Consider the following comments. “The market just doesn’t understand us – it is so unfair…” and “If it weren’t for the bears and short-sellers, we would be alright and could get on and run the business with the shares back at a sensible level.”
I have listened in amazement to chairmen and chief executives make these comments and wondered to myself: how could anyone possibly believe such things?
A company controls the flow of information to the market and can do as much or as little as it chooses to communicate its message effectively. That a chairman, chief executive, finance director, other director or the whole board does not like what the market is doing to the share price does not mean the market does not understand the message. Either the market is saying, “We don’t believe you” or the company is woefully incompetent in its communication. Neither puts the board in a good light.
Unflattering or apparently contrarian work by analysts is often dismissed in similar ways. “If you ignore X and Y, the consensus view of next year is quite close to where we think it should be” is one way of enabling the board to ignore what it doesn’t want to hear – or possibly what the chairman, CEO or FD doesn’t want it to hear.
Surely, it is the role of the FD – or failing that, the chairman, the senior independent director (SID) or another director – to ensure such company views are heard. In those circumstances, a board should want to know why the market, or some elements of it, is saying things that differ from what the board is hearing from its executives, advisers and brokers.
I can think of many cases where the board has seen its share price slide dramatically and not bothered to find out why, or address the underlying issues. The resulting destruction of shareholder value continues and invariably becomes far worse than it might have been if the issues had been addressed properly.
So how, and when, should such ‘off-message’ views be dealt with? One way of handling it is to hire an independent analyst to give the board a short presentation. This way, their remarks cannot be ignored or dismissed, but must be dealt with.
My much wiser chairman recently had a better idea. He invited both the most bearish and the most bullish analyst to address the board at its meeting preceding the annual strategy review, as a way of improving our view of ourselves and avoiding what is known as ‘groupthink’. I cannot think of a better plan for a well-ordered company.
For companies facing more immediate and extreme criticism, the next board meeting will do. The sooner the “we don’t believe you” messages are dissected and dealt with, the better the outcome for a company – albeit not necessarily for the CEO or FD, if their strategy or analysis is found to have been seriously flawed.
A related issue is whether the company knows what its shareholders really think about the company and its board. Often the main source of information on this, beyond direct knowledge from meetings with shareholders, comes from the company’s brokers. They are not always motivated to deliver unpalatable news or views – and indeed, there are enough examples of messengers being shot to make them think twice about being too brave.
I know of one board that insists that either its chairman or SID attend some of the shareholder meetings following all annual and interim results announcements. Another route is to use a specialist independent adviser to survey the shareholders and report its findings.
To see ourselves as others see us is one way of avoiding group think – something now recognised in the recently updated UK Corporate Governance Code as a danger that boards must work to avoid.
Eric Tracey is a former FD and a non-executive director at listed companies
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