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During the Bear Market, Communicate!

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Each day we are assaulted from all sides by the sights and sounds of a bear market and the credit crunch. The bear growls and claws its way into all aspects of how we manage our businesses. Since the last time we faced anything even close to these market conditions, new tools - and indeed new professions within investor relations - have been created. The trick now is to use them wisely.

How different are the challenges faced today? What are the trends we are seeing in this market?

First, a number of changes have taken place on the sell side. This traditional channel of ideas and information to the buy side investors is changing and even reducing in influence. The business model, with its connection between research delivered and trading commission earned, is changing. For investment banks, it is less a profit center and more a cost center. The result is that the nature of analysts is changing, as long serving analysts move to the buy side. 

As a consequence, the pressure is on for companies and their IROs to reach out directly to institutional investors.

Second, the truism that more than half of a company's valuation lies not on the balance sheet but in the nonfinancial value drivers has never been truer. Assets such as management's ability to deliver, R&D spend, brands, patents and market share are driving investment decisions.

So what do analysts consider as they seek to value assets? An initial approach is to look at the relative P/E of the company against a peer group and give it a premium. This premium is then weighed against its "sustainability."

For example, in companies' spending on R&D, analysts will try to find the rate of return of an investment. There are ways of doing this based on public data, but providing examples of investment and returns gives analysts confidence about the future. Similarly, consider investment in staff training. In many company communications we see reference to the "black belts in Six Sigma" employee training. Elucidating the detail behind that investment and enumerating the efficiency it brings is also very helpful to analysts.

A third trend in today's market is the way in which many companies' equity story is changing. As companies assess their ability to survive the tough times, especially relative to their peers, a new story is emerging. And that story is likely to appeal to a completely new set of investors. Value investors assess the prospects of companies very differently from say growth investors, and consequently the "story" communicated by companies needs to change.

So what are the top tips for communicating in these tough times?

The first is simple: stay visible. Even though it is hard to tell a positive story, investors will value your perspective even more in hard times than in good ones.

Next, provide facts not spin. Those valuing companies attach a premium for consistency supported by facts. At the same time, reaffirm the long- term equity proposition. Even though today's story may be unpalatable, confirming that the core strategy remains constant will help.

Third, discuss the balance sheet. When investors are valuing stocks on their growth prospects, it's about the P&L. But when the issue is survival, people need to understand the size and nature of the assets and the size and nature of the liabilities. Safety (or lack of it) is found in the balance sheet. Publishing debt covenants, for example, helps investors assess the ability of the company to support its liabilities in these days of ever more expensive debt.

Next, communicate the strategies of the business. How should this be done? What are the key components of a strategy to communicate nonfinancial value drivers? Consider these:

Consistency. No surprises. Research constantly shows the importance investors attach to the excellence of the management team, the R&D investment and so forth. However, these factors are outweighed by consistency. Clearly, consistent financial performance tells its own story - however, consistency should be a key driver in the year-on-year communication of strategy. Tempting as it may be to rewrite the strategy to fit the changed circumstances, this is much less likely to win a "consistency premium."

Honesty. Many an IRO has had to walk the tightrope between excellence in communication and the (legitimate) concerns of counsel seeking to protect the company from litigation. Recently in its public filings of its quarterly report, a company conceded that a different decision would have saved a considerable cash sum. The CEO was totally honest - and an investor sued him (unsuccessfully). However, in another company, the board directed its CFO not to discuss an issue in its public filings.

On consultation with the IRO, the board reconsidered and the company made an appropriate announcement, with the CFO explaining how the issue had happened and the next steps to be taken to address the issue. They gained credibility - and the consequent premium - especially as it was not the only company in a difficult situation at that moment.

Management Discussion and Analysis (MD&A). Opportunity or threat? The number of those taking legal action on the basis of the "wordsmithing" of the Management Discussion and Analysis has dropped. So can the MD&A change from being the ugly sister of mandated disclosure to a communications opportunity?

•    On the one hand ... The Management Discussion and Analysis is much criticized as a communications tool. Its focus on historical data has made the MD&A cumbersome and a poor choice for communicating the future. Many want to eliminate risk by taking last year's document and changing the numbers. Anything innovative or interesting will be outside of a 34 Act filing. As a result, despite regulators' best efforts, few investors immediately access the MD&A to get an understanding of the strategy for the company.
•    On the other hand ... The disclosure regime permits companies flexibility in telling its story. Provided it is well thought out, well executed and consistent with all the other materials published by the company, the MD&A can move from being a compliance chore to one of the company's best opportunities to communicate the true drivers of their business.

Role of the IRO and the IR team. Who should write the company's story? Who should be in charge of communicating the vision, the strategy and management's capacity to deliver? Some CFOs believe their role to be communicating strategy, leaving the IR person's role to manage the sell side earnings expectations and estimates. However, the IRO should be the key author. Not only does this harness the IRO's skill sets, it allows headroom for an IRO's personal development. By seizing the responsibility for aggregating the materials needed for good communication as well as compliance, the IRO adds value.

Finally, coordinate investor and media relations. It's a small world. When a reporter is working on a story, he or she will call analysts and investors looking for insight. And investors, in turn, pay attention to what the media says about a company. Companies should speak with one voice, and IR and PR should coordinate daily to plan responses on any issues lurking in the market.  

But once the story is complete, how should it be communicated? One-on- one meetings and e-mailing those that you know are by their very nature selective. Some existing investors choose (legally) to hide their identity and so need to be included in a broadcast communications strategy. And with the need to reach out to new investors with a different investment style, broadcast communications are the first steps in educating this new market.

Electronic communication and the Internet provide opportunities to tell the company's story. These opportunities range from properly-distributed news releases, to audio and video availability of interviews with the CEO, to the CEO and IR blog and the Investor Day.

Suddenly, the company starts to come to life, telling its story to both existing investors - providing detail on how the company is weathering the storm - and new investors. 

So, in summary, companies who communicate well, regularly and with insight will not only prosper in the short term but will win more support in the long term. Good communications in a bear market is a good investment. 


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