The years since the financial crisis have seen a massive and co-ordinated effort by regulators, securities markets, law enforcement agencies and governments to clean up global markets, to ensure that investors are treated equally and fairly, and to punish those who would profit by insider knowledge.
But that hasn’t prevented IR issues from arising, even in the most mature markets. Jeff Immelt, the legendary CEO of General Electric (GE) fell from grace as a result of the ‘success theatre’ that his earnings calls had become. Tesco, the UK’s largest supermarket group, received huge fines and censure from overstating its profits, while Elon Musk’s battle with the regulators over his ‘IR-by-Twitter’ approach was a global cause célèbre.
The phenomenon of poor IR in mature markets was brought home recently when an article appeared in a London newspaper trumpeting one of the most frequently-made IR errors: the confusion of PR and IR.
The headline read: ‘Your IPO can dazzle the stock market with the right communications strategy and PR spin.’
To be fair, the headline does not do justice to the rest of the article, and much of the advice it contains is sensible enough: Set realistic expectations. Be transparent and consistent. Set clear KPIs.
And yet there runs through it a sense that communications alone can serve to lead investors to the right conclusions, and that the right ‘spin’ on any facts can deliver a good outcome for investors and issuers. Take this statement, for example:
‘A good communications strategy is crucial in order to create strong demand in the IPO aftermarket and set the right sort of market expectations that won’t leave management teams red-faced in the inevitable investor meetings and AGMs to come.’
Surely this is the job of the accurate representation of a strong business strategy, rather than just slick communications? Investors trust companies with their cash on the strength of future earnings and profits, not rosy presentations of the facts today. And investor expectations are formed by analysts’ consensus, not soundbites.
When companies mistake PR for IR, they are inviting future failure and loss of credibility, because they are encouraging investors to make decisions on the wrong evidence. Instead of facts and numbers, they often use false promises and spin. And this inevitably results in disappointment, disillusionment, and long-term shareholder value destruction.
Great IR, by contrast, uses a company’s management quality, market opportunity and business strategy as the bedrock of its investment thesis. With these three pillars as a framework, earnings calls, business outlook, price guidance and capital allocation become supporting facts in a longer-term narrative, without the need to rely on high-level promises.
The CEO of GE, Larry Culp, delivered a lesson in the difference between PR and IR at his firm’s Q1 earnings this week. Earnings beat expectations, but he refused to be tempted into ‘success theatre’, instead saying: ‘This is one quarter in what will be a multi-year transformation, and 2019 remains a reset year for us.’
Tempting as it may have been to use the upside surprise to trumpet success, it is more sustainable and more accurate to position any disclosure within the longer-term strategy of the company, rather than to take immediate credit for any upside surprise. How refreshing to hear a CEO talk down a good quarter instead.
Using PR for IR purposes is a mistaken strategy that almost always ends badly for all concerned: The issuer loses credibility, the market loses integrity, and investors end up losing money.
Oliver Schutzmann is CEO of Iridium Advisors