Steering through the storm: IR in the downturn

The economy’s tanking: key industry indicators are flashing ‘critical’ and, not unexpectedly, company sales and profitability are taking a beating. It’s a tough time for any CEO or investor relations program – so just what and how should analysts, shareholders and the financial community hear from the company in a recession?

Many executives will want to communicate more, or a whole lot less, but veteran IR counselors and corporate advisers urge companies to keep doing the things that have always enhanced their reputation and built market valuation. ‘Don’t stop communicating. Don’t disappear off the radar,’ advises Peter Hirsch, global corporate affairs director for Porter Novelli. ‘That is a common mistake to make when things don’t look so sweet. Equally, don’t start suddenly communicating like a madman because investors will think you are protesting too much and suspect that there’s something you’d rather not focus on.’

Overall, of course, the investor communications pendulum should not swing too far either way. ‘A best practice IR program shouldn’t really change much in a downturn,’ says Cara O’Brien, managing director of FD’s capital markets practice in New York.

Instead, advisers suggest you communicate proactively. Discuss the difficult issues. Point out which parts of the business are stable and recession-resistant. Outline strategies being implemented to turn around weaker business units. Give investors longer-term goals and a longer-term perspective.

‘Don’t continue to talk about the magical revenue stream you see over the next horizon when the market is hurting and people are worried about more mundane issues like cash flow,’ Hirsch says.

Hard times
The last time the economy shrank for six straight months – the old definition of recession – was in 2001, after the dotcom collapse. There isn’t a consensus yet on whether officially to call a recession but, if one happens this year – as Goldman Sachs economists Jan Hatzius and Ed McKelvey expect – it will be ‘relatively mild’ by historical standards, lasting just two or three quarters.

There is still hope it won’t happen at all. Corporate earnings weren’t so horrible in the first quarter; profits at many companies looked better than analysts had forecast, and some companies continue to report earnings that beat expectations. Still, record high oil prices haven’t fully worked themselves into results yet. There is also no real sense of whether companies have fully owned up to their subprime exposure. Considering these events, first-quarter earnings may be the best of the year, and many expect earnings to tumble from here.

Hatzius and McKelvey say a recession, or the economy tending toward recession, will put pressure on stocks in the financial services, consumer discretionary, industrials, information technology and materials sectors. Sectors that might get something of a pass during a recession include healthcare, consumer staples, energy and utilities.

The job of the IRO – to be completely accurate and open – isn’t enviable as the macroeconomic conditions deteriorate. Veterans do have strategies to get through it, however. Hirsch’s advice for disclosure is not to keep switching the spotlight from one better-performing division to another: ‘The last thing you want to do is go from one quarter telling the Street you’re all about this particular piece of business, and the next quarter acting like you’ve never heard of it.’

The victim approach – ‘circumstances were beyond our control’ – doesn’t work, either. By openly discussing short-term challenges and longer-term objectives, the company focuses on maintaining its credibility.

Keep to the message
Many companies are inconsistent in their communications during financial downturns. Scott Latham, now an assistant professor of management at Bentley College, studied how companies change the way they communicate bad news or uncertainty to the market. After his former high-tech employer pulled its IPO in the 2003 market drop, Latham decided to study the process in depth.

He found the flow of bad news communication typically resembles an inverted ‘U’. At the beginning of the downturn, companies share additional information; the flow then reaches an apex and reverses. ‘When things really get bad, they shut down communications,’ observes Latham. ‘They basically say, We can’t communicate anything else. We thought we were helping people out, but now we are afraid we are hurting the organization more by communicating more.’

It’s a strategy that’s almost certain to backfire. Companies with better performance are the ones that provide more insight. ‘They open up the black box and say, Take a really good look at what’s going on here,’ Latham says. What’s more, investors given greater amounts of information are more sympathetic and patient with management at companies going through hard times.

Delivering bad news to analysts and fund managers isn’t anyone’s idea of a good time. ‘It is extremely difficult. I don’t think anyone knows how to do it naturally,’ says Deborah Wallace, principal of Massachusetts-based Wallace Consulting & Board Advisory Services. ‘Many CEOs are not that confident in their individual skills for handling these problems.’

Some CEOs would do well to consider the dual Chinese symbol for crisis and opportunity, Wallace adds. Tough times represent a chance to focus attention on the areas of the company that have worked well and outline the business areas the recession has unveiled as working poorly. ‘Unless investors are really convinced and they are confident you know what you’re doing, nothing’s going to work,’ she says.

While IR counselors suggest an even-keeled approach to communications, the IR department is not immune to cost-cutting in an organization. O’Brien says public companies can be more strategic in delivering IR messages, perhaps reaching for larger investment audiences through conferences or hosting their own analyst days.

Cutting back completely is not the answer, however. ‘It might be a short-term fix that enables you to retreat for a while, but it’s going to hit your reputation with the Street, key shareholders and the media,’ O’Brien says. She suggests making sure the IR marketing calendar is effective to keep up wider shareholder interest in the stock in case there is shareholder churn during this volatile time.

Listen as well as talk
The ‘hubris hypothesis’ is a term Latham uses to describe how executives convince themselves they know more than the market. He says it is important to be open to other views. ‘If you think about an efficient market – all of the investors, all of the analysts, all of the partners – these folks potentially have a better picture of your organization than you do,’ he says. ‘As an executive, it’s your job to solicit some of that wisdom rather than thinking you know it all.’

Still, the responsibility for results remains with the CEO. ‘I think you need to continue doing what you are doing and explaining what your strategy is for managing through difficult times,’ Hirsch says. ‘Management gets a lot of credibility for being able to demonstrate agility in terms of scaling back when things are still worsening, but also for correctly identifying when things are on the turn, so it can quickly start to invest more in places that will serve the business well in the long term.’

A downturn is the most challenging time to be involved in investor relations. Gaining credibility and visibility for a company – whether in the small-cap or large-cap range – seems toughest in an environment of uncertainty. IROs may find themselves simplifying their investment stories even further for the financial community and sticking to exactly what they know. Strategists say that’s preferable to shutting down completely.

In any case, it seems no one has very much attention for anything else right now.