Danger, Will Robinson! DANGER!
Flagging potential negative developments in upcoming reporting periods can be one of the most difficult and perilous components of IR messaging. Anyone reading this blog is well aware of the downside of getting it wrong. On the upside, there are few better ways to build trust and bolster valuation than clearly telegraphing a potential negative and when it comes to pass to have the market calmly take note, remark that it was expected, and move on to the next key development. Lost in Space’s “Robot B-9” made sure Will Robinson was kept well apprised of potential issues with flashing lights, waving of robotic arms and declaiming the immortal (at least among American boomers) lines “Danger, Will Robinson! Danger!” – but this approach has yet to be accepted as Best Practice Investor Relations. This is unfortunate, because I would enthusiastically don a robot costume and do this on behalf of my clients instead of drafting PowerPoints and news release copy.
There are few more frustrating market interactions for senior management and IROs than to have put clearly in black and white that something negative may happen… and when it comes to pass in the next reporting period having the market punish the company for “a negative surprise.” An IRO that has suffered through this knows that “but it’s flagged right here on page two of our last earnings release” only serves to further annoy the investor or analyst that has already decided management has mismanaged expectations. Cognitive psychologists would review this situation and discuss “inattentional blindness” and the “illusion of attention,” or even the “kick the dog” effect (which ends up badly for the IRO). Having been in the middle of these interactions many times, I usually want to say to the analyst or PM, “hey, you’re getting paid a great deal of money to review our information and this was highlighted as plainly as the nose on your face.” But discretion is certainly the better part of valor in these situations. Of course, the reasons for the market reactions are much less important to the IRO than the best way to avoid them.
The most consistently successful approach when determining how best to manage potential – but not game changing -- negative developments in your overall investment/performance narrative is similar to how airlines manage their passengers when there may be real turbulence ahead. The pilot makes an announcement and the seat belt sign comes on, but the flight attendant also makes sure you stay in your seat and will come by to ensure your seat belt is fastened if the bumps may be meaningful (in my experience “meaningful” equates to whether my drink is in danger of spilling). In IR terms, you need to: “say it” in the earnings release and conference call, “show it” in corresponding presentation materials, and “confirm it” with key analysts following the company. While the influence of the sell-side has waned dramatically in terms of introducing new ideas and perspectives on the companies and industries they follow, they remain critical as a third party reference in the information infrastructure. “Confirm” in real terms means asking “did you see this, and are you comfortable you’re clear about what management is communicating?” That approach could be extended to major investors, but if it is limited to them and the market reacts badly if the bad news plays out, both buy and sell-side will still have the sense the situation was mismanaged.
Do these discussions raise Reg FD and/or fairness issues? No, because the IRO is simply repeating exactly what has already been disclosed in an appropriate fashion, which is of course what makes it a somewhat frustrating and tedious exercise, but it is very much worth the extra time and effort. And in case you wish to try a more fun and creative approach, I will send a “Robot B-9 – Danger, Will Robinson!” action figure to the first IRO that emails me their thoughts on this blog post. Try putting it on the table during conference calls and, at the appropriate moment, hit the “on” button and let Robot B-9 go to work as part of your IR team.