicly available information is reflected in the stock price; and finally the Weak form, which says that a stock’s price reflects all information that is contained in the past prices of the stock. Of the three forms, financial economists are pretty much in agreement that the Strong form, that security prices embed all information about a stock, both public and private, overstates the case. If it were true, insider trading would not reap abnormal profits, which it clearly does. Most settle on the Semi-strong form of market efficiency as their preferred thesis. Since Eugene Fama initially wrote about efficient markets in 1969 literally hundreds of event studies have been done showing that markets rapidly react to widely available information.

So, you may ask, what has all of this got to do with investor relations? The key here is that investor relations has a fair amount of discretion over what information becomes widely available. Forget for a moment what you have to disclose because of regulations and quarterly filings and think instead about other things that make up your company.

Just to take one example, say you have a terrific management team. If you don’t get them in front of investors so that they can judge how great they are, that information is not widely available and the market will never know about it. If investors don’t know how good the entire management team is, they can’t build that into their expectations of future profits and therefore it will not be reflected it in your stock price.

Another example is corporate culture. Nothing in the regulations or disclosure requirements will ever force you to talk about your company’s corporate culture. Yet that very same culture may be a big reason behind your company’s performance and its future prospects. Wal-Mart comes to mind as a company that puts its culture in front of investors by letting them attend Saturday meetings in Bentonville and welcoming them to the extravaganza they have each year at their annual shareholders’ meeting.

What you choose to disclose is entirely up to you and (here’s the rub) your management. Every company is good at something – brand management, technical expertise, distribution or operations, to name a few. Disclosing data of this nature with investors can help them more efficiently value your stock. The key is that the information has to be widely available. That doesn’t mean that you have to disclose it in your filings or put out a press release. Not all information rises to the level of materiality. But it does mean that you have to have a consistent effort to disclose those pieces of information, both in good times and in bad, to all your investors.

Do that and you will have done your part in making the markets more efficient.

Learning from European IR Websites

2010-01-20T11:52:00.008-06:00

First, a brief announcement: registration is now open for my seminar, “Fundamentals of Investor Relations” to be held February 24^th at The Houstonian Hotel. If you are interested in attending, simply go to my web site www.palizzapartners.com, click on the Seminars tab and follow the instructions at the bottom of the page to register. We are offering a high quality educational experience at a compelling price.

And now for something completely different (apologies to Monty Python): Like most modern day office workers, I spend a lot of time in front of my computer getting information off the web. When I do research on companies, I usually start at a general financial information site (my personal favorite is Google Finance, but there are plenty of others out there) to get a quick overview before moving to the company’s investor relations site. What I find when I get there is that many of the investor sites for U.S. companies tend to be very cookie cutter in their approach. In short, the sites are not very interesting or innovative. My impression is that the sites have been assembled from a menu of standard options, sort of the way you can order off a Chinese menu.

I find this somewhat depressing, given the decline in print media as a means of delivering a company’s story and the inherent flexibility that the web provides. As I thought further about it, my conclusions were that there are probably two factors at work here. First, most companies choose to outsource the process of building and maintaining the investor web site portion of their company’s site. I can’t say I blame them for this, as A. doing this well is beyond the capabilities of most smaller companies and B. if you’ve ever worked in a large corporation that maintains the web site internally, you know that investor relations is well down the priority list of most programmers.

Second, the market for providing outsourcing of investor relations sites is essentially a duopoly in the U.S., with all the implications that has on pricing and innovation. Least you think I’m just talking through my hat, over the past couple of years I have spent a fair amount of time looking at European investor relations web sites, and in a number of respects, they do it better. For example, as you can see in the screenshot below, the Italian energy company ENI has a killer main IR page that allows you to customize how you want the information to look through the use of movable widgets.

Or how about a graphics generator for your key data? The screenshot below comparing net income to free cash flow is a graph I generated on the website of EADS, the European defense contractor. The entire process took me six clicks of my computer mouse – no cutting and pasting, and no downloading financials and parsing through the entries and fussing with excel charting functions.

Finally, we live in an increasingly mobile society, but U.S. investor sites seem to think that everyone is sitting at their desk. Below is a screenshot of the Stay in Touch page for Aviva, the U.K. insurance company that gives investors a number of ways to receive their information.

The point of all of this is that here in the U.S. we tend to get a bit insular. We have the largest and most robust capital markets in the world, so naturally we think everything we do connected to those markets is the best as well. However, there seems to be some very innovative things being done for investors in Europe. We could improve our web sites by broadening our horizons a bit.

A Pricing Guide to Executive Education in Investor Relations

2010-01-11T11:24:00.005-06:00

Competition is a wonderful thing. Competing offerings generally result in better offerings, more choices and lower prices for the customer. Conversely, when an organization has a monopoly or near monopoly on a product, prices go up and there is no way to know if you are getting the best the market has to offer. If you don’t believe me, just think about what American cars were like before they started to get serious competition from Japanese and German cars.

Until recently, people who wanted to go to educational offerings about investor relations have had very limited choices at very high price points. That’s why I’ve developed my seminar, “Fundamentals of Investor Relations”.

Talk is cheap (unless, evidently, you want to hear it about investor relations), so I thought I would set out how my new seminar compares to what’s currently being offered and let the readers decide.

Fundamentals of Investor Relations

Cost: $475

Duration: one day

Location: Houston, Texas

Instructor: John Palizza (me), lecturer at Rice University Jones Graduate School of Business, developer and teacher of the only MBA level investor relations course taught anywhere.

NIRI Introduction to Investor Relations

Cost: $1,195 for members, $1,495 for non-members

Duration: two and one-half days

Location: Boston, Massachusetts and Santa Monica, California

Instructors: Volunteer consultants, IR practitioners and NIRI staff

University of Michigan — Theory and Practice of Investor Relations

Cost: $7,200 for members, $8,100 for non-members

Duration: five and one-half days

Location: Ann Arbor, Michigan

Instructors: University of Michigan finance professors and Jeffrey Morgan, NIRI president.

Online Certification Program in Investor Relations, offered with the University of California, Irvine

Cost: Six required courses and one elective course at $660 per course for members, $860 for non-members, plus one elective course at $575, textbook cost of $100 per course and $125 candidacy fee. Total cost: $5,360 for members

Instructors: various volunteer practitioners

Certificate Program in Investor Relations at NYU School of Continuing and Professional Studies

Cost: five courses at $775 each, total cost $3,875

Instructors: various volunteer practitioners

If you’re wondering why I can offer this seminar at a price point much lower than anyone else, the answer is that I am much more interested in elevating the educational level available for the discipline of investor relations than I am in making a lot of money. Don’t get me wrong, I’m as driven by the profit motive as any good capitalist, but frankly, I think current offerings are overpriced, inconvenient and take way too much of people’s time. I know what the costs are to put on a seminar and I don’t see it justifying the pricing I see. I think the seminars are being priced for what the traffic will bear, not to the marginal cost of the product.

So here’s my promise: Attend “Fundamentals of Investor Relations” and you will be given the basic knowledge about investor relations you need to have a solid grounding in the legal, marketing, finance and stock valuation aspect of the discipline. I also promise you that we will not waste your time. And we won’t force you into a vendor’s showcase for “networking time”. All we’ll do is have a dialog about the essential knowledge you need to know to do your job well. When all is said and done, I believe you will get a better product – one that is used in a MBA curriculum - at a lower price than anyone else is offering.

This is my first time offering the seminar and it’s being offered in Houston. If we have success, we’ll bring it to other cities, so that it’s convenient to the customers.

If you’re interested, or know someone who might be interested, you can find more information about our upcoming seminar on February 24, 2010 under the Seminars tab on my website http://www.palizzapartners.com or you can email me at john@palizzapartners.com or call me at 281-727-6775. I love to talk about this subject.

More Essential Life Skills for the Investor Relations Professional

2010-01-04T13:13:00.004-06:00

First, a brief commercial: I am happy to announce my seminar, "Fundamentals of Investor Relations" will be given in Houston on February 24, 2010. The workshop was developed from my MBA course at Rice University and is designed to be a comprehensive one day overview of the essentials of investor relations. At a cost of $475.00, it represents a great value. For more information, visit the Seminars tab at my website at www.palizzapartners.com.

In the early days of this blog (September, 2007), I wrote a humorous piece entitled “Essential Life Skills for the Investor Relations Professional”. Much to my surprise, the essay has proven to be one of the more popular posts I’ve written. I suspect that people do a web search looking for relevant advice about how to actually practice investor relations and wind up getting my advice about learning to talk with their mouths full, sound enthusiastic when they’re answering the same question for the thirtieth time and other odd bits of advice, but nevertheless, from the data, it appears that people actually read the post when they get there. Therefore, in an attempt to inject a little more humor into what tends to be a humorless profession, I introduce part 2 to my essential life skills series.

Today’s piece of advice is to learn to think of the analysts that cover your company as your children. This may sound like an odd analogy, but in my experience, their behavior often mirrors that of my children when they were growing up. Consider the following behavior traits:

They all want to be first in line. Think about the fight to ask the first question on your conference calls. Think about how quickly they want to get notes out on First Call.

They all want your attention immediately. When an analyst calls, they are interested in getting the answers to the questions they have NOW, not according to your schedule. This certainly sounds like my children.

They all want you to love them best. The job of an analyst is to assemble pieces of information into an investment thesis, and they all want better information flow (their version of love) than anyone else.

Because they’ve been to school, they think they have all the answers. In the case of my children, it was grammar school, while in the case of analysts, it’s business school, but other than that, it’s pretty much the same. Actual practical experience doesn’t seem to count for much.

When it comes to finding out information, they prefer to be told rather than dig the facts out of a book. My children would always opt to try and have me give them the answers instead of looking it up in a textbook. All you have to do here is substitute Report on Form 10-K for textbook and you can see my point.

I could go on, but by now I think you understand the analogy. The question then becomes what parenting skills come into play as essential life skills for investor relations professionals?

First, just as you must love all your children equally, you must also love all the analysts that cover your company equally. There is no room for playing favorites. Many people will find this piece of advice difficult to follow, because, just as with your children, every analyst has a different personality, some of which are nicer than others. Nevertheless, you must act like an adult here and be fair and consistent, even if the analyst has a sell rating on your company.

A corollary to this is that, just as you teach your children to respect others, you must also respect all analysts. Company investor relations officers often lose sight of the fact that analysts are pulled in many different directions by portfolio managers, hedge funds, research directors and the need to continually generate investment ideas. Compounding this you have a divergence of viewpoints – to most IR officers there is little difference between the company and its stock, whereas to an analyst this is a crucial difference. Because of this, a lack of respect for the work being done by the analyst can arise. An essential skill of an IR professional is to respect the work an analyst does regardless of their conclusions.

Finally, actions speak louder than words. It doesn’t matter how much philosophy you may preach to your children, if you don’t walk the talk, they will see right through you. The same is true of analysts. You have to be honest and straightforward in how you respond to their questions. If in discussing a topic, you fail to cover some essential points simply because the question asked wasn’t specific enough, your credibility will eventually suffer.

Although I could continue in this vein for an extended period, I have to stop now. My children are home for the holidays and I have to go break up a fight about who gets to use the car tonight…

XBRL – Part Three, or, Son of the Return of XBRL

2009-12-17T14:57:00.000-06:00

Back in January and February of this year, I wrote a couple of pieces about how I didn’t really get what all the whoopla surrounding XBRL was about. Those pieces generated a fair amount of comments and I even wound up talking to the folks at the SEC about XBRL. Not to put too fine a point on it, at the time I stated that I just couldn’t understand how XBRL was going to revolutionize the use of data by investors.

While I was doing research the other day on the SEC’s EDGAR database of filings, I noticed that reports are now beginning to be tagged as having “Interactive Data”. So I thought that I owed it to myself to go back and see how this XBRL stuff works in practice. Maybe the scales would fall from my eyes and I would see the error of my ways. Maybe I would be able to see how the data flowed seamlessly, enabling us to quickly reach investment decisions that were lost to us before. And maybe pigs would fly.

What I found when I went to the interactive data was that you could click on a heading such as Income Statement, and the P&L would come right up. I found the data had two properties: first, the headings were tagged. So for example, if you click on Revenues, you find that it’s US GAAP, the data type is monetary, the balance type is a credit and the period is the duration of the quarter. In other words, what you learn in Accounting 101. Secondly, you can grab the data and paste it into another document fairly easily. Also of note was the fact that the financials and notes are available as an Excel download, although everything I downloaded had a file name of “Financial_Report.xls”, so if you don’t rename the file right away, it becomes one of many with the same name.

After I had played with the data for a while, I sat back and thought about the cost /benefit analysis for what we’ve gone through with XBRL. On the benefit side we’ve gained a bit of functionality. I, for one, will welcome the ability to grab data off a downloaded spreadsheet rather than re-keying it when I want to do some analysis. But I don’t see a lot beyond that. The tagging of the data seems to merely tell me what I knew before. Further, professional investors have had the data in comparable and downloadable form for years. Systems such as Bloomberg and Telemet Orion (and I assume Reuters, although I have no experience with that system) already perform this function and a lot of other analytics as well. So my conclusion is that only relatively small investors are being helped. Against this we have to weigh the thousands of dollars spent and numerous man-hours invested by every company converting to XBRL.

To me this seems like another example of something that sounds good in theory, but the practical advantages just don’t seem to live up to the hype. In other words, it’s a governmental agency imposing a standard where the costs outweigh the benefits. The irony of it all is that the ultimate cost for all of this will be born by investors, because the cost of adopting to the new systems is a corporate expense, which lowers earnings, which will result in lower share prices.

A Discounted Cash Flow View of Investor Relations

2009-12-04T10:55:00.001-06:00

Every now and again, it’s helpful to stop and think about the frameworks in which investor relations operates. From a finance viewpoint, traditional academic finance approaches the valuation of a company along the following lines: “the value of a company is based upon investors’ estimates of the sum of its future cash flows, discounted back to their present value”. (Investors will often use earnings per share and dividends per share as proxies for cash flows.) The confidence that investors have in those estimates is based largely upon: 1. A company’s past performance as a measure of its ability to continue to perform, and 2. The investors’ view of the economy and the markets as expressed by the discount rate they assign to the cash flows. In other words, what drives the equation are estimates about the future, using the past record of the company as a reality check.

When you think about it this way, several interesting things about investor relations pop up. First, the equation is predicated on what will happen in the future, yet most of investor relations is spent explaining what occurred in the past, i.e. last quarter. So it’s important that proactive investor relations officers spend much of their time discussing what the firm is doing to insure future revenues and where the markets for their products are headed. If investor relations can’t, or won’t, explain how the firm intends to grow revenues, earnings and cash flows into the future, they shouldn’t expect investors to make that leap of faith for them. Companies that have to sell products or services will almost always have better forward-looking market data than investors. Judiciously sharing that data with investors will help them make better estimates. And by removing some uncertainties, it can help lower the discount rate assigned to the cash flows, which results in a higher present value.

Secondly, management matters. How can investors be expected to place large bets on your company’s future performance through the ownership of stock, if they haven’t met and assessed management’s ability to continue to perform? Yet many investor relations departments view their roles as gatekeepers, only allowing access to management at limited times to favored investors. If you want to achieve fair valuation over the long haul, investors need to speak periodically with management. Investor relations departments can function to save management a lot of time by making sure investors understand the company before seeing management and by covering what I would characterize as “routine maintenance” questions, but eventually, investors need to hear directly from the management team to see if they have a grasp on strategy, details, customers and markets.

Third, consistent profitability over the life of the investment will be more valuable than big profits in the out years of the investment, because they will be discounted less and will help compound earnings projections in later years. Consistency will also help investors assign lower discount rates to future cash flows, as they are much more comfortable projecting based on visible trends than they are if your earnings are all over the map.

So why then does everyone make such a fuss about the most recent results, and why do the short-term results seem to have such an outsized influence on the stock price? The answer, quite simply, is “Because that’s the way the math works”. (When my kids were struggling with math in grammar school I used to tell them that all of life was a math problem – this is a perfect example.) If, based on recent results, an analyst reduces their estimate for the first year of a five year model, not only does the reduction count for more because it is almost entirely undiscounted, but it will reduce estimates in future years, as the models are constructed to build and compound on previous years. Further, if the model is taking dividends into account by estimating them as a percentage of earnings, it will reduce all subsequent dividends as well. Conversely, changes made to estimates in the later years of a model have a much smaller effect on estimated present value and the price investors will pay for a company’s stock.

To put all of this in perspective, smart investors are betting on your future success, and that’s where the bulk of investor relations communication should be. But don’t neglect to adequately explain current earnings because if you don’t, and estimates are too low in the early years of investors’ earnings models, the perceived value of your firm will wind up being too low.

In other words, the ability to adequately explain current and past performance creates the foundation necessary for investors to understand a company, but helping them understand the basis for future profitability is the structure they need for estimating a fair value for your stock.

Looking Forward by Looking Back

2009-11-18T22:00:00.000-06:00

The upcoming holiday season of Thanksgiving, Christmas and New Year’s is always cause to sit back and reflect on what has transpired over the course of the past year and what it portends for next year. I freely admit that my crystal ball is as fuzzy as the next person’s but we’ve had such an interesting year I can’t resist the temptation to extrapolate past events into future predictions in two areas, regulation/legislation and, the use of social media in investor relations.

Investor relations in the U.S. during 2009 was heavily impacted by the advent of a new administration in Washington, an administration that comes from a different political viewpoint than the previous administration, one that favors more regulation rather than less. The new Chairman at the Securities and Exchange Commission, under pressure to prove that the SEC was still relevant, made it very clear during the year that increased regulation of the securities markets and more vigorous enforcement of existing regulations were top priorities at the Commission. Thus during the year we had a flurry of regulatory actions that touch upon investor relations issues, including Reg. SHO, designed to cut down on “naked” short selling, approval of NYSE rules eliminating broker discretionary votes in director elections, proposals regarding the use of “dark pools” and updating the rules surrounding notice and access for proxy materials.

On the enforcement side, we had the first ever enforcement action under Reg. G, relating to abuse of Non-GAAP numbers, the first Reg. FD enforcement action since the SEC lost the Siebel II case in Federal court, and a series of high profile insider trading indictments.

And guess what? For next year I predict … more of the same. In large part, the continued regulatory onslaught will be driven by Congress. For months now, financial markets reform has been on the agenda of our august legislative body, but the bills being considered by the House and Senate are quite a bit different as they relate to how corporations deal with investors. The Senate version includes requirements for annual, non-binding say-on-pay voting, mandated proxy access, and elimination of staggered boards, among other things. My prediction is that most of these requirements will be negotiated out of the Senate version as the business community begins to focus on these items, but that won’t be the end of the process. The SEC, being a political animal, will pick up the ball and then attempt to do by regulation what Congress failed to do by legislation. Look for some of the aforesaid issues to pop up on the SEC agenda next year. It will continue the trend towards the federalization of state corporate law that has been ongoing over the past fifty years. On the enforcement side, the Commission will continue to try and bring actions so that they appear to be doing their job. After dropping the ball on Bernie Madoff, they’re desperate to prove there is a new sheriff in town.

On the more practical side of actually communicating with investors, the hot topic during the year gone by was the use of social media. Particularly during the last half of the year there have been a spate of commentators, myself included, discussing the issue. Generally, the arguments break down upon the following lines: For social media – “This is the dawn of a new era where everyone can communicate with everyone else without anyone getting in the way, and isn’t that great? And anyone who doesn’t get it is a troglodyte.” Those against social media – “You’re right – I don’t get it. This stuff tends to be a bunch of unfiltered junk and a huge waste of time.”

The truth, of course, is somewhere in the middle and I think that over the course of the next year we will continue to see modest use of social media by investor relations departments. Dell has shown that blogs can be done in a thoughtful manner and Southwest Airlines has successfully used Twitter to get the word out quickly during a crisis communications situation. But most corporations are conservative in nature, and have general counsels that lie awake at night worrying about securities litigation, so things will happen very slowly. In fact, by the time corporate legal departments get comfortable with, and figure out how to let investor relations people use Twitter safely, it will be old technology and social media will have moved on to something else.

Insider Trading Hurts Us All

2009-11-12T14:37:00.001-06:00

There seems to be an epidemic of insider trading cases these days. First we started with the Galleon indictment alleging that Galleon profited from receipt of material nonpublic information from a variety of sources, including an investor relations firm working for Google, corporate executives at IBM and Intel, and a partner at the McKinsey consulting firm. This has been followed by criminal charges being brought against an additional fourteen people including hedge fund managers, a trader, a broker and a M&A lawyer, with five of them already agreeing to guilty pleas.

All of this raises some interesting questions ranging from, “Where have prosecutors been for the past several years?” to “What have compliance officers been doing at these firms?” but what I want to focus on is the bigger picture, insider trading itself. As you would expect, a number of commentators have expressed opinions about insider trading, and some people have gone so far as to suggest that the penalties for insider trading should be abolished because it’s common and impossible to police. Even beyond that, a number of noted academics have argued that insider trading is good for the markets because it makes the market more efficient.

Let’s start with the basics; the case law and the statutes surrounding he use of material non-public information are, with a few exceptions, pretty clear. To greatly oversimplify: If you are in possession of such information and you received it as a result of a duty to the corporation, or from someone who has such a duty, or if you have misappropriated the information in violation of a fiduciary duty, you can’t buy or sell that security.

The insider trading laws in the U.S. really get to the issue of fairness in our securities markets and go all the way back to the Pecora Commission hearings following the stock market crash of 1929. The result of those hearings was that the public was outraged that bankers and stock market insiders could manipulate company information for personal gain. The Securities Act of 1933 and the Securities Exchange Act of 1934 were a direct result of those hearings and the U.S. emerged with the most transparent market system in the world. The prohibition on dealing in insider information has served our markets well over the years.

In sum and substance, you cannot allow people to benefit from information simply because of their position, nor can you allow them to leak that information to a select few. To do so would mean that the markets were a rigged game, and people’s faith in the markets would take a severe blow.

Because of the large sums of money at stake over inside information that traders can benefit from, there will always be a few people willing to test the system, from Dennis Levine and Ivan Boesky in the 1980’s to the Roomy Khans of today. But let’s be clear – these are not close calls. Everything I have read about the current series of cases involves people who knew they were going beyond normal everyday information gathering and into the realm of the illegal. The use of disposable cell phones to avoid detection and payment to sources of information are not things one normally sees in the normal information gathering process of analysts.

This is not a victimless crime – activities that bring disrepute on the fairness of the markets impact all of us because people will be less willing to commit capital to unfair markets. I have absolutely no sympathy for this type of crime and hope that prosecutors continue to bring cases where appropriate. Fortunately, I think we will continue to see these cases, as good prosecutors can make their bones on them – after all, look at what it did for Rudy Giuliani.

Reg. FD and the Law of Unintended Consequences

2009-11-03T10:51:00.002-06:00

It used to be in the good old days (some would say bad old days) stock analysts saw a goodly percentage of their job as talking to and cultivating relationships with management. The classic example of this is the analyst I refer to as the “Information Vampire” who would talk to management until they felt they had sucked every last drop of information from them. The thought process was that by building a relationship, the analyst would pick up enough tidbits of information to give them an advantage over the average investor, and because management liked them, they might let the analyst know something important before everyone else, either in a one on one meeting or by being the first phone call they made when news is breaking. On such things careers were built on Wall Street.

Then along came Regulation Fair Disclosure, in which the SEC mandated that if a company is going to say something important, it has to tell everyone at the same time. It doesn’t matter if you are best buddies with the analyst who has followed you through thick or thin or if a portfolio manager had been a loyal shareholder for many years. The reasoning was that the securities markets need to appear to be a level playing field for all concerned, regardless of whether you are a professional money manager with $50 trillion in assets or you are a retail investor looking to buy 100 shares of stock. (This is very much the same type of governmental thinking that gave us the Robinson-Patman Act prohibiting price discrimination between customers, but that’s a subject for another day.) The SEC then proceeded to announce a series of enforcement actions to drive home the point that you can’t just go off and blab to institutional investors. They never actually won a court case on the subject, but they made their point and companies toed the Reg. FD line.

This, of course, did not stop Wall Street’s desire for an information edge. We are, after all, talking about an industry with serious amounts of money at stake. It just meant that the quest for information went elsewhere. Hence today, courtesy of Reg. FD, we have at least two new types of information hunters on the scene.

The first of these is the “Channel Checker”. This is a person who specializes in cultivating a network of industry sources, be they lower level employees of the company, suppliers, customers and competitors. They usually don’t talk to the company very much, if at all. This type of analyst has always been around, but since the advent of Reg. FD have increased in number as they try to supply investors with they type of information edge they can no longer get from the company.

The second type of information provider that has gained more prominence since Reg. FD has been the expert network systems. These are organizations that have created data bases of people with expert knowledge on particular subjects. Then, when an investor needs to get up to speed quickly on a subject, whether it’s current inflationary trends in the footware industry in China or the likelihood of a drug getting through the FDA approval process, there is someone out there, that for a fee, will expound on the subject. (Disclosure: On occasions, I have been retained by expert networks to discuss things about which I have knowledge.)

Companies, of course, don’t like either one of these developments, as they can’t control the information being disclosed or put any spin on the story. In and of themselves, the channel checkers and expert networks are not a bad thing, they are just different sources of information. It’s just that the SEC shouldn’t kid themselves into thinking that Reg. FD has made the information the same for everybody. It just means that professional investors have to redirect their efforts as to how they get it and how they pay for it.

Loose Lips Sink Ships – What Investor Relations Officers Can Learn from the Galleon Fiasco

2009-10-22T10:13:00.004-05:00

By now there shouldn’t be a single investor relations officer who is not familiar with the recent news that the Galleon Group hedge fund has been charged with insider trading. The case is a great example of the lengths some less than scrupulous investors will go in order to obtain information that might give them an edge on the market. Among the allegations in the government’s criminal complaint are that inside information was obtained by Galleon personnel from executives at IBM and Intel, from a McKinsey partner and from Market Street Partners, an investor relations firm.

At this point, every self respecting investor relations officer should be revisiting their corporate disclosure policy and scheduling refresher sessions with their executives on the dos and don’ts of making public statements and discussing internal information. I don’t doubt that every one of the firms named as having leaked the information had a policy in place discussing conversations with securities analysts and confidentiality of information. But periodically, people need to be reminded of it. Put succinctly, periodically they need to have the bejesus scared out of them. I’ve always found that the prospect of public humiliation, the ruin of one’s career, large monetary penalties and the possibility of jail time will focus the mind amazingly.

What investor relations officers do appears deceptively simple – they just talk to people. So naturally, executives, who have been successful in many other things within their organization, think that they can do this as well as any staff geek stuck away in an office who has never had to run a division or make real money. And thus begins a slippery slope that unscrupulous analysts are happy to exploit. Once an analyst has established a relationship with an executive, more and more information begins to slip out, inadvertently or not, until the damage is done. This is at least partly because executives do not deal with analysts every day and are probably not familiar with what the company is and is not saying publicly. Further, although they may get briefed once a year on what constitutes material information, it’s not a central part of their workday and probably not something they are likely to remember.

The short answer for companies is that unless you are a designated company spokesperson, you should not be talking to investors or analysts unless you are under supervision of someone from the IR department. You should hammer this point home with your executives. The risks in doing anything else are just too great. Remind them of this by showing them some of the people involved in the Galleon scandal doing a perp walk in front of the cameras.

In saying this I am not advocating less information being made public. I am an advocate of more and better disclosure for investors. However, that disclosure should come from people who know how to deal with the Street and the myriad of ways they will try to escalate the amount of information being given.

So the next time you have an analyst day, or a field trip to a facility, tell your executives to leave their business cards in the office. After all, you don’t want your ship springing leaks.

Wal-Mart and Same Store Sales: The Fallacy of Less is More

2009-10-13T10:46:00.000-05:00

There was an opinion piece recently in the daily email reporting of IR Alert by Carol Schumacher, the Vice President, Investor Relations of Wal-Mart. In the piece, Ms. Schumacher details how Wal-Mart’s practices for reporting sales store sales have evolved over time. I read the article with some interest as I have owned Wal-Mart stock for many years and have longed believed that they were one of the premier retailers in the world. I wish I could say the same about the way they report same store sales today.

In the early days of the company, when sales were regularly outpacing everyone on the planet, Wal-Mart reported weekly comparable store sales every Saturday. This to me is ideal. It shows you have great reporting systems, a desire to keep investors informed, and by the time the company reported the quarter, one item of uncertainty, the sales number in your more mature stores, has been eliminated and the market has incorporated it into their estimates.

Alas, it could not last, particularly as Wal-Mart’s sales began to slow, and a few years back the company moved to a more common monthly reporting system. At the same time, they instituted a program to provide guidance on their view of the upcoming month’s sales. My guess (and that’s all it is) is that the issuance of guidance was a bit of a sop to the Street to ease the fact that analysts were going to get less frequent hard information and more company estimates.

This year, Wal-Mart has stopped reporting same store sales on a monthly basis and will report them only in conjunction with their quarterly earnings. Again, to sweeten the pill, they shifted to providing guidance on comparable sales figures for their U.S. and Sam’s Club stores for the upcoming quarter.

The reasons given in the article for all these changes seem to fall into three basic categories: 1. This is the way everybody else does it, 2. By giving out only quarterly numbers, they decrease volatility in the stock, and 3. Wal-Mart is focusing on more long-term metrics, which will help focus investors more on the long term.

Because I don’t agree with the direction Wal-Mart is headed in, let me try and address these issues in the order listed. First, Wal-Mart didn’t get to be the biggest retailer in the world by doing things the same way that everyone else does. The company has famously broken the mold on many retail practices and prospered. Further, this isn’t the way everybody else does it. It is only the way other companies whose sales have slowed down do it. If Wal-Mart were posting numbers that regularly showed them to be well ahead of the competition, as they were in the 1970’s and early 80’s, my guess is that they would be continuing to give out weekly comp store sales numbers. By changing the way they report, what Wal-Mart is really doing is sending a message that they think future sales will look less robust than they have been in the past.

Second, to understand the volatility issue, look at what Wal-Mart did: they consistently scaled back on providing hard data in a timely fashion, going from weekly to monthly to quarterly comp store sales numbers, while substituting guidance or estimates. Of course you are going to get guidance wrong from time to time. These are after all, estimates about future events. And when guidance varies from actual numbers, trading volatility will follow. The answer is not to decrease the flow and timing of hard information; the answer is to decrease the amount of estimates.

Third, and finally, let us turn to the issue of getting investors to focus on long-term metrics. Companies need to remember that the stock market has a split personality: over the short run it is a popularity contest, trading on the number du jour; over the long haul it is a discounting machine, using past information to discount estimates of future cash flows. It takes both short-term and long-term investors to make a market, and when you are a bellwether stock such as Wal-Mart, you will get both in droves. Investor relations officers all want the long-term buy and hold investor, but short-term investors help increase a stock’s liquidity and when a stock trades more liquidly, volatility goes down, not up.

I know that Mies van der Rohe famously said, “Less is more”, but he was speaking about architecture, not same store sales. When thinking about same store sales, I tend to follow the maxim of classically trained economists, which is: “More is always better”.

How to Read 10K Reports Revisited - Cracking the Code

2009-10-06T14:49:00.001-05:00

A portfolio manager friend of mine told the following joke to the students in my investor relations class last April: Question: If you are a public company, how do you hide something from analysts? Answer: You put it in the 10-K report. There is a lot of truth to this. Reports on Form 10-K are dense, laid out in a fashion to follow a government bureaucrat’s idea of how to display information and written mostly by lawyers and accountants. This is a deadly combination.

Because of this, companies can sprinkle little tidbits of information throughout the filing and comply with disclosure requirements without really telling you much unless you learn how to read the code. (I just read the latest Dan Brown thriller, so it may influence my writing here.) To me cracking the code means opening up two or three years worth of filings on your computer, seeing what’s changed and applying some simple math. I’ve written about this before (see my blog posts dated September 10, 2008 and March 5, 2009) but I like to revisit it periodically to show how disclosure is not necessarily the same as telling you what’s really going on.

This time I decided to look at Sysco Corporation’s 10-Ks for the past three years. I chose Sysco because having worked there, I know the company well, but it’s been long enough ago so that I did not have a hand in writing any of the 10-Ks in question. Further, Sysco, which has been faced with a shift in their industry – consumers who, in the face of economic duress, are dining out at restaurants less often – seems to be managing the downturn about as well as you could expect. Because Sysco has been coping with deteriorating sales trends by reducing their expenses, I thought that if I focused on headcount, some interesting things might pop out that perhaps should have merited more discussion in the filing. I was not disappointed.

To begin, I called up three years of 10-K filings and did a word search on “employees”. It turns out that Sysco had 47,000 full time employees last year, compared to 50,000 in 2008 and 50,900 in 2007. This means that the decline in employees is 6% this year compared to last year and 7.7% over a two-year period. Interestingly, nowhere in this year’s filing does the company talk about the trend except to mention “reduced headcount” without telling what it previously was. For that you have to go back to the previous filings. This is fairly typical of what you see companies do: give you the fact, but neither explain it or put it in the context of quantity or time. They’ve complied with the technical disclosure requirement, but haven’t really explained what’s going on.

While I was going through this exercise, I also noticed that they were engaged in a similar exercise in disclosing the number of sales related personnel. This year Sysco states that they have 13,000 sales, marketing and support staff. You have to go to the previous years’ filings to find out that this compares to 14,000 a year ago and 14,400 two years ago. So the decline in sales oriented personnel was 7.1% last year and 9.7% over a two-year period. This outpaces the decline in overall headcount and the decline in overall sales, and raises some interesting questions about sales going forward, but nowhere in the filing does Sysco address this topic. For example: Does this mean that Sysco thinks they had too many sales people before? Is this decline in sales personnel an indication of Sysco’s thinking that sales are likely to remain depressed going forward? Have they reorganized their sales force along different lines? With 9,000 more customers than in 2007 (391,000 then versus 400,000 in 2009) and 9.7% fewer sales personnel, what’s happening to customer service levels? Unfortunately, you will search in vain for answers to these questions in the 10-K.

And in this, Sysco is not alone. Companies focus on checking the regulatory boxes when they write their 10-Ks. In spite of the SEC’s efforts to the contrary, these are mostly documents that look back at the previous period’s results. What investors need is something that helps them gauge the future prospects of the company by pointing out trends and important correlations. And for that, companies leave them on their own. And then they whine that investors are undervaluing them because they don’t understand how rosy their future prospects look. As Pogo once said, “We have met the enemy and he is us.”

It’s Not Easy Being Green

2009-09-30T14:45:00.002-05:00

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

2009-09-23T11:22:00.002-05:00

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

2009-09-17T09:30:00.003-05:00

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

2009-09-08T16:17:00.000-05:00

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

2009-09-01T15:19:00.001-05:00

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.

More on Activist Investor Situations

2009-08-24T10:29:00.002-05:00

As I wrote last week, the highlight of the NIRI Southwest Regional Conference this year was a case study on how activist investors swoop in on a company that is experiencing operational and governance problems. That is not to say that the case study was the only thing we learned from. Damien Park, who runs a firm devoted to helping companies who find themselves in these types of situations called Hedge Fund Solutions, opened the conference with some interesting facts about activist investors. Here are some of his observations, mingled with my views on the situation.

Activist investors will have studied your company for an extended period of time – often a year or longer. This means that they are not acting on impulse but rather have thought through exactly what they want to do. The company, in the meantime, is often caught unawares, much like a deer in the headlights of an onrushing truck.

To this I would add that companies compound the time crunch by the committee structure to how they react in these situations. The CEO, COO and CFO get together and discuss the problem. Then they bring in their advisors – the general counsel, the investor relations officer, the corporate communications people and others and have another meeting. Then the Board of Directors schedules a meeting. All of this takes up that precious commodity, time.

As Damien pointed out, while the company is doing this, the activist has issued a press release and probably started giving interviews to the press. He probably is also saying that the company has not responded to his overtures. He may have already started to talk with other investors about how he thinks things can be improved at the target company. “Me too” hedge funds have started to buy up the company’s stock in anticipation of making a quick buck. Everything is designed to ratchet up the pressure on the company and the Board of Directors to force them to accede to the activist’s demands quickly.

The company, after an internal meeting or two (or three, or four) will come to the realization that they do not have the expertise in-house to deal on even terms with the activist and will start casting around for experts they can hire. This is one of the critical junctures of the process. Choose wisely and you may emerge unscathed; choose poorly and you may have a couple of directors on your board from the activist firm. Companies, especially the smaller capitalization companies that tend to be the focus of many of these types of attacks, generally don’t know the right people to call.

From what I can see, there are a limited number of firms that specialize in these types of situations and if you are a company under the gun, you want one of them. You don’t want your local outside counsel. You don’t want your normal public relations firm. This is like brain surgery – you want firms that have done this many times before and know exactly what the options are and are capable of acting quickly. Yes, they will probably be from New York and cost a lot of money, but now is not the time to be cheap.

One way to help prepare your company is to start to get to know the right firms before things go downhill. At a minimum you should have in your rolodex/contact list the following types of firms that work on activist shareholder defense situations: a law firm that specializes in this area, a proxy solicitation firm, a firm that is expert in the defense against activist investors, a public relations firm that has experience in proxy contests and shareholder activism and investment bankers that have M & A experience. There are a limited number of firms that have extensive experience in this area, so talking to all of them, selecting the ones that fit your company and you are comfortable with and maintaining a dialog is not that time intensive. And more crucially, when the time come that you need this type of advice, you will know the right people to call and save precious time.

Think of it as the Boy Scout defense: “Be prepared”.

IR and Activist Investors

2009-08-17T16:10:00.001-05:00

Last week I had the pleasure of attending the National Investor Relations Institute (NIRI) Southwest Regional Conference in San Antonio. I’m on record as having said this before, but I think it bears repeating: I believe that the Southwest Regional Conference is a better learning experience for investor relations professionals than the National Conference. I say this because the Southwest Regional Conference is shorter – a day and one-half as opposed to two and one-half days and thus more focused and, with a smaller number of people in attendance, you actually feel as if you have a chance to get around and talk to everybody.

This year, under the leadership of Lee Ahlstrom, President of the Houston NIRI chapter, the Conference took an interesting departure from the usual lineup of speakers. The first morning saw everyone engaged in a case study examining the actions of an activist investor confronting a company with operational and governance issues. The case required everyone to participate, assuming the role of members of the Board of Directors, while members of management, the activist investor, and an institutional investor presented their side of the situation. The case drove home the incredibly fast pace of events in these types of situations, as members of the Board found themselves with large amounts of data, conflicting agendas and not much time to make a decision.

As someone who uses case studies to teach investor relations, I was very interested to see how things would turn out. After all, the audience was mostly corporate IR practitioners, who would normally be expected to side with management. I had worked on the case with Lee and a number of other professionals in the field and thought that the case was even-handed, presenting issues on both sides of the situation, but with case studies you never know quite how the participants will react. To my surprise, the overwhelming number of participants voted in favor of negotiating with the activist shareholder, recognizing the difficult realities of activist investor situations.

I would be the first to admit that a single case study result does not a trend make. But Directors face enormous pressure to do something in these situations beyond the Nancy Reagan defense (“Just say no”). Add to that the additional pressure Board members face when you consider Director’s liability and potential lawsuits, and you start to understand the leverage activist investors have.

As investor relations professionals we are often the early warning system for these troubles. If you are consistently getting questions about underperforming units or assets, you should let your management know. Hedge funds often talk to one another about investment ideas and when the same question keeps popping up it can serve as a warning sign. Similarly, if your corporate governance scores are low or your compensation practices out of line with your peers, you should be tactfully suggesting that the Board address these issues. Better that the Board act on its own than be forced to by an activist investor.

Finally, set up a program to talk to your major institutional investors to discuss items other than the latest quarterly results. Solicit input on governance issues, compensation and equity plans, with senior management present. You can do this either as a separate call or ask that you spend 5 – 10 minutes on the topics during your next non-deal roadshow. Those are the institutional votes you will need next time there is a potential proxy fight and you would be well served to have a history of listening to your investors on these issues rather than waiting until you are under the gun.

Corporate Communications and Ethics

2009-08-11T09:47:00.001-05:00

What do you do when you no longer believe in the position or information your employer wants you to tell the public? If you hang around the business of disseminating information for companies long enough, this is an issue you may very well face.

Such was the position Wendell Potter, former Vice President of Corporate Communications at CIGNA, the health care insurer, found himself in a while back. His experience in seeing the human side of lack of health care coverage ran smack into his company’s opposition to health care reform and its practices of canceling health care coverage in order to write only the most profitable policies. Potter underwent a change of heart and wound up leaving his executive position at CIGNA in order to work for the opposite side of the argument. You can discover more about his actions and see his interview with Bill Moyers at www.pbs.org/moyers/journal.

The interview set me to thinking about the right way to handle such situations, either in an investor relations context or a broader communications context. What are the ethics of the situation? Does your duty lie to your employer or your sense of what’s right? When do you reach the point of walking away? What about your family that relies on you for support? You can’t predict how or in what circumstances these situations will confront you. Not all of us have a moment such as St. Paul on the road to Damascus, but if you have thought through some of the things you may face beforehand it helps clarify the issues when it becomes your turn in the penalty box.

First, there are the simple cases. At the egregious end of the scale, if your employer tells you to communicate something that is wrong or clearly misleading, and it’s material, you are obligated to say no. For public companies, disseminating false or misleading material information is a violation of federal securities laws and no employer can make you break the law. If your choice is between going to jail or being unemployed, better to be free and poor than employed but awaiting sentencing.

At the other end of the scale, there are the things your company does which you may not personally like but which you have to defend. Corporations are profit-maximizing entities that sometimes close divisions or plants at great human cost. You may not like the particular actions in question, but they are for the long-term health of the corporation and its shareholders, so you swallow hard and stick to the company talking points. Welcome to the real world. As long as you can get up in the morning and look yourself in the mirror, you should be OK.

But what if things fall somewhere in the middle or you can no longer look yourself in the mirror? You become convinced your company is wrong, or headed down the wrong strategic path? They are not doing anything illegal, but they are doing things you don’t agree with. At what point do you get off the bandwagon? Are there things you can do to prevent what looks to be inevitable or are the only options quit or keep your mouth shut? I wish I had the answers for those questions, but they are often very dependant on the exact situation a person finds themselves in, and each of us must find our own ethics path, often without much help from anyone else. There are however, a couple of books that might be helpful to the process. Joseph L. Badaracco, Jr. a Professor of Business Ethics at Harvard Business School, has written two books, Defining Moments, When Managers Must Choose Between Right and Right and Leading Quietly, An Unorthodox Guide to Doing the Right Thing. These books suggest strategies for de-escalating situations where ethical conflict may arise. In addition, Professor Badaracco recognizes in Leading Quietly that sometimes the small things we do in the name of self-preservation are OK. All of us have mixed motives in the business world, including the desire to stay employed. Sometimes it may be necessary to pick your battles, saving your moral stands for the important issues.

I haven’t presumed to provide many answers here. When faced with these situations, each of us must do what we believe to be right. The press celebrates those like Wendell Potter who take a clear moral stand. Certainly there is justification for this, as they have clearly sacrificed much to make their stand. But as Professor Badaracco points out in his books, there are often things we can do to dial down the potential conflict before it comes to an all or nothing stand. These may not be perfect solutions, but it’s not a perfect world.

Getting Useful IR Data for Free

2009-07-13T11:30:00.002-05:00

Occasionally, while doing research on the web for something I’m working on, I will run across something that I didn’t know about, pause, and think, “Huh, I wonder if I’m the only one who hasn’t known about this until now?” Such was the case recently when I was engaged in research about the change in ownership of a company.

There is a web site, www.whalewisdom.com that I have found to be very useful in tracking change in investor ownership. The improbable name comes from (I think) the fact that they attempt to follow the investments of some of the largest hedge funds, the whales, and derive some measure of wisdom from what they are doing. The site is set up to help investors track the holdings of hedge funds, but it is also very useful for tracking the change in investor ownership of companies as well. The site has compiled data from SEC filings about investor ownership in companies and put it into reasonably useful form.

As most investor relations officers in the U.S. know, the Investment Advisors Act of 1940 requires that all investment advisors with assets under management of over $100 million file a report of their holdings on a quarterly basis with the SEC. The quarterly reports are known as 13 F filings and are helpful in understanding your company’s shareholder base. There is an entire cottage industry of firms that provide this sort of information to investor relations officers. Generally, this information tends to be expensive and bundled with lots of other services. The advantage of the Whale Wisdom site is that it’s free – and you don’t even have to register to use it. In this day and age of constrained budgets, that’s a big advantage.

There are several useful things you can do on the web site. You can select a company, yours, your competition or some other company, and see who owns them. You can look at ownership changes over time, as the information on filings goes back to September 30, 2007. I find this particularly useful, as when you look at a whole year’s worth of data, trends become much clearer then if you are looking at a single quarter. Are good, solid, long-term holders trimming their positions? Are more hedge funds moving in? Are you losing growth investors and getting value investors in their place? (I’ve seen this with several companies I follow closely as they have hit the wall on organic growth. When you start seeing lots of value investors, you know the P/E ratio will be a long time recovering.) You can even download the information to an Excel spreadsheet if you want to manipulate the data further.

Often times the investors themselves won’t tell you what they’re doing – the larger funds are particularly sensitive to this – so it’s up to you to figure it out. If the type of investor you are getting doesn’t match your story, it’s time to sit down and reconsider reality.

Another nice thing the site does is allow you to type in the name of an investment firm and see their holdings. So if you’ve got a new investor you’ve never heard of before, you can go see what else they own and get a feel for their investment style. You can sort their holdings to see how important you are in their investment universe. You can even see if the firm has any 13D filings, indicating the possibility that they may be a more active (read hostile) type of shareholder.

Due to the schedule of 13F filings – 45 days following the close of each calendar quarter – the information is not up to the minute. You wouldn’t want to rely upon it if you were in the middle of a proxy contest. But if you are interested in looking at longer-term trends in your company’s stock, this site is helpful. And the price is right.

Personal Note: Investor Relations Musings is taking a vacation next week, as I join 8,000 of my closest friends biking across the great state of Iowa in the rolling party known as RAGBRAI. If you are a faithful reader, do not fear, the blog will return in two or three weeks, as soon as I’ve had a chance to recover from my vacation.