Poor communication strategy could spark share price slump

It’s tempting when times are this tough for a finance director to cut spending to the bone and eliminate those departments which appear, at first glance, to be cost centres rather than value creators. For those FDs of a more cynical persuasion, closing or scaling down the company’s communications or investor relations departments seems an obvious way to save cash ­ it’s difficult to see how they can add much value in a tumbling market.

But new research published by communications consultancy Blue Rubicon suggests this would be a rash move and would have a real impact on the value of an FD’s share options. The study showed that for 43% of the companies that experienced the biggest share price falls during the period 2002 to 2007, poor communication was a key trigger for the slump.

This study, conducted for Blue Rubicon by econometrics analyst Oxford Metrica, looked at the most significant sustained positive or negative share price movements for each FTSE-100 company over a five-year period. It also stripped out the impact of the overall market on share price movements.

Hard evidence
Fraser Hardie, senior partner at Blue Rubicon, says the company undertook the study because it wanted hard evidence of the impact of effective communications on a company rather than relying on more qualitative market research. As any seasoned watcher of financial markets knows, there are always times when the true value of a company and market sentiment become disconnected. This study suggested that a poor communications strategy could exacerbate the disconnect.

“When we started to look at this more closely, we noticed that an inconsistent communications strategy is punished very heavily by the market as this breaks down investor trust in a company,” Hardie says. This makes sense: financial markets can cope with bad news, but it’s uncertainty that really makes share prices fluctuate wildly and destroys confidence in a company’s manage ment.

Blue Rubicon’s research was carried out during the halcyon days of the bull market that covered the time in which the FTSE-100 recovered from the low of 3,287 reached in March 2003 to a high of more than4 6,500 towards the end of 2007.

Times are now very different with economies around the world moving rapidly into reverse and crises erupting on an almost daily basis. In such uncertain times, there are good reasons for companies to focus more time and money on the way they communicate. Research carried out by the polling company, YouGov, showed that Blue Rubicon’s findings could be especially vital in the current market conditions. A study in the months after the Northern Rock crisis showed that poor communication, particularly through the company website, played a major role in the run on the bank.

“For almost four days after the first news report [on Northern Rock], no one could access the company website,” says Steve Nuttall, head of financial services consulting at YouGov.

“This was a major factor in the initial loss of confidence by many investors. Even though Northern Rock happened some time ago and other crises have emerged, the penny has not yet dropped for many companies that uncertainty destroys share prices.”

Nuttall believes the nub of the problem lies with those companies that have lost their ability to communicate to investors and customers about the impact of different risks to their business models. “It is not communicating the precise risk of a situation that creates uncertainty. Companies should be reassuring the markets that they have analysed and quantified the likelihood of different types of risk and the impact they would have on their business model at a very early stage,” he adds.

“A company needs to present a lucid analysis of the market and the sector along with the growth prospects and what risks there are to achieving those growth targets,” says Hardie. Too many companies focus too heavily on the financial results at the expense of the narrative around them. “The current climate shows us that a company’s story is just as important as the numbers. When the fundamentals are disconnected from sentiment, the narrative becomes more important,” adds Hardie.

Stage fright
Companies are good at laying out their strategic objectives and showing how they have achieved those objectives through their financial performance, but they are not so good at showing the stages between the strategic goals and the reported results.

“They do not communicate how they achieve those goals on a day-to-day basis through marketing, brand management, or people development,” says Hardie.

For FDs who are still tempted to cut the communications budget, the study has another incentive for keeping it fully staffed, particularly for those whose remuneration is linked to the performance of their company compared with competitors in the same business sector. The study found those companies with an effective communications strategy enjoy an 8% premium relative to their peers.

FDs may be disappointed to discover that the cold, hard logic of their financial numbers isn’t enough for the company to command a higher share price, but at least the upside seems to justify letting the investor relations department get on with the job in hand.