Easing the small-cap regulatory burden

Companies at the low end of the market cap spectrum often view compliance with Securities and Exchange Commission regulations as a Sisyphean burden, with costly, recurring, quarterly and yearly work. While designed to protect investors, the level of detail demanded can be daunting. Adding to the practical burden of finding and reaching investors in a competitive capital market, small-cap managements can struggle with the weight of legal and accounting fees built into corporate overhead.

This week, the SEC provided some relief for nearly 1,000 businesses. As reported by The Wall Street Journal, the new rule classifies a company with less than $250 million in publicly traded shares as a “smaller reporting company,” with less detailed reporting requirements, especially on executive compensation. That enlarges the category from the previous threshold of $75 million. The SEC also added companies with less than $100 million in annual revenue and a public float of less than $700 million.

The new rule also allows smaller reporting companies (SRCs) to report two years of audited financial statements rather than three. Read the SEC’s announcement on the changes here or the full 100-plus page final rule here.

SEC Chairman Jay Clayton was quoted in the agency’s release:

I want our public capital markets to be a place where smaller companies can thrive … Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all.  These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.  Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.

In my mind, the main beneficiaries will be emerging businesses like biotech and IT companies, starting up the market-cap scale – plus small, regional businesses that seem to stay in the $100-200 million range. In both cases, the costs and time involved in reporting have discouraged going public or remaining public. Simplifying seems like a good thing.

No doubt there are critics. And regulatory philosophies are cyclical – the next time there’s a bear market, we’ll hear cries of “Never again!” along with tightening up on rules that are being relaxed now. For now, it’s a positive for our small-cap friends.

© 2018 Johnson Strategic Communications Inc.

Skin in the game: ‘I’ and ‘We’

Investors like to know a CEO and other leaders have “skin in the game” – a personal stake in the company’s success in creating value. Now a study by accounting profs at Tulane University suggests that reassuring investors is as simple using the first person on conference calls.

Described in today’s Wall Street Journal (“CEOs’ Simple Trick on Earnings Calls: Saying ‘I,’ ‘We’ and ‘Us’”), the study of investor psychology “found that investors leave with a more positive impression—regardless of a company’s results—when managers use personal pronouns such as ‘I,’ ‘we,’ ‘my,’ ‘ours’ and ‘us,’ or what the researchers refer to as self-inclusive language.”

The study takes two approaches: Analyzing more than 50,000 earnings-call transcripts with a textual-analysis tool, the researchers found that market reactions to the calls were more positive when executives used self-inclusive language. Separately, more than 250 people were asked to make investment decisions after listening to simulated conference calls on a fictional company, Webtex – some using “I/we/us” language and the alternate version referring to “Management” or “Webtex.” First-person language won.

Some companies like to refer to themselves in the third person – as if humility requires saying “The company” or “Management” did such-and-such. Worse yet, they’ll use the passive voice: “Full-year earnings are expected to be $1.80 to $2.00.”

I’ve always thought that using “We” or “Our team” is stronger, allowing management both to take credit for accomplishments and to acknowledge shortcomings. It’s not a matter of ego – it’s a way to affirm that we’re accountable. We have personal skin in the game.

© 2017 Johnson Strategic Communications Inc.

 

 

 

What’s the value of your brand?

Andy Warhol’s “Coca-Cola [3]”
Crystal Bridges Museum of American Art

The typical raw materials of valuation are numbers – and investor relations people get very comfortable working with metrics that feed investors’ calculations for growth, margins, cash flows, multiples of earnings and the like, and assorted more granular numbers.

But what value do you assign to your company’s brand? Your customer base? Your products or product lines? Valuing these seems open to as many interpretations as, say, a painting by Andy Warhol. Assigning a dollar value seems more like art than science.

So I find it interesting when brand gurus, from time to time, peg the best-known brands as having a monetary value. Recently I ran across the “Global 500 2017” – a list of the world’s most valuable brands – published by Brand Finance, a London consultancy in brand strategy.

The list itself is interesting to browse. No. 1 in 2017 is Google, nudging Apple to No. 2 from its place at the top last year. The iconic Coca-Cola, a favorite of old-school marketing profs (and Andy Warhol), has slipped to No. 27. Christian Dior is No. 500.

The directory is sortable by industry, country or year. If you sort for your industry or country, you’ll see the big names – maybe your company’s, if you rate. If not, it’s still interesting to see who did make the list. (Estimated dollar values are given for the top 100. Beyond that, the Brand Finance table is a teaser to draw you into buying their services or reports. Everyone’s got to make a living.)

So what makes the Google brand worth $109 billion, and Apple $107 billion, and Amazon $106 billion?

Poking around for Brand Finance’s Methodology page, you can pull back the curtain. When they talk about a brand, they mean the trademark – words, iconography and other intellectual property. The value, then, is an estimate of what you would have to pay to buy (or could gain by selling) global rights to that brand. Brand Finance estimates the future revenue that a brand will generate, applies a royalty rate, and does a net present value calculation. Along the way, the gurus mix things like a brand’s financial performance with its emotional connection and sustainability to score “brand strength” on a scale of 1 to 100. Then they multiply by a royalty rate based on deals in the relevant sector. And they apply that to forecasts of future revenues related to that brand. Stir, mix and – voila! – brand value.

In my mind, intangibles are best understood qualitatively. Saying the Starbucks brand is worth $25.615 billion seems less meaningful than talking about its actual financials, plus forecasts – or looking at today’s market cap. Investors should qualitatively understand those emotional connections, daily habits of customers, sales of other stuff under the Starbucks name, and so on. Separated from the organization, all the baristas and training, aromas in the stores, and whatever else goes into the “brand,” the value of the name could go way down. Sometimes it happens fast, when a big crisis overtakes a company. More often it is slow, as management loses its edge or people’s tastes change and leave the brand behind.

When it comes to assigning monetary values to brand, I must confess I feel more confident with, well, the numbers – in the sense of sales, margins, discounted cash flows.

But it’s still interesting to contemplate the value of your company’s brands (corporate and products). We should all analyze and talk with investors about the durability, customer loyalty, competitive strengths, and values that maintain and bring growth to our brands. Investors will factor this into their assessment of brand value – which is the one that counts in IR.

What do you think?

© 2017 Johnson Strategic Communications Inc.

 

 

Gift bags and a chat with shareholders

A nice feature on the Estée Lauder annual meeting ritual – a gathering of mostly older ladies dressed to a T, gathering for a continental breakfast “beautifully displayed,” a gift bag of cosmetics, and genteel conversation – lightens up p.1 of The Wall Street Journal today.

It is a nostalgic image, of a time when shareholders formed bonds of loyalty and companies cultivated that. As today’s headline says, “Estée Lauder’s Annual Meeting Is a Pampered Affair.” The shareholders’ questions, of course, dealt with issues of makeup.

I’m a fan of annual meetings and have attended many. A few, mostly consumer companies, offered product samples or showed off their wares. Some had the atmosphere of a reunion, including firms with many retiree-shareholders, where the focus was more internal than external. Some have been family affairs, revealing sons and daughters of the founder as mid-level executives (that tells you something). An occasional meeting has brought confrontation between activists and a CEO. Some at company locations have included tours. Coffee, or even breakfast, is a nice touch.

To me, the more personal events are nice. I can’t argue that these affairs pay for themselves, but they make a kind of statement, “We care about you, our shareholders, our owners. We report to you.”

Of course, the investor relations team is likely to provide planning and logistical help for the annual meeting. This brings me to my point: Whether large or small, all-business or old-home-days, an annual meeting is about reporting to shareholders, answering their questions and receiving any input. It is like a one-on-one with the big institution, but democratized.

I think it’s too bad when companies, noting that only a handful of investors will attend, reduce the annual meeting to a reading of the lawyers’ script, going through the motions of voting on board seats and executive pay, and then adjourning after 10 minutes. They say it’s because no one attends but, then, why would anyone? It’s a vicious circle – and becomes a pointless date on the corporate calendar.

In my experience, annual meetings also can bring out the deepest concerns of shareholders. “Are you planning to cut the dividend?” was the first question at one I attended. “What’s your plan to turn around declining sales?” “Is the strategy failing?” “Will this acquisition destroy value?” Real questions. Investor relations in the relationship sense.

So I say, bring on the gift bags, a video of the new plant – but, above all, an explanation of the strategy for next year and how we are going to build the value of the business for the future. What do you think?

© 2016 Johnson Strategic Communications Inc.

Hillary (or Donald) ate my homework

Ya gotta love it! This just in from today’s Wall Street Journal:

If you believe U.S. corporations, Americans are drinking less coffee, eating fewer doughnuts and taking fewer cruises, all because of the presidential election. Companies have made a habit of finding excuses for their quarterly results. Blaming the weather is a perennial favorite. The fear of rising interest rates is another. Brexit is a newer culprit.

Now, Tuesday’s vote is front and center.

Among the companies blaming election angst for lagging performance, according to WSJ, are Starbucks, Dunkin’ Brands (Dunkin’ Donuts married to Baskin-Robbins), Carnival Cruises and McDonald’s. After tomorrow, of course, companies can blame it on whoever wins.

Oh, for the days when companies blamed slow sales on weather – snow in winter (or too-mild weather), heat (or cool) in summer and so on. Is the problem ever that we aren’t selling what people want to buy?

Is this a question investor relations people should ask before news releases and conference calls make these excuses an official message point? My guess is investors are taking notes.

 © 2016 Johnson Strategic Communications Inc.

‘That’s not a strategy’

Henry R. Kravis, co-chair of KKR, in the July/August Bloomberg Markets, on interviewing CEOs of potential investments:

I compare their responses to the dot-com period around 2000. Back then I’d ask, ‘What’s your strategy?’ and people would tell me, ‘Go public.’ I’d say, ‘That’s not a strategy-that’s a way to raise money.’ ‘It’s all eyeballs,’ they’d say. ‘OK, eyeballs,’ I’d say. ‘You’re looking at your screen: How are you going to turn those eyeballs into money?’ And of course all of those people went away.

The arrogance during that time was staggering. I can’t tell you how many people told George [Roberts, Kravis’s cousin and partner in KKR] and me, ‘You don’t get it …’

In explaining our companies’ strategies, investor relations officers – and CEOs – should be wary of two traps: (1) hubris and (2) mistaking a near-term payday for a real strategy to build a profitable business.

© 2016 Johnson Strategic Communications Inc.

 

IR webpage: connecting with investors

Looking at the IR page on Mattel’s website the other day, I saw something worthy of emulation. Not some fancy technology – the toy maker uses a standard back-end system with an automated feed. No beautiful graphics. Or even terribly unique content – just news releases, SEC filings, slide decks, stock quote … the basics seen on other IR sites.

What struck me was a brief introductory text. A welcome. Here it is:

INVESTORS

In addition to making great toys, the Mattel family of companies is proud to uphold our responsibility to investors and media by providing immediate access to the latest Mattel financial information and news. Delve into executive presentations, events, track stock history, and annual reports.

What I like is that this lead-in to the page makes a connection. Most IR webpages skip the pleasantries. Investors, after all, know what company they’re researching, and they can find links or tabs that lead to information they need. “Just the facts, ma’am” is the typical rule.

For me, Mattel’s little intro accomplishes three important things:

1. Branding – reinforcing the feel-good identity of Mattel
2. Bonding – expressing a commonality of interest that lets people know “We’re here to serve you”
3. Calling to action – encouraging investors to use specific tools

At the bottom of Mattel’s IR webpage is the company’s boilerplate – reinforcing who the company is, in factual terms like names of its main toys and in feel-good terms like awards for ethics and corporate citizenship. And the page encourages linking to social media.

If a website is meant to be interactive – and it is – we ought to give more thought to how we connect with people. Maybe even tell them we are providing this information because we think they’re important.

© 2016 Johnson Strategic Communications Inc.

 

Mind the GAAP – and the perceptions

One of many fond impressions London offers to visitors is the warning “Mind the gap” – a uniquely British way of cautioning subway riders not to trip over, or get their foot stuck in, that space between platform and railcar. Very polite and considerate. A stumble could be nasty.

The gap investor relations people must mind – pardon the pun – is the difference between earnings under Generally Accepted Accounting Principles and the measures that CEOs, as well as some investors, prefer for assessing the performance of businesses. The EBITDAs and Adjusted-Whatevers are so many and varied that investors and IR professionals must watch our footing.

A good primer on the issues is provided in “Where Financial Reporting Still Falls Short” in the July-August issue of Harvard Business Review. A couple of accounting profs look at GAAP and the gaps in terms of what investors should look out for, and to some extent what policy wonks might try to regulate next. For accounting is also all about regulation.

Issues they cover are disclosure matters that IR people need to “get”:

• Universal standards, with GAAP and IFRS converging (or not)
• Revenue recognition, especially for complicated products or services
• Unofficial earnings measures, Adjusted-How-We-Look-At-Our-EPS
• Fair value accounting vs. what you paid for an asset
• Cooking the decisions, not the books

The writers call this last item “the more insidious – and perhaps more destructive – practice of manipulating not the numbers in financial reports but the operating decisions that affect those numbers in an effort to achieve short-term results.” So a CEO (or other execs) seeing indications of a revenue shortfall will cut prices to move more product before quarter-end, or to save earnings will delay a discretionary cost like an R&D project or ad buy. Voila! Suddenly EPS meets expectations.

I’m not sure that’s new, or always insidious. When you judge people by numbers, they strive to hit the numbers – teachers teach to the test, sales people sell what they have incentives to sell, and CEOs try to hit their numbers. If the market wants to encourage long-term thinking, boards and perhaps investors can start judging CEOs by the change in performance over years, not quarters. Short-termism is an issue. But I am skeptical of policy makers (or accounting profs) tinkering with regulations to alter how executives make decisions.

The perceptions behind this article are more concerning: Investors don’t trust, with good reason or not depending on the company, disclosures they receive. GAAP or non-GAAP, trust is absolutely critical. Perceptions matter.

What can investor relations people do about this gap?

1. Understand our own companies’ GAAP and non-GAAP metrics, not just to provide the mandated reconciliations but to be able to work through the numbers and clearly explain the rationale.
2. Ask investors what they like (or don’t) about our financial reporting.
3. Benchmark peer companies for insightful metrics and best practices.
4. Challenge our managements if metrics are confusing or misleading.
5. Be an advocate for simplicity and clarity.

Being transparent means giving information that enables investors to see what’s going on in the business. That doesn’t just mean more pages of accounting boilerplate and reconciliation tables. Perspective is one of the greatest values IR people can give investors.

© 2016 Johnson Strategic Communications Inc.

Beware of spell check

There is a double warning in an advertisement by Hartford Funds in the July-August 2016 issue of Bloomberg Markets. First, the disclaimer cautions investors that things don’t always work out as hoped.

And then, unintentionally, the ad warns communicators of all kinds – including investor relations – not to place our trust in spell check. (I’m assuming the financial marketers didn’t mean to say their mutual funds could suffer a loss of principle, but rather a loss of principal.)

Proofreading by humans still matters. That’s one of my, er, principles.

© 2016 Johnson Strategic Communications Inc.

Altitude sickness, anyone?

Headlines like “Dow Presses On to Historic Peak” seem a little scary. Yet there it is, splashed across page 1 of today’s Wall Street Journal.

Being part of anything cyclical can bring its chills as well as thrills – because of that old saw about what goes up must … (well, you know, I don’t want to say it). We don’t know, of course, whether this is THE PEAK or simply a peak. And I can’t forecast worth a darn.

Not all that long ago, in the summer of 1979, Business Week‘s cover declared “The Death of Equities.” If you had taken that as a Buy signal and held on through the 1980s and 1990s, you would have done alright – check it out on the WSJ‘s graph.

But “Historic Peak” does make you think. Many of us work for companies that have shared in the market’s relentless, if bumpy – maybe historic – climb. The trends may look fine. But did we cause this rise in the market – or in our companies’ stocks? And what comes next?

My feeling is that all of us, especially investor relations people, need to stay a bit humble about trends and prospects.

© 2016 Johnson Strategic Communications Inc.