Knowing when your organization is ready
By Chris Plunkett
A CFO at a technology company in turnaround mode once asked me about the merits of hosting an investor day. Management had been demonstrating progress in executing the company’s strategy and the stock was in recovery mode. Profitability was on the mend and the company continued to return a sizeable amount of cash to shareholders. But, it remained early in the turnaround process, key markets remained under pressure and sizing the path to near-term revenue growth was difficult at best.
I told the CFO that I did not think the company was ready for an investor day. Rather, I believed it was best for management to continue to visit with top shareholders as well as engage with long-term oriented investors via one-on-one meetings. This was a period that called for conservative guidance and careful management of expectations. The CFO was not pleased with my answer. She said, “What do you mean we’re not ready? We have to be ready – we always have to ready.”
What she meant was that the organization, which had recently strengthened its operating team and made significant progress in fostering a culture of accountability, should always be in a position to deliver an investor day presentation. By this, she meant management should be able to provide a detailed overview of the company’s assets, financial position, market opportunity and the strategy for gaining share and delivering value to shareholders.
She was right. However, the problem was that the company was not in a position to effectively size the level of customer demand near-term given broader industry issues. So, it was arguable that the company was not really ready to host a detailed presentation and provide guidance on its outlook. Investors had been expecting a sector recovery to take place – but the timing remained unclear. Management was doing a solid job addressing what was in the company’s control – but the macro-environment was not cooperating.
The company was already getting credit for making the necessary changes to its operating strategy and approach to costs. However, if management hosted an investor day, attendees would expect to gain a higher level of insight on the state of the company’s target markets – and revenue expectations. Analysts and investors would want details on how much of the revenue pie the company could take – and when. This would be difficult to do – which created a risk of disappointing the investment community.
This is part of the dilemma of hosting investor days. Some companies host these events regularly, often bi-annually, while others choose to host them at select points in time when management can provide a thorough update on guidance. In general, we have found that when analysts and investors take the time to attend these in-depth events, they naturally have elevated expectations on the level of information that will be provided. There is also a tendency to expect good news, such as guidance pertaining to an improved revenue forecast, a step-up in profitability or the decision to pay a higher dividend.
Too much of the time, management teams think that hosting an investor day in and of itself will create goodwill, lead to improved sentiment and support a higher stock valuation. It doesn’t work this way. Sometimes, investor days have the opposite impact – and stocks decline – because uncertainties and even strategic flaws become evident and a sense of elevated risk surfaces among the investment community.
Hosting an investor day generally exposes a company, its management, and its operations to a much deeper level of scrutiny than traditional presentations or quarterly conference calls. The stakes are higher. In fact, the investment community increasingly expects management teams to deliver 3-5 year outlooks at these events. For some companies, this is not only very difficult to do, it’s ill-advised given the unrealistic expectations it may foster and the ensuing pressure it may put on the organization.
So, before making a decision to host an investor day, management teams need to consult with their boards and advisors to determine if the company is truly ready. Among other steps, a company should:
- Evaluate the broader state of the industry and the many macro-factors on the horizon that may impact performance and outlook – and how they may limit the company’s ability to provide realistic financial guidance,
- Conduct an in-depth shareholder survey to garner a clear picture of sentiment and obtain the benchmarking input that will determine if an investor day really makes sense and whether management can specifically address investor demands, and
- Review the most difficult issues and potential pitfalls and the company’s approach to handling the toughest Q&A, especially as part of such a highly visible platform.
The concept of being ready to host an investor day takes several forms. The macro-environment plays a big role, as do shareholder expectations regarding the depth and timeframe of financial guidance that will be provided. A public company should generally always be ready to host an investor day – but the decision to move forward at any given time is influenced by a host of factors – many outside of management’s control.
Prudence in planning these kinds of events is paramount. Sometimes it may be best to wait to host an investor day if management is not in a position to deliver the level of forward-looking information that investors often expect at these events. There are plenty of other disclosure channels to deliver the company’s story and maintain an open dialogue with the investment community. Hosting an investor day is not a mandatory event. It’s one of many investor relations platforms – and should be used strategically.