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

Scheherazade in the Boardroom: Story-telling for the Capital Markets

This week in Alrroya Aleqtissadiya, the United Arab Emirates (UAE) business and financial daily, I discuss the importance of story telling for companies' investor relations efforts, especially during phases of uncertainty.

The numbers have gone dumb. They can no longer speak for themselves. There used to be a time when the numbers were the only game in town. In those days, they always came in ‘in line with expectations.’ Like guided missiles, once they were launched, they could take care of themselves. The results moved like clockwork and analysts could predict earnings right down to the decimal point. Those were the good old days. It is no longer the case. These days the numbers need crutches to walk with. These supplied metaphorical supports are the context of business performance provided by company management.

For a long time, the Management Discussion & Analysis (MD & A) found in annual reports was dismissed as a lightweight, feel-good appendage which most serious readers of reports hardly bothered with. It was seen as another opportunity for the CEO to pat his executive team on the back for doing no more than riding on the crest of the economic growth wave. Within the same sector and capitalization group, it was hard to tell one MD&A from the other. Readers who skipped this section did not feel that they had lost anything. After all, the numbers in the Financial Statements section had a voice of their own.

In the past two years, as company results have somersaulted and whipsawed those numbers have changed in character. They used to be reliable, steady and undramatic. Instead, words like ‘unparalleled,’ ‘unprecedented,’ ‘turbulence,’ ‘turmoil,’ ‘panic’ have become part of the corporate lexicon. In fact, these descriptives have become so common that they have attained the status of cliché. One hardly reads an earnings release, Chairman’s letter or MD & A that does not have a generous sprinkling of these classifiers. But waving these narratives away because of the proliferation of these terms would be missing the point.

A close reading of these missives shows that companies are paying more attention to explaining the parameters of performance. Executives freely admit that under normal circumstances, their recent performance would be intolerable but given the unique circumstances of operating businesses in the past two years, such dismal results should be, if not excusable, at least, understood. Hence, the importance attached to the narratives underlying these numbers. When the results were good, it was alright to serve up fluff. Now, that would be suicidal.

Smart companies are seizing every opportunity they can to explain what they are doing to ride out the economic storm. By ‘smart’ I mean companies that recognize that the competition for capital has gotten fiercer in the past two years. Disclosure is no longer a sop offered to markets under regulatory pressure, it has become the path to survival for many corporates. Tighter liquidity and lower risk tolerance means that while investors may forgive poor results they want to know what companies are doing to staunch the bleeding. Clearly, talk is good.

The question then is whether this practice will survive when the good times return. There are several good reasons why companies must not revert to their old ways. Let us briefly look at three.

First, the notion that legalistic compliance with regulatory standards is sufficient to satisfy investors’ requirements is outdated. Investors expect a deeper level voluntary engagement which does not come across as something written by the legal department or prepared from a template. Warren Buffett’s letters to Berkshire Hathaway’s shareholders is a beacon of best practice that more companies need to adopt. The CEO needs to carefully think about the most questions that she would like to have answered if she were a non-insider shareholder in the company. After compiling this list, she needs to respond to each question with the transparency that she herself would expect if she was an outsider.

Second, investors are beginning to look beyond the recent share price movement and financial statement to the dynamics driving a business and the sustainability of its business model. This creates an opportunity for companies to educate the investment community about the drivers of their business. It also allows them to shape the criteria that investors use for judging them. A proactive value communications effort can have a major influence on how investors discount a company’s future earnings. However, rather than being generic in their macroeconomic review, companies need to focus on those factors that had the most impact on their business performance.

Third, these management narratives are becoming the equity market brand of companies. In effect, they are a type of corporate logo in prose and as such, deserve the same quality of attention companies give to designers working on a visual design for the company. The economic meltdown has shown how the markets can react differently to the same woeful results by two companies in the same sector, punishing one severely and letting the other off lightly. In each case, the narrative was the key.

Admittedly, the crisis has come and is on its way out. But there are many lessons about investor expectations that companies should pick from it. Unless they do, they will have been guilty of the same crime that Talleyrand, the great diplomat, accused the returned Bourbons of: ‘they have learned nothing and forgotten nothing.’

The original article can be read here on the Alrroya Aleqtissadiya website.

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