The Danger of High Flying Startups

WeWork, once a darling of Wall Street, even before its planned IPO, has been in the news a lot…and not because its stock price is flying high after going public.

In fact, as those in the investment community well know, WeWork recently pulled its IPO amidst investor doubts about the company’s valuation and concerns about corporate governance, according to the Wall Street Journal.

A follow-up WSJ story covered the incredible downfall of the company and its CEO, who has since been relieved of his duties, removing him from the company he started in 2010. According to an editorial in The Washington Post, “This might be the most spectacular implosion of a business in U.S. history. Other failures were bigger, in mere dollars. But WeWork has to be the most literally incredible. Profanity seems somehow inadequate. It’s just . . . holy wow.”

This spectacular implosion points to WeWork’s former CEO, Adam Neumann, whom The Atlantic called the “Most Talented Grifter of Our Time.” That’s saying a lot, given the downfall of Theranos due to its founder, Elizabeth Holmes, and the billions stolen by Bernie Madoff, pyramid schemer extraordinaire.

Looking at some of Neumann’s actions, it seems like the writing was on the wall.

For example, during a courting process by Nasdaq and the New York Stock Exchange, Neumann was said to have asked if the exchanges would ban meat or single-use plastic products in their cafeterias. A noble thought for sure, but one has to wonder what kind of power Neumann thought he could wield. While working on the company’s S-1 in preparation for the IPO, Neumann’s wife, also WeWork’s chief brand officer, insisted it be printed on recycled paper, but rejected early printings as not being up to snuff. This set the process back by days, because the original printer refused to work with them anymore. Earlier in his history, Neumann is reported to have claimed that he wanted to become “leader of the world, amassing more than $1 trillion in wealth.” While a successful CEO needs to have a healthy ego, these vignettes point to someone whose ego passed healthy, all the way to downright irrational.

SoftBank Group eventually bailed WeWork out through a $10 billion+ takeover, which, according to Reuters, gave Neumann a $1.7 billion payoff. That’s a lot more than the company’s currently estimated $8 billion valuation, but not even close to the $47 billion valuation it supposedly held in January.

Can the WeWork story provide insight for future start-ups and for venture capitalists who fund them?

For one, the financials, operations and inner workings of a company matter. When a high-profile unicorn, with a tremendous pre-IPO valuation files an S-1, the details become public and scrutinized by a lot of very smart investors. If a company is not on solid ground, with a strategic plan that can be effectively implemented, it’s probably not ready to go public. Additionally, when a CEO of a high-profile unicorn, with a tremendous pre-IPO valuation has delusions of grandeur, it’s probably not a great idea to back him or her, unless they have proven their worth.

While there’s no cookie cutter mold for determining which companies and CEOs will ultimately be successful, quality should be the rule, among many other warning signs that should be heeded.

Laurie Berman, lberman@pondel.com

Fax me! No really, Fax me!

Believe it or not, “faxing” is as prevalent today as it was during its heyday of the 80s and 90s.

Financial services, healthcare, government and manufacturing industries still rely on fax technology, mostly because of security and regulatory reasons.

For many corporate communications veterans, the fax machine used to be a lifesaver. No more sending press releases via snail mail.

While cloud-based fax services have advanced the standalone fax machine, the basic principle of sending information between two dedicated points remains the same.

The same goes for corporate communications. Social media, cable and other innovations have transformed how we communicate, but what we say is still paramount.

Consider these vital communications imperatives still relevant today:

  • Make the story interesting. Whether targeting Wall Street or Main Street, the narrative needs to be noteworthy. Not every company or organization will be doing super exciting work. Leverage a unique characteristic to help cut through the media clutter.
  • Know thy audience. Rule number one when it comes to communications. Deeply understand the various stakeholders within a company or brand’s ecosystem.
  • Communicate clearly. Keep it simple and refrain from too much jargon and industry buzz words. Sometimes the use of technical terminology is required, but it’s important to explain in layman’s terms.
  • Stay on message. Keep it tight. Generally, too many action items or message points can confuse an audience.
    Spell check. Apparently good grammar and correct spelling seem to have been forgotten, particularly when communicating on social media. Review before sending. Period.

The communications industry will continue to undergo technological innovations that will alter the way Information is conveyed. But whether spoken or written, communicating effectively is a priority that should never change.

— George Medici, gmedici@pondel.com

Benefitting from a Small Thought

I’m not generally a fan of motivational speakers and their messages. While such speakers are usually talented and entertaining orators, try the next day to remember what they said, and… umm, it’s usually impossible.

Recently, I heard one of these guys speak. He left the audience mesmerized with his oratory skills. But more importantly, he gave everyone one small, easy-to-remember thought as a take-away. I heard this fellow speak at a two-day meeting for the senior staff of one of our client companies, about 60 people in total. It is an annual event meant to build internal kinship and foster collegial bonding, as well as a time when the management team presents lessons they learned during the past year, along with business updates.

Sprinkled in between the corporate presentations at this year’s meeting, the speaker’s first words were “I am not a motivational speaker.” But he was.

He has published a book, but I refuse to mention it here, since this blog is not a promotional vehicle. I am not even going to mention the speaker’s name for the same reason. But before I divulge the thought he aptly imparted, which is really more of a motivational metaphor, you should know that the speaker assured the audience that by putting it into everyday practice, you can achieve results that “are beyond your wildest expectations.” That’s a pretty wild exclamation, but, of course, one must take into consideration that motivational speakers are known for using hyperbole.

He said that all you need to do is write the number 211 on a piece of paper, place it prominently on your desk, and then remember – metaphorically speaking – what it stands for. Huh?

You are probably scratching your head at this point, having invested the past minute reading this blog, and not having the foggiest idea why you are continuing to do so, or where this is heading. So here it is, direct from the book: “At 211 degrees, water is hot. At 212 degrees, just one degree more, water boils. With boiling water comes steam. And with steam, you can power a train.”

The point is that going the extra mile, pushing just a little harder in every task, can make a tremendous difference. One small extra degree can produce exponential results: 211 to 212. We follow that metaphor at PondelWilkinson. It helps us perform beyond our clients’ expectations, and it really works.

— Roger Pondel, rpondel@pondel.com

Socially Responsible Investor Relations

Companies are often encouraged to disclose their do-gooder ways when it comes to environmental, social and governance principles, known as ESG. After all, an increasing number of investors are basing their investments on these traits. More than a quarter of the $88 trillion assets under management globally are invested based on ESG policies, according to a McKinsey & Co. study. So why aren’t investor relations professionals held to similar standards? IR folks must confront ethical issues daily.

We are often conduits to investors making significant decisions that have implications for people’s retirement or college tuition savings, and yet there isn’t a governing body (except for the SEC in extreme cases) that consistently assesses the way IROs handle their business. For example, how often do IROs tout financial results when the results actually suck? Obfuscating the truth does no one any favors.

To get the conversation going on what principles should apply to IROs from an ESG perspective, following is an attempt to construct the beginnings of a manifesto for socially responsible IR:

Put management teams in front of the right investors. We’re all busy and stressed out trying to please our bosses. Don’t let lack of genuine investor interest lead you down the path of quick-fix meetings with toxic money.

Don’t bury the lead. If financial results are bad, do not wait until 10 paragraphs later to discuss why in a news release.

Call investors back in 24 hours. Who you gonna call? Your investors. Yes, they are important no matter how big or how small. Never let too much time pass before calling them back.

Think about what’s in the best interest of shareholders when advising management. Simple rule to follow but difficult to implement when agendas conflict.

Attend investor conferences strategically. Management teams should only attend investor conferences if they serve to enhance exposure among an important group of investors. Do not attend conferences if the schedule is anemic.

Provide guidance that is realistic. Guidance can be a very slippery slope. An honest assessment of what the company can achieve will enhance credibility.

Do not underestimate the power of social media. One word: Tesla.

Rely on your colleagues to tell a company’s story. From CFOs to CMOs, your colleagues can help you craft a compelling narrative. Monologues are boring. Breathe life into a story with different voices.

Announce news that’s really news. Or else it’s just noise.

Speak up. IROs are often privy to conversations that may have dire consequences for the company and its shareholders. Never withhold information from people who can help rectify an issue.

— Evan Pondel, epondel@pondel.com

Taking America’s Pulse Online

The Pew Research Center recently announced it would be conducting the majority of its U.S. polling online, much like most other public opinion surveys these days.

Until recently, phone-based surveys were the de facto standard for opinion polls. According to Pew’s own research, the number of surveys conducted over the Internet “have increased dramatically in the last 10 years,” driven by available technology and lower costs.

What shifting to online polling means for our long-term phone survey trends | Pew Research Center

The paradox is that people respond to online and phone polls differently. Pew calls this the mode effect, when responses to some of the same questions are different depending on the interview format.

For Pew, switching to online polling after years of telephone surveys will have an impact on quantifying historical data. This also may influence how media report on the center’s year-over-year trends.

Online polling methodologies may be shaping a new generation of survey taking. The good news is that trusted pollsters are transparent about these approaches.

And when it comes to the pros and cons of online vs. telephone surveys, a simple Web search will yield myriad results, including observations from Pew, as well as in Forbes.

Most polling firms and universities use a combination of online and telephone survey methods. It’s essential, however, that online surveys produce statistically accurate data, especially when the results are used by media.   

To help ensure reporting accuracy, the National Council on Public Polls published a list of 20 questions a journalist should ask about poll results. The irony is that reporters don’t have time to review questions because of today’s ultra-competitive “real-time” news environment. 

General consensus says polls serve a greater good helping define public opinion on everything from brands to policy. Media love surveys too. So much so that The Hill launched “What America’s Thinking,” a Web TV show that focuses on the latest news about public opinion.

As storytellers, we rely on accurate trends to help shape different narratives on behalf of our clients, whether that data is derived from the Web or via telephone.

— George Medici, gmedici@pondel.com

Thoughts on Board Diversity

Board diversity has been in the news for quite some time, but more recently, California became the first state to mandate that publicly traded companies headquartered in the state name women to their boards. Countries outside the U.S. have enacted similar laws. 

The new law stipulates that companies with at least five directors will need to have at least one female member by the end of this year, and two or three female members, depending on the size of the board, by 2021. According to the Wall Street Journal, the mandate in California could accelerate boardroom diversification across the country. 

But does diversity really matter? 

As noted in Forbes by professor Katherine W. Phillips from the Kellogg School of Management, diversity can result in better decisions. She explained that diversity “often comes with more cognitive processing and more exchange of information and more perceptions of conflict,” which she believes can spur new idea generation and creative solutions. 

Lisa Wardell, president and chief executive officer of Adtalem Global Education, wrote in Corporate Board Member that “board composition sends a powerful signal to current and future workforces about an organization’s commitment to equality of opportunity. It also signifies a commitment to performance, since studies show clearly the benefits of a diverse workplace.  McKinsey & Company found companies with strong gender diversity among their executives were 21 percent more likely to outperform on profitability compared with peers.”

Mike Myatt, chairman of N2Growth, recently offered a top-10 list in favor of diversity. You can read it here

Last year, Elizabeth Warren, a current U.S. senator and 2020 presidential candidate, introduced a bill called the Accountable Capitalism Act, that, among other things, would require that workers at companies generating more than $1 billion in revenue directly elect 40 percent of a company’s board of directors. This seems, to me, a bit more controversial than the new California mandate. In fact, when conducting research for this blog, I couldn’t find much in support of her proposal. Interviewed on CNBC, professor Jeffrey Miron from Harvard University said that Warren’s proposal “will create a whole set of new rules that the federal government will enforce. Those rules will not be clean, explicit or simple.  They’ll be messy, they’ll be complicated. [It will create a] huge ability for companies to evade and avoid.”

So, what are companies doing, if anything, to increase board diversity? 

A survey conducted by the National Association of Corporate Directors late last year showed that more than half of directors who responded said that their organizations have board diversity goals. Of those, 70 percent sited the need to enhance the cognitive diversity of boards, while almost half said that board diversity is a moral imperative. Barriers to diversity mentioned by 54 percent of respondents were the lack of an open board seat, while 53 percent cited finding diverse candidates that meet the board’s skill needs.

I’m as eager as the next person to see boards diversify and become more representative of current demographics and the investors they represent. But I’m also in favor of building boards with the best talent. As Myatt noted, “You’ll never hear me recommend diversity solely for the sake of checking a box, but when diversity in the boardroom offers so many benefits to the CEO (and to the entire organization) it’s nothing short of irresponsible for chief executives not to place their board composition under the microscope.”

It remains to be seen if recent efforts around board diversity will result in increased shareholder value, but it’s absolutely worth it for companies to look at their entire organizations, from top to bottom, to ensure diversity throughout its ranks. According to Wardell, “Performance comes from finding the best talent. And diversity, at its most basic level, is about increasing the pool of available talented people from which to choose.”

Laurie Berman, lberman@pondel.com

What Kermit the Frog and Microcap Companies Have in Common: It’s Not Easy…

Pity Kermit the frog when he sang, It’s Not Easy Being Green.

We all know the tune. Now try singing that tune to yourself, quietly please, but exchange Kermit’s words with: It’s not easy being microcap. Respect is so hard to come by. It’s tough to get investors to listen. And people always call you ‘too small.’

It’s not easy being a microcap company.

It was never easy being a microcap company. And It got even a little tougher in the second half 2018, when, along with the market’s tumble, BofA Merrill Lynch quietly said it would no longer trade in stocks selling for $5 or below, with market caps lower than $300 million.

We even unofficially learned that Merrill distributed talking points to its wealth managers, saying penny stocks are illiquid and can be easily manipulated for fraudulent purposes, and that the asset class is rife with companies with shaky businesses.

How sad. While such negativity and bias against microcap companies may be appropriate for some, many microcap companies have solid management teams and business models… and deserve better. Hopefully in 2019, other brokerages will not follow Merrill.

It’s always been challenging for microcap companies to command the same degree of investor interest and respect as their bigger brethren. But with help from IR professionals, there are ways not only for microcap companies to command respect, but with a little patience, to enhance value as well. Some thoughts for the new year: 

— Carefully identify and attend select microcap conferences, even though there typically are fees to pay. 

— At those conferences, weed out the investors from those who are there selling services, then cultivate relationships and communicate with them regularly. 

— Issue corporate news on a regular basis to keep the company’s name in view, and think about conducting quarterly conference calls.

— Consider producing periodic podcasts and webinars to demonstrate industry leadership, then publicize those events. 

— Judiciously use social media, paying close attention to Reg FD. 

— Professionalize corporate communications, including having a great website, just like the bigger cap companies.

— Be transparent and apply sound corporate governance practices. 

— If you can get on the road occasionally and have cultivated enough investors who will take a one-on-one meeting, do so. 

— First and foremost, although last on this list, focus on profitably growing the business.

Roger Pondel, rpondel@pondel.com

The Best Donut in Los Angeles

WARNING:  You have to read this entire blog post to know where to find the best donut in Los Angeles.

With third-quarter earnings season nearing its sunset, the year is practically over.  OK, OK, let’s not get too far ahead of ourselves.  But seriously, what does 2019 hold for capital markets?  Um, uh, well, that’s hard to say.  A few preliminary ideas from the IR observation deck:  Investors will care even more about diversity at the board level, cash preservation or lack thereof will weigh heavily on investors’ minds, and public companies will feel more pressure to perform on a quarterly basis to justify high stock valuations.

Indeed, these variables have already surfaced in 2018, particularly in California.  A California law passed in September that requires all publicly held companies based in the state to have at least one female board member by the end of 2019.  The law goes further by also requiring companies with at least five directors to have two or three female directors by 2021.

At the same time, continued volatility in the market and rising interest rates are influencing companies and investors alike to carry more cash on their balance sheet.  This trend will likely persist as the Fed partakes in gradual interest-rate increases in 2019.  That being said, investors don’t necessarily have the patience to watch a lot of cash sit idle on a balance sheet, so use it wisely.

Speaking of patience, high U.S. stock valuations will require companies to prove their pudding is still the best pudding around, and the onus will be on IR professionals to ensure that stellar financial performance is communicated effectively.

There are a number of other IR-related topics to consider for 2019, such as the continued effects of MiFID II, how artificial intelligence will influence IR, and the best place to eat a donut in Los Angeles when you’re on an NDR.  But for now, let’s just get through earnings season.

— Evan Pondel, epondel@pondel.com

Three Toots on Hitting the Big Five-0

By now, those who know us, know that PondelWilkinson turns 50 this year.

A half-century is a long time for any company to be in business. Throughout those five decades, while we have tooted the horns of our clients—we have not tooted our own. So, please allow me this rare exception to make three little toots:

First, a toot to the firm’s founder and my former boss, Mel Rifkind, 93, who kicked things off in 1968, when I was still in school and had not the foggiest idea that our kind of business even existed. Mel was a pioneer in our industry, who founded our firm on four principles that remain at our core today: apply sound thinking to meet unique client challenges; attract the best talent, regardless of position; deliver quality, responsive service; and always operate in a respectful and ethical manner.

Second, a toot to our clients and all associated with our firm for the confidence you continue to place in our organization.

And third, a deep personal thanks to our loyal, talented, hard-working staff, the best professionals in our industry, and to those who have served us in the past, of course including my late partner of 25 years, Cecilia Wilkinson. People are our only assets, our secret sauce, and our treasures.

Now for the fun stuff. What else happened in 1968, the year our firm was founded?

  • Sixty Minutes made its debut on CBS.
  • Apollo 8, the second manned spacecraft, orbited another world, the moon, for the first time.
  • The Special Olympics held its first event.
  • Our very own trade association was born, NIRI.
  • Sadly, Martin Luther King Jr., 39, and Robert Kennedy, 42, were assassinated.
  • The 911 Emergency Line was launched.
  • The Big Mac was introduced for 49-cents.
  • President Lyndon Johnson signed the Civil Rights Act.
  • A few famous people were born: Will Smith; Naomi Watts; Hugh Jackman; Marc Anthony; Ashley Judd; Molly Ringwald; Gary Coleman; Josh Brolin; Cuba Gooding Jr.; Dodgers Hideo Nomo, Frank Thomas and Mike Piazza.
  • Jimi Hendrix, the Beatles and Led Zeppelin had the best-selling albums.
  • The most popular movies were The Graduate, Funny Girl and Planet of the Apes.

Roger Pondel, rpondel@pondel.com

Celebrating 50 Years

As our firm celebrates its 50th anniversary year, we thank our clients for the trust they have placed in us, and for allowing PondelWilkinson to help enhance value, build businesses and protect reputations.

It has been our privilege to work side-by-side with stellar management teams and boards of directors of companies big and small, established and emerging, global and regional.

When our firm was founded in 1968, it was done with a business philosophy based on four simple tenets: apply sound thinking to meet unique client challenges; attract the best talent, regardless of position; deliver quality, responsive service; and always operate in a respectful and ethical manner. That philosophy has endured.

Today, we pride ourselves on long client and staff tenure, with a collaborative, professional team that is the best in our business.  We are grateful to our referral sources for their confidence in recommending us.  And we extend deep gratitude to a vast network of wonderful people with whom we work every day on behalf of our clients, from investors and analysts, to editors and reporters, lawyers, accountants, and so many others.

Technology has transformed much of what we do, but our core competencies and the scope of our services remain highly focused, grounded in relevant experience: investor relations; strategic public relations; and crisis communications.

Aside from our day-to-day client work, in 2018 alone, we have been privileged to arrange highly successful investor days; stage business/financial media events and NDRs; develop communications for several mergers and acquisitions; and craft delicate, reputation-defining messages regarding a number of highly sensitive matters.

Tooting our own horn is not generally our style. We fully believe it is our role to be the rock, the secret sauce, the foundation behind the scenes, and have our clients shine brightly, center stage. But hitting 50 is a pretty big deal, and we know you will understand and share our exuberance.

So, to everyone we know, thanks for being there for us. We look forward to being there for you for decades to come.