As much as companies, and their advisors, would prefer that every quarter go in the books with numbers in line or ahead of expectations, that is not always the case. Reality is that business for most companies is dynamic, with quarterly financials fluctuating for any number of reasons. When a company misses management projections or external estimates but quickly returns to regularly reporting results in-line with expectations, that “off” quarter will often be considered a “blip”. Unfortunately, sometimes businesses have several quarters of underperformance, which creates more significant communication and credibility challenges.
While proper, consistent communication can help keep the investment community’s eyes on the longer-term focus and strategy, several quarters of underperformance can begin to call into question whether or not management is capable of executing on the strategy and meeting those long-term goals. Generally, investors and analysts will support companies with management teams that they view as trustworthy and capable of successfully growing a business over time. The ability to build and maintain that trust hinges on being straightforward and as transparent as possible; most seasoned investors and analysts have radar that is well-tuned when it comes to spotting executives that are “all hat – no cattle”.
When a business is firing on all cylinders and a company is reporting good news, communications and interactions with the investment community are more predictable and enjoyable – who doesn’t like being the bearer of good news? Most businesses, however, will hit a rough patch at some point, which naturally places more strain on communications with the investment community. When a business faces headwinds that aren’t of its own making (hello 2020!) management is not ‘on the hot seat’ per se, but still needs to clearly articulate a plan to work through the issues at hand.
For the purposes of this piece, let’s focus on situations where underperformance is more a function of company-specific factors that have occurred repeatedly, such as decisions to raise prices that dampened demand more than expected, new product launches that went poorly, or an acquisition that did not deliver as expected. In situations like this, it is natural for investors to question management’s abilities.
To illustrate this point, let’s assume Fictional Cell Phone (“FCP”) company has reported several recent quarters of underperformance as device sales, including new product launches, have fallen flat. How then to reassure the investment community that management is capable of steering the business in the right direction and resuming growth, over a certain timeframe? Contrary to the instinctive reaction by many to go into a shell, a comprehensive communications strategy and plan is the best option.
A first place to start is embarking on an honest reckoning about the current state of affairs. In some instances, the company might retain an external consultant to provide more in-depth market research. The company can either communicate that they are conducting a formal review, or wait until they have determined the best path forward.
Either way, that alone is certainly not enough to win back the trust of the investment community, but it is a key starting point in resetting the dialogue. Investor relations advisors can be very helpful in soliciting input from key stakeholders, such as top investors and industry-focused analysts. These constituents can be a valuable resource by relaying their own perceptions along with those of customers and competitors.
Communicating to the street that the company is formally evaluating its current strategy accomplishes several things: first, it establishes the fact that ‘business as usual’ will not suffice. Second, it creates the expectation that the issues plaguing the company will be rectified. Lastly, it reassures the market, as well as employees, that management is honest and willing to look at themselves critically for the good of the business and its shareholders.
Transforming insights to action is key. Depending on the severity of the situation, the Board of Directors often charts the course of action. In some cases, a change in personnel will follow, such as a department head, but sometimes change occurs at the Board level or in the C-suite.
In the absence of a personnel change, the Board may still feel the need to implement a strategic shift. As this takes place, management may be hesitant to share details concerning business initiatives such as new product launches for competitive reasons. Providing additional transparency does, however, help reassure the market. Explaining what the company is doing, and why, and the expected timing, allows investors to monitor progress against these stated objectives, which leads to a rebuilding of confidence over time.
It is also helpful to reconsider how the bar is set, particularly when it comes to providing guidance. When a company “underperforms”, it is relative to company guidance and/or street expectations. Thus, a company may still be growing but just not at a rate the market expected. That is, of course, a different story than a business that is contracting. In either case, properly setting expectations will go a long way in influencing how a company is judged. In going through a “reset”, it can make sense to discontinue providing specific financial guidance, at least for a period of time. Particularly when there has been a change in the C-suite, new leadership is well-advised to suspend formal guidance until such time as they have a high degree of confidence regarding future financial results. This pause can often take several quarters.
An integral component of any communications strategy is to establish realistic expectations. During earnings season the financial news is chock full of headlines like “ABC Company reports earnings below consensus.” Never mind that ABC’s earnings may have doubled compared with the prior year period. The market reaction is invariably cued by results relative to expectations. Institutional investors and analysts are also wise to “sandbagged” guidance whereby companies provide low-ball estimates they can easily beat. Companies, and their investor relations teams, must work to strike a delicate balance in order to issue realistic projections that are indicative of future performance and present a defensible basis for proper valuation.
Providing measurable goals, both qualitative and quantitative, is a worthwhile exercise for all involved. Beyond establishing reference points for investors and analysts to build their own expectations and models, it helps establish credibility by holding management accountable for achieving a defined level of performance. Thorough self-evaluation, paired with clear communication, and followed by successful execution provides investors with comfort that the company is on the right path.
Summing it Up
The key takeaway is that during times of operational challenges, companies and their shareholders are best served by expanded and enhanced communications. Honest discussion of the issues facing the company form a communications ‘backbone’. From there, clearly articulating remedial actions allows all stakeholders to monitor future execution. As the company progresses on the path it has laid out, investor relations should amplify this success through well-crafted communications and by continuing to interface with investors and analysts. IR should ensure that the goals being communicated are reflective of the long-term value creation story, and that this renewed story is being properly understood.
If you have any questions or want to discuss this topic, reach out to me anytime.