Earlier this week I published a column for CFO World on the theme “How to win the markets confidence” (In Swedish). In this week’s post I will give you a summary of the most important key points from the column.
Regardless if your investors are very short term oriented as Wall Street’s Gordon Gecko or have long term ambitions with their investment, be prepared for that you as a CFO or IRO always will have to answer tricky questions. But if you where about to invest 100 million in a company, wouldn’t you also be quite critical and cross-examine the company’s financials as well as management’s competence?
Telling sunshine stories about success does not create acknowledged and trustful communication with the stock market, but transparency and confidence does. Here follows some tips and advices on how not just to gain the markets confidence in an upturn, but also how you can keep it a downturn.
1. Transparency creates trust. Silence generates chaos.
When the credit crunch hit the market, investors made their decisions by heart, not by using rational analysis. There was a never-ending need for more information. The winners of the crises where companies that where very transparent with how the crisis would effect their business and financial results. The losers were companies that choose silence, acting as normal while the global financial market collapsed.
Answers as “No comments” from a company make analysts and investors depend on external sources. This often ends with a very pessimistic analysis about your company as an investment case. To communicate risks and keep transparency in a downturn is a challenge, but it will create trust. A proactive communication always gives you the opportunity to be one-step ahead of the market, while reactive communication means that you constantly are running behind.
2. Discuss market drivers and risks
How do you explain that it is possible to upgrade the company’s growth targets to 10 % when your industry only is estimated to grow by 5 %? Your growth targets will be considered as unrealistic and a weak link in your strategy, unless if you further explain the most important market drivers and where the company see growth opportunities.
The success factor is to explain and educate the market about macro financial triggers and statistic that has an impact on your business. Trustful financial communication demands that you discuss both opportunities as well as risks.
3. Tell the market that you execute by your strategy
Many Nordic companies have revised their long-term strategies during the year. But most often the strategy consists of a graphic illustration in the Annual Report.
Tell the market that you execute by the company’s strategy. This is easily done by continuously referring to development in strategy during quarterly presentations or if the company does organisational changes or acquisitions, end each statement with “as in line with our strategy…”
A management that execute by strategy is considered trustworthy and competent.
4. A trustworthy strategy must include measurable financial goals
A vast majority of the companies I meet are very reluctant to give guidance or estimates about growth targets and turnover. “We will be punished if we can’t deliver as promised”.
My argument is instead that a strategy or cost savings program with no measurable goals has very low credibility. Milestones and financial targets make it easier for investors and analysts to understand and follow your long-term targets.
5. Fast and accurate internal reporting procedures are a must
Malfunctioning internal reporting processes can cause tremendous consequences for a company and it’s management. Swedish HQ Bank is just one example. Ericsson’s profit warning three years ago is another case of worst practice. That the company partly blamed their internal reporting process for causing the profit warning did not help to restore the crash of confidence.
The market has an exaggerated tendency to misinterpret negative as well as positive statements about profits and losses. Make sure that any quotes about turnover originate from the company’s internal analysis and figures. Fast and accurate internal reporting procedures are a must.
6. Make the CFO and IRO visible
Since Lehman Brothers got erased from the financial map CFOs and in many cases also IROs have become a safe harbour for investors; explaining any deviations on financial results and margins.
That IROs have been rewarded for their efforts and advanced to more strategic positions was mention in an earlier post “Nordic IROs on the move – advances in to strategic positions”.
That several Nordic CFOs have been appointed top positions is another trend confirming their growing importance as a “safe harbour”. For example Ericsson’s former CFO Hans Vestberg succeeded Carl-Henric Svanberg as CEO in January this year. Danske Bank recently appointed CFO Tonny Thierry Andersen head of Danske Bank Denmark.
The market will continue to be sceptical and information demanding as long as there is an imminent threat of a double dip. Numbers will be analysed and interpreted different depending on the recipient’s knowledge about your company and industry.
The importance of CFOs and IROs skills and knowledge will continue to grow in the aftermath of credit crunch and will be crucial to win and gain the markets confidence. To succeed you need to increase transparency and most important of all, prioritise to educate the market when it comes to macro financial triggers and how this statistics affect your financial results as well as long-term strategies.