Customs Street Advisors is a full service investor relations firm based in Lagos, Nigeria.

When speech is golden and silence is dross: Proactive value communications is the key to sustaining investor faith in the economic downturn.

In recent months, we have observed two interesting communication reactions among Nigerian companies to the present economic distress. The first reaction is the overly optimistic message. In this case, CEOs declare that the dire macroeconomic situation has not affected their companies, which are poised to maintain their strong growth in the foreseable future. Publicly, companies in this state of denial vigorously argue that they are immune to the downturn, while internally, they are in panic mode: slashing costs, laying off staff and cutting investment. The second type of reaction is the 'go dark syndrome', when companies just drop out of the news. In this case, these companies hold the mistaken belief that only good news is worth communicating. Taking the logic to its conclusion, since this is an inclement season, the best policy is to shut up, batten down the hatches and wait out the hurricane. When this second group does eventually deem it necessary to communicate, it does so with a terse press release or the now familar SMS messages urging receivers to ignore rumours. We believe that these reactions are counter-productive. The first, because few are fooled by the rosy picture CEOs paint in the press, and the second, because companies need to carry investors along in their plans for riding out the storm. In this post, we suggest positive steps that companies should take in developing a proactive investor communications in the downturn.

In a July 2007 interview that would haunt him, Charles Prince, the former CEO of Citigroup remarked that the bank was still dancing to the music of providing cheap credit to private equity firms and that the subprime crisis was unlikely to cause severe disruption to its lending policies. Four months later, he would resign after the bank suffered a $5.9 billion writedown and acute drop in profits.

A study of events in the past two years is an instructive masterclass on the importance of proactive value communications if companies want to retain the initiative on their destiny. The case of now defunct Bear Stearns highlights the importance of proactive communications. Within the space of a few days in March 2008, Alan Schwartz, the CEO, moved from robust guarantees of the bank’s liquidity position to a humble admission of a significant deterioration in its liquidity position. In a letter to Nout Wellink, chairman of the Basel Committee on Banking Supervision, written shortly after the takeover of the bank by JP Morgan, Christopher Cox,  SEC Chairman, stated that ‘the fate of Bear Stearns was the result of a lack of confidence, not a lack of capital.’

The case of Bear Stearns reaffirms what Walter Bagehot, the 19th century British economist, said that ‘every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact, his credit is gone.’

This should sound a loud wake up call to company executives who persist in the simple thinking that denial followed by silence are sufficient to calm markets in this turbulent season. Neither Schwartz’s smooth reassurance on CNBC, the business network, that the bank’s parent company ended 2007 with $17 billion of cash, nor Chairman Cox’s statement that the SEC was comfortable with Bear Stearns’ capital cushion was enough to save the bank.

What mattered most was that at a time markets needed to hear from Bear Stearns about how it was taking concrete and quick steps to reduce its leverage, manage its sub-prime mortgages’ exposure as well as review its business model to diversify its sources of income to other businesses and regions, its executives bank chose the stiff upper lip. When they eventually decided to speak up, it was too little, too late. In fact, speaking on CNBC the week before its collapse, Alan ‘Ace’ Greenberg, its former chairman, described rumours about the bank’s illiquidity as ‘totally ridiculous.’

Of course, there are times when the prudent thing for a chief executive to do is to investigate and confirm the severity of a situation before making a public report on the likelihood of the evolving situation affecting their businesses. In such cases, companies need to publicly acknowledge that their businesses are exposed to certain risks, disclose those risks in a responsible manner and then describe the measures that they are taking ensure that the risk remains manageable.

When companies do this, they must move beyond general descriptions like ‘we remain committed to creating shareholder value’ to stating the specific steps they are taking to retain confidence in their franchise during testing times. Such assurances may be:

1. ‘Last week, we set up a Committee headed by myself, the CEO, Jimi Latoye, the senior independent director, Nnamdi Ogugua, the chief financial officer, and the heads of our six business divisions, to examine our exposure to the oil and gas sector. We have also invited Pricewaterhouse Coopers, the restructuring experts, to do an independent review of all our flagship businesses, and the potential risks they would face in a downturn.’
2. ‘We have hedged over 65% of our exposure to telecoms companies, and we retain only the highest quality, most liquid collateral on our loan book.’
3. ‘We will be marking down our real estate assets by 45%, since that is what the market has priced similar assets on the average over the past three months. We remain committed to transparency and full disclosure of our risks to shareholders. We are confident that we have taken the right and appropriate steps in the circumstances. We continue to watch the evolving macroeconomic situation closely, and will respond to new developments accordingly.’
4. ‘Our stock market margin loans’ exposure is less than 3% of our total balance sheet. This represents a manageable and non-material exposure compared to our total asets and capital base, which stood at N488 billion naira on December 31, 2008. Our Credit Risk Review committee takes a very responsible view of the assets we hold as collateral for these loans, and are confident that we hold senior quality and liquid assets to cover our exposure. The companies whose securities we hold are well run, solid companies with superb, untanished prospects in any term, and which, elsewhere we know very well as many are our banking clients. We are convinced that the acute drop in stock prices has affected these exemplary companies for the simple reason that their securities are the most liquid, and in conditions where cash is king, the best will be the first to go. Regardless, we are convinced beyond the pale of doubt that our exposure is well within the limits, and is no cause for anxiety.’
5. ‘The recent drop in cement prices reflects larger events in the macro-system within which our business operates. We are not immune to these. According to an independent report, The Nigerian Housing Market 2009-2012, jointly published by the Nigerian Institute of Estate Surveyors & Valuers and the Nigerian Institute of Quantity Surveyors last week, the construction of new buildings is projected to decline 12% during that period. As early as March 2008, we had anticipated this contraction in demand, and have made good progress in paring our risks. In December 2008, we completed the sale of our Kaduna plant to our Chinese partners for seven times earnings, a good deal in any market, and we successfully renegotiated our short- and mid-term loans with our banks. We intend to move up the value chain by investing in concrete processing plants, which we are already well advanced in, because we expect that sector to grow by 40% over the next four years. We are reasonably confident that our risk downside is limited, and manageable.’
6. ‘In recent weeks, we have received a number of enquiries about our exposure to consortia and companies which partook in the privatization process. We have already issued a press release disclosing our exposure. We shall reiterate on those again during this conference, and would be glad to take your questions at the end. In the time being, we have also set up a website, www.disclosure-credibility.com, with an extensive library of documents and SEC filings on our loans to companies involved in the BPE privatization process between 2000-2007. Our corporate website, www.globalbanknigeria.com, remains a good source of information on our institution. As always, if there are any questions that you feel have been left unanswered, please feel free to contact our investor relations team.’

Companies need to recognize that in the current situation, only those companies that institute a deliberate policy of updating markets on their position will earn investor trust, which can be the equivalent of real capital, when any guerilla narratives (rumours) are spread about it or its peers. This brings to the forefront the collateral damage that companies can suffer when their any of their peers (companies in their business line or wider sector) are under a cloud of uncertainty over loans or bad investments.

Only proactive value communications that says ‘This is us. This is why we will ride this storm through and come out stronger. This is why we are different from our peers. This is why our customers still bring us their custom. This is why our people, from the youth corper intern to the heads of our regional offices and senior management believe in the future of this great company.  These are the manifold reasons why this business still has its best days ahead of it,’ can differentiate one business from another. You can’t fake that kind of good copy. The message has got to be authentic. There can be no question of plagiarism in engaging at that level.

Importantly, it is no enough to just ’say’ these things. Companies need to be consistent, credible, responsive and transparent in their messages. If there is any incongruity between the things that they are saying and what they are doing internally, which goes back to their core values, then sooner rather than later, a disgruntled employee or customer will bring that to public attention. Before the company knows it, a single voice of discontent can quickly become a chorus of dissatisfaction drowning out its value messages.

Let us now look at what companies can do to put in place a pro-active value communications system in place during the downturn.

1. Do a business wide assessment of the risks the company faces by:

• Making sufficient allowance for a significant softening of demand, not just a token decline.
• Realizing that there will be tight limitations on their corporate financing options.
• Reviewing how the economic conditions will affect their current but uncompleted investments and projects, which were started in more optimistic circumstances.
• Examining how the slump will affect the sector as a whole: demand, supply, peers.
• Getting a clear picture of their cash cushion and burn rates.
• Understanding how the slowdown will affect their clients, customers and suppliers by canvassing feedback and doing their own investigations.
• Considering opportunities and merit for consolidation among peers.
• Developing a clear and candid picture of any deteriorating conditions in certain parts of their business that may require closure or sale at a big discount.
• Admitting that some difficult decisions will be taken such as layoffs, branch and plant closures.
• Preparing for internal sabotage and leakage of sensitive information by having water-tight internal and crisis communications plans in place.

2. Communicating core messages and engaging key stakeholders by:

• Set up a communications plan for broad key stakeholder groups (investors, suppliers, customers and most importantly, staff), then within those groups, segment into micro-verticals that require targeted messages. The recent examples of some Nigerian banks which reported that laid off employees had started a campaign of calumny against them shows the importance of working out a communications plan for each group. The un-coordinated response of the banks via SMS messages, often with incorrect spellings and grammar with no contacts for further information or feedback, shows the confusion that a knee-jerk response can produce, since recipients of the message did not know how to get further clarification on the issues and insinuations, which fuelled the uncertainty even further.
• Taking the initiative by responding to potential questions before alternative answers are presented by revisionist guerrilla narratives.
• Holding meetings with key stakeholders, since ‘investors’ are not an exclusive group, and many employees, customers and partners may be shareholders or belong to affinity groups that shareholders belong.  This is the best time to get on the road to see shareholder groups, asset managers and stock brokers across the country. The panic is being fed by lack of information. It is not enough to issue a statement in the media. Face-to-face meetings with investors are a unique opportunity to showcase the company’s achievements, discuss its situation and give direct answers to any investor concerns. In all these encounters, even while keeping an eye on the share price, executives need to remember that the business, not the stock price, is the story. CEOs must focus listeners’ attention on the balance sheet because that is what they can control. The share price is beyond their control.
• Giving a score card on the results of their mid-term strategy started three to five years ago and where they are on that road map. For instance, a bank could say:

In 2003, we made deliberate steps to become a top-three bank for businesses with annual earning between N250 million and N3 billion in six years. At the time we were rated 16th among 25 banks in the country. We developed products and services to capture that slice of the market. Today, five years later, we are proud to say that we control 26% of that segment. In 2002, we took a decision to become a top- five bank in servicing salary earners with incomes of between N10 million and N45m within five years. At the time, few saw the implications of a rapidly growing middle-class on the savings habits and aspiration cultures of this group. Accordingly, we created products responsive to their needs, and today, we are ranked number two in that segment. These are just two examples of playing fields we chose to compete in, and where we have excelled. We remain one of the most attractive employers for top talent, across all sectors, and we have one of the lowest customer churn rates in the sector. We have achieved these by earning the trust of our customers, motivating our staff and staying committed on the original vision of the founders of this bank: to become the number one choice for your saving and financing needs.

• Providing compelling and cogent reasons supported by evidence on why the company’s strategy remains valid and credible. Here, companies need to be balanced, and not over promise on a strategy’s potential because in the current conditions, even the best strategies may not bring in all the goods.
• Focusing their messages on the customer-client and not on their own organization-centric  achievements. This means less of ‘Nigeria’s biggest bank’, ‘  and ‘Best investment bank on the continent’ and more of ‘The number one bank for small and medium business loans’, ‘The first choice for easy credit’, ‘Times have changed, but we haven’t', ‘Committed to supporting businesses in difficult times. That’s what we’ve been doing for over 40 years.’
• Showing areas where they are beating their peers, saving more than their peers, being more prudent in the management of resources than their peers. Companies need to highlight the good points, even as they are candid on the road bumps.
• Being proactive on the internet and media with a regularly updated website, participation on news site comment areas, op-ed pieces by senior executives, television and radio show appearances, monitoring and responding to issues that directly or indirectly affect the company or its peers and sector on Nigerian internet forums, while identifying that themselves as representatives of the company. At all times, the message should be balanced, and if need be, self-critical on where mistakes were made, so that listeners and readers do not tune off or dismiss these messages as more marketing hype.

When one thinks of it, crisis situations also present opportunities. Well-managed companies that seize the day in the circumstances by communicating what they are doing to shield themselves from the turmoil will come out on top. When a well run company’s stock price drops in value to extreme discounts, it can shake the faith of investors, customers, suppliers and employees. It also poses risks to the long-term growth of the capital markets, which is fundamental to company’s access to the resources they need to invest, grow, provide jobs and services to society. Companies owe it to their key stakeholders not to fail in this responsibility. Before the going gets tough, the tough need to start talking.

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