U.S. corporations are facing the most challenging environment for shareholder relations and communications since the recession of the early 1990s. Without question, the current economy is causing some companies to suffer from a “bunker mentality”—instead of going on the offense to tell their investors what their strategy is to deal with an uncertain economic environment, they close up, follow their course unswervingly, and hope for these trying times to pass.
This is unwise, because economic difficulty probably isn’t receding any time soon. As participants in a global economy, U.S. companies that have overseas markets must be particularly sensitive to the slowing demand for goods, particularly in countries like China and India that have been major consumers of American products. In other words, there are threats to corporate performance that investors are going to notice; that makes it all the more important for companies to explain their near-term and longer-term strategies to deal with these threats and uncertainties. Going silent leaves the analysts and investors on their own to judge how relevant issues will affect the company, and leaving investors on their own to judge your company’s performance generally isn’t good.
The Corporate Response
While these economic and market conditions make visibility difficult, company senior officials should get out of their foxholes and go on the offense. But, before doing so, they should take an overview of their investor relations program and corporate governance to ensure they are focusing on their fiduciary role and stewardship of shareholder interests and value creation. Underlying all of this must be a strong emphasis on disclosure and transparency—two qualities that companies tend to shy away from in hard times.
Emphasis on risk assessment and risk management. If you have not already done so, establish an internal risk assessment committee. Make sure the investor relations officer is part of that. Periodic risk assessments should be provided to senior management and the board of directors. Even better, to underscore transparency, investors should be advised of significant risks in the Management’s Discussion and Analysis and in investor meetings once it is public information. The failure of proper risk assessment has destroyed much of investor confidence in the financial services sector.
Dealing with hedge funds. While overall hedge fund performance has been sub-par this year, and while a number have folded, some are still very active and are changing the model for board-shareholder communications. Instead of wanting to meet with senior management and the board on governance issues like the traditional investor activists, their focus is on changing corporate strategy to achieve (in their view, at least) greater shareholder value. This creates a source of tension in communicating with activist hedge funds since senior management and the board take ownership of their strategy. Activist hedge funds are increasingly taking significant positions in a company’s stock and are asking for one or more board seats. The investor relations officer should evaluate the hedge funds to determine which ones are short-term holders who short the stock for immediate gain, and which ones are investing for the longer term. The latter are the ones you want to meet with.
Keep your eye on corporate governance issues. Setting the tone from the top is essential in today’s environment, in which boards must demonstrate that they are the stewards of the shareholders’ interests. As part of an overview of corporate governance, look at board composition and committee structure to ensure the directors reflect the broad interests of the investors. As I suggested in my August 2008 Compliance Week column, establishing a shareholder relations committee of the board would send a positive signal to investors, providing that it is perceived as authentic. With an increasing number of say-on-pay shareholder proposals, you should focus on improving transparency in the Compensation Disclosure and Analysis, particularly in communicating pay for performance goals for key executives.
The role of the sell-side continues to change dramatically. Two-thirds of companies listed on the New York Stock Exchange and Nasdaq have no sell-side research coverage, primarily because of a decline in funding for research. With fewer dollars going to pay analysts to write research reports on companies, a new model is emerging: More and more analysts instead take company officials out to meet with institutional investors, for which the analysts receive “soft dollars” in return as part of trading fees. There’s an inherent conflict of interest in this arrangement; analysts will tend to take companies to the firms that are big volume traders, rather than those firms that are value investors who serve the bests interests of long-term shareholders. Companies who are losing sell-side coverage (or have none at all) need to step up their efforts to reach the buy-side analysts directly with their company story. The buy-side wants access to senior management in one-on-one meetings, and there are services that can assist companies in targeting potential institutional investors and match their portfolio criteria with the characteristics of the company. These services can also assist in setting up the investor meetings.
Take advantage of the Securities and Exchange Commission’s proposed guidelines for using the Internet to improve investor communications. Over the past eight years, the SEC has moved from being skeptical about using the Internet to embracing it as a primary means of investor communication. Consider a few SEC actions over the years:
In adopting Regulation Fair Disclosure in 2000, the fully accessible corporate Webcast was accepted as a means for full and fair disclosure.
Under Regulation G, the SEC requires companies that use news releases containing non-GAAP earnings to reconcile those with GAAP earnings and to post that information on their Websites.
This year, the SEC allowed companies to use “notice and access” as an alternative to mailing proxy materials, using the Website as a means for dissemination.
Also, in 2008, the SEC amended the federal proxy rules to allow companies to use their Website for shareholder e-forums and provided the company legal protection for what others might say in these forums.
The SEC published proposed guidelines in July 2008 that would allow companies that consider their Website as an adequate means for full disclosure to post their earnings releases on their site, as opposed to issuing releases through the wire services. Moreover, the proposed guidelines would allow companies to use their Website as a means for disclosure or real-time material developments.
A large part of how companies can take advantage of these disclosure developments will hinge on how well companies can take advantage of XBRL, the “interactive data” technology the SEC clearly will mandate sometime soon. In my next two columns, I’ll take a deep dive into XBRL and how companies can exploit it to maximize their investor relations.
The market is very different today from what it was in the early 1990s. The complexity of shareholder relations and communications is also far greater. But companies today have more sophisticated means to communicate with their investors, and the SEC has provided some of these tools. Companies would be wise to evaluate them and adopt those that enhance their shareholder communications so they can better understand the companies they are investing in and have the confidence that senior management and the board are in a difficult economic environment are doing their best to enhance shareholder value.
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