Maintaining Credibility in a Downturn
The demands of managing a going concern intensify during a prolonged downturn. Bot public and private companies are required to make tough decisions in order to adapt to the economic environment while preserving the organization’s mission and financial health for the long term. In addition, people are looking toward corporate
This is a particularly difficult time for the leadership of public corporations. These executives have the additional responsibility of enduring increased scrutiny as their decisions play out in the public arena. Regardless of the economy and despite the threat of a double dip recession, stocks trade every day the market is open.
Maintaining credibility in a downturn is problematic because . . .
• Generating sales and earnings is increasingly challenging as the downturn persists.
• Uncertainty about the variables driving financial performance makes forecasting with any precision nearly impossible.
• Motivating an already lean work force who may be multi-tasking due to previous expense cuts and staff reductions can be awkward.
• Watching a company’s stock drop is disappointing if not discouraging . . . most companies are working too hard for such low valuations.
Any given stock trades with its peer group, industry and the general market. Occasionally, the market moves on news unrelated to a company’s financial performance or fundamentals. We saw this within the past week as institutional investors quickly adjusted their portfolios to manage the risks and returns for their clients. Investors may have been forced to sell the stock of a company with solid financial performance and a great future in order to offset the losses of another company in the portfolio.
Because buy and sell decisions during a market adjustment do not accurately reflect investors’ longer term outlook for the companies in which they hold equity, it is important for corporate leadership to avoid over-reacting to the sell-off. Credibility and consistency are more important now than ever.
Well-informed investors make sound investment decisions regardless of the vagaries of the stock market. Companies attract investors when they continuously display behavior such as managing expectations with quantifiable metrics on a regular basis; sharing realistic long-term goals and future prospects; taking the time to explain the strategic significance of corporate decisions and/or changes in structure, direction and investment characteristics; and remaining accessible to investors on a planned and consistent basis. All of these activities promote informed investment decisions and help reduce the uncertainty about a company’s future financial performance, but only if the information is timely, comprehensive and accurate. Continuity builds credibility.
The recovery . . . . not the sell-off . . . associated with the recent meltdown is an opportunity to measure investor perceptions about your company and its investment characteristics. This can be accomplished by measuring how quickly your stock recovers compared with previous market-related downturns in stock valuation relative to your peer group and the overall market. The speed in which your trading volume and stock price return to levels that more accurately reflect your company’s investment characteristics is a good indication of investor interest.
A depressed stock price should be considered a buying opportunity and generate increased investor interest. If the recovery of your stock takes longer compared with others in your peer group or industry, it may indicate inaccurate investor perceptions. You may need to improve your information flow with existing and prospective shareholders. The key to making changes is to be objective about the measurement.
Stocks that have appreciated gradually and consistently since the last downturn have a greater probability of recovering more quickly this time than stocks that have experienced frequent and wide fluctuations in trading volume and stock price within the last couple of years. Prolonged uncertainty is difficult to overcome but can be resolved. It is worth the time and effort to determine whether a change in your behavior could increase investors’ understanding and accurate expectations about your company. Doing so could result in more stable trading activity. It reminds me of quote for which there are several reiterations and no consensus on its origination, “ . . . doing the same thing over and over again and expecting different results.” It may be time for a change.
After 35 years, I continue to respect institutional investors’ resilience to negative news given an appropriate amount of time to process and adjust to the new information. I have learned over the years that investors reward companies committed to promoting informed investment decisions.
