They Own Your Company

By Chris Plunkett

The process of directly interacting with the investment community is an increasingly important responsibility for IROs, CFOs and other investor-facing executives, given a myriad of changes in the regulatory, research and investing environments. Through their roles in communicating with the Street, these executives play a key part in supporting informed opinions regarding the companies that employ them. In turn, their actions can help support a fairer valuation and reduce trading volatility in their company’s shares.

The vast majority of institutional investors are professionals who treat company officials with the appropriate level of respect and consideration, even when they ask tough questions. But sometimes an investor may become abusive in his or her quest to garner valuable information from company spokespeople. Some shareholders may even act downright nasty and hurl relentless criticisms about the company’s performance or make unrealistic demands. Our clients often ask us for counsel on what to do when this happens.

We see these situations all too often in the IR business. Most of the time, the abusive investor is not an activist. Their positions are not always large and they’re not looking for board seats or changes in senior management. Rather, they tend to be short-term players under pressure to generate quick returns. They often buy on speculation and momentum, rather than basing their decisions on strategy and fundamentals. Their fire naturally rises after they’ve bought shares and the stock weakens, putting them in a difficult position given their brief holding horizons.

When this happens, they often go on the attack in an effort to glean a material information edge that will enable them to make a decision on what to do with their shares. Among other tactics, they may try to illicit a sense of guilt among IROs that it’s the company’s fault that their stake is underwater – even though they may have purchased shares at an unrealistic valuation driven by speculation – rather than fundamentals.

As the next quarterly reporting period approaches, they will turn up the volume in an effort to gain insight into performance. They may ask why the conference call date has not been announced yet and whether it has something to do with the stock’s weakness. They can also accuse the company of operating in a vacuum with the lack of news momentum negatively impacting shares. And, they may send complaints to a board member or demand access to the CEO during the earnings quiet period.

These are just some of the strategies these kinds of investors use. Little has been written on what an investor owes a company, if anything, in terms of interaction protocols or manners, for that matter. This is understandable, given they are taking a risk in purchasing shares. But there will always be some momentum players who cross the line. Dealing with them is one of the more difficult aspects of the IR business. They’re not pleasant and they put company spokespeople at risk.

So, how should IROs and CFOs deal with aggressive, short-term investors? The list is long and strategies can be nuanced – but it really begins with planning.

• First, it’s critical to communicate a realistic long-term strategy and clear metrics the Street can use to monitor your company’s progress. Telling a compelling story that’s focused on long-term value creation, will naturally attract investors that think the same and value management’s vision. This doesn’t mean quarterly results don’t matter, of course. But, putting performance in the right context and carefully managing expectations can go a long way toward reducing volatility and attracting supportive shareholders.
• Second, depending on your company’s market cap and fundamentals, you should spend the majority of your time targeting investors with long-term holding patterns. This may seem obvious, but some IROs give nearly equal weight to every investor that approaches the company. Go out of your way to interact with the larger funds that have done their homework, understand your industry and have shown genuine interest in your company’s strategy. This not only makes sense, it’s a key part of your mission. As a gatekeeper, it will also allow you to use management’s time most efficiently in the marketing process.
• Third, should an investor become abusive in their interaction with you, be sure to keep a careful record of your conversations and communicate the situation internally. Strengthen your guard and take extra precautions not to get trapped into providing material information. Focus on historical facts, not speculation. Likewise, refrain from creating a situation where the investor can claim you told him or her something sensitive or controversial.
• Fourth, don’t take it personal. It’s easy to say, but it makes sense. After all, the abusive investor doesn’t care about you and employs the same tactics on other companies. In cases where the investor is particularly abusive, you may also want to step back and limit interaction. Yes, you read that correctly. Life is short – there’s no reason to take abuse. This is where earnings quiet periods are particularly helpful.

These are just a few of the steps you can take to reduce the potential of dealing with aggressive, short-term investors. Most are not activists, but some of the strategies for dealing with activists certainly apply. As an IRO or CFO, the odds are high that you will have to interact with them on some level at some point in time. Seeking to limit that possibility is an objective worth pursuing.