How to Handle Bad Financial News
August 2016 – Financial PR/IR & Prof. Svcs. PR
David Clair, CFA, Senior Vice President, ICR
To say the markets have been dizzying this year is an understatement. Stock instability, the Brexit vote, and an uncertain political climate in the U.S. have required companies to adjust to constantly evolving circumstances, while an anemic IPO market has changed the rules for private companies looking to raise public capital.
While the markets have reacted with volatility, financial communications and investor relations professionals are tasked with communicating an organization’s performance and strategy to key stakeholders calmly and dependably, regardless of the challenges at hand.
As a former financial analyst, I’ve seen the impact that communication can make on a company’s ability to navigate through a difficult situation. A failure to communicate clearly or in a timely fashion after a setback or a muddled explanation of missed guidance can lose you the trust of shareholders, customers, and employees. My rule of thumb is that for every quarter where a company messes up, it takes three quarters of outperformance to recover credibility.
On the other side, I’ve seen companies overcome huge hurdles by communicating effectively and proactively addressing the issues at hand. Transparent dialogue with stakeholders builds confidence in management and in the future performance of a company.
However the markets and global economy have affected your business this year, no company or organization can avoid having to communicate disappointing news forever. The true test is how you deal with the situation that presents itself. Based on my experience guiding my clients and my background in sell-side equity research, I’ve identified four critical best practices for communicating through challenging financial news:
A perceived lack of transparency can damage trust more than any single news item. If you expect to miss guidance, for example, it’s critical to pre-announce the shortfall in advance, even if it impacts the stock in the near-term. The alternative – surprising investors and analysts during a regularly scheduled earnings call – puts management’s credibility into question along with the financial metrics.
I was once on an earnings call with a promising biotech company that had just missed revenue estimates by 25 percent. During the Q&A, I asked management why they hadn’t disclosed the shortfall earlier. There was a painfully long pause while management searched for an explanation that never arrived. That moment of silence said more than any spoken response could have. Confidence was lost instantly – a far more damaging outcome than would have resulted from pre-announcing the news.
Be crystal clear.
When delivering difficult financial news, don’t try to bury the details or make excuses. Investor calls, business updates, and town hall meetings should be used productively to reduce uncertainty, provide clarity around strategy moving forward, and answer questions. Your investors, employees, customers, and partners are paying attention, and if you try to distract from the crux of the issue, someone – whether it’s an employee, analyst, or journalist – will eventually identify the missing pieces and call you out.
I once heard a CFO of a company say “we’re comfortable with consensus” in response to a question about the outlook for the business, even though the company maintained that it didn’t “officially” provide guidance. To the analyst community, this was clearly doublespeak. Saying you’re “comfortable” with consensus is guidance. The company’s management team was later taken to task when they missed consensus, although they continued to insist they hadn’t provided guidance.
I’ve also seen companies blame external factors – like the weather, a common scapegoat during the winter – for poor financial performance rather than acknowledging internal issues like a manufacturing glitch. While immediately issued analyst reports often reflect management’s explanation, longer-term research usually identifies underlying causes. Once again, decision-making based on avoiding near-term negativity can damage trust and cause irreparable damage to management’s credibility.
It’s better to underpromise and overperform than to overpromise and underperform. If there’s poor financial news in the pipeline and the stock will inevitably take a hit, management should lower guidance to a level that’s not just achievable, but leaves room for upside. Reset expectations to a level where management is highly confident in its ability to deliver, and then focus your energy on meeting – or surpassing – those metrics.
Keep in mind, you can’t get away with doing this frequently. While lowering guidance and then executing effectively against those revised expectations can actually reaffirm trust in management, repeatedly revising guidance shows a failure to learn from past mistakes and will have a negative effect on credibility.
Have a plan.
Once you’ve communicated an unfortunate situation to your stakeholders clearly and transparently and set realistic expectations, refocus on the future. Investors and employees in particular don’t just want to know the details of a problem – they want to understand how you plan to solve it. People react positively if you can show them that you’ve already taken concrete action to improve and prevent similar issues in the future.
While none of us go to work each morning hoping for a crisis, some kind of bad news at one point or another is inevitable. However, by communicating clearly to our stakeholders and providing actionable steps to overcome challenges, we can be instrumental in ensuring the long-term success of our organizations.
David Clair, CFA, is a senior vice president in ICR’s healthcare practice.