Avoiding confrontation is crucial, but IROs tend to pursue the opposite approach
In the film Peter’s Friends, Rita Rudner’s character, the star of a fictional sitcom, turns to her husband at the airport and laments, ‘You know what I hate about being a public figure? The public.’ I’m sure many executives running public companies have shared a similar sentiment from time to time.
The good news is that, alongside your trusted investor relations counsel, there is a group of professionals who can act as a barrier between you and the mass of institutional and private investors: sell-side research analysts.
Sell-side research analysts are ‘experts’ on your company, and often your peers’ companies as well. Their job is to advise a bank’s clientele on whether or not your stock represents a good investment. In doing so they publish research reports, help to disseminate and interpret your news, and generally gauge your changing prospects.
Sell-side analysts will cover you for a number of reasons. Either their investment bank was involved in your IPO or a subsequent follow-on financing, or they believe their clients can earn money by investing in your stock, whether in long or short fashion. But just because an analyst is covering your company does not mean he or she believes in your investment story, your company or you. Every now and then you will come across an analyst who, for logical or illogical reasons, hates what you’re doing and rates your company a ‘sell’.
What should you do about such analysts, and how can you get them to see the light? Let’s start with some context. Whenever a CEO or CFO asks me what they should do about an analyst who just issued a sell recommendation on their company, I remind them that for every buyer of a stock, there needs to be a seller. Thus, at any given moment a liquid and functioning market must contain a divergence of views; therefore it’s reasonable – and arguably healthy – for that divergence to be represented among your covering analysts.
Nevertheless, a negative analyst could be causing harm to your company, depending on the rationale behind the sell recommendation.
Analysts are people, too
Analysts can be as flawed as any other member of the human race. Their perception of you may be colored by any number of previous experiences or goings-on in their lives. Maybe the last company they championed in your sector turned out to be a horrible call and left them with egg on their face. Maybe they just don’t believe in your technology, and never will, because they don’t understand it or prefer a competing platform. Maybe they just don’t like a member of your management team. There can be a variety of reasons that lead to a fractious relationship.
Avoiding confrontation is crucial, but I’ve found that executives tend to pursue the opposite approach. Many corporate leaders confront the analysts with an argument about why they’re wrong, or they seek to isolate them as a form of punishment. It’s easy to feel this way. After all, as an entrepreneur you have more skin in the game than the analysts do. But blowing up or pulling away from a bad relationship won’t help to heal it. In fact, by cutting an analyst off from a more positive view – your own – of your prospects, you won’t help correct or change his or her view.
So what do you do? For starters, stay engaged with the analyst. That doesn’t necessarily mean giving his or her bank a key role in your next financing (usually the opposite occurs and for good reason). But you should still seek that person out for a meeting when you’re in town, entertain his or her questions on your analyst calls, and respond to his or her inquiries and requests for information.
At all times you should be polite and, while you may not agree with the analyst, you should never tell that person that he or she is wrong. You can, of course, freely admit that your viewpoint is different, and you should feel free to politely and calmly explain your reasoning.
Understand analysts’ perspective
Take a look at their published research and evaluate the assumptions they have made that differ from your own. If you find any factual mistakes, you should let them know. But be sure to do so in person, never in writing or in an email copying in their line managers or colleagues, and make it clear that you are trying to help them, not yourself.
As in all industries, there are good and bad analysts. There are people who see their employment as a job and people who see it as a career. Some are diligent and some are sloppy. While it is never your job to explain to a third party why an analyst has a sell rating on your company – ‘That’s a question better directed to the analyst’ is the appropriate response there – you should let inquiring minds know that an analyst published a recommendation without extensively talking with management beforehand, and explain the fundamental differences between the analyst’s outlook and yours. But avoid badmouthing an analyst, as this tends to make you look bitter and defensive.
In life and in business, we give power to the people we choose to. So if you come across difficult analysts, you yourself choose how important they and their views become. You do so through your reaction to their assessment and your interaction with them.
Laurence Watts is vice president at Westwicke Partners