Tag: Stock Market

How CEOs should engage with Analysts.

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Our latest research provides clear guidelines to help CEOs create more valuable Analyst relationships.

Research has consistently confirmed that perceptions of Corporate Leadership is the No.1 most important influence on Investment Decisions and Share Valuation.

But our most recent research confirms that CEOs do not control the management of Analyst relations with the same discipline as they manage many other – less critical – parts of their executive responsibilities.

We carried out a series of confidential interviews with a representative sample of Buy-Side and Sell-Side Analysts who cover Asia-based Corporates.

Our aim was to identify the most persuasive influences that shaped their positive and negative impressions of CEOs.

And we found that Analysts were consistent and crystal-clear about their requirements from CEO engagement:

10 Principles For Effective Analyst Engagement

Throughout all our interviews there were 10 core principles that consistently created a perception of ‘CEO Added Value’ – regardless of sector.

Different Analysts gave different priorities to each characteristic, but the core guidelines were always the same.

These principles are detailed here, with the relative importance of each principle ranked by qualitative evaluation:

  1. Strategic Clarity

Most important of all, Analysts gave a much higher value to CEOs who were able to communicate a clear, compelling rationale for their Strategic Decisions.

This Strategic Clarity demands a clear, consistent description of their primary Corporate Objective, a persuasive articulation of their Strategic Options, an Option Analysis including their respective upsides and downsides – resulting in a clear, powerful support for their chosen Strategic Direction.

Analysts attributed a significant Premium to those CEOs who delivered impressive Strategic Clarity – and a significant Discount to those who were less effective.

  1. Industry Vision

A CEO’s Vision for the future of their Industry in the mid- and long-term is absolutely fundamental.

Vision determines the potential value of the CEOs entire Business Strategy. It must shape every decision, and every value judgement.

Analysts are obviously specialists in their sector, and they encounter many different Visions of the future, and have access to all relevant data on which to make their evaluations.

Every CEO must therefore be able to clarify a persuasive view of future trends, threats, opportunities & implications, based on facts, presented with power and passion.

  1. Honest Dialogue

Analysts place enormous value on having access to open, one-on-one dialogue with CEOs.

This personal dialogue and relationship shapes trust, confidence and empathy – and enables a clearer understanding of the CEOs Vision, Strategy and Issues.

This dialogue must always be informal, unscripted, one-on-one contact – preferably face-to-face, definitely on con calls.

The CEOs who provide the most personal, unscripted access are invariably the ones who are most confident in their own abilities and decisions, and – consequently – the ones who command the highest ‘Leadership Premium’.

  1. Consistent Delivery

On many occasions, Analysts have found themselves impressed by a CEOs ability to articulate a persuasive Business Strategy based on a convincing Industry Vision – only to hear of inconsistent actions or directions with little advance notice or explanation.

This creates confusion and doubt.

Analysts fully appreciate the need to move fast in order to seize opportunities or mitigate threats.

But they frequently hear of Management Changes, for example, with no warning or explanation.

Not only does this make them doubt the decision, but it also undermines their CEO confidence.

Analysts have most confidence in CEOs who deliver management actions that directly relate to their Vision and Strategy.

And if there are necessary variations, they value advance notice and a persuasive explanation.

  1. Future Focus

The more obsessed a CEO sounds with their Short-Term results, the less confident Analysts feel about their long-term potential.

Institutional investors assign premium value to Corporations with CEOs who have identified a persuasive Industry Vision, a powerful Business Strategy – and the Management Capability to deliver.

The more focus placed on Short-Term results suggests Short-Term problems and Short-Term focus – neither of which, obviously, lead to premium Valuation.

  1. Conscious Transparency

In conversations with Analysts, CEOs often try to avoid, minimise or dismiss developments which could threaten their Vision, Strategy or Plan.

That never works.

It often makes things worse.

Analysts give much more respect to a CEO who is both alert to potential new threats and challenges, honest regarding their implications, and prepared for response.

  1. Competitive Respect

According to Analysts, many CEOs are hardwired to either dismiss the strengths of competitors, or to diminish their threat.

Obviously, Analysts are specialists in their sectors and have a full understanding of the competitive landscape. They are not fooled by a CEOs feigned confidence.

Analysts therefore place a high value on CEOs who are honest, open and respectful.

And, not surprisingly, they have greater trust for CEOs who exhibit a thorough awareness of their competitors’ strengths and threats, because they will be better prepared to defend against them.

  1. Critical Visibility

One of the most common and criticised characteristics of CEOs, it seems, is to ‘disappear’ when there are significant problems, issues or challenges for their business.

When the going gets tough, many CEOs go into hiding.

Yet these are precisely the times when CEO contact and dialogue is most critical and most valuable.

Challenges and Crises are the ultimate test of Vision, Strategy, Transparency, Authenticity and Capability.

These are opportunities to add enormous value to the CEO brand.

The more a CEO hides and avoids contact, the worse the impression of their courage and competence.

And the more they avoid direct dialogue, the more they are missing a valuable opportunity to engage, impress and add long-term personal authority.

  1. Financial Credibility

Many CEOs are more comfortable talking about Vision, Strategy, Management Actions and broad Financial Issues – but are less comfortable leading discussions that drill down into Financial Details.

As a result, they often ‘hide behind the CFO’, leaving responsibility for communication of all financial details to their CFOs.

Analysts, however, have far greater respect for CEOs who are confident debating the numbers, convincing in financial discussions.

This doesn’t mean that they have to lead all finance discussions – of course not.

But they must be happy to lead discussions about the most important financial issues, exhibiting a confident grasp of the most critical details.

  1. Corporate Consistency

It’s critical for Analysts to see the CEO’s Vision and Strategy communicated throughout the Corporation.

The Leadership team must all be aligned, consistently communicating the same principles as their CEO, and presenting Corporate Actions in the context of the Company’s Vision and Strategy.

This obviously applies to direct Analyst Communication, throughout Earnings Calls, AGMs, Conferences and Investor Websites – but also throughout all internal and external messaging.

Analysts have witnessed several occasions where the CEOs Vision and Strategy is not reflected in further Management Dialogue or Corporate Communications.

The result is simple and profound:

CEO Authority and Credibility is immediately undermined, and Market Valuation is eroded.

Analyst Engagement Demands CEO Dedication, Not Delegation.

All these principles are obvious and logical.

But it is truly amazing how often Corporate CEOs fail to follow them.

CEOs should manage their Analyst engagement with the same discipline and dedication as they manage their business.

They should not be led by their CFOs. They should not be led by their IROs. They must lead all engagement themselves.

Yet, precisely because it is one of the few parts of their role that they cannot delegate or direct, it is often one of the hardest for them to apply.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

What happens if you miss consensus?

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CFOs are obsessed with meeting consensus – so obsessed, in fact, that they are often willing to make decisions that could damage their company’s long-term performance in order to make sure they don’t miss it.

Yet research shows that the stock price of companies which employ earnings management to meet consensus perform worse in the following year than honest companies that miss consensus.

CFOs are obsessed with meeting consensus

Research by a team from Columbia Business School has found that most CFOs would choose to make decisions that could destroy corporate value rather than miss analysts’ consensus.

As a result, they would carry out earnings management to meet consensus – at the expense of their company’s long-term performance.

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For example, 80% of CFOs said that they would decrease discretionary spending to meet an earnings target – even though they accepted that such actions can destroy corporate value.

And 55% said they would delay starting a new project to meet an earnings target, even if such a delay can destroy corporate value.

Several interviewed CFOs candidly acknowledged that they have made real corporate sacrifices to hit an earnings target.

Is this obsession justified?

What proportion of companies miss consensus?

An analysis of 180,000 quarterly results over a 17-year period found that:

  • 13% of company results reported an EPS that met analyst consensus precisely
  • More than 25% of companies beat consensus by $.01 – $.03
  • Combined, this means that almost 40% of companies met or marginally exceeded consensus
  • Whereas just 15% of the sample missed consensus by $.01 – $.03

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So, if you miss consensus marginally, you are in the company of a small selection of poorly-performing companies.

And – to make matters worse – everyone will assume that you did everything possible to meet consensus but failed – creating doubt about your underlying corporate performance and management competence.

So what is the impact if you do?

What is the short-term impact of missing consensus?

In another analysis, a team from the University of Chicago School of Business found that:

  • Stocks of companies that hit consensus rose by 1.6% on average over the 3 months ending with the earnings announcement – reflecting investors’ response to management guidance and analysts’ forecast revisions made prior to the final results.
  • Those that missed consensus dropped by 5% on average.
  • Those that beat consensus increased by 5.5% on average.

Yet within those averages, there is a wide disparity

In fact, research also suggests that some companies get hit hard yet others are not affected at all.

What creates the greatest stock price declines after missing consensus?

Investors respond differently to earnings misses for different companies at different times. Some are punished severely while others escape unscathed. And, interestingly, the size of the consensus miss had only marginal impact on stock price movement.

The Chicago School of Business analysis found that two factors had the greatest impact on the stock price declines of companies that missed consensus:

  1. Weakness in Company Fundamentals

If the consensus miss is disclosed with a disappointment in sales, cashflow, margin – or with a downbeat management outlook – it invariably leads to significant loss of share price.

  1. High Growth Expectations

The team at Chicago ranked the companies that missed consensus according to their market-to-book ratio (the ratio of the forward-looking stock price to the historical-based book or equity value per share), and they found that:

  • Companies that missed consensus, but had low prior growth expectations, experienced a stock price decline of -3.6%.
  • Companies that missed consensus, and had high prior growth expectations, experienced double that decline: -7.3%.

In short, high-growth companies are hit twice as hard as low-growth companies when they miss consensus.

And overvalued stock is hit the hardest.

As a result, it is not in the interest of any company to employ earnings management that camouflages weakness in corporate performance.

In fact, research suggests that companies that are honest to the markets about their performance achieve superior stock performance that those which choose to camouflage corporate weakness with earnings management.

What is the long-term impact of missing consensus?

Sanjeev Bhojraj and a team from Cornell examined what happens to companies that miss the consensus estimate by a penny – without employing earnings management.

They identified such companies by tracking unusual changes in the major expense items that commonly reflect earnings management – accounting accruals, R&D, advertising expenses etc.

They found that manipulating companies that beat consensus received a temporary 3-4% increase in their stock price – but had lost it all by year-end.

But companies that missed consensus by one penny without manipulating earnings did not receive any decline in stock price in the short-term – and a year after the consensus miss, their stock price had increased significantly.

Honesty Pays

It is most likely that you will risk missing consensus sometime, if you haven’t already.

According to an analysis by Morningstar, for example, just 3% of companies have reported an increase in EPS consistently over a 10-year period.

And only 3% have reported an increase in free cash flow consistently over a 5-year period.

So you will probably miss consensus one day.

But earnings management can both damage your stock price and erode your corporate value.

As a result, rather than camouflaging weak performance under earnings management, companies are advised to communicate the issue to the markets with a clear plan to address the weakness.

If you deliver on that plan, your stock will emerge stronger.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

Is the growth of Passive Investing distorting stock prices?

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The extraordinary growth of Passive Investing in recent years has resulted in the main Passive Managers – BlackRock, Vanguard and State Street – becoming some of the biggest investors in a disproportionate number of company stocks.

Recent research identified the scale that these ‘Big Three’ Passive Managers now control:

BlackRock, for example, had a 5% shareholding (or more) in about two thousand companies in the United States – out of only 3,900 publicly listed U.S. corporations.

Which means that BlackRock holds 5% blocks in more than a half of all listed companies in the US.

Vanguard had 1,855 five percent blockholdings worldwide, of which around 1,750 were in U.S. listed companies – accounting for 45% of all US listed companies.

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Amazingly, the ‘Big Three’ combined constitute the largest shareholding block in 1,662 companies – or 40% of all listed companies in the United States. And their mean ownership accounts for more than 17.6% in each of these companies.

Within the S&P 500 specifically, the ‘Big Three’ combined constitute the largest owner in 438 of the 500 most important American corporations – around 88% of all member firms.

These 438 corporations account for about 82% of S&P 500 market capitalization.

This is an enormous concentration of ownership, a concentration that is at risk of distorting the stock markets, the investment industry – and the way that CEOs and Corporate Boards need to manage and direct the companies that they represent.

Because, unlike Discretionary Investors, Passive Investors neither measure nor trade stocks based on Company Fundamentals.

They have limited engagement with the companies that they invest in.

And when Activists get involved, Passive Managers support Activists in around 50% of proxy votes.

This creates serious implications that companies must respond to as a matter of urgency – and fiduciary duty.

For much more detail about “The Rise of Passive Investing – and how Companies should respond”, you can download a complete, complimentary copy of our latest Reputation Report on the subject by clicking here.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

How to protect your Share Price in a Corporate Crisis.

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Every Second Counts

Last year, an interesting article analysed Samsung’s response to the Galaxy Note 7 Crisis.

The conclusion was simple:

In a Corporate Crisis, the longer you delay, the bigger the cost.

The Historical Perspective

There are two famous and powerful historical examples that illustrate the point: Johnson and Johnson’s response to the Tylenol Crisis of 1982, and Merck’s response to their Vioxx Crisis of 2000.

Johnson & Johnson made the decision to withdraw its entire stock of Tylenol from shelves within just 5 days of discovering that a small sample of the product had been tampered with cyanide.

The company’s share price declined by 9.5%.

On the other hand, Merck took 1,065 days of obfuscation and regulatory negotiation between 2000-2004 before it eventually confessed to safety issues with its Vioxx pain drug and activated a global recall.

Throughout that 3-year period, Merck stock lost an enormous 46% of its value.

All the textbooks and PhD Theses use these two case studies to prove that fast actions reduce financial impact.

But do those principles still apply today?

Crisis Response Today

Several recent and ongoing Corporate Crises give us good opportunities to compare the impact of speed versus hesitation.

VW is an excellent, live example.

It took VW 476 days after the first evidence of its diesel emissions tests emerged in 2014, before it admitted that 11 million cars were actually equipped with illegal engine software.

Over that ridiculously prolonged period, VW’s share price collapsed by 45%.

Takata, the world’s largest suppliers of automotive air bags, took 194 days after the first report of fatal defects appeared in the New York Times in November 2014, before it confirmed the potentially fatal defects.

That was long enough for its share price to fall by 30%.

Despite all the hype, Samsung has actually handled its Galaxy Note 7 Crisis relatively well.

After first reports of its exploding problem emerged in September 2016, it took Samsung just 42 days to manage their way through 9 different phases of Crisis Management, resulting in the final closure of the entire product line.

The fall in share price was only 5%.

Target moved even faster in 2013. They told 40 million customers that their data had been compromised just 29 days after discovering the breach.

Their share price declined just 3%.

GM’s Mary Barra set a new standard in 2014. It took only 13 days for GM’s new CEO to admit to faulty ignition systems and start recalling vehicles.

As a result, GM’s shares lost only 6% in the next quarter.

On the other hand, Yahoo waited 55 days after discovering their data breach to tell 500 million customers in September 2016.

That delay could just have cost them US$5 billion of Verizon’s money.

The Speed of a Tweet

Social Media and Digital News make the need for speed greater than ever.

According to recent research by Freshfields Bruckhaus Deringer LLP, 28% of Corporate Crises have become international news within 1 hour.

Yet it normally takes companies at least 21 hours to formulate an official response.

And one year later, 53% of companies had not seen their share price regain pre-crisis levels.

So it’s truly amazing that companies like VW and Takata still think that procrastination can save them.

When it’s most likely to destroy them.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.

One thing that Investors can’t measure is worth 34% of the world’s Corporate Value.

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How you manage your Intangible Assets can transform your Market Value.

Last year, Ocean Tomo published an extraordinary analysis which concluded that Intangible Assets accounted for an extraordinary 84% of Market Value on the S&P 500.

Tangible Assets accounted for only 16%.

Yes:

The entire Fixed Assets and Current Assets of the S&P 500 accounted for less than one fifth of Market Capitalisation.

I know that ‘Intangible Assets’ includes a large basket of items, but these numbers are still extraordinary.

IFRS 3 determines that Intangible Assets must be disclosed under five basic categories: Marketing-Related, Customer-Related, Contract-Based, Technology-Based and Artistic-Related.

But what’s even more interesting is this:

According to GIFT 2016, published by Brand Finance in partnership with the Chartered Institute of Management Accountants, the largest proportion of Intangible Assets are not disclosed at all.

They analysed 57,000 companies domiciled across 160+ jurisdictions with a total Enterprise Value of US$89 Trillion.

Their Global Analysis had different results from Ocean Tomo’s, which had been limited to the S&P 500 – but the findings were equally extraordinary.

They found that Net Tangible Assets account for US$46.8 Trillion – or 53% of Total Enterprise Value.

Disclosed Intangible Assets, including Goodwill, accounted for almost US$12 Trillion – or 14% of the world’s Total Enterprise Value.

But ‘Undisclosed Intangible Assets’ accounted for a massive US$30.1 Trillion – or 34% of the world’s entire Enterprise Value.

Let me just confirm what this means:

More than one third of the average Company’s Valuation is created by forces that never appear in their Financial Reporting, and can’t be measured by Market Analysts.

Reputation is a Strategy Consulting Firm that provides personal counsel to Asia’s leading CEOs, advising them how to build and protect their company’s Market Value in the new world of business – and the new age of investing. 

If you would like to discuss how we can help you build and protect your company’s Market Value, please connect with us via our website or by email to Connect@TheReputationPartnership.com.