A client recently questioned why Catalyst would recommend sending out a release to our stakeholder email list when it contained “bad news” i.e. a preannouncement of disappointing results?
It was a valid question from someone new to the IR role, so we thought we would share our advice more broadly.
For investors, the guiding rule is to keep them informed – as they are owners of the company and all news (good and bad) is important. News flow is valued as it drives stock prices in the short and long term. A regular stream of news also helps builds trust that a Company is keeping you well informed. Seeing that a company doesn’t “cherry pick” its news flow, gives investors comfort that they don’t have to wonder if something has happened behind the scenes – particularly if the share price is volatile.
In the long term, news is neither good nor bad but a string of data points on a long road that keeps investors informed and updated on a company’s outlook. Good and bad news triggers buying and selling which equals “liquidity” – a critical aspect of public investments. How we deal with these business data points can also affect buying, selling or provide comfort to keep holding.
Knowledge and the comfort that you are being made aware of key factors is what enables investors to remain engaged in a stock. Uncertainty about what’s going on in the business or concern that management night not be fully transparent on major issues – causes smart investors to exit, as they recognize they are handicapped in their decision making.
We regularly counsel our clients that it’s better to deliver bad news quickly and with full transparency – rather than seek to delay or hide it, because the impact of the news will become apparent eventually in either case. There is no denying that bad news will cause some investors to sell some or all of their stock – but in the former case, the credibility you build by being forthright – makes it far more likely the investor will reenter your stock when the issue is behind you.
But if an investor feels surprised or misled by management due to omissions or delay – it’s highly unlikely they will EVER return to your company – and their negative perceptions can travel to other investors – as Wall Street is close knit community. Considering this dynamic makes doing the right thing in disclosure an obvious decision.
Getting back to the issue of distributing unfavorable news – with respect to your customers, customer prospects and/or partners that may also be on your distribution list – we offer similar advice. Because most industries tend to be very insular “fish bowls,” news gets around with great speed – often aided by your competitors! Given this reality, can you realistically believe you can succeed in only sharing good news and trying to suppress the bad within your industry group. Is it realistic to assume that “they might not ever learn about it…” if you try to keep something quiet? Of course our answer is “no” and it’s backed by experience.
With respect to Wall Street, we strongly recommend getting ahead of the rumor mill by:
1) moving as quickly as you can,
2) framing the message in your own words and with proper context,
3) putting the news in investors’ inbox and pushing it to the channels investors and analysts monitor,
4) following up with key analysts, investors and media to make sure they saw the news, and
5) being available and proactive in addressing the inevitable uncertainty and questions from key stakeholders.
This approach should lead to better responses to disappointing announcements because the communication will best reflect the perspective and balance you provided. It should also help accelerate putting the situation “behind” you and importantly, it just may remove a motivation to SELL prior to more broad dissemination of the news/ rumors. In a word – it helps to inoculate you from further impact from the situation – by eliminating any perception of acting before the news is fully reflected in a share price.
Thinking from the investor’s standpoint, it is far better – and less scary – to learn of challenges from the Company itself. Certainly, we all learned this lesson as kids when confronted with disclosing the “small dent” in the family car! This requires prompt and clear communication – and requires a policy of sending out all newsworthy announcements with the same policy.
To pretend that if you don’t inform these constituencies – they won’t find out – makes little sense and has not been true in our experience over the years, particularly with the brightest and most engaged investors (who tend to exert the most influence).
While a slight of hand might work with stakeholders who pay little attention – if they are tuned out, how important can they really be? In the end, we know that your most important constituencies will likely be influenced by how you handle such situations. We believe your credibility stands to benefit from open disclosure – so why risk the reputational damage of being viewed as less than forthright with Wall Street.
In closing, our experience has shown that success in building relationships on Wall Street is a marathon – not a sprint – and you need to maintain your pace both uphill and down. Persistence and balance is required to reach the finish line, and along the way your fan base will grow if you build the right profile.
If investors sense communications inconsistencies, however, Wall Street interest can disappear overnight, without a word. While this silence can be mistakenly viewed as success for a less than forthright strategy, the more telling disappearance of their capital from your equity, along with polite declines for future meetings, is the true consequence of failing to execute credible IR communications.
At the end of the day, the answer to most IR questions is a question: “What would I want a company to do if I were an investor?” The follow on question is – how would that make me feel about the Company and its management?
This “karma” approach has guided our IR efforts for decades with repeated benefits. Please call us if you’d like to learn more!
The Catalyst IR Team