The Seven Deadly Sins of IR

Market Climber helps companies understand the unwritten rules of the capital markets and avoid the investor relations mistakes that can damage their reputation and access to the capital markets

The Seven Deadly Sins of IR

The Seven Deadly Sins of IR 1024 576 Investor Relations - Market Climber Inc.

The Seven Worst Investor Relations mistakes Made by Executives

It is hard enough for companies to cultivate the crucial relationships they need. Yet, all too often, management teams damage these essential relationships by committing the investor relations mistakes we discuss below. We call these common investor relations mistakes the seven deadly sins of IR. After connecting with the capital markets, building broker-dealer support and analyst coverage, don’t burn your bridges with the following:

Condescension

Condescension in any setting can kill a relationship. But this is especially true when addressing factual discrepancies with analysts and investors. While factual errors can be frustrating, management teams need to remember the pressure analysts and investors are under. Analysts today commonly cover more than 20 companies, many of which report at the same time. Now imagine an analyst invests the time in their 90-hour work week to comb through your public disclosures, update their financial model, and write a report… but they get something wrong. A management team that elects to condescend to an analyst in this moment seriously jeopardizes the relationship.

Don’t go down the road of condescension. Instead, reach out with kindness and respect with a desire to educate. And be thankful to your analysts and investors for their willingness to engage on the issue.

Petulance

A good analyst will update their recommendation based on a balance between the performance of your company and the performance of its shares. If the value of your shares begins to outpace the value of your company, then an astute analyst should put a “sell” or “hold” recommendation on your stock. Period.

Now, if you go and throw an undignified fit and act like a cry baby when (not if) this happens, you can do serious long-term damage to your analyst relationships (Word gets around). Most of the time, if you have a good relationship with your analyst, they’ll give you a heads-up outside of market hours before their report goes out. If their recommendation is supported by the facts be sure to thank them for the heads-up, stay calm, and carry on. If it’s not supported by the facts, then kindly and professionally point out the discrepancy with supporting evidence that is publicly available.

Mystery

If your disclosures and reporting make your business difficult to understand, it will make it more difficult to garner research coverage from the sell side and investment from the buy side. Many companies claim that their lack of transparency is meant to protect competitively sensitive information. That may be. But whatever the reason, if your financial reporting is indecipherable, you will trade at a discount, and your cost of capital will be higher than necessary.

Instead, provide your investors with a clear story, a long-term plan, and measurable milestones.

Selective Disclosure and Indiscretion

Investors and analysts will regularly ask questions that, to answer, would require management to reveal material undisclosed information. Under no circumstance should management provide this information. The correct response is always: “We have not disclosed that”. However, to correctly identify these situations requires intimate knowledge of the company’s disclosure history (including news releases, quarterly reports, information circulars, annual information forms, etc.). This is where an investor relations professional can intervene to protect the CEO/CFO before they unintentionally selectively disclose something material. Managers that feel they are close to the line can also respond with “I am not sure if we have disclosed that… let me check and get back to you”.

Engaging in selective disclosure:

  • Restricts legitimately managed funds from trading. Until management properly discloses the material information, the fund is stuck with their position. Creating a stuck-holder out of a stockholder is likely to draw the ire of the fund’s risk committee, and can result in an exit or a significant draw down in their position.
  • Impairs management’s credibility and harms the company’s reputation.
  • Can result in significant fines and negative publicity. Securities commissions have fined companies millions of dollars in highly publicized rebukes.
  • Can jeopardize careers. While no one is likely to go to jail, securities commissions can impose administrative penalties that can imperil your present and future employment.

A Note About raising capital

Another thing management should be discreet about is their intent and timing to raise capital. If institutional investors become aware that a company is raising capital in the near-term, demand for a company’s securities in the open market can dry up. Investors will wait for the new offering because they will likely be able to buy the block size they are looking for at a discount to market. Paradoxically, management should also never publicly rule out the need to raise capital in the future. Doing so essentially tells the sell side that they will be unable to generate a return on the services they are providing.

Promotion

The golden rule in the capital markets is to under-promise and over-deliver. Promotion, therefore, is seen as one of the most deadly sins.

Credible CEOs and CFOs never talk about:

  • Their company’s future share price.
  • How undervalued their company is.
  • Their value relative to their peer group.
  • The analysts that are going to launch coverage on their company (before they officially launch).
  • Their predictions on what their analysts’ recommendations and target prices will be.

Never mind the liability created by any of these actions, acting in this manner is detrimental to management’s credibility. Such proclamations will succeed only in alienating both the sell side and the buy side.

Hyperbole

Another area of promotion to be mindful of is the use of hyperbolic language. If you are going to say something over-the-top like “We are the world’s best…”, you better have bullet proof evidence to back-up your claim. And even if the claim is bullet proof, you should acknowledge the over-the-top nature of what you’re saying and immediately provide backing evidence.

Ultimately, the most important function of investor relations is to manage expectations appropriately. Pumping up expectations to unrealistic levels will only put a company and its management team in a penalty box that is difficult to exit.

Exclusion

The banking teams at many broker-dealers will enthusiastically work their fingers to the bone for a company. Excluding that broker-dealer from your syndicate, or giving them an insulting percentage when raising capital, will seriously dent their enthusiasm. In fact, it is very possible that you could lose the support of that broker-dealer for good.

An extreme example of exclusion is raising money through an un-brokered placement. While there are times that a company has no other option, an un-brokered placement hurts everyone on the sell side. It also hurts the company doing the un-brokered placement because the sell side will be very reluctant to allocate any more resources to them.

Here are a few more behaviors that hurt sell side relationships:

  • Excluding broker-dealers that provide research coverage from institutional marketing.
  • Threatening to scuttle a fully marketed debt or equity offering.
  • Undermining your broker-dealer by mishandling roadshow commitments.
  • Utilizing an investor relations firm that competes directly with the broker-dealer.

Avoidance

If your company has just released bad news, you should get out in front of it. Meet with your investors and provide them with the context they need to truly understand what is going on. Unfortunately, many companies burn their bridges by avoiding their investors during challenging times. Again, once an investor puts a company in the penalty box, it’s very difficult to get back on the ice again.

A Final word on Investor Relations Mistakes

Misperceptions about the capital markets are often the root cause of these investor relations mistakes. Management teams should not allow the natural tension that exists between the interests of broker-dealers, investors, and their company to devolve into resentment. Broker-dealers provide research coverage, access to capital, and bring forward accretive M&A opportunities. Investors provide capital for management to allocate. By better understanding the role that each segment of the capital market plays, and their underlying interests, executives can avoid these errors. Management teams should embrace the various segments of the capital markets as the critical resource they represent to public companies. 

The common mistakes described above negatively impact investor relationships and shareholder value. That said, many of these mistakes are not covered by formal rules and regulations. Unfortunately, many of the rules are unwritten, and the consequences to companies that break these unwritten rules can be severe. Market Climber helps management teams understand the unwritten rules of the capital markets and avoid its many traps.