Thanks – NIRI & University of Michigan

This week I’ve been attending the Theory and Practice of Investor Relations executive education program at the University of Michigan Ross School of Business. The seminar is an opportunity to delve into financial, regulatory and communication aspects of IR with an expert faculty – plus a diverse group of colleagues who bring their own experiences and insights.

The annual program is co-sponsored by the National Investor Relations Institute (NIRI) and the University of Michigan. I was thrilled to attend with a scholarship awarded at the NIRI 2008 annual conference in San Diego. One purpose of this post is to say thanks to NIRI and the University - and, at end of the week, I strongly recommend it to any IR, finance or corporate communications executive.

Besides advancing my own skills, the seminar has been a time to step away from day-to-day work and think about what we do as IR and communications professionals. I’ve assembled quite a few of my comments and take-home learnings on a Lessons @ NIRI-U of Michigan notes page in this blog. Let me know if anything sparks a question or reaction for you.

Vikram Pandit & his annual reports

The September issue of Portfolio magazine carries an interesting profile on Vikram Pandit. Nine months into his role as CEO of Citigroup, Pandit is the subject of a spate of recent news articles probing whether he is up to the job (or whether Citigroup is too enormously complex to fix).

The electrical engineering grad and PhD in Finance (see bio) “has researched his plan to fix Citigroup with a focus bordering on obsession,” Portfolio says, including reading Citi annual reports that go back to 1956. Explaining his interest in a half-century’s worth of annual reports, Pandit comments: 

With any organization that’s been around for 200 years, it has a history and culture. It develops a unique DNA in many ways. To get a clear sense of that picture has been very important to me.

You have to admire the recognition that history and culture matter, even in a gigantic business organization. People working up and down the corporate ranks do have some sense of heritage, “a unique DNA,” however mixed those stories may become through innumerable mergers, de-mergers and changes of strategy. Looking into what made a company great may help lead a CEO in charting the path forward to future greatness.

As an IR practitioner, I found the use of annual reports as a chronicle of corporate DNA intriguing - and challenging. Beyond the numbers, each year’s report to investors is an opportunity to capture and describe the life force of a company, not only the business strategy buy also the personality and human drive, that ultimately produces the financial performance investors are seeking. Long-term investors often are betting on that DNA.

(Endnote: Thanks to BankStocks.com’s blog for alerting me to this profile.)

Reputation lasts more than a quarter

Winding up another earnings season that’s been a little rough for many, it may help to remember what’s important in the long run. This quarter, too, shall pass. A few years ago Warren Buffett, legendary CEO of the Berkshire Hathaway portfolio of companies, reminded his senior managers:

We can afford to lose money - even a lot of money. We cannot afford to lose reputation - even a shred of reputation.

 - Warren Buffett, August 2, 2000, memo to CEOs
of portfolio companies, quoted in Warren Buffett CEO:
Lessons from the Berkshire Hathaway Managers
by Robert P. Miles (New York: John Wiley & Sons, 2002) 

Keep an eye on the water

Companies continue to swim in what could be turbulent waters, especially management teams struggling with weak performance or caught in an economic riptide. And then there are what some folks call the sharks.

Shareholder activists are just as active in 2008 as last year, according to FactSet Research Systems Inc., a data-crunching firm. Activists unleashed 262 campaigns, including 53 formal proxy fights, in the first half of 2008. It’s virtually unchanged from 259, with 55 proxy fights, in the first half of 2007.

According to Financial Week (July 28-August 4), “A handful of hedge funds continue to pick the most fights.” Eight hedge funds are responsible for 30 percent of the battles, with Carl Icahn and Philip Goldstein’s funds at the top of that list, FW says.

FactSet runs a surveillance and intelligence service called SharkWatch, as well as a takeover defense monitoring and advice service called SharkRepellent. (We might guess from the names that there is a lack of affection for hedge funds and other activists – although FactSet gathers and sells data to varied players in the capital markets.)

Institutions vs. I-banks: who’s better?

A study by three Harvard B-school folks casts doubt on the assumption some execs have that overworked sell-side analysts are less reliable in their judgments than buy-side people with similar skills who work for institutional investors. It’s unusual to read something nice about the sell side.

“Buy-Side vs. Sell-Side Analysts’ Earnings Forecasts,” in the July/August Financial Analysts Journal, makes a quantitative comparison of earnings forecasts by two sets of analysts on the same 337 companies from 1997 to 2004. It’s a total of 3,526 buy-side and 58,562 sell-side earnings estimates.

Results: The buy-side analysts were more optimistic and less accurate in forecasting earnings than the sell side. Median buy-side estimates were 3 to 12 percent higher than the sell side’s. Median absolute forecast errors were 4 to 11 percent higher for the buy-side analysts.

The authors also offer some insights into differences in work life between researchers at I-banks and number crunchers for mutual funds. For example:

… Scope: Buy-side analysts may follow 50-100 stocks, in broad industry sectors, and write reports on about 15. Sell-side analysts also write on about 15 stocks, but focus on narrower business segments and do not attempt to track as many stocks in total.

… Writing: Buy-side analysts typically write brief reports, two pages or so, getting to the point for their portfolio managers. Sell-side analysts write detailed industry reviews and bottom-up company reports. Thorough reports and narrow specialties could give sell-side analysts deeper insights.

… Compensation: Buy-side analysts are rewarded for the performance of their recommendations and impact on their firms’ portfolio managers. Sell-side analysts are paid based on comparisons to other analysts (e.g., Institutional Investor rankings) and business-generation metrics such as commissions and soft dollars.

Comparing earnings estimates, of course, may be the wrong metric. If you’re a portfolio manager (or a mutual fund shareholder), the more important criterion could be returns on the analysts’ buy and sell recommendations. The sell-side focus, on the other hand, has always been on quarterly and annual earnings estimates. So the study reinforces the sell side’s expertise in short-termism.

The FAJ article doesn’t settle anything, but it’s an interesting commentary on the art of financial analysis on both “sides” of Wall Street. And an argument for IR continuing to reach out to both.

The media - your summer thriller?

Here’s a summer reading idea, since we have a few weeks left, maybe with some pool or beach time: Manage the Media (Don’t Let the Media Manage You) by journalist William Holstein. It’s a quick, easy read in the Harvard Business School Press “Memo to the CEO” series: 100 pages, with many anecdotes and a real-life point of view. 

Even if your job in investor relations excludes dealing with the media, this little tome offers valuable insights, so think outside the silo. Sooner or later today’s headlines on executive pay, shareholder activism, CEO missteps and other topics may come home to roost – and as an IRO you will have input into how your company communicates in a crisis. A little forethought now may help avert a nightmare later.

Attacks on corporate reputation pose some of the worst risks to shareholder value, and the author notes that CEOs and boards are starting to realize the need to manage those risks:

In response to the rapid emergence of coalitions of critics, shareholders and investors, and in recognition of the increasing prevalence of Internet-based communications, there appears to be growing consensus … that the broad role of communications must be more deeply integrated into how CEOs chart their business strategy. Communications can no longer be a sideshow.

Media relations also caught the attention of NIRI in the July issue of Investor Relations Update - worth a peak if you haven’t read the article.

Not that a CEO, VP of public relations or IRO can really “manage” the media. Giving up that illusion is the first step toward successfully working with the media. What Holstein presents is a practical set of suggestions for how companies can manage themselves to communicate more effectively. 

SEC guidance on the Web (follow-up)

Good commentaries on the SEC guidance on corporate websites, blogs and the like at two other blogs: TheCorporateCounsel.net and IR Web Report. The devil is in the details, of course, so you’ll want to study the SEC’s interpretive release (update: the full release was posted on August 1).

The broad implication is certain: Companies need to get on top of what they’re telling investors online - intentionally or unintentionally, on the official website or on some employee’s blog or MySpace page. (See July 30 post below.)

SEC clarifies guidelines for IR on the Web

The Securities and Exchange Commission today approved new guidance for public companies’ communication with investors via websites, blogs and other Internet channels, a long-awaited update for investor relations officers and executives who last heard from the SEC on this topic in 2000.

The SEC press release provides a broad outline - and some further hints at the direction were provided in staff comments today - but details are in the interpretive release itself, which has not yet been posted on the SEC website. The commission promises clarification on several issues:

• Use of websites to comply with Regulation FD requirements. The SEC promises guidance on how companies may disseminate updates or material information online, without the well-worn ritual of issuing a press release to make information “public.” The interpretive release will go into particulars on how companies can evaluate whether (1) their websites are recognized channels of distribution, (2) posting online makes the information available to the marketplace in general, and (3) investors and the market have time to react to the information posted. Details will be of interest to IROs as well as PR staffs and vendors.
• Liability consequences of online financial communication. Specifics include corporate websites’ provision of data in historical archives (without considering an old news release or financial report “reissued” every time someone accesses it); links to third-party websites or reports (updating the SEC guidance on disclaimers to avoid “adopting” the other persons’ views for liability purposes); and summary or highlighted information (imagine a brief overview of financial reports, without rehashing all the notes and disclaimers in the 10-K).
• Blogs and online forums, a hot topic among IROs eager to interact with investors in a 21st-century way. The SEC affirms that antifraud provisions of the securities laws do apply to statements made by companies or persons acting on their behalf in these venues. (In my book, this is the only sensible approach.) And companies can’t force investors to waive protections as a condition of entering such a forum.
• Sarbanes-Oxley and the website. The guidance cuts companies a little slack by discussing boundaries so that not all information that might appear online (many company websites offer areas for marketing, recruiting and other purposes as well as investor info) is subject to Sarbanes-Oxley rules on disclosure controls and procedures.
• Cool graphics. The SEC gives the go-ahead to creative technologies that use video or interactive features but aren’t “printer-friendly.” Apparently it doesn’t have to be on paper to be disclosure.

It’s great that the SEC is responding to this need for clarity, following a recommendation from its Advisory Committee on Improvements to Financial Reporting. Companies will want to study the guidance to implement best practices, and stay legal, as investor relations enters the era of IR 2.0.

Hedge fund activists - doing what works

The best defense against “activist” shareholders going into battle against management is prevention: taking actions on management’s own initiative to realize shareholder value (e.g., cutting costs, making better use of the balance sheet, or confronting difficult decisions in leadership). Activists will keep hectoring companies they think are in need of change because, well, it’s a good investment strategy: 

Activism is become increasingly popular as an investment strategy among hedge funds for one main reason - it works. According to our research at 13D Monitor, the average return for more than 200 material activist campaigns that were completed during the past two years was 18.55 percent, nearly double the average return of 9.49 percent for the Standard & Poor’s 500 stock index for the same time periods.

- Kenneth Squire, founder of 13D Monitor,
“Not Your Father’s Activist,” Alpha, May 2008 

IR & your company’s market cap

In an article on perception studies in IR magazine, Brian Rivel, president of Rivel Research Group, drawing on years of talking to institutional investors about companies and their stocks, noted a conclusion on the value of investor relations itself:

We can point to cases that clearly show the impact good IR has on valuation. In our experience, 10 percent of company valuation is tied to truly superb IR. A downside valuation of 15 percent accounts for bad IR. That’s a 25 percent swing, so companies that communicate well attract a much higher valuation.

- Brian Rivel, quoted in Adrian Holliday, “Feedback at a Cost,”
IR magazine, June 2008, p.41