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Substance over Style: An Advanced Learners’ Guide to Communicating in the Downturn

At the best of times, most companies on the Nigerian Stock Exchange put up a dismal performance at communicating with the investment community. The reverse in economic fortunes has exponentially amplified those failures. This week in Street Talking on NEXT I make a few recommendations for issuers on what they need to be telling investors at this time.

Bruce Wasserstein, the late chairman of Lazard, the storied investment bank and dealmaker extraordinaire, used to say that it was the lot of the corporate advisors to offer a lot of advice to companies for free, which can be a thankless task. The double facts that the counsel was valuable and free did not mean that the companies would take it. Companies are hard-wired to discount pro bono recommendations. Bearing the odds in mind, here are some suggestions to companies on the Nigerian Stock Exchange on keeping investors engaged through the recession. Actually, investors might also find them useful in judging companies.

Let me begin by saying that companies and investors need to perish the thought that there will be a flight to safety. It is a material misapplication of meaning. The origin of the term is derived from the preference for government issued securities with reliable coupons over volatile equities. Therefore, it is misleading for companies faced with an unprecedented economic uncertainty to pretend that they will be beneficiaries of a flight to safety.

Last month, an analyst note from Vetiva, the securities firm, commenting on the Q1 2009 results of a leading mid-tier bank observed that the bank was poised to take advantage of the flight to safety in customer deposits. While the bank’s management should be commended for navigating treacherous waters without capsizing its vessel, it is a misnomer to describe a pass mark in the Central Bank special audit examination as a certification of ultra-safety for revenues, profits or dividends.

Companies run a major reputational risk when they set expectations that they will be hard pressed to meet. The only thing worse is when companies allow others to set performance expectations for them. In either case, companies owe it to investors to set the records straight if they hope to build and maintain street cred, an asset as liquid as any on their balance sheets.

It beats the imagination that in the past year, CEOs of fewer than ten percent of the companies on the NSE have granted media interviews outlining their response to the crisis. For unfathomable reasons, even these interviews quickly turn to artless ego-profiles. In a period when the share price has fallen by more than fifty percent and write-downs are in the tens of billions, why would shareholders want to know how the CEO met his spouse or his preferred summer holiday destination? It is not only an insult to shareholders but an indictment of C-suite values. While Rome burned, Nero fiddled.

Here are my suggestions for companies that want to establish street cred in the economic downturn. I have listed them in five consecutive steps.

First, companies should be talking more about the business environment in which they operate with adequate emphases on the unique challenges, threats, opportunities and constraints faced by their sector. The latest financial result is just one data point and a lagging indicator at that. Companies should proactively embed that performance in a tracing narrative. They should stop waiting until the results release date to talk about their operating environment.

Second, companies should be discussing their strategy for surviving and thriving in the inclement environment. The obvious vocabulary here should be cost-cutting, new business, client retention, cash management, strategic partnerships, business unit reviews (divestitures, spin-offs, sales, mergers, acquisitions) and increased investment. They should readily provide the convincing case for their choices over the alternatives. Targets should be time-linked and not open-ended. Furthermore, instead of broad statements like ‘we are looking at a number of opportunistic acquisitions’, companies should be clear on why any contemplated action is consistent with the long-term strategy and how soon it expects to complete a transaction.

Third, companies should be clearly state how they are executing on the strategy and measuring progress on that scale. Again, they must move beyond generalizations in updates to specifics. Execution is king. Since the whole idea is to make the investment community reach the same conclusions on the company’s prospects as the board, companies must provide them with the same key inputs. Garbage in, garbage out.

Fourth, companies need to be frank about their estimates of the duration for which the trough season will last and when they expect returns from their strategy to begin to pay off for investors. It is plain deceitful for companies to give the impression that recent write-offs are the last piece of bad news they will hear. There is more where that came from. This downturn will not be wished away. Long-term is the new short-term.

Finally, companies should be seizing every opportunity they can for face-to-face meetings with shareholders, analysts and the financial press. Management should be going on road shows to cities with major shareholder populations and hosting one-on-one meetings with significant holders of the stock. Of course, management time is scarce and the logistics are costly. But companies need to ask themselves this: ‘expensive in relation to what?’ As the saying goes, penny-wise, pound- foolish.

The original article may be read here on the NEXT website.

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