The Credibility Paradigm

The experience, track record, and perceived competency of a public company’s management team plays a crucial role in the investment decisions of most investors.  Management is not only judged based on its performance, it’s judged based on how well it communicates that performance.  This communication is a primary contributor to management’s credibility.    

Credibility takes time to develop and also requires building and maintaining relationships with key stakeholders in the investment community.  If relationships with these key stakeholders are part of the foundation for credibility, then every time a company communicates with these key stakeholders is an opportunity to either build, or erode, credibility.  Management should adhere to five simple rules to ensure that as many of these opportunities as possible result in building, maintaining, or restoring credibility.   

Rule #1 – Manage expectations  

It sounds simple: Never promise what you cannot deliver.  Managing the expectations of the investment community is integral to building credibility.  When not managed properly, share prices can be quite volatile.  Managing expectations involves knowing what to say, how much to say and when to say it.  Management needs to be aware that there are benefits and risks to providing or not providing varying amounts and certain types of information to the ‘Street’.  For example, providing limited and/or unspecific information provides flexibility, but may not satisfy investors’ needs in terms of measuring your performance.  

Rule #2 – Set milestones or objectives 

Investors require road signs beyond basic financial measures to gauge a company’s performance, especially for a smaller company, whose financial results may fluctuate or take time to develop in its early stages. Management should clearly articulate its company’s corporate milestones and other objectives within the context of the long-term business strategy to allow investors to measure their progress.  With every successful achievement of a milestone, a management team builds credibility in the eyes of the investment community.     

Rule #3 – Identify key performance indicators (KPIs) 

How is an investor to properly evaluate the potential of a company if he or she does not know how management itself measures the Company’s success?  Management should publicly communicate those key measurements that, in its mind, reflect their company’s performance.  By disclosing these key measurements, known as key performance indicators (KPIs), management not only demonstrates that they really understand their business, but also provides a framework for investors to keep score from the sidelines. 

Rule #4 – Be forthright in all communications 

In both good times and in bad, it is crucial that management be forthright in all communications.  When things are going well, communications should relate successes to milestones, key performance indicators, and execution of strategy.  When a company encounters rough waters, more than at any other time, management should maintain open lines of communication, disclosing the issues, the rationale behind them and the action plans to rectify them.  Companies should have well-defined crisis communications plans to ensure that the company’s executives know what to do and how to properly respond when bad news hits. Responding inappropriately during a crisis can cause irreparable damage to credibility.  

Rule #5 – Provide consistent messaging 

Companies have a broad range of stakeholders with which they communicate with every day – investors, analysts, suppliers, customers, and special interest groups to name a few.  All company spokespeople, whether designated investor relations spokespeople or frontline workers, such as customer service representatives or sales staff, should be delivering consistent and clear messages.  Inconsistent communications can cause confusion in the marketplace, posing a significant risk to credibility.  A Company should have a disclosure policy in place outlining a limited number of specific people who are responsible for communicating with the investment community and financial media, with unambiguous guidelines for communications by others in the organization.  

Conclusion 

A strategic investor relations program is required to effectively build, maintain, or in some cases restore, credibility as well as to effectively convey and increase the general awareness of a company’s business prospects and strong growth opportunities.  Strong management credibility can result in a higher valuation relative to peers – as the investment community attributes greater value to the likelihood of strategic growth initiatives being successfully implemented.  Adhering to the five rules outlined above will help management shape the opinions of key audiences and preserve investor confidence.