Can we talk? Five tips for
communicating in turnarounds
In tough times, investors scrutinize every detail. Here’s how to
manage the discussion.
Few challenges are as daunting for investor relations as communicating with
investors in the middle of a restructuring. Managers of public companies need
to reckon with heightened scrutiny of reporting and regulatory disclosures.
Those in private equity–owned companies face rigorous performance dialogues
about management. And while doing so, managers in a turnaround must
simultaneously convey a sense of humility about what went wrong and confidence
that they know how to correct it.
Article narration
Whether the turnaround takes the
form of a formal restructuring or a strategic redirection, investors will cast
a gimlet eye on the slightest nuances of every statement, report, public
appearance, and performance metric for signs of strength or weakness. Competitors
will cast any hesitation and ambiguity in the most ominous terms, the better to
win over customers, suppliers, and key employees. And, of course, all these
challenges come at once, just when managing the core business is most
difficult.
As with most complex situations,
there is no one-size-fits-all approach to communicating during turnarounds. But
our work suggests that some general rules of thumb for investor communications
can be refined for these particularly difficult discussions. By adopting an
investor’s point of view, monitoring shifts in the shareholder base, targeting
specific future milestones, working to rebuild credibility, and branding the
turnaround, management can better maintain focus and shore up critical investor
support.
1.
Communicate from an investor’s point of view
A successful turnaround requires
input and collaboration with a wide range of stakeholders, such as owners
(investors), the board of directors, employees (including unions and work
councils where relevant), customers, suppliers, government bodies, and
communities. Communicating early and often is crucial to create a consistent
narrative and convince stakeholders that the turnaround is a winning
proposition for all involved.
But investors hold the purse
strings. If they recognize a company’s progress and reward it with a higher
share price, employees may well be encouraged to double down on their efforts.
Conversely, if the investors’ view of a company remains glum for too long, it
can dampen morale, lead to defections, and ultimately undermine the viability
of the entire turnaround. Weak performance can also lead to a decline in share
price that can open the door to an attack by activists or a takeover bid at far
less than the intrinsic value of a business. In that environment, no news is
usually considered bad news. Lack of communication can accelerate this process
and its risks.
Moreover, communications with
investors should set the tone for discussion with all audiences. It can be
tempting to tailor messaging heavily for different stakeholders. But in our
experience, this only adds complexity, conflicting narratives, and risks. We’ve
seen some cases end quite badly when the company mixed up what it told to whom,
when messages for internal management leaked to investors or other stakeholders
(such as unions), or when messages intended for external audiences confused
employees about company priorities.
2.
Watch for shifts among core shareholders
Even in the best of times, prudent
managers devote energy to understanding how their most important shareholders
view and value a company. These “intrinsic” investors base their decisions on a
deep understanding of a company’s strategy, its performance, and its potential
to create long-term value. Because they are focused on a company’s long-term
intrinsic value, they are more likely than shorter-term investors to support
management through a turnaround1
—and most likely to move the company’s stock price as it evolves.2
In our experience, shifts in this base of investors nonetheless can occur more
dramatically in turnaround situations than when companies are struggling, which
can be a harbinger of the likely difficulty of the turnaround ahead.
Thorough analysis of such investors
can help managers assess the likely impact of various improvements. Interviews
by external agents, such as communications or public-relations firms, can be
particularly helpful to tease out pain points. It is then management’s task to
address those points head on and not try to hide the real issues behind
platitudes and pleasing statements. One natural-resources company’s
shareholders, for example, acknowledged and complimented management’s efforts
to address specific hot-button issues that had come up during interactions
among managers, the board of directors, and top shareholders.
3.
Express a specific vision for the future
A company undergoing a turnaround
must paint a detailed and compelling strategic vision of its plans to address
the root cause of underperformance or distress. For one electricity and gas
utility, this meant recognizing shortcomings in its capital discipline and
committing not only to improve return on investment but also to deliver
short-term results. For a payments company, it meant reducing fragmentation in
the core business by properly integrating ten prior acquisitions that had
tripled the size of the company, rationalizing facilities and SKUs, and
building a new and more efficient central support structure.
The vision should also include
high-level financial goals, with an outline of how they will be met. Companies
should be candid about the trade-offs they’re making, for example, between
capturing savings to improve the bottom line in the short term and reinvesting
in the business to sustain performance after the turnaround effort is complete.
In our experience, investors understand that reinvestment is an important part
of long-term value creation—and they are supportive, as long they understand
the investments managers are making and when they expect returns.
While getting too specific on timing
can backfire, investors typically value, and in some cases demand, some sort of
concrete guidepost. For example, one high-tech company set a midterm goal of
growth in earnings margin of between 17 and 19 percent, and it regularly
referred to progress toward that goal in reports and during earnings calls. One
company in a cyclical industrial business, which had been earning returns below
its cost of capital for five years, set a bold goal of return on invested
capital at or above the cost of capital, even at the low point of the cycle—and
it gave rough magnitudes of the cost and margin improvements it expected from
its largest divisions to get there.
4.
Rebuild credibility
Until managers of underperforming
companies earn back credibility with investors, their valuations are unlikely
to reflect more than a heavily discounted version of the improvements
management is claiming. Regaining trust—both to demonstrate open and honest
transparency and, frankly, to inspire confidence that managers know what
they’re doing—requires a change in tack from usual communications on a number
of fronts.
Break all the bad news at once. As a general rule, managers should make a point of being
as candid as possible from the very start. It’s a well-established principle of
politics, but it’s just as applicable to companies in a turnaround. A new
management team has a great opportunity to acknowledge all past mistakes and
start with a fresh slate. For example, one industrial company’s stock actually
rose the day it announced a write-off of more than $1 billion, since investors
viewed this as a signal that the new management team would make a decisive
break from the mistakes of the past and would make hard decisions to exit
dead-end investments that were still absorbing capital and management time. For
an existing management team, the task is even more daunting. It takes strong
leadership to criticize one’s own actions, sometimes at the risk of being
replaced. Investors may be more patient at the outset of a turnaround while
they await evidence that the turnaround is working. But the patience of even
the most committed intrinsic investor will wear thin if bad news just keeps
dribbling out.
Build a track record of delivery. Communicate only the goals you know you can achieve—using
metrics and milestones you revisit regularly—and then prove you can achieve
them. Credibility is at a premium in a turnaround—and nothing erodes it like
making a promise and falling short. Metrics do not need to be purely financial.
For example, one mining company that had consistently missed its financial and
output targets focused its turnaround goals on progress against operational
metrics, such as overall equipment effectiveness, to demonstrate tangible
performance improvement. While such operational metrics were not directly
linked to top-line performance, they offered investors a way to track managers’
performance and hold them accountable for improvements.
Tie incentives to targets. Talk is cheap, and sophisticated investors gravitate to
management teams that put their money where their mouth is. Structuring
compensation packages to directly tie them to turnaround targets, as well as
having executives and board members buy meaningful amounts of stock in a
company, signals a commitment and confidence to follow through and deliver on a
management team’s promises. One company unveiled a new turnaround incentive
plan that aligned incentives for management and frontline employees using
similar performance metrics. Investors reacted positively, citing this as an
example of the company’s focus and commitment to turning a new page and a
reason for holding on to their current position.
Increase transparency. Just as breaking bad news all at once can improve
credibility in a turnaround, candor can help not only at the level of overall
financial guidelines but also of specific projects. We’ve seen two different
basic-materials companies make a practice of detailing, during earnings calls
and investor gatherings, 10 to 20 projects for improving operational efficiency
and their impact on cash generation and workforce behavior. Investors noted
that they appreciated the more vivid picture of the type of transformation the
companies were undergoing and added that the observed margin improvements had
come from more promising and sustainable sources than shortsighted cost
reduction.
Be confident—and humble. Managers must exude confidence at their ability to
withstand challenging times from markets and competitors, as well as project
the success of the company’s planned turn-around. But they also need to show
humility in the face of distress, whether it’s due to past underperformance or
external factors. Shareholders will examine word choice and tone for signs of
the kind of arrogance and overconfidence that come from denying past missteps.
5.
Brand the turnaround
To many executives, branding a
turnaround may seem to be mere marketing, but it can be an effective way to
crystallize a focal point and amplify the narrative for the outside
world—making the rebuilding effort more credible. One mining company, for
example, gave a pithy name to its transformation effort and mentioned it in
every external communication. Soon after, investors and media alike were citing
the project by name as shorthand for the company’s promising turnaround,
rendering internal and external communication more coherent and giving
employees’ internal efforts some external recognition.
A brand can also convey a sense of
new beginning. Attaching a campaign name to write-offs, exits from failed
ventures, and even mundane PowerPoint templates for earnings-call slides can
reinforce a consistent and compelling change story and build critical momentum.
Ultimately, communication is not a
substitute for performance. Nothing drives a stock price like beating
expectations and punishing short sellers quarter after quarter. But a
thoughtful approach to communicating to investors and other stakeholders can
help managers build the momentum they need to bring a struggling company into a
new era of value creation.
By Ryan Davies, Laurent Kinet, and
Brian Lo
http://www.mckinsey.com/insights/corporate_finance/Can_we_talk_Five_tips_for_communicating_in_turnarounds?cid=other-eml-alt-mip-mck-oth-1504
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