Companies are facing a double whammy in shareholder communications. Volatile markets mean more questions than ever before from shareholders, and Reg FD brought new restrictions on how to answer those questions. Keeping in compliance while being responsive requires a game plan.
Volatility in financial markets leads shareholders to ask senior executives pointed questions about company performance and operations. The challenge is to anticipate shareholder concerns and proactively address them without running afoul of the SEC.
Last year, Daisytek International Corp. faced a mini revolt among a small group of shareholders. The wholesale office supply distributor was looking to bolster its sagging stock price by spinning off one of its subsidiaries, a move that was opposed by some of the hedge funds that held stakes in the company. The hedge fund managers thought Daisytek was vulnerable to a takeover by another company a situation they welcomed as an opportunity to get out of the stock. Because they expected the spin-off to dim the prospects for a takeover, the hedge fund managers came out against it in a series of media interviews.
Daisytek senior management countered by getting its side of the story out. "We decided we needed to talk to major shareholders one on one to explain our strategy for the company and to get them to understand that we're working hard to make that strategy a success," says Ralph Mitchell, CFO and executive vice president, finance, of the Allen, Texas, company. Mitchell and other executives traveled to meet with shareholders, making a prepared presentation and answering questions. This approach worked well. "Shareholders were very pleased that we communicated with them in the face of adversity and took the time to meet with them personally," says Mitchell.
In addition to building up a reservoir of goodwill with shareholders and shoring up support for the spin-off, these meetings provided the management team with important insight into what was on shareholders' minds. "People appreciated that we were giving them enough information to make decisions, even if it was not a good story," says Mitchell. "Most shareholders are businesspeople, and they own the company because they identify it as an opportunity. They want the facts necessary to make decisions and are very appreciative when they get that information. Our goal was to tell them what we intended to do about the company, and they were free to go if they didn't agree with it."
Staying out of Trouble
In the wake of Regulation Fair Disclosure (Reg FD), this level of shareholder communication may be more complex to pull off, but it is no less important. Reg FD states a company cannot give out material information exclusively to certain shareholders unless it releases the information to the public at large within 24 hours. In this environment, companies need to handle their interactions with shareholders carefully, but they should not stop communicating. "Companies need to be more thoughtful in what they say, when they say it, where they say it and how they say it," says Allan Jordan, vice president with investor relations firm Golin/Harris International in New York City.
"I have seen, on a couple of occasions, institutional investors misusing Reg FD to try to get to information that companies have not yet made public," says Chris Garland, senior vice president, investor relations, with Ketchum Inc., a marketing and public relations firm in Atlanta. "They use it almost like a threat: You have to take my call, or you are in violation of Reg FD." This is, of course, untrue. Companies are not required to release information on demand unless they have already released that information to someone else.
How executives should manage shareholder interactions and handle questions about their business depends on the situation. In formal, planned meetings, managers have the luxury of preparing what they will say and anticipating shareholder questions and they should seek out this type of situation whenever possible. Finance executives can prepare for such a meeting by developing a comprehensive list of potential shareholder questions and their answers. Then they need to review the list and their presentation to make sure that their statements do not contain any material information that has not yet been released to the public. In addition, someone from investor relations "should always be present during the actual presentation and Q&A session to act as a watchdog, in case there are any slipups," says Garland.
Even with this level of preparation, finance executives may face unexpected questions. In this case, it is best to err on the side of caution. "Off-the-cuff answers to questions are what generally get companies into trouble," says Robert Uhl, a partner and director of accounting research for Deloitte & Touche LLP in New York City. "It is better to risk irritating shareholders than to give erroneous information. If you don't know the answer, you should promise to get back to them or not answer the question, particularly those that can get you into legal quicksand."
Politely refusing to answer inappropriate questions is acceptable. "Whenever we have Q&A sessions with shareholders, we feel comfortable telling them when we can't answer a question," says David Kelsey, vice president and CFO of Oglebay Norton Co., an industrial minerals and aggregates company in Cleveland. "For example, we don't discuss product pricing or any plans to raise prices. If we get a question about pricing, we politely decline to answer. We also don't offer anything that a competitor can use to their advantage."
At the same time, Oglebay Norton goes out of its way to provide information to shareholders before they ask for it. The company gives out a great deal of data in its quarterly conference calls and has expanded the accompanying press release to include information about revenue and margins for each segment of the business. "We want to be evenhanded, so on earnings calls we don't just load up on sweets," says Kelsey. "We also discuss things that could have an adverse effect on earnings, like energy costs not just good news." However, Oglebay Norton can go only so far. The most common question Kelsey hears from shareholders is about future performance expectations, but "we don't offer insight into future performance," he says. "We refer people to the comprehensive models published by analysts to deflect these questions."
The company also provides shareholders with 12 quarters' financial performance data and it communicates about the major drivers of its business to enable them to do their own analyses. For example, because the company spends the equivalent of 15 percent of its annual revenues on energy, executives discuss energy consumption patterns and explain how those change quarterly so that shareholders can estimate how changes in energy prices might affect performance.
Recently, Oglebay Norton responded to bankruptcies in its key customer segments by issuing a press release which showed that those developments would not prevent the company from achieving its earnings targets. "People read the worst into this, but we were on top of it," says Kelsey. The release helped shareholders understand the company's bad-debt reserves and the quality of its accounts receivable. Moreover, by putting this information out in the public domain, the company was better able to answer shareholder questions about the issue without fear of running afoul of Reg FD. Oglebay Norton's open approach to information sharing has made shareholders more confident in the company's management team.
Shareholder questions are primarily driven by what is happening in the company and in the broader economy. Therefore, preparing for a conversation with shareholders means taking stock of the issues the company is facing in its own operations and in the industry at large, then deciding the key messages to communicate about those issues.
This year, of course, the big topics on every shareholder's mind have been the economic slowdown and stock price volatility. Shareholders are likely to focus their questions on why a company's stock price has fallen and how the economy will affect the company's future performance. "If earnings are down, shareholders might want to know of any additional events that might cause further reductions in stock price or if the company is contemplating layoffs," says Norman Strauss, national director of accounting standards with Ernst & Young LLP in New York City. "If the company is losing money and hasn't yet achieved profitability, shareholders are likely to want to know if the company has enough money to stay in business before it becomes profitable."
From an operations standpoint, companies should be prepared to comment on trends and events in their industries. If there is a lot of consolidation going on in the company's industry, shareholders are likely to ask about the company's interest in acquiring other companies or its own potential as a target of an acquisition. Companies may also see a lot of Internet-related questions, particularly regarding their expectations for Web-based operations and the resources they are investing in that side of the business.
Changes to financial reporting are also likely to generate questions, particularly if new accounting rules could change the company's profitability. For example, the new restrictions on pooling-of-interest accounting for acquisitions may have an impact on the earnings of companies that have used pooling in the past. Issues like revenue recognition, large restructuring charges or big write-offs can generate concerns, says Strauss. And executives should prepare to comment on the appropriateness of executive compensation packages, as well as more general questions about stock option programs, repricing and the impact of both on the company's financial statements.
Whatever questions finance executives face in meeting with shareholders, the key is to balance the shareholders' right to know with the need to stay within the bounds of Reg FD. The end result should not be communicating less with shareholders, but rather communicating more strategically.
Preparation, Honesty and Practice
Communicating with shareholders is an inevitable part of finance executives' responsibilities. Here are some strategies for fulfilling that duty:
- Be ready to speak to shareholders anytime. Always have up-to-date message points. Deal with impromptu meetings by making sure all the officers in the company have a set of key messages that are updated weekly. "As a rule of thumb when talking to shareholders, I assume that anything said in the conversation could end up on the front page of The Wall Street Journal or The New York Times," says David Kelsey, vice president and CFO of Oglebay Norton Co., an industrial minerals and aggregates business in Cleveland. "So if something would embarrass the company, I don't say it."
- Use investor relations staff as a watchdog. "Under pressure, it is easy to slip up; another person there watching out for you can diffuse these pressure-cooker situations," says Chris Garland, senior vice president, investor relations, with public relations firm Ketchum Inc. in Atlanta.
- Issue a press release before talking to shareholders. If you know you will discuss material information with shareholders, consider sending out a press release to ensure public disclosure of that information. For example, when Daisytek International Corp. found out that one of its largest customers had filed Chapter 11, the company issued a press release explaining that this event would not have a material effect on its earnings because of tight controls over credit. "We did this because we anticipated a lot of questions about the issue," says Ralph Mitchell, CFO and executive vice president, finance.
- Don't answer hastily. Know what information has been made public and what information has not. And "if you don't have the information, it is not unthinkable to say, 'I'll get back to you,' " says Allan Jordan, vice president with investor relations firm Golin/Harris International in New York City.
- Anticipate questions. Practice your presentation to keep off-the-cuff remarks to a minimum; unplanned comments are most likely to get you into trouble.
- Be forthcoming and honest. There is nothing worse than misleading shareholders. "You have to get the information to shareholders, whether it's good, bad or ugly," says Mitchell. "A lot of companies resort to defensive posturing and call their lawyers first to find out how much they have to disclose when something happens."