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Performance Rules, but Perception is Everything: How to Know What Investors Truly Think About Your Company

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This article was originally published by national news wire service BusinessWire, a Berkshire Hathaway company, on its global blog July 9.

If you’re familiar with the British sci-fi fantasy series, Doctor Who, you know that a common plot device is the use of “perception filters,” in which aliens attempt to alter reality to reflect what they want you to see. A favorite episode is with actor/comedian James Corden, who lives on the first floor of what appears to be a normal two-story building – only the building does not have a second floor, just a scary alien machine parked on top of it with a perception filter designed to hide its existence.

Wouldn’t it be nice if we could use perception filters to influence how investors and financial analysts think about public companies? I am sure many management teams would love to use something like a perception filter to ensure that only positive things are said about their companies.

Alas, we all know this isn’t possible. And yet, one of the more interesting things I have observed over the years is how many management teams believe they already know what investors think of their companies – as if they have a perception filter firmly in place.

While many C-suite executives and corporate IR professionals dialogue often with the investment community and glean valuable insights from their conversations, it is a mistake to assume that investors will share everything that is on their minds. As Peter Drucker, the celebrated author, educator and management consultant, once noted, “The most important thing in communication is hearing what isn’t said.”

How, then, can management truly gain insight into what investors think? Enter the perception study, a tool designed to gather unique and candid feedback. It is only through the use of an independent third party that companies can truly get to the heart of what investors think. Third parties are able to create an environment that protects anonymity and are better positioned to share tough feedback with management.

Designing a Perception Study

There are many ways to design a perception study, which at its core, seeks to determine how investors view the company, its strategy, management team and IR program. Perception studies often are particularly useful before and after major events, such as an investor day, or when a company is in the midst of transition.

In most cases, many investor responses are surprising. Also in most cases, a good perception study pays off handsomely by revealing tangible and actionable items, along with nuances, of course, that facilitate communication and potentially valuation improvement.

Perception studies create opportunities to:

  • Streamline business models that have become too complex.
  • Simplify messaging to better resonate with the investment community.
  • Improve an IR program in ways a company might not have seen.
  • Provide benchmarks for future comparison.
  • Let the investment community know that the issuer cares.

Dichotomy of Opinion

In a recent perception study we conducted for one of our clients, we found a fascinating difference of opinion about the company, with views that converged around common themes, but were almost polar opposites of each other. Interestingly, this dichotomy of opinion often was expressed by the same participant in the study.

For example, investors praised the management team’s ability to articulate the company’s investment attributes, but at times felt they could be too “promotional” in doing so. Investors also liked how the company positioned itself to capture emerging trends in its industry; at the same time, however, they believed the actions management took to take advantage of these trends made the business too complicated to grasp.

Perhaps most importantly, investors felt the company altered its strategy too frequently. While many praised management’s ability to pivot when the facts on the ground changed, the rate of transformation left investors and analysts wondering if management had a clear roadmap for the future, which, in turn, made it difficult, if not unnerving, for many of them to invest.

The perception study created an opportunity for our client to:

  • Clearly articulate its business strategy, highlighting its vision for the future.
  • Help investors understand exactly how management perceives the path to value creation.
  • Simplify its story and improve consistency in metrics presented. 
  • Provide a candid discussion of business performance, both positive and negative aspects.

Understanding what investors and analysts truly think is a fundamental responsibility of the management team and board of any public company. Such knowledge provides tangible results and can serve as catalysts for positive change.

Jeff Misakian, jmisakian@pondel.com

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

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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

Making the Grade for a Reg A+ Offering

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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 the IR Update story on regulation A+ offerings.  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

The Write Stuff

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I recently taught a writing course at NIRI’s Fundamentals Conference, which is mostly geared toward IROs who are relatively new to the business, as well as more experienced folks who’d like to brush up on the basics.

My presentation focused on the fundamentals of writing earnings news releases, conference call scripts and shareholder letters. The biggest challenge people said they faced is crafting a compelling story in what has become a template-driven world.

Following are some boiled-down writing tips from my presentation to help make that writing resonate:

Know Your Audience

Your written piece should address the following:

  • What Information do they need?
  • Why do they need it?
  • What do they currently believe?
  • What should they believe?

Plan & Organize Your Content

  • Identify your key messages
  • Create and work from an outline
  • Use blocks of content to develop a sequence of thoughts
  • Test your sequence for clarity

Draft Without Judgment

  • Fill in the outline
  • Work quickly – don’t agonize
  • Read it out loud. Is the flow logical?
  • Listen to your own ears
  • Give it a rest and re-read in the morning

Revise for Power

  • Punch up the opening and closing
  • Change passive voice to active voice
  • Strip out excess words, phrases and fluff
  • Make it natural and conversational – should “fit” the company/spokesperson

— Evan Pondel, epondel@pondel.com

Trump’s Effect on IR

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There has been a heap of stories written about President-elect Donald J. Trump’s effect on trade relations and health care, but nary a peep about how his presidency is going to affect our world, meaning investor relations.

Granted, it would be unusual for media to report on how our country’s new chief executive officer will influence investor relations because, um, IR isn’t necessarily something bandied about in the Oval Office.

But consider this: The American people are like investors, and how you treat them in good times and bad will affect the valuation of the country. And depending on how Trump executes his policies, many publicly traded companies and their investors will have to adapt to changing market conditions.

Following is a prognosticator of sorts on how Trump will affect the world of investor relations from an industry perspective. The analysis is based on discussions with the Street and analyst notes.

  • Consumer – Investor relations executives in this sector may experience an increase in inbound calls based on exposure to manufacturing overseas, particularly in China. Trade issues may thwart valuations and likely raise a lot of questions if a company has manufacturing exposure in foreign countries.
  • Construction – Generally, investors should have optimism regarding this sector’s near-term future.  At the same time, more dollars flowing to infrastructure could prompt greater scrutiny of infrastructure companies that aren’t performing.
  • Renewables – This sector has received bipartisan support in recent years, and there is no reason to expect otherwise during the next presidential term. The biggest conundrum for IROs in this space is selling the value proposition of renewable technologies and how soon they can be realized under the incoming administration.
  • Healthcare – With a lot of questions surrounding the future of the Affordable Care Act, many investors and investor relations professionals are likely unsure of where certain business models will stand under the new administration.
  • Technology/media – Hard to say what challenges may surface in this sector. Social media companies may come under fire for alleged fake news practices, as well as influencing the presidential outcome, which could certainly keep IR pros on their toes.
  • Banking – Investors are expecting interest rates to rise, which could bode well for the bottom line in this sector. Loosening up on regulations could also help move more financial services stocks into the black. IR executives will likely have to speak to how banks will enhance their net interest margins once the new administration is in full swing.
  • Aerospace/Defense – With a lot of suppliers in foreign countries, there could be a backlash with respect to manufacturing costs. Even though a Republican administration generally bodes well for this sector, optimism may soon fade if trade relations continue to slide.

— Evan Pondel, epondel@pondel.com

IR 101 for Private Markets

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CrowdWith the first quarter of 2016 the slowest period for initial public offerings since 2009, market watchers are wondering if the trend will continue in the year ahead. So, where might investors look for new opportunities? Try private markets, or specifically, companies utilizing crowdfunding as a financing method.

Starting May 16, the general public will have the opportunity to participate in the early capital raising activities of start-up and development-stage companies through crowdfunding. You can read all about it on the Securities and Exchange Commission’s website.

What isn’t discussed on the SEC’s site is how these companies will communicate effectively with their investors. Many of these companies are likely on tight operating budgets, and the idea of allocating funds toward investor relations is not exactly a priority.

However, now that the general public has the ability to participate in a stage of investing usually reserved for institutions, management teams need to ensure these new investors are communicated with regularly, as well as treated with the same dignity and respect as a Fortune 500 investor.

Following is a top-10 list of IR advice for companies going the crowdfunding route:

  1. Initiate some form of periodic communication with your investors, perhaps in the form of a quarterly update letter, podcast or even blog post.
  2. Select a representative from the company or an outside consultant to handle incoming inquiries from investors.
  3. Utilize presentations, fact sheets, video and social media to help investors understand the company.
  4. Consider hosting an investor call on a periodic basis to foster transparency and an open line of communication.
  5. Develop an investor relations page on your website to keep investors posted on recent news and the company’s progress.
  6. Consider hosting an annual meeting that investors will actually attend. The event could generate more support, as well as more funding for your company.
  7. Keep investors in the know about relevant industry news, so they, too, can become experts.
  8. Under promise and over deliver. Managing investors’ expectations is key, especially for early stage companies.
  9. Stay away from divulging too much information about your company’s future financial performance. Again, this harkens back to under promise over deliver.
  10. Treat investors as owners not strangers.

Bottom line: Professionally crafted communications form a foundation to attract and retain investors, regardless of an issuer’s size, but even more so for early stage companies, as they go to market for the first time and build their organizations.

— Evan Pondel, epondel@pondel.com

Ad Tech’s Implications for PR and IR

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1101110321_400Los Angeles is an epicenter for all things trendy, so it should come as no surprise that the City of Angels is also a hotbed for “Ad Tech” or advertising technology companies. Ad Tech has surfaced as a formidable force in the marketing world, enabling advertisers to slice and dice data to prognosticate trigger points for consumers.

Indeed, advertising and technology have long been consummate bedfellows, but does the rise of the ad tech industry have implications for PR and, perhaps even, IR worlds?

The metrics used in ad tech seem relatively objective, while the variables that factor into the success of PR and IR are often subjective. And yet, PR and IR firms are consistently asked to measure success. It is a conundrum that will likely continue to thwart PR and IR firms with greater frequency, as metrics from contiguous industries, such as ad tech, dominate the collective consciousness of the marketing world.

There are certain variables that PR and IR folks use to gauge success, including media coverage, the number of new analysts covering a company, and attracting new followers on Twitter and LinkedIn. But again, in the ad tech world there is usually a direct correlation between a successful advertising campaign and sales. This isn’t necessarily true for PR and IR.

What is true is that setting realistic expectations apply to all industries, and if you can present a program with achievable goals, it shouldn’t matter what the data say, as long as they support the expectations set forth at the beginning of an engagement.

–  Evan Pondel, epondel@pondel.com

Director Tenure Tops List of Expected 2014 Boardroom Topics

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We recently debuted our “heard around the water cooler”  series.  Following is the first installment:IR photo

Director tenure topped the list of topics that board members of publicly traded companies are expected to discuss in 2014, according to the Boardroom Water Cooler survey conducted in January by PondelWilkinson Inc., a corporate public relations and investor relations consultancy.

Institutional investors are beginning to advocate the concept of “board refreshment,” as a groundswell of concerns surface related to directors who have been in place for significant periods of time.

“The conversation clearly has shifted from age-related bias to tenure,” said Laurie Berman, managing director of PondelWilkinson. “Age notwithstanding, there is growing belief that the longer a director has served, the less independent he or she becomes from management, which is contradictory to fundamental governance mandates.

“Perhaps for some of the same reasons that term limits exist for political leaders, we soon may see an enactment of board member term limits as part of the increasing democratization of publicly owned companies,” Berman said.

The second most popular topic around the boardroom water cooler is the Securities and Exchange Commission’s mixed vote in September 2013 in favor of requiring companies to disclose the pay gap between employees and the CEO.

Originally mandated four years ago by the Dodd-Frank Act, if the rule passes, public companies would have to disclose the median of the annual total compensation of all of its employees, excluding the CEO, against the annual total compensation of its CEO, and the ratio of the two amounts.

“This proposal follows closely on the heels of the ‘say-on-pay’ advisory votes already in place,” said Evan Pondel, president of PondelWilkinson. “However, since the SEC was not unanimous in its vote, the proposal will likely be subject to strong challenges. Its underlying theme closely tracks the momentum that is building in Washington and elsewhere around income inequality,” Pondel added.

Survey results also point to heightened 2014 boardroom discussions about:

 

  • Cybersecurity and wrestling with increasing threats to intellectual property and information systems, such as the Target retail chain recently experienced;
  • Big data and taking full advantage of emerging technology to drive profitable growth;
  • Effective use of social media to enhance brand awareness, along with customer and shareholder loyalty;
  • Interest rates and how management should take advantage soon of what may be historically low rates before it is too late, regardless of current financing needs;
  • How best to comply with the newly required Form SD requiring disclosure beginning in May 2014 of the level of due diligence a company exercised to determine whether its products and products in its supply chain contain conflict minerals;
  • Maintaining valuation after a robust 2013;
  • How to deal with what may be a period of increased shareholder activism and a mindset that activists should be listened to, rather than avoided, and could actually bring good ideas; and
  • The importance of listening to small individual investors as well.

The anecdotal survey was compiled by the firm’s staff, who queried public company directors, CEOs and CFOs, sell-side analysts and institutional and individual investors.

Setting Goals for Your IR Program

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Nearly three-quarters of all investor relations officers set specific goals and objectives to measure their IR programs, according to a just released NIRI survey.  I’m actually quite surprised that the number isn’t closer to 100%.  In the absence of goal setting, how do you determine priorities and make decisions about what to tackle on a daily/weekly/monthly basis?  How do you adequately assess which activities add value for your company and which don’t?  How is your personal effectiveness evaluated?
 
Of those who do report formally measuring their programs, 80% use both quantitative and qualitative measures.  The top five measurement criteria noted were:

  1. relationships with the financial community;
  2. feedback from the financial community;
  3. individual meetings with top shareholders;
  4. qualitative assessment by the C-suite; and
  5. composition of the shareholder base.

 
I might also consider looking at changes in sell-side sponsorship, additions to earnings conference call participation and introductions to new potential shareholders as a tactical method of determining how an IR program is progressing.  Unsurprisingly, and for good reason, most of those surveyed do not believe a change in their company’s share price is a valid measurement tool.
 
Clearly there are many ways to track and measure IR effectiveness, and much is dependent on company performance, size and maturity.  Although investor relations is a delicate balance between art and science, it seems that not setting goals and objectives for your program is a big disservice to yourself and everyone involved in building sustainable value for shareholders.

 

— Laurie Berman, lberman@pondel.com
 
 

the great mIgRation

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IR folks come from all walks of life.  From CPAs to CFAs to MVPs, IROs come in all different shapes and sizes.  It appears the most recent IRO migration derives from the sell side.  Bedraggled by long hours and marketing trips, sell side folks are finding their way to IR like divining rods in search of a water source. With beads of sweat building up on their brow, they seek solace in the halcyon world of IR.
 
The question is whether they are merely seeking a mirage or a practical career change.  Quite frankly, I don’t know.  But what I do know is that the more diversified an IR agency’s skill set, the better off the agency is in facilitating clients’ needs.
 
To encourage diversification in our field, the following is a top ten list of occupations that I believe serve as the most appropriate preludes prior to joining an IR firm or serving as an internal IRO.
 

10. Psychic
9.  Linebacker
8.  Buoy
7. Anchor
6. Quantum Theorist
5.  Existentialist
4.  Lion Tamer
3.  Anesthesiologist
2.  Masseuse
1.  The little stuffed rabbit that dogs chase at the track

 

— Evan Pondel, Vice President, epondel@pondel.com