Misperceptions and misunderstandings are often the biggest barrier to achieving a fair valuation. To enhance shareholder value, companies must address misperceptions and ensure the market fully understands their business. Clear communication, then, is the first step in the Premium Valuation Framework. However, it is also the most difficult aspect for companies to address. This is because management teams suffer blind spots due to their intimacy with the business, unique language, and inability to get honest market feedback.
The Perception Audit
The first step in achieving clear communication is for management to assess its own blind spots. A perception audit is the right tool to determine what misperceptions exist on both sides of the capital markets. An independent third party enables the perception audit to solicit honest and unfiltered feedback on an anonymous basis. Market Climber recommends that all mandates begin with a high quality quantitative and qualitative audit. In addition to identifying perception gaps, a perception audit should set a baseline of investor relations performance. This can be measured annually to determine how the investor relations program is improving. There are always misperceptions about a company that can revolve around any of the following:
- The basic nature of the company’s business
- Commercialization pathway
- Growth strategy
- Acquisition strategy and source of synergies
- Capital allocation
- Management credibility and competence
- Sustainability performance
- and more…
Simplify the Story
When we talk about a clearly understood story, we are talking about a simple story. It is no coincidence that the most powerful and broadly remembered stories are simple. When was the last time you heard the story of the three little pigs? There are plenty of resources available on how to write and communicate better. The resources below can help authors improve their delivery of key information:
- Why Business People Speak Like Idiots – Fugere et al.
- The Elements of Style – Strunk and White
- Style: The Basics of Clarity and Grace – Williams and Colomb
Less is More
Less is more when communicating to the capital markets. Management teams often talk themselves past a sale by going into far too much detail. Even if you don’t manage to turn your audience off, the more detail you go into, the less bandwidth your audience has to remember the key points of your value proposition. Remember that the longer it takes you tell your story, the less impact it has, and the less your investors will remember.
Drop the Jargon
Misperceptions are commonly rooted in the jargon, acronyms, and technical terms that are unique to a company and management team. We help companies strip away jargon and translate their story into lay terms. We then use this to refine their messaging, reporting, and investor communications without drowning the audience in detail. As a result, communications are accessible and easy to understand for generalists in the capital markets.
Focus on the Basics
Company’s can start by clearly articulating:
- What problem their company solves or what need it addresses
- How big the market opportunity is
- Why their company is unique or what their competitive advantage is
- What their vision for future success is
Once the story is simplified and focused, company’s naturally migrate away from boilerplate language and laundry lists of bullet points. Instead, communications zero in on the most relevant aspects of their story and performance.
Select the arena
Companies can deliberately define the arena that they compete for capital in. This is one of the most overlooked aspects of investor relations. Management teams often miss the opportunity to select a favourable arena due to their own fixations. Even once an arena has been deliberately selected, external influences can pull a company off message. Management must constantly guard themselves from distractions such as a competitor’s valuation and trendy fads. Consistency is the key requirement to maintain the appropriate frame or lens on the company’s performance for the capital markets. Just like a marathon runner that decides to go toe to toe with a boxer. Or a sumo wrestler that competes in a 100 meter sprint. Champions become losers when they choose the wrong arena.
Report Using Clear Language and Scorecards
Report in a way that is accessible to the lay person without the use of jargon, lingo or legalese. In addition, if the way a company consolidates its financial information is confusing, or if it diminishes the transparency of its operations, the company will only succeed in damaging its credibility and reputation.
The report should be a story
Good reporting should seamlessly integrate financial results with the company’s operational narrative, strategy, and five year plan. This requires investor relations to work closely with management, finance and operations to ensure everything hangs together. However, the more an organization operates in silos, the more difficult it is to build the quarterly narrative. Ensure your investor relations team has maximum access to the operational information they require to do their job.
Reporting that is cryptic or makes a company’s operations an unpredictable black box will impair the company’s credibility. Every company has information it cannot disclose for competitive reasons. Be sure to strike a fair balance between helping investors understand the company’s performance and keeping competitors at bay. A company with unpredictable / indecipherable financial performance will trade at a discount, and their cost of capital will be higher than necessary.
Scorecards are a great tool to focus the market on a company’s key performance metrics. Naturally, these metrics should be built around the levers that management has at their disposal to create value. Many management teams are reticent to provide the market with this additional level of accountability. However, while they can be scary for management teams to publicly deploy, they also create a high degree of trust, credibility and confidence. There is also no better way to deliberately frame a company’s performance for the market.
Whether it is Management’s Discussion and Analysis, the news release or a webcast deck, reporting should be structured so that the most important information is in the front and the details are in the back. Start with the big picture first before getting into the specifics. While the structure of reporting should remain consistent over time, it should not be regurgitated boilerplate. Every quarter is different so the story must reflect this.
Expectation is the root of all heartache. Investor relations can enhance shareholder value by using every tool at its disposal to manage capital market expectations. If your company doesn’t provide guidance, it can help to point your investors to publicly available and reliable macro-economic statistics that serve as forward or real-time indicators of your operational performance.
Management should set realistic operational and financial milestones. Then, use the scorecard mentioned above to consistently measure the company’s progress against these milestones regardless of success. It should go without saying that a company’s guidance should be conservative. Investors prefer it when companies under-promise and over-deliver.
The Transition to the public markets
Management teams that regularly use technical language with specialist investors often struggle with the public market. This includes private companies backed by venture capital and private equity. It also includes public technology and biotechnology companies that deal with an ecosystem of specialist investors. To expand their investor base (and valuation), companies should work to appeal to the broader base of generalist investors in the public markets. While generalist investors might be less patient and require clear communication, they are the key to mitigating the risk of being held by a small group of specialists.