IPO-candidates and listed companies alike have at least one thing in common: they all want to attract and retain long-term shareholders.
Brian Bushee, Vice Dean of Teaching and Learning of the Accounting Department at University of Pennsylvania’s Wharton School, once suggested that “changes in disclosure practices have the potential to shift the composition of a firm’s investor base away from transient investors and toward more patient capital. By removing some of the external pressures for short‐term performance, such a shift could encourage managers to establish a culture based on long‐run value maximization.” (“Identifying and Attracting the “Right” Investors: Evidence on the Behavior of Institutional Investors” Applied Journal of Corporate Finance, 2004)
Simply put, no investor will accept to be taken blind-folded on your long-term journey with just a ‘trust me’ and a hug from your part. They need a perspective, a sense of direction that only you, the company’s CEO, can give them.
Ditching the outlook section is not an option.
Companies are not legally required to provide earnings guidance, although it is common practice for many of them to do so. What is the alternative if you are loath to commit, for instance, to a set number for your operating margin one quarter, one year (or more) down the road?
It is quite effective to develop the outlook section from the company’s business model and strategic directions:
- What is it that you want to achieve?
I recommend you avoid themes like “profitable growth”, “value creation for shareholders” that are too commonplace. Be a little bit more specific: increasing market shares, becoming one of the top 3 leaders in your industry, growing the share of specialty products as a percentage of revenue, diversifying your geographic footprint, reducing your exposure to cyclical markets, etc. Each time with a metric to support your goal and allow the investment community to track your progress against it.
- How much is it going to take you to get there?
Generating positive free cash flow, lowering your net debt, a combination of organic growth and acquisitions, strengthening your pricing power, raising the R&D spend, disposing of non-performing assets, etc.
- What are your working assumptions?
Constant currencies and scope, interest rates, commodity prices, GDP, “barring any unforeseen circumstances”, etc.
The outlook section does not have to be wordy or convoluted or confusing. It can be qualitative, yet relevant, informative, instead of dangerously quantitative. With this in mind, you will focus on what is under your control, on the potential progress that investors will be able to measure and that you are prepared to be held you accountable for. It is the quality of your strategic execution in the long run that will drive investor trust and optimize your valuation.
You should take the opportunity of your next investor meeting to ask: “Do you think we should provide guidance?” or “What is your view on the way we discuss our business outlook”? Visit FINEO’s website and download The Essential Shareholder Engagement Checklist to find out more on how to make the most of your investor meetings. Or ask me for your own copy.
All in all, develop your own strategy about the way you articulate prospects and objectives. Some investors expect guidance, others hate it. Just make sure your guidance strategy is consistent over time and is aligned with your business model, corporate culture, strategy and compensation policies.