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

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

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

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

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

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

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

Practicing Safe Presentations

How many times have you been at a conference and seen a corporate investor presentation that begins something like this:

“Good morning. I’m Joe Terrific, CEO of Godzilla Industries, and I’m here to bring you up to date on all the great things we’re doing. (Pause while he moves rapidly from the title slide, past the safe harbor slide to the beginning slide describing the business.) Here at Godzilla Industries…”

In other words, the safe harbor statement slide is up on the screen fleetingly, but not referred to verbally. The thinking being that they’ve shown the disclaimer about forward-looking statements, all the investors in the room are sophisticated institutional investors and know that when a company makes projections and statements about the future things don’t always turn out the way the company thinks they will. The requirements of the Private Securities Litigation Act of 1995 have been met, right?

Well, maybe not.

A recent ruling by a federal trial court for the Western District of Washington has underlined the need for companies to make sure they verbally reference the safe harbor disclaimer. The case is In re Coinstar Securities Litigation, Case No. C11-133 MJP (W.D. Washington Oct. 6, 2011) and all practitioners of investor relations should take notice of it.

The case involved allegations that on various occasions the management of Coinstar made projections and statements about future expectations that did not come to fruition. As happens in these cases, the lawyers for Coinstar made a motion to dismiss the complaint. This is a motion made early in the proceedings that has the effect of cutting off the litigation before the really big legal bills start to pile up. It is done before pre-trial discovery takes place, which is when a plaintiff can drive a company to distraction by forcing it to produce thousands of pages of documents and produce members of management for time-consuming depositions. Once discovery starts, the chances of the plaintiff wringing a settlement out of the company go way up, as it is often cheaper to settle than to pay hefty lawyers fees for several years running while lawyers pore over boxcar loads of documents in the hope of turning up a smoking gun, with the Russian roulette of a jury trial lurking in the background.

In the Coinstar case, one of the allegations made in the complaint was that forward- looking statements made by company management at an investor conference were false or misleading. In making the allegation, the plaintiffs relied upon a transcript of the presentation, and because the transcript contained no reference to the cautionary language on the company’s presentation slides, the court ruled that for purposes of a motion to dismiss, they could not take notice of something that wasn’t in the record and therefore the lawsuit could proceed on those allegations.

This does not mean that Coinstar lost the lawsuit, but it does mean that the lawsuit can continue and move into the pretrial discovery phase, which is almost as bad as losing. Coinstar did not accompany their safe harbor slide with a simple statement such as, “Statements made in the course of today’s presentation may contain forward-looking information and actual results may differ materially from what we are presenting today. The slide you now see gives you more information on the assumptions and factors we consider in making those forward looking statements and where to go to get more information on our risk factors.” As a result, they have subjected themselves to, at a minimum, additional and unnecessary legal bills, and at worst, the potential of a large settlement or jury award.

So today’s lesson is, just because the safe harbor slide is in every presentation, and everyone has heard it dozens of times before, doesn’t mean that a trial judge will assume investors have heard about it. Practice safe presentations - always refer to the safe harbor statement and slide.

Building a Good Investor Presentation

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.

Sell Side Coverage, Part 2

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.)

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

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.

Whistle While You Work

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

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.

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

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).

Insider Trading – The More Things Change…

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.

Stand Up and Take It Like a Man

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?

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?

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.

Using Computers to Predict If a CEO is Lying

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?

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

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.

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

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.