In coming months there will be a fundamental change in investor psychology. It will have implications for how CEOs and investor relations specialists communicate with investors.
Before COVID-19 and the current economic recession, long term investors focused mainly on whether they had the right stocks in their equity portfolio. If a company had problems, or was expected to fall on hard times, investors would replace it with another stock.
In the growth market of the past decade most investors, therefore, had a rational approach to buying and selling securities: having bought a share, they tended to hold it until there was a specific reason to sell.
Post-COVID-19, investor attitudes can be expected to change. The re-bound in share prices, after governments pumped unprecedented stimulus into the economy, will most probably give way to continuing volatility and a long-term malaise as the recession plays out. The Great Coronavirus Recession (GCR) is shaping up as greater than the GFC.
In this uncertain future environment, investors may re-adopt the modus operandi that dominated in the initial days of the coronavirus market crash. That included selling stocks to avoid further share price declines, or to have cash available to take advantage of dips in the market. In doing so, they may decide to sell stocks that would be long-term holds in a more stable market.
Many investors will need reasons to hold a share, in contrast with the past when they concentrated on the reasons to buy or to sell it.
So we have to reinforce repeatedly to our shareholders why our company’s business model and competitive position are sound, why our management has the right skills to outperform the sector, and why we will emerge from the GCR as a stronger business. In other words, we have to keep reminding them why they should hold our shares.
We need to communicate directly, so shareholders receive the messages we want them to hear. We cannot rely on the media to deliver our messages for us – while we may think that’s their job, it is not, and many journalists are under pressure following job cuts and may not have time to check all facts.
Our communication should not be a one-way street. Ongoing dialogue with key shareholders and regular perception studies will enable us to find out what they are thinking and fine-tune our messages to address concerns and misconceptions.
Of course, we should also communicate our messages to brokers and to other investors in the hope they will come on to our register. But the priority is to remain close to our shareholders and persuade them to hold on to our shares when selling stocks to raise cash.
So how do we do this?
During the GFC, when the gloom and uncertainty seemed at their worst, a CEO said to me: ‘What is the point in putting out good news? The market is focused on negatives. I would be wasting my time.’
He missed the point. We must keep talking to our shareholders, for they are interested in all news, whether good or bad. They want to know whether they should hold or sell. And if we say nothing, they may fear the worst – because they, too, are in a negative frame of mind.
Companies that keep talking reduce investors’ fears of what we call ‘bad news risk’. They limit share price downside, and they get credit for maintaining information flow.
There has been much debate about guidance in this market. Visibility of future earnings varies, of course, from company to company. But for most it is difficult to be confident when we can’t foretell the extent of the recession.
It is tempting, in these circumstances, to provide only the vaguest of forward-looking statements. But it is worth remembering that many of our shareholders are nervous, and are ready to sell if they suspect uncertainty. They are asking which companies will emerge from the recession in a stronger competitive position, and they need information on which to base their investment decisions.
So, even if we are not providing guidance, any factual information – or insight into how our business is travelling – can be useful. For example, how much of our revenue is under long-term contract; how is our order book; what are we hearing from our customers; are debtors under control; are input costs under control; what steps could we take to reduce costs if trading continues to deteriorate?
These particular questions may be irrelevant to our business. But they are examples of the kind of information we can provide. The more we communicate, the more transparent we seem, making shareholders and the analysts who cover the stock less nervous about our prospects. In the present uncertain market, investors often interpret silence to imply a worst-case scenario.
What information should we provide?
First, we must be realistic about the impact of the coronavirus on our business – but the way we communicate this is important. If we say we are at the mercy of the economy, we appear passive and vulnerable. If, however, we explain how we have changed our business practices in response to falling demand, we seem pro-active and more in charge of the situation. And if we can draw on past experience to explain how our business or sector is generally affected by a downturn, so much the better. Investors need reassurance that management understands how the company is likely to be impacted as the recession deepens. They appreciate knowing how the company is making decisions to protect earnings.
Second, the information investors expect to receive has changed. They want details of cash flows, contingent liabilities, hedging, off-balance sheet arrangements and debt facilities that in the past they would have taken for granted. What are our facilities’ covenants and how close are we; when do the facilities mature; which banks are in our syndicate and what will we do if one of them declines to renew the facility? These are questions we are likely to be asked; so we need to be pro-active and offer the information, but to do so as succinctly as possible.
We may also be asked about any plans for an equity raising, so should consider how this would be answered.
Third, we need to be sure our shareholders understand the dynamics of our business operations – the factors that influence our revenue and earnings, risks that can affect performance and, most importantly, how we earn our profit. The CEO of a mid-cap company disagreed with me recently when I said that, while fund managers understood his business, many retail investors did not. That surprised me, until he explained he meant that even some of his institutional shareholders did not understand the business model.
This lack of understanding is not just a criticism of the buy side. It demonstrates the difficulty some CEOs have in explaining the dynamics of their business to people who are unfamiliar with it. And in an environment where dividends are vulnerable and investors cannot rely on market momentum to provide capital gains, businesses that are not understood risk relegation to the ‘too hard basket’.
So communication in ASX announcements, annual reports, investor websites, presentations, newsletters, etc. needs to be at two levels. It needs to educate investors about what the company does, the dynamics of its business, its growth strategy, etc, while at the same time providing more detailed information for those who are already familiar with the company.
This requires an understanding of how people absorb information in this electronic age. It also requires careful structuring of messages, succinct and clear language, and a layout that enables the reader to find quickly the information he or she wants. We all are bombarded today with so much information that if messages are not presented clearly, they may be missed or our audience may misinterpret what we are saying.
Even in these days of data mining and analysis, the ability to communicate effectively with investors using the written word is as important as ever.
Fourth, if our shareholders do understand the dynamics of our business, they will appreciate the importance of those factors that are key contributors to its performance. These may be brand leadership, proprietary technology, customer relationships, etc., etc. If one of our messages is that we are cutting costs – whether reducing headcount or deferring capital projects – we must be clear that these key contributors will not be affected. If we don’t, our shareholders may be concerned that the company’s growth when the economy improves will be constrained.
One upside from a recession is that many companies restructure their operations and emerge in a stronger position. The potential benefits of any restructuring need to be explained clearly so shareholders understand and support management’s rationale. We should not assume they understand.
Fifth, there may be an increase in M&A activity, which makes investor relations all the more important. Effective communication can strengthen the loyalty of our shareholders; if they understand the post-recession potential of our company, they are less likely to accept a low-ball offer.
In addition, it is particularly important in this market that we have a takeover defence plan. We may never need it, but if there is a bid for our company we will be on the front foot from the start and well positioned to maximise shareholder value.
The importance of winning shareholders’ trust
An important objective of the dialogue we need to maintain with our shareholders is to win their confidence and trust. In tumultuous times investors tend to favour companies that demonstrate good governance and transparency, rather than pay lip service to them with cookie-cutter statements. This is especially the case with board structures: are our independent non-executive directors really independent?
Increasingly, too, investors are favouring companies with strong corporate values and active sustainability programs throughout their operations, as there is evidence that these companies tend to outperform in the long-term.
Communication programs should, therefore, balance financial and operational performance with messages that create perceptions of high governance, social and environmental standards.
The bottom line, in these challenging times, is that we should review our investor relations program to ensure we are communicating effectively with the investment community, and check that investors and their advisers are ‘hearing’ our messages accurately and understand their significance.
Most importantly, we should focus on expanding our dialogue with our shareholders; they have already chosen to support us and we may need their support during the coming months.
To discuss this thought piece and related issues, please contact Anthony Tregoning, managing director of Financial & Corporate Relations on 0411 852 448 or at firstname.lastname@example.org. For further information on FCR, visit www.fcr.com.au.