Give No Quarter

Making the morning media rounds on June 8, 2018, were Jamie Dimon, Chair and CEO of JPMorgan Chase & Co and Warren Buffett, Chair and CEO of Berkshire Hathaway, advocating for an end to quarterly earnings guidance.  As they laid-out in a Wall Street Journal op-ed piece, quarterly earning guidance is a key contributor to the short-termism prevalent in today’s market and is detrimental to the long-term health of companies and the economy overall.

I agree that annual or long-term guidance is preferable to quarterly guidance. I experienced the benefit of a such switch some 15 years ago.  At my former company, giving quarterly guidance was like being on a treadmill; for a myriad of reasons we often found ourselves watching the numbers and issuing mid-quarter guidance updates.  When making our switch, we articulated a long-term business framework, set 3- to 5-year sales and return on invested capital targets and provided perspective on commodity trends and tax rates to help inform margins and EPS expectations.  The change freed up management’s attention for other things and marked the beginning of a new multi-year golden age at the company.

However, I disagree with the contention that companies providing quarterly earnings guidance are contributors to the market’s short-termism.  I think in many ways this is akin to blaming the victim.  I understand how, in the competition for capital, companies can believe that giving quarterly guidance is a reasonable adaptation in a market environment where:

  • Not all investors are long-term focused: witness the influence of hedge funds in the market or the prevalence of high frequency trading and other strategies that buy/sell on factors other than business fundamentals.
  • Not all companies belong to the S&P 500, operate in attractive markets or industries, or are blessed with good analyst coverage, all of which help companies attract targeted investors.  It can be tough for small cap companies or those challenged industries to get the attention of long-term investors.
  • Factors outlined in a previous blog post, such as easy access to information, technology to speed decision making, low transactions costs and multiple investment vehicles (i.e., equity, debt, options, futures, etc.), reinforce a short-term focus among investors.

Quite frankly, given the points above, I don’t think quarterly guidance makes a difference to the companies who provide it.  It simply provides another inflection point for the market to trade around.  That’s why I believe annual or long-term guidance is the better approach and recommend it to others. As I experienced, it enables a longer-term focus within the company and eliminates a key distraction.  Further, if articulated well, long-term guidance – one that encompasses a framework of the business and its prospects – can build a deeper understanding of the business among investors, enabling them to better value the company.

A good resource for companies thinking of making this change is a 2017 Focusing Capital on the Long Term (FCLT) report, which not only debunks six common quarterly guidance myths, but also outlines an approach similar to that used by my former company and includes specific company examples.

Lisa Ciota
Lead-IR Advisors, Inc.

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Board Binge

Have you ever spent a weekend binge watching a series on Netflix?  I wonder if that’s what it’s like to serve on the board of Netflix.  It takes a lot of time, but there’s high engagement in content.

That’s my take-away from the Stanford Closer Look Series article on Netflix’s approach to corporate governance (May 1, 2018, Larker & Tayan).  Described by Netflix founder and CEO Reed Hastings, as “extreme openness for extreme duty of care,” Netflix gives directors significant access to the company’s inner workings, more so than most companies.

To understand what makes Netflix different, it’s important to understand what’s typical.  Normally, corporate boards meet 4 – 8 times per year with directors serving on committees convening another 2 – 8 times.  To prepare for each meeting, directors receive potentially hundreds of pages of power point decks, financial data and business analysis to review about a week in advance.  There may also be ad-hoc, informal calls between and among directors and the CEO throughout the year depending on the circumstances.

In a dynamic, changing environment, is this typical approach enough?  By its actions, Netflix thinks not.  Netflix engages directors in ongoing strategic discussions by exposing them to discussions of performance and strategy on a regular basis. Netflix does this by having directors attend – as observers only – the CEO’s monthly direct report meeting (1 director attends), quarterly executive staff meetings (1 -2 directors attend) and quarterly business reviews (2 – 4 directors attend).  Further, directors are free to follow up with management after these meetings.  As a result, directors have substantially deeper knowledge of the company, its culture, depth of talent as well as its challenges, opportunities and strategies.

In addition, Netflix directors receive an in-depth, written memo quarterly containing links to additional supporting materials.  No death by Power Point here.  Directors can pose questions directly through the online portal and senior management is expected to answer.  This board memo, including director questions and comments, is shared across the executive management team so everyone is on the same page as to priorities and performance.

As a result of these practices, Netflix board meetings are very efficient.  There’s little need for presentations or performance recaps.  Instead, time is spent on dialogue and discussion. Decisions can be made sooner because of the board’s deep and current understanding of the business and its people.  As one director said: “Netflix has made two big “chasm crossings” and most companies don’t even do one. One was getting from DVD to streaming, and number two going to streaming licensing to original content. It was a huge leap, and it’s hard to imagine we could have done it without the intimate knowledge of the operations and the people.”

Can this approach work at other companies?  I can see it working in cultures where there is a high level of openness, confidence and trust in the business, strategy and each other at all levels of the organization.  I think a degree of humility is also required to truly benefit from the diverse perspectives such cultures can nurture.

Lisa Ciota
Lead-IR Advisors, Inc.

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Summer Reading

It feels like the full force of summer has finally arrived and with it my thoughts are turning to all the things that go with summer:  golf, beaches, farmer markets and summer festivals.  And, maybe, hopefully, time to read a new thought-provoking book.

I haven’t chosen a book for this summer yet and am open to suggestions.  In the meantime, here’s some of the books that really make me think.

Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies
Author:  Geoffrey West

Scale illuminates the simplicity behind the apparent complexities of living organisms, cities and companies.  Taking a 10,000 ft (or higher) view, West demonstrates how living organisms live and grow according key “governing ratios” (my words) that are essentially the same for a whale, a mouse, a tree.  Just as interesting are the “governing ratios” of cities, how they scale and their virtual immortality. West’s analysis of the life cycle of companies feels somewhat limited but the concepts are worth further investigation.  There’s some advanced math here, but the fundamental relationships and ideas are understandable and compelling.

The Ajax Dilemma
By Paul Woodruff

Proof, once again, of Homer’s Iliad’s ability to inspire and instruct.  Using the story of the conflict between Trojan War allies Ajax and Odysseus over who should be awarded Achilles’ armor, Woodruff raises questions about rewarding and recognizing performance while sustaining morale.  Should the reward go to the leader who executes his job day-in and day-out (Ajax)? Or the strategist with a brilliant idea (Odysseus)? What about team vs. individual performance? Are these either-or questions?  Is there a difference between what is fair and what is just?  What role does wisdom, compassion and respect play in developing reward and recognition programs?

The Prince
Author: Niccolo Machiavelli

Timeliness advice across the centuries.  About politics, Machiavelli was a realist – not an idealist. This got him a bad rap by those who held politics to be god’s work, but Machiavelli understood human nature and how things got done. This is what he brings to The Prince: clear-eyed insights into the strategies and tactics of gaining influence, power and control.  Written for the new ruler of the city-state of Florence, a center of commerce during the Renaissance, much of Machiavelli’s advice in The Prince remains applicable to the business world today.

Zen and the Art of Motorcycle Maintenance
By Robert M. Pirsig

Of all the books I’ve read, “Motorcycle Zen” continues to influence my perspectives and makes me think.  Using a cross-country motorcycle trip as a metaphor for a journey of reflection and thought, Pirsig asks what is the true meaning of quality.  How does quality relate to objective and subjective truths?  Can they be integrated to create a wholistic philosophy?  Read the book yourself and see how it influences your perceptions.


Pride and Prejudice
By Jane Austen

Yes, this is a story about social class, manners and romance.  But it’s also a story about self-reflection and growth.  Over the course of the novel, as the main characters Darcy and Elizabeth each examine why they are attracted to and repelled by the other, both come to recognize their own faults and work to correct them.  Thereby, they open their hearts to create a stronger understanding and connection with the other.  Who knew, relationship therapy from the 1810s?


Lisa Ciota
Lead-IR Advisors, Inc.

Present Command

Its that time of year again.  Planning for NIRI-Chicago’s annual investor relations workshop is underway.  As always, it’s great to collaborate with other investor relations leaders on the planning committee.  As the committee develops a compelling agenda, we are also identifying potential speakers who can speak to our program content.  Top most in my mind is identifying people with executive presence.

What do I mean by that? It’s not just about being a good public speaker, although that’s part of it.  Executive presence is inextricably linked to key qualities of leadership centered around:  Style, Substance and Character.

  • Style: Style is related to how you present yourself and interact with others. It’s about being inclusive, respectful and acting with intention.  It’s about knowing how and when to flex from being a team leader to a team player to a coach.
  • Substance: Substance is how you connect with others, inspire commitment and align visions. It is reflected in your confidence and composure built from experience and wisdom.
  • Character: Character is foundational.  It’s comprised of your optimism, courage, integrity and values – in short, your approach to others and life.

Someone with executive presence commands the room through an authentic blend of temperament, competencies and skills.  They draw out the best in others even as they present the best in themselves.  They engage to lead – exactly what I want from speakers at our upcoming workshop.

*   *   *   *   *

I invite you to join us at NIRI-Chicago’s 2018 Investor Relations Workshop:  Strategic IR for Transformational Times on September 28.  Registration and agenda will be posted on NIRI-Chicago’s website in late June 2018.

Lisa Ciota
Lead-IR Advisors, Inc.

Best Conference Call Ever!

Or at least in 2018.  That’s how CNBC’s Jim Cramer described Tesla’s (NASDAQ: TSLA) first quarter earnings call.  (Watch video.)  Jim Cramer gave voice to what every Investor Relations professional (and CEO and CFO) sometimes feel.  The tedious questions repeated a thousand different ways, the focus on minutiae and (sometimes) the attitude.

Cramer’s opinion wasn’t the norm.  Many appeared shocked that Tesla’s CEO Elon Musk brushed off certain analyst questions and complained about day-traders and short sellers.  Musk, it seemed, was not going to kowtow to the providers of capital, the arbiters of valuation.  In reaction, Tesla’s stock traded down 5.5% the next day despite the fact that Tesla reported better than expected results.  Was there permanent damage?  Who knows? Tesla’s stock has since recovered but its bonds continue to trade below par.

In view of the hullabaloo over Tesla’s call, I think it’s worthwhile to unpack the dynamics of the quarterly earnings call/webcast.

It all starts with the SEC Act of 1934, which requires registered companies to provide periodic updates on performance – the 10Q filing. Add-on Reg FD, which requires companies to communicate broadly, and technology, which speeds data gathering, analysis and trade execution, and you create a market ravenous for information.  Consequently, the quarterly earnings release and investor call/webcast can be like a sugar-rush for the financial markets.

The audience on the typical call/webcast is comprised of sell side analysts, buy side and retail investors and the media.  Companies would gladly prioritize the buy side on these calls if they queued up for questions. But, it’s the sell side who queue up and dominate Q&A.  In my view, this reflects, in part, the sell side’s desire to self-promote to attract clients.  By asking incisive questions, sell-siders build their reputation and demonstrate their unique insights to investors and media.  Thus, the often-lengthy preamble to question(s), the repetitiveness of questions and the (sometimes) skeptical tone of voice.

For companies, quarterly earnings is one milepost along a longer strategic journey.  Companies do want to get their story out so that investors can better understand and value them.  Yet, too often the focus is on near-term financial metrics and a 3- to 12-month outlook, with little discussion of longer-term opportunity or strategy.

So, its understandable companies get frustrated.  Still, it doesn’t make what Musk did on Tesla’s earnings call OK.  In the weeks before the call, there was much in the media about Tesla’s cash flow and ability to meet production targets. The earnings call was an opportunity to reassure that Tesla’s could/would effectively handle these issues. However, by blatantly disregarding some questions, Musk instead raised doubts about the company, damaging reputation and value.

A CEO I once worked for said that as a CEO, “you always have to be on.”  Meaning you should always be aware that what you talk about and how you talk can be misunderstood, misconstrued or offend. Good advice. Now, you can still have a personal style as Musk does, but a little awareness of the impact of your comments and actions can go a long way in a world where news spreads like wildfire.

Lisa Ciota
Lead-IR Advisors, Inc.

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Stay or Go?

“Should I stay, or should I go?”, asked The Clash back in 1981.  “If I go, there will be trouble, and if I stay it will be double,” they concluded a few lines later.

Trouble or double.  When your company gets caught in the vortex of a social or political issue, it can certainly seem that way in today’s polarized environment.  Could we/should we make a statement? Could we/should we take action?  Each situation is unique, but one thing is true: you can’t just stay … still.

Even if you decide to do nothing, that decision is something.  Only a few years ago, companies could stay out of or minimize their role in the social and political discourse.  It’s not so simple anymore.  Expectations have changed and the concept of what creates value has broadened.  Shareholder primacy is no longer defined by an exclusive focus on driving sales and profits.  Consideration is now given to how sales and profits are generated: Is it in a manner consistent with company purpose and values? Have the impacts/implications for customers, employees and communities today and the future been considered?

It is this essential understanding of what the company is and does that serves as a basis for deciding whether to enter the fray.  Communications experts agree companies should have a disciplined approach for deciding what issues are pertinent and relevant.  Spend some time hashing-out company values and convictions to develop a framework for making the “stay or go” decision.  Some questions to ask yourself include:

  • Does the issue impact the company? If yes, how so?  Does it affect the company’s ability to serve customers, attract and motivate employees or operate effectively?
  • What are the implications in view of the company’s core values?
  • Does it potentially affect perceptions of the company? If yes, how so and with which stakeholders? How may the potential change in perceptions impact the company and its prospects?

Even with a framework, many executives, boards and lawyers will want to remain neutral for fear of alienating customers, communities or influencers. However, the days when companies can stay on the sidelines may be over.  That was a conclusion of a Harvard Business Review article, (March 7, 2018, Korshun & Smith), which outlined how an understanding of what stakeholders look for can help moderate the potential fallout of expressing a view: These include:

  • Transparency: Trusting relationships are built on openness and transparency. Stakeholders typically accept a company’s position if they believe the company has been forthright.
  • Consistency: Companies should be true to what they stand for and predictable in their actions.  Surprises or changes in direction weaken trust, leading stakeholders to doubt a company’s real intent.
  • Materiality: Stakeholders aren’t naïve.  They understand and expect companies will take positions favorable to its business. It’s more important to be upfront and true to your word when sharing the company’s perspective.
  • Leadership: By being transparent, consistent and presenting a forthright business case for its perspectives, a company will more likely be respected even if stakeholders don’t agree.

A recent example of a company doing this well is JP Morgan Chase.  As discussed in a previous blog post, CEO Jamie Dimon addressed several relevant public policy topics in his annual shareholder letter, increasing transparency and better positioning JPM to respond should it get caught in the crosshairs of debate.

While senior management has the primary responsibility for addressing relevant, material issues (political ones included), the board should be aware of the company’s framework for addressing such issues and be kept apprised as situations evolve.  I suspect that Dimon’s letter was vetted at several levels of the organization – board included – to ensure all were comfortable with the perspectives shared.

On a final note, I’ve approached this topic from the corporate vantage point.  However, it shouldn’t come as a surprise that some CEOs have strong personal perspectives on a variety of topics, not all of which are pertinent to their company.  In such cases, it’s important to carefully delineate when the CEO is expressing a personal opinion or the company’s position.

Lisa Ciota
Lead-IR Advisors, Inc.

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Tying Knots

When organic growth just won’t do, M&A to the rescue.

No, this isn’t an ancient Chinese proverb, it’s a common growth strategy for businesses in competitive and/or low-growth industries.  Indeed, sometimes the fastest path to growth is via acquisition and it seems we’re seeing more of it. Global M&A is off to one of its strongest starts ever with transactions totaling $1.2 trillion in value in first quarter 2018, building off a similarly strong fourth quarter 2017.

Like marriages, acquisitions don’t always work out.  But those that do are those where the buying and target companies know themselves and each has something to offer the other.  In other words, success rates improve when buyers have a thematic M&A approach that aligns around specific objectives and the business competencies of both parties; the buyer and target validate strategic visions throughout the due diligence process (not just during the deal stage); and buyer and target continuously develop, revise and refine the integration plan and objectives to optimize synergies.

The deal-making process is exciting, and it can sometimes be easy for those involved to get ahead of themselves.  So, while Investor Relations isn’t usually on the frontlines of the merger process, it needs to be involved to represent the investor perspective and serve as a patient, long-term focused voice during the knot‑tying process.

Investor Relations needs to be cognizant of disclosure limitations; align internal and external messaging; and help ensure expectations are realistic.  To that end, Investor Relations should ask some knotty questions including:

QuestionWhat don’t we know? What won’t be – or wasn’t – revealed during the due diligence process? For example, is access to customer data or customer contracts limited due to confidentiality agreements or regulatory or anti-trust concerns.

DollarWhat’s the real total cost?  Its more than just the purchase price. There’s also a cost to the equity or debt used to finance the acquisition.  Other costs may include severance packages, legal and banker fees, target company pension obligations and equity compensation.   All these can affect total costs and the acquisition’s expected return.

safeHow do we protect our own information?  Often confidentiality agreements are one-sided:  buyer agrees to keep target’s information confidential but not the reverse.  Yet, throughout the process the buyer may share confidential information with target that could put buyer at risk if the deal falls through or someone else swoops in and acquires the target.

Slash signWhat can’t we do?  Are there any restrictions between deal and close?  What about after close?  Are you limited from pursuing other acquisitions, raising additional debt, paying dividends, repurchasing stock or taking other strategic actions?

No wonder the phrase “less is more” is so relevant during M&A.  These questions raise important considerations in how to talk about a merger.  Yet, you can almost never say nothing, so a careful calibration of what to say and when is needed throughout the process.

Lisa Ciota
Lead-IR Advisors, Inc.

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Ahead of the Curve

46 pages!  Wow! What were they thinking? 46 pages – that’s the length of JPMorgan Chase (NYSE: JPM) Chairman & CEO Jamie Dimon’s annual shareholder letter.  Back in the day when I produced annual reports, if the CEO letter stretched 4 pages including charts and graphs and the full-color front section was half of this letter’s total length that would have been a lot.

Nowadays, traditional annual reports with their CEO letters seem anachronistic. But investors are hungry for more than a quarterly-earnings based discussion of strategy and results.  Witness BlackRock CEO Larry Fink’s exhorting companies to focus on purpose, and the Strategic Investor Initiative urging for more long-term focused investor presentations.  Investors today want different insights and Dimon’s letter is ahead of the curve in this regard in four key ways:

TelescopeArticulates a long-term focus:  While the letter reviews past year results along key metrics, it doesn’t give guidance or 2018 targets. Instead, Dimon articulates JPM’s philosophy of how it grows and manages the balance sheet.  He also acknowledges the interdependencies of shareholders, customers, employees and communities in the value creation process.

TeamRecognizes the importance of culture:  By discussing the values and behaviors JPM wants to foster (diversity & inclusion, talent development, succession planning) or avoid (bureaucracy, complacency), Dimon essentially recognizes the importance of culture to long-term organizational success.

flameAddresses key business risks:  Most companies limit discussion of risk factors to the 10K, but Dimon’s letter calls out several risks and reviews how JPM has, will, or may need to navigate through them.  Now investors have a better perspective on JPM’s risk management framework and an understanding of likely decisions as these risks may evolve.

govt bldgProvides perspective on public policy topics: By addressing relevant public policy topics, Dimon increases transparency around JPM’s perspectives. Consequently, JPM is better positioned to respond should it get caught in the crosshairs of debate.  Interestingly, the results of a special 2017 Edelman Trust Barometer survey of institutional investors  indicated three-quarters of investors believe companies should articulate their thoughts on political issues relevant to ensuring a healthy and robust business environment.

I don’t advocate addressing all these items in your annual CEO letters – in most cases that would be too much.  However, there are many opportunities to broaden your business messages that you can consider.  For example, articulating a long-term focus can appear in the 10K or investor presentations.  Discussions of culture can be brought to life on a website.  Or, perspectives on public policy can be included on a website or kept in a hip-pocket until needed.

Reflect on the topics investors today are most interested in and how you can get ahead of the curve.

Lisa Ciota
Lead-IR Advisors, Inc.

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Seeing Spots

Last week, Spotify (NYSE: SPOT) – the music streaming business – began trading publicly for the first time.  Spotify’s CEO, Daniel EK, was non-pulsed, telling his employees:

Lots of people have asked me how I feel about tomorrow’s listing. Of course, I am proud of what we’ve built over the last decade. But what’s even more important to me is that tomorrow does not become the most important day for Spotify.  . . .  Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment. Normally, companies don’t pursue a direct listing.”

Spotify went public via the direct listing process, which basically means the company filed the necessary materials with the SEC (registration statement/prospectus, etc.), applied for listing on the NYSE and waited to become effective. Simple.

Because Spotify did not need to raise new capital, it did not go on roadshows (although it hosted an investor day), nor did it hire a bevy of investment bankers to syndicate the deal.  Further, with no new capital raised, there was no chunk of new shares plopped on the market at one time, there will be no green shoe (overallotment) to drop or lock-up period for existing shareholders (primarily company officers, employees and venture capitalists).

It’s not the traditional way most companies go public, but as I noted in a previous blog post (The Last Great Decade, March 7, 2018), we are currently experiencing something of a golden age of venture capital and private equity.  Today, start-ups have access to this smart money for growth capital, enabling founders to maintain control longer and avoid the pressures typically exerted over public companies.  As I concluded, “When a private company does decide to go public, the listing decision will likely be driven by a need for liquidity, not capital.”  This certainly seems to be the case with Spotify.

Now, what works for Spotify won’t necessarily work for everyone.  As a globally-recognized technology brand, Spotify has some built-in demand for its stock and won’t have trouble attracting sell side coverage.  It also has a solid record of private transactions that served as a reference point for setting price. To create and build trading volume, Spotify will be dependent on existing shareholders to sell.  So, volume will likely remain low (for a company of its size) for some time, which raises concerns of price volatility.  However, many small-cap companies deal with this issue all the time and I expect Spotify can as well.

I believe direct listings will grow – Spotify has shown the way – but it won’t displace the traditional IPO.

Lisa Ciota
Lead-IR Advisors, Inc.

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