Everyone loves good news. No one expects bad news, and much less giving negative news. Psychological studies point out that it’s even more difficult and uncomfortable for news-givers to deliver bad news. Nonetheless, investor relations (IR) professionals sometimes have no choice but become the bearer of bad news. As an investor relations officer (IRO) possessing 23-years of experience specializing in investment management said, “You live by the sword, you die by the sword. You're kind of at the mercy of someone else's performance, and you're the one that has to put it into words and actually face the music (so to speak).”
More often than not, many companies don’t think they should have an interest in communications to build relationships with stakeholders until their business goes south, i.e. company stock volatility, unforeseen risks causing a real estate deal’s loss, an incident threatening corporate reputation, and so on. Numerous lessons in the business world prove that a misstep in handling an incident can easily cause a domino effect that can lead to severe financial losses and an imminent crisis. In many cases the problem is rooted in a lack of communications where the company avoids communicating with stakeholders about what went wrong, ensuing trust violation and sour business relationships.
The 2008 – 2009 financial crisis was a significant illustration. While the vast number of investment funds and real estate funds vanished, there were some funds that quickly turned around and grew stronger. Stephen Inc., the nation’s largest independent financial services firm headquartered in Little Rock, Ark., is a great example. Stephens specilizes in private wealth management, investment banking, insurance, capital management, institutional equities and research, private equity, fixed income sales & trading, and public finance. The company places its core values on solid relationships, ethics, clients first and employees’ appreciation. Amid the turmoil of the economic recession, Stephens’s wise investment strategies of modest-leveraging ratio and candid communications empowered the firm. On Sep 15, 2008, the day Lehman Brothers collapsed, Warren Stephens – Chairman, President and CEO of Stephens – sent out a memo to his employees. The memo reflects Stephens’ ethical leadership through effective communications.
On the contrary, legendary investment bank Lehman Brothers’ bankruptcy was attributed to “a lack of trust, over-leveraging, poor long-term investments, and shaky funding,” as Anne Sraders of TheStreet.com, one of the global unbiased financial and investment news sources, pointed out in her article titled The Lehman Brothers Collapse and How It’s Changed the Economy Today dated Sep 12, 2018.
Sraders reported that when Lehman’s stock dove about 77 percent in the first week of September 2008, “[i]nvestors' doubts were growing as CEO Richard Fuld attempted to keep the firm afloat by selling off asset management units, trying to develop a relationship with Korea Development Bank for aid, and spinning off commercial real estate assets.” It was unclear how frequently Lehman communicated with its investors, but if investors doubted Lehman’s strategies, it shows that the investment fund didn’t establish strong relationships with investors based on credibility and through two-way communication.
Sraders describes, “Once it was clear to investors that Lehman was sinking, an upsurge in credit default swaps on its debt of some 66% and the backing-out of hedge fund investors signaled everyone was jumping ship.” This indicates that investors discovered Lehman’s situation from other sources, not directly from the fund. Clearly, Lehman’s collapse struck its stakeholders and the entire world at the expense of investors. People are shocked when they are clueless of the news. This also points out the investment fund avoided delivering bad news to investors and other stakeholders.
It’s understandable that amid chaos with a high level of uncertainties, people don’t take actions into due consideration as much as they usually do. When a business deal doesn’t go well, companies often try as much as possible to delay delivering bad news for fear of estranging investors from future investments. In other cases, when an incident occurs, companies are reluctant to communicate with investors about what went wrong. By not recognizing an imminent crisis, executives may often try to minimize communications to avoid legal liability and tarnishing corporate reputation as advised by legal counsel. In some other cases, companies tried to downplay negative impacts by over-reassuring stakeholders.
For instance, in the United Airlines’ violent removal of passenger David Dao crisis in April 2017 and the Facebook—Cambridge Analytica crisis in May 2018, the slow response of the executives to their stakeholders not only caused billions of dollars of losses in stock value for investors, but it also placed the companies’ reputation and investors’ trust at stake.
Despite the uncomfortable experience, delaying or avoiding delivering bad news proves to be an ineffective strategy for IR professionals. While Lehman Brothers has been gone a decade, there have been bankruptcy survivors such as General Motors growing stronger after its 2009 bankruptcy or Harvard Industries recovery subsequent to its 2002 Chapter 11 filing. The matrix that helped these companies successfully survive a crisis or bankruptcy is planning well to build strong relationships with investors through two-way communication. Particularly, these firms told investors about the bad news, what went wrong and what they have learned to move beyond the crisis.
Establishing and maintaining solid relationships with investors before, during and after a crisis will help the company move beyond a crisis and renew. This is fundamental for envisioning opportunities through crises as Ulmer et al. (2015) emphasized in their book titled Effective Crisis Communication: Moving From Crisis to Opportunity.
Notably, the IR professional’s own conscience and ethical leadership will be tested during crises. Whether the company lives up to its integrity and credibility by prioritizing investors’ best interests over the firm’s interest, using independent judgement and practicing fair disclosure, those codes of ethics will be exposed during crisis. Therefore, it’s vital that an IR professional communicates bad news as well as good news for investors to make informed investment decisions. It will be the worst if investors learn about bad news through the news media. And companies that don’t recognize the importance of communicating bad news are likely going to risk their reputation.
The IRO pointed out, “People don't come clean. They wait, they wait too long. They don't want to be the first one to say, hey listen, I got some bad news. But when they do that, the IR person that has educated their clients, been transparent all along, usually they're going to find that their clients are very sticky. Investors will be shockingly forgiving and they will give people two, three, four chances as long as that IR person is transparent and continues to inform and educate, rather than sugar coat and make everything sound rosy.”
Questions for discussion:
What are some of other challenges that could prevent an IR professional from delivering bad news to investors?
What are the best ways to communicate with investors about bad news?
What preparations will help an IR professional effectively deliver bad news?