New York’s Windows on the World played host to a recent conference on award-winning investor relations. The event, held in conjunction with the Investor Relations Magazine US Awards 2001, gathered a group of IR savants whose efforts have been honored by awards in previous years. Here is a summary of the discussions.
Thompson on FD
Niri president and CEO Lou Thompson is not buying the argument coming from analysts that Regulation FD has caused a decrease in the quality of corporate information. Analysts have been voicing this opinion in recent surveys, such as those conducted by the Association for Investment Management and Research (AIMR) and by Investor Relations magazine in its US Research Report 2001. It’s also something Thompson has heard firsthand in his discussions with analyst societies across the US.
‘The notion that companies are using Reg FD to hide behind and mask their poor performance is objectionable – the numbers don’t show that,’ declares Thompson, citing a recent Niri study showing a 40 percent increase in the number of earnings pre-announcements since the SEC regulation came into effect.
Confusion over the definition of materiality may have caused a decline in the quality of information in some cases, Thompson admits. However, ‘Companies are not hiding behind the rule, they’re abiding by it. And analysts and portfolio managers were very poorly prepared for FD.’
Securities industry associations have been lackadaisical about preparing analysts and portfolio managers for the new regulatory environment, asserts Thompson. ‘AIMR opposed the rule in a comment to the SEC and then did little to educate its membership. And the same can be said for the Securities Industry Association,’ he says. Top brokerage firms like PaineWebber and Merrill Lynch also shirked their responsibility for advising staff members by positing the regulation as the issuers’ problem. ‘The burden does clearly fall on the backs of the companies, but this is a real head-in-the-sand approach,’ says Thompson. ‘It is [Wall Street’s] problem because analysts are having to learn how to operate in this new regulatory environment where they’re not going to get the level of guidance that they once did.’
FD & materiality
Thompson claims FD casts a wider net over materiality, and he cautions IROs and CFOs about reviewing draft earnings models and analyst reports. Most review these for factual accuracy, with 50 percent looking for assumptions they see as non-material. ‘This gets a bit dicey because there are so many assumptions in an earnings model that could be considered so,’ Thompson observes. ‘FD essentially put a regulatory structure around a voluntary disclosure practice.’
On the upside, Thompson is pleased that half of analysts say they have to do more fundamental research under FD, as reported in the AIMR survey. ‘There’s a whole generation of analysts who were basically spoon-fed and didn’t really know how to do fundamental research,’ says Thompson, who finds it interesting that the older generation of analysts were not at all perplexed by the new rule. ‘If FD shifts the onus a little bit more to the backs of the analysts, then maybe we can accomplish something.’
Since FD requires companies to release all information to all audiences simultaneously, some companies are coming up with creative ways to camouflage material announcements. Thompson claims some tend to downplay bad news by putting it in an 8K. This may satisfy FD requirements, but it’s a format the public hardly uses. He points to a major defense company giving out new guidance at an investor conference. The company released their guidance in an 8K but not in a press release. ‘Legally they were covered because they filed an 8K, but they sure ticked off a lot of people in terms of the way they handled the situation.’
According to Thompson, the best way to send out this type of information is to ‘put it in your quarterly release and then you can surround that information with the relevant risk factors.’
Management support
The conference’s most prevalent theme was that investor relations does not exist in a vacuum; for IR to be successful it must have the support of senior management.
‘You can do everything right, and if you don’t have the full support of management, you’re never going to be effective,’ says Anne Marie McCauley, head of IR at Mercury Interactive and winner of last year’s award for best disclosure policy. McCauley emphasizes the importance of IROs receiving not only senior management’s understanding, but also its active support.
‘Perception is reality,’ she continues. ‘It’s very important to understand what the investors are thinking and make sure they understand what [the company] is doing.’
Ron Slaymaker, head of IR for Texas Instruments, which won last year’s award for most improved investor relations at a mega-cap company, boasts that many of TI’s business managers get involved in the IR activities: ‘We think that providing exposure to different managers… will give investors a deeper view of the company.’
Slaymaker says management’s consistent involvement in IR helps build the company’s high level of transparency. ‘IR is about helping investors see the future as our company envisions it. Specifically, what role in that future our company hopes to play.’ This is the kind of knowledge that can only be acquired through day-to-day dialogue with senior management.
Jose Collazo, chairman, president and CEO of Infonet Services Corporation, concurs: ‘It’s difficult for IR to represent a company if it isn’t intimately woven with the strategies of the company. It’s difficult to get that kind of insight into a company when you’re outside of the groups that talk about strategy.’
Credibility
Another hot-button topic is credibility – the notion that in order to be effective and hold sway with the Street, IROs must speak with real authority. Again, management plays a key role, says Mercury’s McCauley: ‘Having a concerted management team and continually executing are the things that build up credibility over time.’
Panelists agree that IR credibility comes from consistently reporting in a frank, open manner even though the news may be bleak.
Chuck Wessendorf, former manager of investor relations at Xerox Corporation, believes his department built credibility by being consistently forthcoming over a sustained period. Even though Xerox stock declined 62 percent in 1999, Wessendorf’s team won the 2000 award for most improved investor relations by a large-cap company. ‘It was not because of outstanding investor relations that year, or any single event that occurred in 1999,’ he explains. ‘The feedback we got from the survey said that Xerox was better at communicating significant events between quarterly conference calls, and that investor relations and the chief financial officer were accessible and knowledgeable.’
Phil Orlando, chief investment officer of Value Line Asset Management, adds, ‘The most important thing IROs can do is gain the respect and trust of investors. Be honest,’ he summarizes. ‘Your integrity is the most important thing you have.’
Other panelists echo Orlando’s view. They emphasize the importance of IROs communicating the basic facts without polish or candy coating.
Greg Geiling, senior telecommunications analyst with JP Morgan, believes it’s very important not to put a spin on the company’s message – analysts want to get the straight story. IROs can build a trusting relationship with the analysts who cover their companies only if they strip their communications of all embellishments. McCauley concurs: ‘It’s important to be a straight shooter, telling it like it is and no hyping.’
Managing volatility
Market volatility, however troublesome, is something IROs have to live with, agree several conference panelists. ‘We feel like we always live in a world of volatility as opposed to this being something new,’ says Carla Lewis, director of investor relations at Microsoft. ‘There have been many days when we have had a $5-10 stock price change, and we can’t even pinpoint what might be driving it.’
Because of this, Lewis has spent plenty of time thinking about the drivers behind market volatility. She points to several external factors influencing Microsoft’s stock price on a day-to-day basis including rumors, the real-time speed of information, the overall downward trend of the market, Regulation FD, a slowing growth rate, and the US Department of Justice’s antitrust suit against the company.
Unisys Corporation’s director of IR, Jim Kerr, offers this: ‘The types of stockholders you have and how they are reacting to your message also affects stock price. We do monthly and weekly updates to find out who’s moving into and out of our stock and we interview our major stockholders.’ Kerr says he discovered the value of profiling during the roller-coaster ride of the last four years. During Unisys’s most volatile period, ‘Institutional ownership went from 73 percent of shares down to 56 and, conversely, retail ownership went from 17 to 29 percent,’ recalls Kerr. This is why IROs must be aware of their company’s investor profile: ‘Who’s buying your stock and why?’
Kathy Dietz, vice president of investor relations at Corning, watched her company’s market cap bounce during Corning’s transformation from cookware empire to fiber optics powerhouse. ‘We actually peaked at $100 bn last summer, and today, we’ve landed back at $25 bn. How’s that for volatility?’ Her recommendation is to not get caught up in the day-to-day gyrations of the market and the stock price.
‘Also make sure to be in tune with the nuances of your corporate messages,’ she adds. In other words, as Kerr emphasizes too, be clear on how different audiences interpret the details of corporate news.
The overall message here is that IR professionals should try to understand the cause of volatility but not waste too much energy trying to control it. As Dietz summarizes, ‘What the market giveth the market taketh away. Volatility is here to stay, and we are just going to have to learn to live with it.’
Speaker’s corner
Thank you to the speakers from Award-winning Investor Relations, March 28-29, 2001
Rick Anguilla, VP of IR, Nike
Vincent Catalano, president & chief strategist, Iviewresearch
Mary Ellen Clifford, assistant treasurer, Intel Corp
Jose Collazo, chairman, president and CEO, Infonet Services Corp
Kathy Dietz, VP of IR, Corning
Douglas Fox, director of IR, Zebra Technologies
Greg Geiling, senior telecommunications analyst, JP Morgan
Neil Hershberg, VP of global media, Business Wire
James Kerr, director of IR, Unisys Corp
Greg Kyle, founder, president & CEO, Pegasus Research International
Alex Lenke, IR manager, Intel Corp
Carla Lewis, head of IR, Microsoft
Anne Marie McCauley, director of IR, Mercury Interactive
Morgan Molthrop, VP of IR, Infonet Services Corp
Philip Orlando, chief investment officer, Value Line Asset Management
Michael Reilly, president, Hally Enterprises
Ron Slaymaker, VP of IR, Texas Instruments
Dr Jeffrey Sonnenfeld, chairman & president, The Chief Executive Leadership Institute
Lou Thompson, president & CEO, National Investor Relations Institute
Chuck Wessendorf, former manager of IR, Xerox Corp
Net change
Intel’s changing IR strategy under Reg FD:
-Separate link on the web site for quarterly outlook in addition to the earnings release.
-Discussion of the quiet period (a month or so before earnings)
-Webcasting of anything material (earnings releases, acquisitions, significant product releases)
-Invite the press to significant events
-A disclaimer on most presentation materials, which are taken down after 60 days
