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Apr 16, 2012

How to guard against gaffes

As more second-tier management gets involved in IR, good training and a consistent playbook can reduce disclosure risks

At Technip, a Paris-based energy services firm, roughly 10 employees outside the C-suite and IR team have undergone a training program to learn the ropes of talking with the company’s sell-side analysts and investors.

‘We want investors to look under the hood and have a better idea of how the motor works in our company,’ says Kimberly Stewart, who heads the company’s four-person IR team.

Stewart, who worked as a sell-side analyst at Paine Webber, Credit Suisse and CA Cheuvreux before becoming an IRO, says her desire to widen the group of internal experts with whom investors meet arises directly from her efforts to study public companies as an outsider. ‘You can’t have a thorough understanding of a firm through only the CEO or CFO,’ she says.

At other public companies, however, IROs are training new employees to speak with investors because investors are demanding broader access.

‘Wall Street is always looking for incremental information about a company, and if analysts and investors can speak with the line folks, they feel they’re doing a little better research,’ explains Matthew Stroud, vice president of IR at Darden Restaurants.

For IROs, the challenge is granting investors the access they desire while delivering a consistent message to the Street.

More and more public companies are finding it takes rigorous training to help executives outside the C-suite prepare to meet investors without running afoul of Reg FD or making other disclosure gaffes. 

‘There’s definitely a lot of interest among investors to see whether what the operational heads say matches what the senior executives say about strategy, operations and tactics,’ says Ann Mayhew, managing director of M:Communications in London.

‘As well as getting more detailed insights, investors want to see how the next tier talks compared with the management team.’

Briefing books and role play

At chemicals giant BASF, all eight of the company’s board members and several of its 15 division heads regularly join the IR team on roadshows, roundtables and investor days, says René Lochtman, deputy head of IR.

BASF has won kudos for letting the capital markets meet with such a broad swath of management. ‘Having divisional heads on tour is very well received by investors,’ says Lochtman. ‘They want to look into the eyes of the people running the divisions.’

Managing an IR program with a chorus of spokespeople isn’t always easy, he adds. ‘We have a one-voice policy to the markets so we do a lot of speaker briefings and training,’ he explains. Typically, new speakers practice delivering presentations, attending one-on-one meetings and leading Q&As before meeting any investors. 

A company’s story is always evolving, so all spokespeople need to keep abreast of the latest communiqués. Therefore, before embarking upon an investor tour, BASF board members and division heads are given an information packet 30-50 pages long, covering everything from the latest intelligence on the capital markets to a briefing on what analysts are saying about the company’s stock. 

Diversified companies are keenly aware of the need to grant investors more access to the heads of various businesses, as are companies with multiple brands that operate under a common corporate umbrella.

At Darden, for instance, investors want to meet the C-suite, but they also want access to the presidents of the Red Lobster, Olive Garden and LongHorn Steakhouse divisions, says Stroud.

Learning the ropes

Mayhew recommends training employees who will be meeting investors for the first time by holding two half-day sessions. The first day, she advises educating them on everything from who the buy side and sell side are to what constitutes material information. 

The second session should focus on role-playing and, to make sure all inquiries ring true, Mayhew asks a company’s IRO for a list of tricky questions investors have previously posed.

Richard Tsang, chairman of Strategic Public Relations Group in Hong Kong, sometimes conducts role-playing exercises at company retreats. He has trained executives by creating a hypothetical crisis scenario – for example, a disaster at a plant – and then letting executives deliver the corporate message to make-believe investors.

Technip has taken the training process to new heights, educating a wide array of executives from division heads to the company’s chief strategist in the nuances of IR in briefing sessions over a six-month period.

‘We send executives to investor meetings to listen incognito,’ says Stewart. She also subjects Technip employees to hours of Q&A practice before considering them ready to lead an actual one-on-one. 

Investors are particularly keen to gain access to public companies in Asia, where growth is rapid and the inner workings of management are perceived as opaque. For companies listed in Hong Kong and mainland China, investors often ask to meet with frontline staff, notes Tsang. 

Unless these individuals are trained in the subtleties of disclosure, however, problems can arise. ‘If a fund manager asks someone on the frontline staff, What’s the production situation last month?, he or she might say, It’s good. We produced 20 percent more than the month before. That quickly becomes a public forecast and will get the firm in big trouble,’ says Tsang.

Dave Mason, president of the Equicom Group in Canada, emphasizes that public companies need to broadcast a common message: ‘Fund managers all talk. If they hear someone’s disclosed A, B and C in one meeting, and A, B, C and D in another, over time, that damages management’s credibility.’

He believes anyone speaking with investors should be encouraged to refer discomfiting questions to the CEO or IRO. 

Avoiding disclosure fiascos takes both rigorous preparation and the judicial use of scare tactics. At Technip, says Stewart, they do ‘hours of Q&A; we pretty much scare the living daylights out of [trainees] before they meet with investors.’ 

Speaking freely

Staying on message is important but what investors really want is candor and a fresh perspective. ‘This should be a free-flowing forum and the speakers shouldn’t be stifled,’ maintains Keith Mabee, vice chairman at Dix & Eaton.

But he says an IR professional should be present whenever conversations with investors take place. ‘Not all division managers or business unit heads are going to be sensitive to all the issues that might tip into disclosure problems,’ he explains.

Should the worst happen and material information be selectively disclosed, the proper next step is publishing a news release and an 8K.

Although Mayhew says she’s seen this happen, she adds that these slips don’t occur nearly as frequently as feared. Often, she says, companies err on the side of being so cautious that the operational heads frustrate investors by giving too little detail.

‘You need to practice not giving forward-looking information but still being willing to educate. You don’t want to look obstructive,’ she warns.

For IROs, having a large team of executives able to speak with investors can be a boon, providing a list of experts to call upon when the CEO or CFO is busy.

When handled well, providing more executives with access to investors can also help a company in succession planning and provide the executives themselves with career-building opportunities. 

‘Executives are usually very interested in getting trained,’ says Mayhew. ‘They’re quite ambitious to get the top job, and they know IR is something they need to have in their armory.’

What’s more, exposing a larger group of executives to investors can help the company innovate. ‘Investors ask really smart questions,’ observes Stewart. ‘What’s more, they have privileged access to a company’s competitors, clients and vendors.’