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Jun 13, 2022

The neglected art of financial communication

Poor communication is putting valuations at risk, says former Ferrovial IR director

Communication is one of the most-neglected management skills. If we look at management courses, we do not usually find specific communication subjects, or they are only marginally included. These courses are focused on technical aspects of the finance function such as company valuation models, accounting consolidation and derivative strategies.

Making the situation worse, press officers often lack solid financial knowledge. The problem is that poor communication has an impact on a company’s share price and can cost a lot of money.

A few years ago, a major infrastructure group sold its airport handling division. The final closing of the deal took place, as often happens in these cases, late at night. The press release was prepared jointly by buyer and seller.

The buyer wanted to say it was investing in sectors with a high-growth capacity. The seller wanted to show off the price obtained and the strategic and financial benefits of the operation, especially if accounting capital gains are obtained. Nobody bothered to think about how this note would be understood by its recipients.

At the opening of the market and despite generating capital gains of almost €200 mn ($209), the seller’s shares opened down 1 percent. The market was reacting badly and it was hard to understand why. After 30 minutes, however, the seller issued a new note and the share price rose by more than 3 percent. So what accounted for the change in sentiment?

Analysts were confused over which price was being used. The first note used the equity value of the deal. In the handling business, however, analysts normally make assessments using enterprise value, which is calculated by adding market capitalization to net debt. In the second note, the equity value was replaced by the enterprise value, leading to a 35 percent increase in the price. The shares immediately began to rise.

Between one moment and the next, there had been a change of almost €300 mn in the valuation of the company. That’s what getting the language right can do!

Understanding the audience

One premise of communication is to use a common language, a basic concept that is often forgotten. In financial communication, companies and their communications departments must speak the language of analysts and investors, which are the target audience. They are the ones who decide in which companies they will put their money. If they don’t understand something, they don’t invest in those companies, except in brief bubble moments.

Communication is often an afterthought to financial operations. But it should be built in from the outset, to understand the deal and think about the most efficient way to communicate it to the market. This preparation also involves knowing the pre-existing perception of the target audience, and the strengths and weaknesses of what is being communicated.

Another aspect that needs to be corrected is the volume of such information, too much of which makes it difficult to understand. Various financial scandals have led to an increase in information requirements and regulation, determining what must necessarily be disclosed but not how to do it.

A business can be complicated to manage, but it needs to be explained in a simple and understandable way without getting lost in the immensity of the details. In the Spanish market, there are companies whose annual reports range from 700 to 900 pages. These documents are not designed with the reader in mind. Investors with portfolios of between 60 and 100 companies do not have the time to read such lengthy documents in detail.

The overload of information is also a strategy, which means the noise and excess of pages obscure the true signs of the evolution of a business. It is not a sign of transparency if the relevant information is on page 537. Being brief, concise and clear is a requirement in all types of communication, especially financial communication.

Communication should also be two-way. Too often, we listen, but we don’t hear what the other party is saying. We are simply taking time to get our message out. Then companies complain that investors or analysts don’t understand them. Active listening is as important as communicating. We must not forget, as management consultant Peter Drucker said, that in communication the most important thing is to listen to what has not been said. There are few silences more eloquent than those of an investor.

Warren Buffet, probably the most famous investor of the last 60 years, has commented on numerous occasions that the best investment of his life was the $100 he paid in the 1950s for a communications course. In numerous videos, he has encouraged young managers to improve their oral and written communication skills, which he says will increase their market value by 50 percent over and above their technical knowledge.

Based on his experience, it seems investing in improving communication skills can be very profitable, does not require a large amount of capital and generates a very high return on equity.

Ricardo Jiménez Hernández is a strategic adviser at Harmon and a former director of investor relations at Ferrovial

Ricardo Jiménez Hernández

Ricardo Jiménez Hernández

Strategic adviser at Harmon and a former director of investor relations at Ferrovial