The Tone sets the tune - Corporate Communications from an Investor's Perspective
By Alexander Dominicus
12.05.2023
The communication of listed companies plays an important role in building trust and credibility with investors. As a fundamentally oriented equity investor, communication with the management and investor relations is an essential part of company analysis. Getting the communication right can have a significant impact on share price performance and the capital market's perception of the company.
The link between targets and achievements and the impact on share price performance
Listed companies must navigate the fine line of making the capital market story palatable to investors and thus highlighting potentials and strengths without raising unrealistic expectations of future developments. In the short term, the share price development usually reflects the actual profit development achieved compared to the expected profit development. Expectations are formed over time by analysts' assessments and investors' positioning. Companies need to understand in their communication that they themselves make a significant contribution to analysts' and investors' expectations. Therefore, it is crucial not only to highlight the potentials in communication, but also to proactively point out the risks and challenges.
Companies sometimes make the mistake of being overly optimistic about the future and not mentioning negative scenarios or downplaying their importance. This phenomenon is understandable to a certain extent, as a board of directors usually adopts an optimistic basic attitude towards its own future business development. This is also important to take advantage of opportunities in the company and to motivate employees, but it can hinder positive long-term share price performance. If a company communicates too optimistically and then one or the other risk occurs, the fundamental development may not live up to the high expectations and investors will be disappointed. In the long run, companies benefit from addressing risks proactively in their corporate communication, aligning them with investors and analysts, and reflect them accordingly in their business plan. In this way, the company helps to create more realistic and reliable expectations, enabling them to meet or even exceed them with the actual fundamental development, especially when certain risks do not materialize. . Positive surprises or "earnings upgrades" can often be a powerful catalyst for the share price performance.
A strategy must include goals - preferably specific and measurable.
Transparency and measurability are additional important criteria that investors demand from corporate communication. Board members should set clear and understandable goals, specify them in the form of KPIs and report regularly on the progress. These goals should be underpinned by a robust and transparent business plan. Companies should clearly show which strategic measures they intend to take to achieve the formulated goals, while sufficiently mapping risks in order to be sure of achieving these goals even in difficult market conditions.
And if something does go wrong - ”The more the better” and "Don't trick me twice".
No company is immune to occasionally failing to meet expectations and having to adjust formulated goals. However, if risks are adequately considered in advance, this should be the absolute exception rather than the rule. The more reliably a company communicates, the better its reputation on the capital market and thus its chances of being positively assessed by investors and achieving a high valuation multiple. Experience shows that when business is worse than expected, challenges often persist initially, or the situation even deteriorates in the short term before normalisation occurs. A phenomenon that often contradicts the optimistic basic attitude of the management. Therefore, the motto is: If the forecast must be adjusted, then please only do it once and do it sufficiently. Companies should communicate particularly transparently and openly in this phase and map the risks more than clearly in the communication. Because the worst thing is when a company has to adjust its expectations a second time. This can lead to a significant decline in reputation in the capital market, making it increasingly difficult to find new investors in the future.
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