An investor perception audit – a formal survey of buy-side investors and sell-side analysts, typically conducted by an independent third-party – has become part of the standard investor relations activities for many public companies. Done properly, a perception audit should highlight the good, the bad, and the ugly about a company’s IR efforts and its reputation on the Street. While many companies shy away from asking the tough questions, we would encourage companies to seek both positive and negative feedback, and to actively address any concerns that are raised.
In a 2007 survey of over 3,000 companies titled, Perception Studies: What are They Thinking?, the National Investor Relations Institute (NIRI) found that the majority of respondents surveyed had conducted perception audits. Of this subgroup, 92% said that they use perception audits to determine the extent to which their company’s strategy was understood and 78% noted that perception audits were useful when refining corporate messaging. Here are some other reasons why you should consider a perception audit:
- Measuring Effectiveness: Perception audits are great for measuring the effectiveness of IR practices. Your corporate strategy may be on target, but aspects of it could be getting lost in translation when you communicate with the Street. An audit can highlight ways to improve your corporate messaging and to market your business more successfully.
- Assessing Disclosure Levels: Understanding what investors appreciate in your disclosure and where you have the opportunity to be more transparent can be key. Importantly, determining how relevant your metrics are to the Street can be helpful as you craft your financial message.
- Management Perception: Audits can be a valuable resource for the board of directors to use as an objective analysis of management as well as a vehicle to collect feedback on the management team’s credibility and reputation on the Street.
- Audience Segmentation: A well-structured perception audit will allow you to identify differences in perspective, sentiment, or expectations between the buy- and sell-sides, between current shareholders and non-shareholders, and between the largest buyers and largest sellers in recent quarters.
- Investor Day Preparation: Perception audits can be used to help plan an investor day, providing you with an objective roadmap of what subjects to focus on, what information to present, and how to make the day as productive as possible.
- Building Credibility: The investment community values being asked for its opinion and views conducting a perception audit as an indication of the management team’s interest in improving.
As my hairs have gotten grayer in the last decade, I can’t help but to have noticed the major transformation that has altered how humans interact with one another. The digital revolution has permeated every facet of my life (as I’m sure it has yours): from how I get my news, to how I stay in touch with my family, to how I do business each day.
The “greatest generation” (i.e., those who grew up during the Great Depression) saw the widespread adoption of telephones and television sets. This generation spent the majority of its working years communicating through pen and paper, typewriters, and “snail mail.” The children of this generation—i.e., the “baby boomers”—grew up with much more access to information than their parents, but the information was not immediate, not “in your face,” and not coming at you from half a dozen devices at once. The way these two generations worked was very different, but the two groups’ outlooks were not necessarily in opposition. Like me, many of you reading this are probably part of Generation X or Generation Y. While we also have distinct world views and experiences compared to the generations who preceded us, we still are markedly different from the youngest members of today’s work force.
Recently, I moderated our first quarterly Wall Street Revealed webinar with special guests Grant Miller, Managing Director, Head of Equity Capital Markets, Cowen and Company, and Matthew Perry, Portfolio Manager, BVF Partners, L.P.
While we covered a host of topics related to the webinar’s theme – “A View of the Current Healthcare IPO Market” – one of the meatiest parts of the discussion (and a topic that drew many questions from webinar participants) was on the definition, value and purpose of “test-the-waters” meetings.
These meetings are made possible as an outcome of the JOBS (Jumpstart Our Business Startups) Act, which – according to the Securities and Exchange Commission – permits an emerging growth company to engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, either prior to or following the date of filing of a registration statement. In short, private companies are now able to meet with potential investors before filing to go public. As Matthew Perry emphasized during our webinar, “I love test-the-waters meetings. Every single CEO, board member and management team should use them to know what their company’s IPO is going to be like well before the IPO is booked and filed.”
Management teams and IR professionals tend to take stock rating downgrades personally. While a downgrade may sting on the day of, in the long run all stocks’ ratings are subject to fluctuations – both up and down. To get a better feel for how the buy-side reacts to ratings downgrades, we reached out to both buy-side analysts and portfolio managers to get some real-time feedback. The conclusion? In general, the buy-side really doesn’t care about the rating on a particular stock. The representatives we spoke to clearly are more interested in learning as much as possible about a company and are less interested in a stock’s label.
Following are ten direct quotes about this topic that speak to why analyst ratings really don’t matter:
- “I don’t care about analyst ratings. I do my own research and try not to let the sell-side influence me.”
- “I love analyst downgrades because it gives me an opportunity to buy the stock.”
- “Most of the time I don’t even know what their ratings are, I just talk to the analysts that know the company the best.”
- “I’ve done this for long enough to know that more than half of them are wrong on their ratings.”
- “Sometimes ratings are based on momentum and not fundamentals. I invest in fundamentals.” Continue Reading
Unless you’ve been stranded on a distant planet, you’ve noticed that equity markets have been hitting new highs lately, and that’s been accompanied by an increasingly robust capital markets environment, even including initial public offerings (IPOs). In fact, the current public healthcare IPO backlog stands at 14, with many more companies already confidentially initiating plans to pursue going public over the remainder of the year.
As recently as six months ago when we would meet with CFOs and CEOs of private companies (or their venture investors), they would have long lists of reasons why their company would never go public. The reasons included cost of capital, the hassle of being a public company, legal requirements, and compliance costs. All of these are particular burdens for smaller companies. In addition, if executives or investors were looking for an exit, they calculated better valuations if they sold to a strategic acquirer or private equity firm. An IPO was truly an option of last resort. Today, when we meet with these same constituents, we see a dramatic shift in their attitude towards going public.
Changing Tides for Healthcare Companies
So what has changed? The overall equity markets are much stronger, IPOs are getting done and trading up in the aftermarket and sentiment from the buy-side has become much more favorable. Some of this positive change has to be credited to the federal JOBS Act—a series of measures that allows private companies to become public in ways that are less burdensome and less costly.
In March 2013, a journalist for The RPM Report (subscription required) wrote that the U.S. Food and Drug Administration (FDA) had held a “late cycle” review meeting with a drug candidate sponsor. The meeting – an element of the 2012 Prescription Drug User Fee Act-V – introduced a new formalization of communication between the FDA and sponsors, and hailed a new investor relations dilemma for companies: Should “sponsors” disclose what is discussed in these late cycle meetings with the agency, or not?
Late cycle review meetings are a change from past FDA practice; previously the agency engaged in less formal, ongoing communications. Formality might be a good administrative move by the FDA. The agency will now more clearly state what page it’s on, rather than making the sponsor figure out the scenario via a stream of communications over several months.
Last week, we wrote about Regulation FD, now in its 13th year of implementation, and offered Part One of a quiz designed to test how well you understand the regulation. Here, we offer a slightly more challenging Part Two of the quiz. We hope you will find this helpful as you think about real life Reg FD situations. 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.
Reg FD Quiz, Part Two- Violation or Not?
1. CEO is aware that your company will likely miss quarter consensus estimates, but this hasn’t been disclosed. CEO looks downtrodden in 1×1 meeting, and talks about what a tough macro environment it has been for the industry. A week later, your company announces lower than expected revenues. Stock trades down sharply on higher than normal volume.
Did the CEO violate Reg FD? (YES) The CEO selectively disclosed material, non-public information through non-verbal cues. Hindsight is perfect; hold a poker face or don’t talk.
2. At a webcasted analyst day, management outlines its new product pipeline, how the products compare to existing technologies and treatments and the timeline for product launches. Two weeks later, in a 1×1 meeting with an investor who missed the analyst meeting, management answers questions about how some of the new products differ from competition.
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.
Some management teams are reluctant to meet with hedge fund managers. While planning a road show or conference appearance, they try to meet with “long only” fund managers. While I can understand that management teams are reluctant to meet with hedge fund managers out of fear of a tense line of questioning or some form of brow beating during the meeting, the reality is that you can’t (and shouldn’t) avoid these meetings. The sheer number of hedge funds is staggering and almost $2 trillion dollars are under management within these funds.
Following are the top ten positive reasons management teams and IR professionals should keep hedge funds on the schedule:
- Don’t judge the book by its cover. Hedge funds come in a variety of flavors. Funds can differentiate themselves by investment style, sector focus, geography, market cap, market neutral, long/short, etc. You may even be surprised to learn that some hedge funds are long-only or exclusively long-term oriented.
- Despite their depiction by the popular press, not all hedge fund managers are “bad guys.” Many hedge fund managers are smart, considerate, thoughtful, long-term investors. Don’t let the structure of their fund dictate if you meet with them. Continue Reading
On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report that outlines how companies can use social media outlets to disclose information and remain in compliance with Regulation FD. The report was the result of the SEC’s investigation of statements made on Facebook and Twitter by Netflix CEO Reed Hastings, where he announced a “viewing” milestone for his online movie and TV rental company. While the investigation centered on whether Hastings violated Regulation FD, Hastings has maintained that his disclosures were neither material, nor exclusive.