Why Distribute “Negative” News?

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

Response to IR Magazine’s Question – Does IR Need an Overahaul

 

Does IR need an overhaul?

The following are our thoughts on the issue Laurie Havelock raised in IR Magazine.
We are a bit slow to the discussion, having only seen this
article today.  YES IR needs an overhaul,
but we don’t think it’s IR as much as the highly conservative, restrictive
environment and fear mongering that limit us in trying to communicate what’s
going on to the people who own the companies we work for.
Fear of class action litigation, SEC reprisals and a strict
adherence to the status quo (the Company’s or its peers) cause far too many
companies to pull their communication heads into their shells.  No amount of leadership or innovation in the
IR role can overcome a C-suite that abrogates its responsibility by following
the advice of its counsel and auditors to take the safe route, admit no
problems or concerns, make no projections and to say little or nothing of real
value to guide those who own the Company. Our function has become
“disclosure” rather than “communication” and yet IR
practitioners have very little power to overhaul the framework to improve our
ability to speak freely about what’s going on. Every aspect of business
involves risk, and generally the riskier the initiative, the greater potential
value it may create. We view good management as needing to listen to all of its
advisors and then make decisions that make the most sense for the Company, not
decisions that eliminate risk.
As counselors who work on retainer, we can’t help but notice
that the most influential people in what becomes the “final word” on
strategy & communications are IN NO WAY measured, judged or compensated in
relation to the creation of shareholder value. Unfortunately and cynically,
their compensation in reviewing communications is in direct proportion to the
extent of their edits. Yes, there are many fabulous, pragmatic attorneys and
auditors – who do understand what IR is trying to achieve and will accede to a
strategy that involves some nominal amount of risk in an effort to enhance the
potential reach and success of a communication and an overall program.
To illustrate how bad things really are, most companies are
even fearful of using quantitative measures or abbreviations in their
headlines, such as “XYZ Q3 Revenues Rise 15% to $525M on Strong Widget
Demand in Europe.” We have submitted headlines like this – which are
intended to differentiate the Company and draw in new investment interest, only
to have them lobotomized into “XYZ Allied United Industrial Corporation
Reports Fiscal 2013 Third Quarter Financial Results of Operations for the
Periods Ended September 30, 2013.”  Not
only does it say little – it take more of an investor’s precious time to slog
through the formality. 
And the people who denied the first version and insisted on
the language of the second got paid by the hour to homogenize any semblance of
communication right out of the release. Their fear, as we have often heard, is
“what do we say if revenues are down next quarter? We must be consistent
quarter after quarter.” That fear makes us unable to communicate about
what’s going well because of some vague fear that a negative event occurs down
the road that will force the Company to publicly discuss it – as if investors
wouldn’t notice if we didn’t put it in the headline!?!  Does the SEC insist that our headlines be
uniform?  Is a headline considered a
standalone disclosure or does the body of the release count?
The same fears keep us off of social media and prevent us
from sharing analyst reports or estimates because of the danger of implied
endorsement. The same fears force us to use overly wordy and qualified
sentences (do we really have to qualify that the quarterly comparison is versus
the prior year’s period when a full P&L is provided in the release? Our
view is that year over year is implied, anything else needs to be clarified.) These
fears also prevent us from taking full advantage of the safe harbor protection.
To we really need to clarify to investors that things might turnout differently
than we currently expect – that we had a one-time, non-cash write down of our
crystal ball to reflect the end of its useful life?
The same legal strictures force us to spend a lot of extra time
and money in every release to reiterate our risk factors, but then leave us to worry
if our other utterances are similarly protected.
In seeking to protect investors and provide clarity – we seem
to have done the opposite. We are damaging the public company’s communications
function, limited what information can be provided, and ratcheted up the costs
in an effort to try to stymie the minority of players with evil intent.
Probably the best way to reboot IR would be to reform our securities laws and
liability – so that a good faith effort to communicate is an asset not a
liability and that investors be given some semblance of responsibility for
knowing what they own, reading our disclosures and understanding that nothing
in life is completely predictable.

A lot is at stake in this question in our view, the costs
and challenges of being a smaller public company have grown increasingly
burdensome at the same time Wall Street – both the sell-side and buy-side – has
been moving away from supporting such companies. Yet small companies have long
been the font of job creation. Yes we need to overhaul IR and a good deal more.