Tom McDonald is a Partner/Managing Director and Head of Business Development. He is responsible for marketing the firm’s capabilities to potential new clients as well as the institutional investment community.
Regulation FD, now in its 13th year of implementation, remains a source of consternation for senior management and investor relations teams in their communications with investors. Some companies err on the side of excessive caution and end up rarely engaging in regular, productive dialog with The Street. Other companies go the other extreme and provide copious amounts of detail while filing an abundance of 8Ks. Finding the appropriate balance is the best strategy for open, useful relationships with investor audiences while steering clear of actions that could lead to SEC penalties.
Here, we offer a brief description of what Reg FD is, followed by a simple test to help you determine your level of compliance with the regulation. We hope you will find this helpful as a starting point as you think about Reg FD. Since the following answers should not be construed as legal advice, we also urge you to talk with your legal counsel before deciding what practices are best for your company and its particular disclosure situations.
What is Reg FD?
Reg FD is the SEC’s attempt to level the playing field for all investors – institutional and individual – by prohibiting selective disclosure of material information.
A “miss” relative to a company’s financial guidance can happen to even the best management teams. Misses can arise from a hiccup in company operations or they can be related to factors outside your company’s control. In either case, the ways in which you assess the problem, communicate it, and follow up in later quarters will have a powerful and lasting impact on the Street’s views of management’s credibility and thus your stock’s long-term valuation.
Assessing the problem
Before you communicate with the Street, make sure you’ve honestly assessed the reason for the miss and its ongoing impact to your results. Was this merely a soft quarter for seasonal or other factors, or was there a one-time event? While it’s possible that ongoing results won’t be impacted, it’s also possible that greater forces are at play: a business segment could be maturing, or your internal growth expectations may have to be moderated. Even if the miss is truly related to an issue out of your control, such as a reimbursement change, make sure you critically evaluate the impact before you communicate any revised guidance.
If it seems to you that there is an investment banking conference every week, you’re just about right. Investment banks routinely hold investor conferences that tend to focus on certain industries (like healthcare or technology). A few Wall Street firms also hold what I’d call “best idea” conferences, which include representative companies from different industries.
Attending a conference can be a valuable part of your investor relations strategy. It’s a great way to get more investors to know your company, and to make vital business connections. But, if you have, say, 15 analysts covering your stock, and each one hosts a conference, that can mean you’re getting invited to 15+ conferences a year. How can you possibly accept every one of these invitations?
Before deciding “yea” or “nay” on attending upcoming conferences, it’s important to understand why they’re held. Decades ago, Wall Street’s equity divisions made money primarily by underwriting stock offerings and trading stocks. As institutional commissions have shrunk, trading has become much less profitable. However, while the buy side is no longer paying as much for trading execution or research services, buy side firms and analysts will pay for access to management. Therefore, Wall Street has strong incentives to arrange venues where they can introduce companies to investors.
All management teams and boards of directors want to know how they’re doing. For public healthcare companies, the wide variety of stock indices makes it easy to draw a comparison with peer companies. But finding the right index is key to making a meaningful comparison. Just because an index includes “technology,” “healthcare” or “mid-cap” in its name doesn’t mean it’s right for you. And the most popular indices are not always the right choices.
Fund managers, especially those who may not understand nuances in various healthcare sectors, will use an index to evaluate your firm’s performance. But, comparing against the wrong index can have serious implications: for instance, if an index that includes many larger cap companies (over $1 billion in market capitalization) is rising, but smaller companies aren’t sharing this momentum, then your smaller firm will compare poorly against the index – and undeservedly so. Further, smaller companies are more vulnerable to certain financial issues than multi-billion dollar firms; access to capital, product pipelines and market volatility can have an outsized effect on a small-cap firm’s stock performance.
As CEOs and CFOs, you no doubt think long and hard about the investment bank with which you want to work. Most management teams consider which investment bankers can best help meet their company’s capital raising and strategic needs, as well as which bank’s sell-side analysts will provide quality research coverage of the company. However, it is also important to consider how impactful the bank’s institutional equity sales force is.
Whether you are already public or thinking of going public, you want to work with a sales force that has real influence in the investment community. Importantly, you want to engage a team that has solid, long-term relationships with those investors who will be buying your stock.
When done well, an Analyst Day (or Investor Day) is an extremely valuable investor relations tool. Typically a half- or full-day event your company hosts for buy- and sell-side analysts, an analyst day meeting can significantly enhance an analyst’s understanding of your company’s fundamentals, as well as aid them in better valuing your stock. At Westwicke, we have participated in hundreds of analyst days over our careers, and this experience lends valuable third-party perspective that has helped many companies hold successful analyst day events. To that end, I offer some do’s and don’ts for analyst days compiled over Westwicke’s years on Wall Street:
Do hold an analyst day every 18-24 months. The event provides investors with a deeper-than-normal dive into your company, and helps demonstrate your management team’s breadth and strategic vision.
Do provide unique content. Think about including members of the management team that investors don’t normally interact with. Consider bringing in physician experts or customers to provide an outsider’s perspective on your products or market. In the planning stages, ask both buy- and sell-side analysts for input.