Category Archives: Investor relations

Prominence is the key concept with the SEC’s new guidance for earnings releases

This earnings season will be the first since the SEC’s May 17th revised C&DIs (Compliance and Disclosure Interpretations) guidance regarding the presentation of GAAP and non-GAAP measures in earnings releases.

SEC Chair White recently spoke of having noteworthy concerns about issuers who present non-GAAP measures “too far and beyond what is intended and allowed by the SEC’s rules” and “troublesome practices which can make non-GAAP disclosures misleading.” Lets tag them as the bad non-GAAPles.

gaaplesThe SEC is aware that just a few bad non-GAAPles have ruined the whole batch

To address this, the SEC has issued new and updated CD&Is regarding non-GAAP measures. The new and revised C&DIs do not represent a formal rule change. However, they are a warning signal to issuers and absolutely demonstrate the SEC’s concerns regarding inappropriate adjustments presented by companies on their non-GAAP financial measures. The SEC is watching earnings releases closely.

Much of the new guidance is strategic if not “philosophical” around the actual measures that an issuer uses to calculation their earnings and guidance. That’s for the Audit Committee to work on. Tactically, the SEC called-out some non-GAAP disclosure presentation practices that are common in earnings releases. The bottomline is that issuers cannot disclosure their results in manner that places undue prominence on the non-GAAP numbers.

“Prominence” is the key concept here. Earnings release practices that the SEC has specified as non-acceptable include:

  • Presenting a non-GAAP measure before its most directly comparable GAAP measure – including within an earnings release headline or caption
  • Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure
  • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures
  • Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures
  • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.

To mitigate risk of non-compliance, issuers that plan to present non-GAAP financial measures in their earnings releases may need to modify their disclosure practices. Chair White strongly urged issuers to consider the updated guidance and “revisit their approach to non-GAAP disclosures.”

Although the SEC is uber-focused on earnings releases with this new guidance, the SEC also urges issuers to uphold these new guidelines in their non-earnings (EDGAR filed) shareholder communications such as in presentations to investors and analysts, annual reports and IR websites. Issuers should communicate with shareholders in a consistent manner – the stock narrative told outside of the SEC filings should be the same as the narrative found within in the issuer’s SEC filings.

By now, hopefully IROs have had in-depth conversations with their corporate securities lawyers. NIRI members should listen to the educational webinar.

Marketing and investor relations: twin sons of different mothers

We recently published a whitepaper discussing what, in marketing parlance, is called “earned” media. Generally speaking, earned media is news mentions, social media shares & reposts and services reviews. This is always placed in discussion alongside paid media (ads, etc.) and owned media (corporate website, etc.).

For marketing, a company earns “earned” by creating great content (blogs, infographics, videos, press releases, webinar and whitepapers) that their audience proactively share. A simple (and artery damaging) example is when you liked and shared that video recipe for Buffalo Chicken Stuffed Baked Potato Skins recipe in Facebook.

How does this relate to investor relations, in context to “content?” Investor relations departments are the quintessential content marketers– specifically because they cannot embellish from the facts at all. They cannot buy ads* (paid media) promising benefits. What IR does is tell their corporate story – generally by offering a mosaic of facts (past performance), introduce the drivers (senior management) and then sit back and hope the customer (the investor) buys.

Let’s compare the tools:

In our marketing whitepaper, two graphs illustrated what 1,500 CMOs told us about the effectiveness of their communications: lead generation and brand building.  As you see, a lot of stuff in the marketing mosaic. What is obvious is that the marketing tools deemed most effective by CMOs – upper right quadrant – are the same tools that IROs have always used. This became very apparent when the marketing vocabulary is replaced with IR vocabulary.

The charts with the orange dots are the original marketing charts. Clicking on any of the four charts will enlarge them.


LG-marcom

Same chart with superimposed IR vocabulary. Extra stuff removed.

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BB-marcom

Same chart with superimposed IR vocabulary. Extra stuff removed.

BB-IR


The mosaic theory is not new to IR. It is newer to us product marketers, mostly as social media has given us a stronger opportunity to build our own publishing network in balance with existing traditional channels. Thank you interwebs!

If you are interested in what media your investors favor, I suggest this whitepaper.

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And yes, I appreciate the irony of this earned media in a blog about earned media.

How to engage with investors in the age of the activist: dealing with CEO compensation

Investors have learned that it pays to be aggressive when it comes to boardroom fights. As a result, companies are preparing for activist campaigns well in advance.

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THIS IS PART FIVE OF A SERIES: read Part Four.


QUESTION > Publishing CEO compensation and its ratio to “regular employees” goes into effect next year. What risks – and subsequent mitigation – are you expecting to address?

Lex Suvanto > First of all, CEO compensation already gets a lot of scrutiny. For companies with management teams that are paid high salaries, or salaries that are much higher than peer companies, they get a lot of attention – it’s a big reputational issue. The new rule regarding the ratio of CEO pay to employee pay isn’t going to put CEO compensation into the limelight all of a sudden, because it already is in the limelight. The ratio is going to make it more so, however, and it is going to make it easier to compare companies apples-to-apples. It’s also going to give stakeholder groups and constituents such as employees and labor groups more ammunition for negotiations and generating media attention.

I think CEOs and boards are going to be more sensitive as a result of this rule. They are probably going to use it as an opportunity to think more carefully about how they communicate this information and what the substantiation is for it.

Kai Haakon E. Liekefett > Like many practitioners, I think this rule is a very good example of a well-meant regulation that causes nothing but an enormous amount of work and a significant waste of money.

When you calculate the amount of money that corporate America is going to spend on this, you’d be shocked. Companies will have to determine what a “regular employee” is, and while that’s easy when you have 20 employees, it is much more challenging when you have 30,000 employees worldwide on very different compensation scales. You also need to figure out what you count as compensation, for both the CEO and employees. It’s an enormous calculation that will cost millions for large companies. And the output is an arbitrary number that says 1:30, 1:50, 1:70, something like that, which is going to be used primarily for one reason – for activists to argue that the CEO is overpaid.

Activists are all over this and will use it to undermine the credibility of management in their pursuit of profit.

Chris Ruggieri > One certainty when it comes to the CEO compensation ratio is that there will be some stark differences between industries. If you take an industry like fast food, where you have a lot of entry-level jobs, you’re going to have a much bigger multiple than in certain other industries.

So like any type of data, it has to be interpreted – you have to put the number in context. It will provide additional information in the marketplace, however.  Just like with the “say on pay” rule, people will be looking for outliers and if they see them, it will begin to stimulate some discussion.

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I suspect you will have some knee-jerk reactions and outrage over certain multiples that appear to be very high. On the other hand, the board should be asking questions if they observe differences between companies in their industry peer group. It’s like any information – you’re going to analyze it, and if you notice trends or differences, it’s going to cause you to ask questions. I think it is incumbent upon executive management and the board to be mindful of that.

Jason M. Halper > One of the main risks regarding the CEO compensation ratio is the question of whether to provide additional narrative around the disclosure. You are permitted to do so under the SEC rule, but if you do provide additional narrative, you need to be careful not to make any false or misleading statements. You also need to consider whether you’re opening up a further can of worms by devoting more pages to it.

Since the rule is not in effect yet, companies don’t know how they’re going to compare with their peers. So there is a lot of uncertainty regarding whether to put narrative around it – you have to be careful, at least in the first year you do it. Initially, I think any optional disclosure would be on the side of explaining the elements that led to the number. So, for a company that has many seasonal workers, for instance, that may drive the ratio higher. That is a fact-based disclosure that could be made, as opposed to a more qualitative or high-level disclosure.

 

Don’t under-communicate Brexit’s impact to investors

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If you watch CNN, you know Brexit is now the crisis du jour. The early dip in the global stock markets were severe, but not devastating but have left both Wall Street and Main Street buried in a Chunnel full of what ifs and now whats. Certainly, our 401Ks may well take a short-term hit, however the global economy, not unlike investor relations, is a long-term play. That said, keeping US-based shareholder value high is paramount, and to do that shareholder confidence must remain high… and that requires shareholder communications.

The first step for US investor relations departments prior any commutations: Think like an investor. Where will their concerns lie? How can you hold their confidence?

  • Understand the actual fiscal exposure your company has in the UK, germane for banks and financial services corporations. Work with the models your investors use to see the impact. Call your top US investors for their perceptions.
  • Will London lose its weight as an investor destination? Call your top UK investors for their perceptions. What are their plans?
  • Pundits are already stating that NYC will become a stronger investor destination. Re-run your targeting models and non-deal roadshow schedules?
  • London may no longer be a gateway to EU investors. Do you need to directly pierce your messaging deeper into the EU? What is your financial brand like in these non-Anglo countries?
  • Understand the actual tangible physicality your company: factories, employees, suppliers. Will a lower pound be positive or negative?

I guess the base question is – and a company can only answer this individuallywhat if there is probable material impact? Does IR wait until the next quarterly call to disclose that? Do you let The Street write their own narratives about your value? Do you, if you pardon the PR parlance, “get ahead of this crisis” before it becomes a crisis? Preparation, not panic.

Shareholder communications builds shareholder confidence. Shareholder confidence builds shareholder value.

What / how is the best way to communicate with investors? Request our new “How Investor Relations Consume IR Content” study.

request

It’s a printed report. We will mail you. Ink on paper!

NIRI conference photos (batch 3) and Wall v. Main report about investors

Why do we like attending the National Investors Relations Institute 2016 Annual Conference? Because it’s the only time when passionate IR practitioners (and decision maker$) get together to share ideas, swap notes and have a little comradery-ish fun.

Yeah. We love this IR stuff. It was the perfect environment to introduce our new “Shareholder Confidence 365 Study” paper.

You can order a printed copy here.


NIRI PHOTOS BATCH #3! Click here for batch #2

JOHN3 LIAM3 LIZ2 TONI2 JOHN2TONI4 TREVOR2 TREVOR5 BILL3 JACK3 JACK4 JANE3 JENN3

Thank you to the NIRI Staff and the members for such a positive experience! See you in Orlando, 2017!

 

How to engage with investors in the age of the activist: preparing well in advance

Investors have learned that it pays to be aggressive when it comes to boardroom fights. As a result, companies are preparing for activist campaigns well in advance.

M&A_BLOG_ART2016blue

THIS IS PART FOUR OF A SERIES: read Part Three.


QUESTION > How can you take into account the views of an activist investor while maintaining corporate strategy and not alienating other shareholders?

Chris Ruggieri > In the case of activism, I think the best defense is a good offense. This means not just running your company well and making good decisions, but also routinely revisiting them. There is a big debate about whether shareholder activism is good or bad, and that debate will likely rage on forever. But if there is one good thing to come out of the current wave of activism, it’s that we are seeing companies more routinely evaluate strategic alternatives, transaction possibilities, and business performance. We’re also seeing an increased focus on capital allocation at the board level, meaning that board directors are asking more questions about the approach and process that management goes through to evaluate its strategic choices. I think that is really healthy and positive for companies and their shareholders.

There is also no one single profile of activists – they have different personalities, different strategies. Some activists are very discreet in the way they engage and interact with companies, while others have become quite adept at leveraging the media and using social media, for example, to get their point of view across. There are certain activists that regularly use social media as a platform for broadcasting their point of view and their message.

Jason M. Halper > Ideally, the key is to have ongoing dialogue and engagement. So before an activist is on the scene, the company should be looking at vulnerabilities. Is there a big cash pile on hand? Is the company underperforming? Is the share price down? Has there been a material negative event? Things such as that might attract an activist, and you should be preparing for how to respond if someone comes on the scene, or if institutional investors have concerns. Hopefully, in the course of dialogue with an activist or an institutional shareholder, the company can be persuasive as to what it is doing to address the issue.

Lex Suvanto > From the vantage point of a company, an activist investor is usually an unwelcome challenge. Companies and management teams build their own strategies and have their own plans for the future – they’re instituting initiatives to maximize shareholder value based on the information they have. Often it’s not easy to have to deal with an activist investor who is suggesting significant changes to the way things are being run or to the teams running the company. As a result, many of the strategies that companies are pursuing now – including governance engagement and the cultivation of long-term investors – are built around trying to create a stronger base of shareholder relationships.

However, activists are not always seen as a negative. I’ve spoken to a lot of long-term investors who have told me that they agree with the activist 90% of the time. If you’re asking the question from the vantage point of the investment community, the presence of an activist is often thought of as a potentially good thing.

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John Viglotti > The issue does come up when companies are considering how to approach their communications materials. When you have an activist investor, it can end up in a proxy fight, which can play out almost like a political campaign. Both sides hire proxy advisors and generate press releases about why shareholders should vote a certain way. Both sides may put up specialized websites around the issues. The intensity of them varies, but proxy fights really do ratchet up the level of shareholder communications, and companies and activists spend a lot of money to win support, including on things such as full-page ads in the Wall Street Journal. After all, a big activist has a lot of money at stake.

Kai Haakon E. Liekefett > The issue of how to deal with activists is the billion- dollar question. The legal standard is straightforward. In most US states, the board has a fiduciary duty to act in the best interests of the company and all the shareholders. You would be violating your fiduciary duty if you took a corporate action just to silence an activist investor if you didn’t believe the action was in the best interests of all shareholders.

Now, many activists call for the sale of a company – and not because they think it’s in the interests of all shareholders. They do it because it is the most efficient way for them to realize a significant return on investment. So when you face these activists, you basically have a decision to make. If you agree with them that now is the time to sell, you sell – that’s fine. But if you don’t agree and you cave just because you are concerned about a potentially nasty proxy contest and about what that could do to your reputation, then you have not been doing your job and you have violated your fiduciary duties.

This is not just theory. There was a case last August in the Delaware Chancery Court that has received astonishingly little coverage in the media, titled In re PLX Technology Inc. Stockholders Litigation. In that case, an activist launched a proxy contest against a company, arguing that it was time to sell. The board vehemently disagreed, but it lost a proxy vote for minority representation on the board. Following the proxy vote, the majority of board directors remained the same who had vehemently argued against selling the company – and yet the board decided, “Okay, we will sell the company anyway.” Shareholders sued, and the Delaware Court ruled that the board’s decision constituted a breach of fiduciary duty.

REPORT: 53% of investors won’t even consider your stock without an IR website

Imagine you are a sales person and you only answer the phone 47% of the time. That’s the metaphor companies need to consider regarding not having an IR website. Small-caps, please heed this.

It does seem that institutional investors (W) are a bit more “trusting” in regard to needing to “visually validate” an issuer online. Having access to sell-side reports is probably accounts for the delta between the streets.

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Here are some examples of the sites we host: we can build a variety of design formats – at a variety of service packages to fit into a budget.

LEARN MORE: Our new “Shareholder Confidence 365 Study booklet is now available. You can order a printed copy here.