The Tax Cuts and Jobs Act, signed into law on December 22, 2017, signifies the most comprehensive overhaul to the US tax code in more than three decades. Among the more significant changes from the legislation are the reduction of the corporate tax rate and a lower rate on the repatriation of overseas cash.
These changes, while greeted by much of corporate America as long overdue, pose varied communications challenges for US companies and for IROs charged with spelling out the short and long-term implications of tax reform. Compounding these challenges are the broad and diverse group of stakeholders involved, the political nature of the topic, a cynical media environment and an increasingly CSR-conscious investor community.
Fairly quickly after the passage of the new legislation, many high-profile companies – such as AT&T, Apple and Bank of America – took a proactive approach, announcing the financial impact from tax reform and capital allocation plans for any windfall in advance of their upcoming earnings report. These announcements were generally made via press releases and/or internal memos leaked to the press. These firms have sought to build goodwill by showcasing how they’re sharing the tax savings with employees via one-time bonuses, increased 401k contributions, or more and better training. Several companies, including Boeing and Citizens Financial, also announced increased levels of charitable donations, a nod to the heightened attention paid to CSR by institutional investors and the broader public.
Yet some companies, particularly those in the financial sector, have faced one-time charges due to the revaluation of deferred tax assets. Some of these companies proactively announced these charges before their official earnings report. These firms remained steadfast in essentially highlighting the positive, longer-term benefits of the legislation for earnings and cash flow.
With earnings season now in full swing, public companies have taken a variety of approaches to communicating how the legislation will impact their businesses and capital allocation strategy. The majority of companies have used the earnings release and part of their prepared conference call remarks to communicate the new laws’ effects, both quantitatively and qualitatively. That said, we have also seen a few examples of companies that have been less than transparent concerning specific details about where the newfound capital will be earmarked.
We believe the legislation and resulting spotlight on US companies offer an opportunity for IR and communications teams to earn goodwill from the firm’s various constituencies. With current and prospective employees, investors and other important stakeholders watching, they have a captive audience to showcase the company’s values, priorities and long-term strategic vision. In his recent CEO letter, BlackRock’s Larry Fink said as much, writing that ‘companies should explain to investors how the significant changes to the tax law fit into their long-term strategy’.
Based on our work with our public company clients, and from the reaction of the sell-side community and financial media to companies that have responded publicly to the legislation, we offer the following five recommendations to IROs and other company leaders as they navigate the communications challenges posed by tax reform:
- Understand that you’re speaking to a broad stakeholder group: For more than a month, US workers have seen headlines about tax savings and bonuses. No doubt, your employees – current and prospective – will be listening when you discuss tax reform and related investment plans; so will the media and business partners. Remember these groups and their interests when preparing investor communications.
- Be prepared to answer questions on capital allocation priorities: While no company should feel pressured to prematurely share capital allocation plans, IROs ought to expect and prepare for the question from investors and analysts, with a view to being as transparent as possible. Any response must show consistency with the firm’s stated strategic priorities and past communications.
- Be wary of headline/reputational risk: Take advantage of the opportunity to learn from the first wave of organizations that have announced their investment strategy for tax savings. Several have been criticized in the press for not going far enough in ‘sharing the wealth’ or for lacking a long-term focus. Weigh how your message will be perceived and try to strike a balance between appeasing employees and investors and supporting your company’s mission.
- Take control of your financial narrative: Silence is not an option on this topic. Refusing to communicate honestly and transparently will allow others to tell your story. IROs should use this opportunity to discuss specific benefits of the legislation and what it means for the company’s strategy and financial framework, particularly if your firm is planning to reinvest any of the savings in profit-and/or growth-building initiatives.
- Connect the dots internally: As noted, investors are not the only parties that will be impacted by the legislation. IROs must therefore work hand in hand with others internally, such as human resources, employee communications and public relations teams, to ensure a consistent message. Failing to do so can result in confusion and mixed messages among employees and other stakeholders.
Jeremy Cohen is vice president at Edelman Financial Communications in Chicago. Patrick Ryan is account supervisor at Edelman Financial Communications in New York. Deb Wasser is executive vice president and US practice lead for investor relations at Edelman Financial Communications in New York.
