Since Dodd-Frank, shareholder outreach has stepped up exponentially. Over the past few years I have facilitated numerous dialogues with my clients, shareholders and proxy advisors.
As my Forbes Executive Pay Watch Interview series continues, I am fortunate to have Moira Conlon, president of Financial Profiles, Inc., as my guest. Moira has been involved with investor relations and corporate communications for more than 25 years. She started Financial Profiles in 2007 to help public and pre-IPO companies address issues affecting valuation and corporate reputation, and to effectively communicate with Wall Street and the financial press. In addition, Financial Profiles serves as the public relations agency for the Southern California Chapter of the National Association of Corporate Directors. With a staff of about 20 executives, Moira and her team have deep and broad experience gained at Wall Street firms, global Investor Relations (IR) and Public Relations (PR) organizations and corporations across several market segments.
Robin Ferracone: Moira, thanks so much for joining me today. Obviously, we are in the thick of 2016 proxy season. Disclosure, transparency and crisp investor messaging are critical components to communicating with shareholders. Can you share with us how you have seen investor relations evolve over the past five years?
Moira Conlon: The proliferation of activist investors is the main change we’ve seen in IR over the past five years and that isn’t abating.
According to Activist Insight, activists targeted 350 public U.S. companies last year, up 9% from 2014 and 217% from 2010. Today, no company, big or small, is immune to an activist attack. Activist campaigns don’t always stem from an undervalued stock. In many cases, the activist simply believes a company can be worth more in the short-term based on the actions they are suggesting.
In response to unprecedented levels of activist campaigns and other factors driving short-term thinking on the part of corporate America, there is a groundswell of conversation about what companies can do to overcome the mentality of “short-termism.” BlackRock Chairman and CEO Larry Fink is lobbying for companies to clearly articulate their strategy for long-term sustainable growth in their communications with investors. He also suggests “the board is managements’ first line of defense against short-term pressures” and advocates for boards to “support management during periods where performance has deviated from the long-term trajectory” – which he notes is difficult to do in the absence of a “clearly articulated long-term vision, strategic direction and credible metrics against which to assess performance.”
Against this backdrop, value creation strategies are front and center for investor relations planning and communications. This requires companies to maintain a constant pulse on Wall Street sentiment – both positive and negative – in order to communicate appropriately and effectively. Today, periodic investor perception studies, along with a vulnerability assessment and plan for dealing with an activist attack, are crucial elements to a solid IR program.
Boards also have become more engaged in investor relations in recent years. Management and investor relations officers (IROs) are more focused on keeping their boards well-informed about valuation issues and investor sentiment, and are establishing or refining protocol around board/shareholder engagement.
Ferracone: Interesting points. My colleagues and I at Farient work with Compensation Committees and Nominating and Governance Committees to develop pay programs, and help our clients think holistically about performance and corporate governance. In your experience, how are successful companies communicating this to shareholders?
Conlon: That is a great question and a topic of interest to many of our clients. Executive compensation is still the central corporate governance issue for both investors and management. And according to a survey conducted by RR Donnelley, investors are still deeply dissatisfied with compensation disclosure. Specifically, they believe companies must do a better job explaining how growth strategies translate into operational and financial results, how pay incentivizes management to support execution of the corporate strategy and how the compensation committee arrived at its decisions. They also want to know how the operating divisions support this alignment.
Companies that score points for good executive compensation practices provide clear and concrete language about their short-term and long-term incentive compensation programs, both in terms of the metrics they use to determine eligibility for incentive compensation and the explicit dollar value of the targets. The metrics used to measure performance should be relevant to the business and go beyond earnings per share (EPS), which can be easily manipulated. For example, if a company is asset intensive, investors would expect Return on Assets (ROA) to be a top metric for performance measurement. Often, it is the compensation programs based on soft, qualitative key performance indicators (KPIs) that deliver the $50 million CEO paydays – and those boards often claim they have to “pay up for talent.” The takeaway from an investor’s perspective is the more clarity and disclosure around compensation programs, the more likely the incentive targets will be taken seriously and be reflected in actual pay.
Conversations that connect performance and corporate governance are on the rise as companies begin preparing for the mandatory disclosure of the CEO pay ratio in early 2017. As companies are evaluating this data, gender pay gap issues are also coming to the forefront. A few companies, such as SalesForce.com, are out in front of these issues with strong messaging around actions to address pay and gender inequality, and these efforts are being viewed quite positively from a PR perspective. We recommend boards and management teams take a proactive approach to getting out ahead of the issue rather than waiting until they are put in the penalty box. As one investor said, “Equality and diversity, when backed up by facts and statistics, are valuable attributes of a good corporate story.”
Ferracone: Moira, can you please share with us how you have worked with your clients to develop a strategy for ISS and shareholders? Is there a difference in how you communicate to different shareholder groups (e.g., public pension, mutual funds and union funds)?
Conlon: We emphasize to our clients the need for consistent and proactive communications and outreach to major shareholders. IR isn’t effective if you approach it like switching on a light. If the first time a company is speaking with its major shareholders is to request support for a controversial management proposal, it is likely to be an uphill battle. We encourage our clients to engage regularly with their major shareholders to make sure they have a strong understanding of the strategic direction of the company and an established level of trust in management. Investor engagement should be a two-way dialogue where shareholders share with management their views on corporate strategy and governance issues. In the end, companies that reach out and engage with their shareholders on a regular basis are far less likely to be caught off guard by a controversial proxy issue that they have to go out and scramble to defend.
Generally, when it comes to effective messaging, the key is to deliver a consistent message to all audiences. That said, as with any important sales call, it is important for companies to know who their audience is, and to consider the specific investment style and preferences, and how the corporate story and messaging may be received ahead of any engagement. This is particularly important for special interest groups, such as union funds, which have a high level of interest in executive compensation. Unions use powerful tools like the right to strike or put pressure on a company, so it’s important to conduct research and anticipate their reaction to any proxy proposal ahead of time. Information is often readily available. For instance, on the AFL-CIO’s website there is an “Executive Paywatch” section dedicated to showcasing high-paid CEOs in a low wage economy.
Ferracone: How should companies communicate difficult topics to various audiences?
Conlon: For many years, we have been involved in helping management teams and boards communicate on a wide range of difficult topics or bad news, ranging from significant earnings disappointments to unexpected executive departures. Here are a few key considerations:
• Transparency and complete information are critical; provide as much information as you can, but avoid making statements that you will need to retract or change in the future. Carefully craft your message or response. In the absence of a coherent response, you lose control of the story as others fill in the missing pieces
• Bad news does not usually get better with time; if it’s material, you need to get it out there. In any case, bad news should be announced as soon as all of the facts are known and the situation has been evaluated. The goal is to avoid the age old credibility buster: “When did you find out about this and why didn’t you tell us before now?”
• The best way to deliver bad news is with a solution – an action plan for fixing or moving beyond the problem, including a reasonable timeframe and milestones. While you can’t change history, you can impact what is being done to fix the problem and what policies or protocols are being put in place to make sure the problem doesn’t occur again
• Audiences are interconnected. Think through and prepare for the impact of bad news on all key stakeholders – investors, employees, customers, regulators, vendors, etc. For example, news about a company sale may be well received by investors looking for a quick return on their investment, but would be negative news to employees who may lose their jobs
• Finally, don’t forget to turn the bad news into good news by communicating how you addressed a challenging situation and moved beyond it. Take credit for positive outcomes. This will help shore up credibility
Ferracone: Lastly, I would appreciate your predictions around what you see for shareholder and corporate communications going forward into 2017 and beyond.
Conlon: It’s hard to predict what will happen next, but it’s safe to say the operating environment for public companies has become very challenging and that is not likely to change any time soon. What’s interesting is many of the same basic rules of engagement apply in any environment. The companies best positioned for success are: 1) committed to good corporate governance and transparency; 2) have a good read on investor sentiment and are focused on doing the best possible job communicating their plan for value creation stories; 3) are actively and effectively building strong relationships with investors, and 4) can be counted on to communicate credibly and consistently in good times and bad.
Ferracone: What questions are you receiving from clients, particularly around executive compensation, about how they should communicate with investors?
Conlon: At any point in time, there is always some issue we hear about across our client base – the price of oil, concerns in China, etc. Of course, companies need to be aware of these issues and explain their impact on business. It’s also important to help investors understand what factors are in your control and what factors are beyond your control. When factors beyond your control are impacting business results, investors will want to know what plan B is for delivering value in spite of a challenging backdrop.
As far as executive compensation is concerned, any company planning to increase compensation when corporate performance doesn’t merit it should think twice and consider the headline risk ahead of time. From a reporter’s perspective, the translation is: “Big Pay Raise for CEO Despite
Decline in Profits.” Any tricky communication about executive compensation in the current environment needs to be handled very carefully and include a credible explanation. Once again, transparency reduces risk.
Ferracone: Moira, thanks so much for joining me today. I believe the big take away here is that we can do everything right, but if a company doesn’t communicate effectively with shareholders and stakeholders, it may find itself challenged with trust issues and/or attention from activists along the way.
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This article was contributed to forbes.com by Robin Ferracone. Opinions expressed by Forbes Contributors are their own.
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