COVID-19: Investor Communications During Q2 Earnings Season and Beyond

In the four-month period since COVID-19 was recognized as a global pandemic, we have seen an extensive impact on both the capital markets and public companies. As highlighted in COVID Impact – By the Numbers:

The stock market has experienced unprecedented volatility.

  • Companies have been shoring up balance sheets, driving YTD debt issuance to $1 billion as equity issuance plummeted.
  • 58 companies in the S&P 500 either suspended or cut dividends.
  • Over half of S&P 500 companies withdrew guidance.
  • Senior management and directors of many companies have taken pay cuts.

Against this backdrop and as we head into the heart of Q2 earnings season, we wanted to share some thoughts on investor communications.

For most companies during COVID-19, almost every communication has been a crisis communication.

When COVID-19 initially hit, companies were forced to deal with myriad challenges, including state-by-state regulations and an often-confusing federal response. Almost overnight, 'business as usual' ceased to exist. Companies quickly turned their attention to the well-being of employees and customers, financial and operational challenges, and stress testing business models in the face of a crisis with no play book and limited information about the outlook. At the same time, there has been an almost insatiable demand from investors and analysts for real-time information from company CEOs and CFOs on the current situation and the health of their companies.

All of this has created new challenges for investor communications starting with the need to craft communications that provide both transparency and maintain credibility in the face of a fluid and ongoing crisis. To this point, some classic crisis communications advice is relevant:

  1. Avoid making statements that might be changed or retracted later.

  2. Serve up problems with solutions. This requires developing new messaging that reflects the current environment and recognizes that the story, which worked during a period of strong economic expansion, may no longer be relevant.

  3. Focus on what you can control and avoid commenting on things that are beyond your control.

  4. Stay accessible and engaged with all stakeholders.

Lack of guidance is clouding visibility

As companies have suspended guidance, analysts have been slow to update their models and, as the Wall Street Journal reports, we are now seeing the widest dispersion in analysts' earnings estimates since 2007.

Most of our clients are taking a cautious approach to guidance in what is still a very tenuous environment. That said, whether companies provide guidance or not, performance will be judged against consensus estimates. Therefore, ahead of Q2 earnings, we recommend that companies review sell-side models and consider providing color on any line items that might help analysts get their models more closely aligned.

As far as reinstating guidance, we don't see much of a first-mover advantage. We expect companies will revisit guidance when they have more visibility, and that some will initially opt to provide quarterly versus annual guidance. Either way, companies will likely take a conservative approach.

Investors and the SEC want companies to provide forward-looking information

The SEC recently provided supplemental guidance that urges public companies to update disclosures relevant to providing investors with a clear picture of their financial health and ability to survive the pandemic. The SEC previously stressed that in the current environment, forward-looking information can be more valuable than historical information and that "these disclosures should enable an investor to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company's operations and financial condition, including liquidity and capital resources."

From an investor's perspective, information reduces risk, so it is no surprise that investors are urging the SEC to set standards for disclosure that are meaningful both during and post-pandemic. Investors will view stale or incomplete information as a risk, so companies should make sure their investment stories remain relevant in an evolving environment.

We recommend reviewing summaries of the SEC's roundtable with investment community leaders on disclosure published by Cleary Gottlieb and Troutman Pepper.

Renewed activism with a focus on leadership

While activist campaigns initially declined when COVID emerged, the number of companies adopting poison pills and other defense measures has increased. Many experts predict there will be an uptick in activism with a growing emphasis on leadership quality. In a recent CNBC interview, Rich Thomas, Head of Lazard's European Shareholder Advisory Group, said, "During the COVID-19 crisis, shareholders were less interested in cost reductions, job cuts and return on capital. When the question has been about leadership and how the board and management are steering the company through the crisis, they have been more receptive."

Activism has been around for a long time and most companies should have a protocol for dealing with it by now. Our advice remains the same:

  • Remember that good investor relations and governance are the best defense.
  • Look at the company through the lens of an activist investor to identify vulnerabilities.
  • Shore up messaging to reflect how you are navigating the COVID-19 environment and highlight lessons learned in the pandemic and how you will apply them to strengthen your future performance.
  • Maintain strong relationships and open lines of communication with current investors and analysts and continue to build a pipeline of potential new investors. Since the onset of the pandemic, many companies have experienced significant disruption to their investor bases as they have transitioned from growth stocks to value stocks. Virtual non-deal roadshows and conferences are convenient ways to conduct investor meetings, and companies should leverage these opportunities to build relationships with new investors now.
  • If your company is vulnerable to an activist attack, consider engaging a surveillance firm to better understand who currently holds your stock, evaluate defense measures, and draft a communications defense plan.

ESG is most definitely on the radar and the "S" is in focus

The pandemic and social justice issues will most likely move the ESG agenda forward, even for small- and mid-cap companies. In addressing the COVID-19 crisis, companies have been compelled to focus on all stakeholders – employees, customers, bankers, regulators, and vendors – not just investors. Social justice issues have brought the "S" in ESG to the forefront and companies are now paying closer attention to human capital issues like diversity, inclusion, and equality. According to a recent Harvard Law School Forum on Corporate Governance article, we should anticipate widespread disclosure on diversity and inclusion metrics in ESG frameworks as well as the addition of Human Capital Management reports to the arsenal of ESG communications materials. Bold statements about plans to address diversity and inclusion are great, yet today's environment calls for an "actions speak louder than words" approach – and follow-through matters.

The definition of leadership continues to evolve and to focus more and more on the role CEOs play in helping the world and all stakeholders not just shareholders. A recent Barron's article names 25 CEOs who navigated unprecedented challenges to keep their operations and people thriving during COVID. They key point is that today's most revered CEOs are not only running great companies but are also doing right by all stakeholders. This is a big departure from prior years, when top CEO lists focused on growth charts, profitability, and shareholder returns.

A few closing thoughts

COVID-19 has taught us many lessons, and perhaps the most important one is that successfully managing through a crisis of this magnitude and complexity is a unique opportunity to build trust, credibility and corporate reputation across all stakeholders. The following are some final communications considerations as we navigate the pandemic:

  • Continue to monitor COVID, sector and peer group developments to stay abreast of relevant information you'll need to communicate effectively.
  • Carefully craft messages that are transparent, credible, and accessible to investors and that consider the fluid nature and many unknowns of the pandemic.
  • For companies that suspended guidance, fill the void with information and metrics that help investors model the business in the current environment.
  • Remember that consistent and transparent communication in good times and bad is the way to go. Investors and analysts know that no one has all the answers – don't let that stand in the way of forthcoming communication.
  • Don't wait for things to get back to normal to meet with investors; leverage the opportunity to meet with existing and new investors efficiently through VNDRs, conferences or good old-fashioned phone calls.
  • Know how your company is being valued and stay ahead of vulnerabilities to activism.
  • Broadly communicate your ESG story. If you haven't focused on ESG, now is the time to get started. The humanity companies demonstrate during this crisis will be recognized and remembered.

Please contact Moira Conlon, President of Financial Profiles at 310-622-8220
or mconlon@finprofiles.com if you have questions or would like to request our presentation – ESG – A Competitive Advantage that Drives Shareholder Value, which provides a straightforward overview of ESG communications.