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

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

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

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.

Making the Grade for a Reg A+ Offering

Evan Pondel wrote a story in the May/June 2018 issue of IR Update on Regulation A+ offerings and what they mean for investor relations professionals. You can download a PDF of the story here.  Following are some IR tips for companies pursuing a Reg A+ offering:

  • Ensure that you are telling a story that individual investors will understand
  • Align with experts in public relations and digital marketing
  • Millennial themes tend to generate the most interest with respect to Reg A+ offerings
  • Answer investor questions via live phone conversations, email and FAQs
  • Exercise patience when speaking with individual investors
  • Apply Reg FD and consistent communication whenever telling the story
  • Under promise and over deliver

Has Activism Waned?

High impact activism campaigns declined in 2017, according to a recent webcast by law firm Morgan Lewis, down to 298, the lowest level since 2013.  There were 80 proxy fights in 2017, down from a high of 133 in 2009.

Even considering these statistics, activism remains a key component of the investment community’s goal of improving shareholder value at the companies they own. A few of the reasons cited on the webcast for ongoing activist pursuits are regulators’ lack of enthusiasm to “stem the tide of shareholder activism,” substantial inflows of capital to activists, an “M&A environment that encourages activists to push companies into play,” and increased willingness by companies and their boards to engage with activists.

Targets generally have several things in common. Has your stock performed poorly?  Do you have excess cash on your balance sheet?  Has total shareholder return lagged your peers?  If so, activists might have their sights set on you.  Are your corporate governance practices lacking?  Is your CEO a woman?  According to Harvard Business Review, activists are more likely to target female CEOs (but that’s a subject for a completely different blog post).

Once a target is identified, how do activists carry out their missions? Morgan Lewis provides a playbook that includes accumulating shares in the target company, engaging with the company, applying pressure, and finally, seeking influence and control.

There are several ways companies can track activist activity to lessen the surprise if an advance is made. Increased trading volume, meeting requests from activists at investor conferences, market rumors, and SEC filings (although this list is nowhere near exhaustive), can all signify a coming fight.

More importantly, there are several ways companies can help prevent an activist attack. Conduct a vulnerability assessment, which should include looking closely at recent and historical performance (both financial and operational), understanding your current shareholder base, and reviewing board composition and bylaws, among others.  You can also consider adopting a shareholder rights plan to discourage hostile takeovers, review the company’s plans for enhancing shareholder value, and be active in the investment community rather than going underground (again, this list is far from exhaustive).  Perhaps take the advice of Canadian Lawyer and “think like an activist.”  It may be cliché, but the best defense often is a good offense.

— Laurie Berman, lberman@pondel.com

Exceptional CEOs

I’ve worked with many CEOs over the last 25 years. Some great, some good, and some who didn’t quite make the grade.  The great ones had a few traits in common…they were excellent communicators, compassionate and whip smart.  (Italicized text represents my own editorial.)

The Harvard Business Review recently outlined four essential behaviors of successful CEOs:

  • Making quick decisions with conviction. Decisive.
  • Engaging for impact. Collaborative.
  • Proactively adapting. Doer.
  • Delivering reliably. Expectation setter.

Russell Reynolds Associates, a global search and leadership advisory firm, offers the following in their thought leadership blog:

  • Willingness to take calculated risks. Gutsy.
  • Bias toward action. Doer.
  • Ability to efficiently “read” people. Insightful.
  • Forward thinking. Innovative.
  • Intrepid. Courageous.

And from CNBC reporting on a panel at SXSW which examined the traits of many successful Silicon Valley CEOs:

  • Psychopathic???

I admit, this one stumped me. Dictionary.com describes psychopathy as “a mental disorder in which an individual manifests amoral and antisocial behavior, lack of ability to love or establish meaningful personal relationships, extreme egocentricity, failure to learn from experience, etc.”

Doesn’t exactly scream successful CEO to me. However, venture capitalist Bryan Stolle believes that psychopaths are common within the CEO ranks because to successfully start a company you need to be “uncompromising in your vision, which requires a hearty dose of both ego and persistence, and you have to be willing to sacrifice almost everything for success.”  Still not sure I buy it.

Dr. Igor Galynker, the associate chairman for research in the Department of Psychiatry at Mount Sinai Beth Israel, believes that “lacking empathy, more often than not, will help you in an environment where you have to make decisions that create negative consequences by necessity for other people.” I’ve never known or worked with a psychopathic CEO, but according to a 2016 study, 21 percent of senior professionals in the U.S. had “clinically significant levels of psychopathic traits.”  Kind of frightening for those working with these 21 percent.

While collaboration, innovation and insightfulness are clearly important CEO qualities, I suppose it is possible that a little bit of ego, tenacity and charm could also result in success.

Laurie Berman, lberman@pondel.com

The Protocols of Selling a Story

Everyone is selling something.  It doesn’t matter if you’re in business, education, or politics, we’re all trying to sell a widget, a way of thinking, a party affiliation.  The difference is the method in which something is sold.

For example, are solid facts used to back up a thesis about why a consumer should buy something?  Does an educator emote and use theatrics to explain a concept to students?  How authentic is a politician when she or he attempts to relate to the needs and wants of constituents?

The IR world is no different in that most public companies are creating investor theses to sell a company’s story.  There are a lot of variables that influence the efficacy of a pitch to investors.  But in the spirit of writing a pithy blog post in 500 words or less, following is an abridged guide to what’s hot and what’s not when selling a company’s story in today’s market:

What’s Hot

  • Financial Performance – Nothing beats a solid track record of financial performance when trying to attract investors
  • Transparency – The easier it is for investors to understand a company’s model, P&L, and balance sheet, the more likely an investor will be inclined to take a calculated risk and invest
  • Management Relevance – There is a distinction between relevance and years of experience. Relevance is demonstrating why an executive is the best person for the job today, not a decade ago
  • Long-Term Competitive Advantage – The company must present a compelling thesis in terms of why it has built one of the greatest mouse traps that goes the distance when up against competitors
  • Consistent Communication – Somewhat self-serving here, but if all of the aforementioned items are firing on all cylinders and there is no communication … <insert that sucking sound>

What’s Not

  • Hyperbole – Adjectives such as “leading,” “best,” “greatest,” often instill more skepticism than confidence
  • Homogenous Board – In the age of activism, boards of directors are easy targets, especially if they lack independence and diversity
  • Compensation that Isn’t Tied to Performance – Speaks for itself
  • Press Release Overload – Some companies are prolific and have an endless stream of news to relay to investors, although it becomes rather obvious when companies are simply issuing press releases for the sake of “looking” productive
  • Revolving Door in C-Suite – Too much turnover at the top doesn’t curry favor with most investors

— Evan Pondel, epondel@pondel.com