Essentially, the successful investor relations program seeks to demon- strate three basic things to persuade the investor of the success and poten- tial of your company. These are factors that attempt to demonstrate to the investor and the security analyst a company’s ability to succeed in the future—to increase the value of its equity and to use its capital effectively.
These factors, discussed in greater detail in Chapter 6, depend upon an extraordinarily complex structure of characteristics, but still they all evolve to three basic points . . .
• Earnings and other measures of financial soundness
• Management
• Plans
Earnings, cash flow, and sound balance sheet and financial structure are,after all, what a corporation is all about. They represent the return on the investment. They signify the company’s ability to succeed as a corpora-
tion. They demonstrate the soundness of a company, and if a track record of financial stability and growth is present, they may even attest to the com- pany’s ability to sustain that soundness and growth.
But at best, earnings, and even cash flow at any given moment, consti- tute only a small portion of the measure of a company’s viability, and they demonstrate not the near future but the immediate past. It’s the degree to which the pattern of financial performance demonstrates the ability of the company to continue to earn that must be projected. It’s the degree to which financial performance and other factors contribute value to the company and its securities. In today’s dynamic world, the random events that can adversely or favorably affect a company proliferate.
It should be remembered, too, that not only do circumstances and con- ditions change at a rapid rate, but they, and the results of the change, are accessible in real time to the investor and analyst.
Consider a picture of Times Square at high noon, freezing the motion of people and vehicles and even weather at that moment. A picture of the same view taken at 12:01 would be quite different. People and vehicles would be in different positions, and perhaps even the weather will have changed. Compare that view of Times Square, still photo by still photo, with a motion picture of the same view. You now begin to get a sense of the dynamic of a company’s condition in an economic environment that that changes constantly.
What makes this even more interesting, in considering the view of a company by its investing public, is that the changing conditions, the chang- ing view, the dynamic of the economy and the company—all are instantly visible to the investing community via the internet.
Thus, analysis has changed. And thus, the nature of investor relations has changed, if only because the investor and the analyst understand this dynamic, and demand that information be supplied, as often as possible, in real time.
But if earnings and cash flow and balance sheet and overall financial performance were the sole measure of a company’s potential as an invest- ment vehicle, there would be no auction market. It would all be done by computer. What’s more to the point is not just the earnings record of a com- pany, nor even the consistency of its positive cash flow and earnings growth.
The second factor is management.A corporation may, by definition, have a perpetual life, but its ability to operate successfully is a function of its management during the tenure of the individual managers. This is as true of a $2 million company as it is of Microsoft, for all its vast size and great- The New Investor—and What Influences the Investment Decision 17
ness. If, during the next few years, Bill Gates, the chairman of Microsoft, makes a decision about the computer industry that differs from others in his industry, it will alter the entire structure of Microsoft—and perhaps the entire computer industry—for many generations to come.
The boom years of the late 1990s produced an odd management phe- nomenon called the cult of personality.In fact, it may well have contributed to the corporate excess of the period. This was a situation in which CEOs of major companies, given overwhelming credit for management success, became stars—super CEOs. Jack Welch, of GE. Bill Gates of Microsoft.
Warren Buffett of Berkshire Insurance. And so forth. They became legends in both corporate and public annals. Executive compensation rose to pro- portions that, in too many cases, seemed outlandish, and began to cause alarm by shareholders. While in some cases, adulation and significant com- pensation were warranted, in too many other cases bonuses and compen- sation packages were granted in spite of poor performance, rather than because of great performance.
At the same time, this cult of personality became, for some, very heady stuff, and led to the excesses that bred the disasters uncovered in the first years of the 21st century. This is the behavior that led to the revolutionary regulation that now characterizes the corporate world. It bred, as well, a distrust of corporate management at a time when that trust was needed to buoy the investment world. Not only does management now have to proj- ect its skill, it has to defend its integrity. Again, the sins of the few are vis- ited upon the vast number of honest executives.
And what, then, must now be projected about management? Not just the skill, intelligence, vigor, and clear-sightedness of its officers, but its abil- ity to see the company, the industry, and the economy clearly. It’s the ability of the management team to deal with the day-by-day problems of the com- pany, and its ability to develop and implement realistic long-range plans. It’s the ability to fathom all aspects of management—operations, administra- tion, production, marketing, distribution, finance. It’s the ability to deal with contingencies in changing situations. Is the management that brought the company from $10 million to $100 million in volume capable of deal- ing with the same company when its volume reaches $10 billion, and there- fore with an entirely new set of problems and opportunities?
Third is plans.What is the company going to do tomorrow or five years from now? What are its long range strategic programs? Where is it going?
What are its objectives—long, medium, and short range? How does it
intend to finance its plans? Are its plans realistic in terms of the industry, the market, the economy, management’s abilities, and the company’s finan- cial condition? In these dynamic times, circumstances quickly turn positive to negative, as new technology obsolesces old technology. How nimble is management in its ability to change course as market or economic con- ditions change?
The word vision is now popular, and like many popular words, it has become a fad word. Too bad, because vision is a word of substance in man- agement, and in judging management. In fact, vision,in management, may be said to be a projection of the outer reaches of possibility. It is not only the vision of a corporate leader that must be projected and judged, it’s the assessment of his or her ability to make that vision a reality. When Carly Fiorina of H-P envisioned the value of merging with Compaq, it seemed far-fetched. But she accomplished it, and turned a far-fetched vision into a successful company. She saw the need, in the future, to change the configu- ration of H-P, and the way to do it. She fought off the naysayers, who were cursed with the lack of her vision. She made it happen.
It is this kind of vision that distinguishes a manager and distinguishes the manager’s company. It is this kind of management skill that must be projected to the investment community, if it is to trust the company to use its invested capital well.
When all of these factors about a corporation are projected and under- stood by the financial community, and when they are projected believably and consistently, then that company can expect to compete successfully in the capital markets. In fact, to the degree that predictability is possible, there is a premium that accrues to it.