Taking Stock

It always happens at the end of the year – people take stock of the past 12 months and measure what was most important, popular, read or viewed.  Not to miss out, below is Lead-IR’s top 5 blog posts of 2018.

Lead-IR Advisors
Top 5 Most Viewed Blog Posts of 2018

  1. Ahead of the Curve, April 18, 2018
  2. Replay: New Kid in Town, September 26, 2018 (Original post: February 21, 2018)
  3. Face North, October 31, 2018
  4. Long Days, Short Stint, October 10, 2018
  5. Its Personal, Redux, August 1, 2018 (Original post: January 5, 2018)

In reviewing this year’s top posts, three key themes emerged:

Beyond Business Issues
Should CEO’s and companies address public policy, political or social issues? If so, when and how?  In the past, such topics were considered beyond the normal scope of business and companies and CEOs could stay out of the fray.  However, the general public and investors increasingly believe it appropriate for companies take a stand on issues relevant to fostering a healthy business environment. Both the Ahead of the Curve and Face North posts offered perspectives and best practice pointers on doing just that.  The former outlined how Jamie Dimon, Chairman & CEO of JPMorgan Chase discussed public policy issues in his annual letter to shareholders.  The latter highlighted the importance of having a deep understanding of company purpose, values and culture to guide decisions on where when and how to take a stand.  While not in this year’s top 5, the Stay or Go post from early May 2018 also addressed this topic.

C-Suite Transitions
From the sudden passing of Fiat Chrysler’s CEO Sergio Macchione, to Pepsico’s CEO Indra Nooyi’s retirement and the surprise ousting of GE’s former CEO John Flannery, CEO transitions were a hot topic in 2018. So, it’s no wonder readers found It’s Personal, Redux’s discussion of key disclosure considerations related to CEO health matters and Replay: New Kid in Town’s pointers on introducing a new CEO to investors, particularly relevant.  If you’re working with a new CEO, I suggest reading October 2018’s Just Being post and reflecting on what “becoming” a CEO means in the full sense of the word.

Focusing on Tomorrow
Or rather, there’s not enough of it – focusing on the long term, that is.  Everyone and their brother complain about the short-termism prevalent in the markets today.  Yet, as discussed in the Long Days, Short Stint blog post, it seems every solution to counter this is focused on what companies should or shouldn’t do.  Certainly companies can do some things to counter this as suggested in the Give No Quarter post.  But, as outlined in the Easter Bunny blog post, the current market structure is designed to support investors who drive a big chunk of trading today and have short-term investing horizons.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Long Days, Short Stint

The juxtaposition of long summer days against concerns over short-termism seemed to be a key theme in summer 2018.  It started in June with the Business Roundtable urging companies to end quarterly earnings guidance.  Then in August, we had a two-fer:  Senator Elizabeth Warren (D-MA) introduced The Accountable Capitalism Act and President Trump tweeted the idea of changing from quarterly to semi-annual earnings reporting.

What all these had in common was a concern the short-termism prevalent in today’s market is detrimental to the long-term health of companies and economy overall.  And each, in their way, proposed changes or actions to counteract those forces.  I too am concerned about short-termism, but question why so many seem to think that its companies that need to change to alleviate the problem – it all about companies needing to start doing this or stop doing that.

Maybe I’m missing something, but I rarely hear suggestions on how investors or other financial market participants need to change.  Let’s face it, there’s a significant number of financial market participants who are not long-term focused – think some hedge funds as well as high frequency and risk management traders.

On any given day, these short-term focused market participants can dominate market volume thanks to easy access to information, technology that speeds decision-making and execution, and low transactions costs.  As Tim Quast of Modern IR noted, “when some machine can hammer every bid or offer and immediately cancel the order and reprice your stock 8% lower with a one-share trade. It’s absurd. We are failing to understand what the real malady of markets is – and it’s much more about structure than story.”

In my view, the majority of public companies are long-term oriented but in the competition for capital they need to deal with the reality of a market focused on quarterly results and the daily news flow.  So, what’s a company to do?  Well, don’t give up.  Many of your permanent and long-term investors want to hear about your strategies for the future.  One great idea comes from the Strategic Investor Forum which suggests companies treat quarterly earnings as “building blocks of longer-term plans and disclosure rather than the central focus.”  You can also review the 2017 Focusing Capital on the Long Term (FCLT) report for thoughts on how to shift the investor dialogue to a more long-term perspective.

While short-termism won’t go away any time soon, by consistently providing a longer-term perspective on the company’s framework for creating value and managing risk in a dynamic environment, you’ll be better positioned to earn investor patience and plan for the future.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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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
President/Founder
Lead-IR Advisors, Inc.

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The Easter Bunny and Other Wish Fairies

I was having tea with the Easter Bunny the other day … Well, that’s how I felt after reading the CECP’s letter to CEOs urging for a more strategic, long-term presentation that integrates a discussion of social and environmental risk at their Strategic Investor Initiative (SII) Investor Forums.

Hallelujah, I initially thought.  An opportunity to talk about where we are going … the forces shaping how we get there … and the framework to manage risk, evolve and create value while on our journey.  I applaud the SII’s goal to shift the investor communications paradigm away from a relentless short-term focus.  Past Forums were attended by major institutions like Vanguard, BlackRock, Dimensional Fund Advisors, CalSTRS, NYCERs as well as Clearbridge, Neuberger Berman, Gabelli Funds and Starboard Value.  Presenting companies have included:  IBM, Humana, Aetna, Unilever, Merck, Johnson & Johnson and Medtronic.

Will this SII effort work? Time will tell, but it’s important to note that so far, the Forum has primarily attracted investors whom would likely own the presenting companies anyway, regardless.  Further, I suspect the Forum had no impact on investor outlook, did not attract new investors to the companies or result in a material change in investor positions.

The reality is most investors are under just as much pressure to deliver short-term returns for clients as CEOs are to create short-term value for shareholders.  Further, the factors that support a short-term focus (some of which are identified below) are pervasive.  I’m not sure there are any wish fairies who can change that.

Factors Supporting Short-Termism

Short Termism Slide

In the competition for capital, most companies need to adapt and respond to a market that will continue to focus on quarterly results and 1- to 2-year valuation time horizons. Recognizing this, the SII suggests “repositioning quarterly earnings performance guidance from the ‘finish line’ to the starting line.”  Essentially, in their view, quarterly earnings should become the “building blocks of longer-term plans and disclosure rather than the central focus.”

This is good advice.  While short-termism won’t go away, by consistently providing a longer-term perspective on the company’s framework for creating value and managing risk in a dynamic environment, you’ll be better positioned to earn investor patience as the company evolves and invests for the future.

So, as you get ready for your next quarterly earnings, think about:

  • How current initiatives, tactics and results are stepping stones moving the company closer to its long-term performance zone
  • How relevant trends related to customers, suppliers, competitors and/or operating environment shaped strategies and impacted results; How are these trends expected to evolve

Weave the answers to questions like these into your earnings materials.  It’s likely only a matter of repositioning some comments throughout.  It will take thought, but in long-term it may be worth it.

 

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.
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Tags: short-termism, institutional investors, CECP, Strategic Investor Initiative,