Investor Relations and Coronavirus Pandemic
COVID 19 – A human and economic tragedy
For several reasons, the COVID-19 situation is disturbing, not the least of which is the severe impact of this pandemic on the health and general wellness of billions of people across the world. The economic impact is equally heart wrenching with thousands of job losses, severe contraction in the GDP of several countries, and huge uncertainties on revival timelines and the extent of this recovery.
The market observers would often wonder why all of this is not reflecting in the global market indices. There is a very powerful force of liquidity that is stopping all of this from making an impact on global markets.
But it is clear that the beneficiaries are only a small set of companies and analysts would call them tech titans and how their business will get a boost as a result of this Coronavirus pandemic, the scenario on the other side is not as great.
How Companies have to deal with the volatility
Even when one doesn’t see the S&P 500, NASDAQ Composite, or our own NIFTY and SENSEX reflecting this distress, the stock markets in these times are often plagued by a high degree of instability and unprecedented volatility.
What does this mean for companies and their CFOs? What role can Investor Relations (IR) practitioners play in engaging successfully at this COVID-19 time — and reacting to various stakeholder demands?
For instance, portfolio managers, investors, and analysts are likely to ask for information on the effect of the virus on a firm’s sector, including the effects on sales production and profitability, as well as the extent and length of the impact on overall financial health.
These stakeholders are also likely to want details on the triggering mechanisms for management to intensify activities or take a foot off the pedal.
They would also like to know whether falling below a certain key performance indicator (KPI) level will cause the organization to delay capital spending, or pause production, or furlough staff in serious situations.
Also, on the top of the mind for investors is whether the COVID-19-related uncertainty will affect the company’s willingness or trust to pay dividends or repurchase stock. All of these are important questions.
The Challenge for the CFO
As a result of the COVID-19 crisis, all CFOs find themselves dealing with economic problems to some degree.
Efficient cost control is now a matter of critical significance for many enterprises, as sales will be threatened and uncertain in the near future. It is equally difficult for CFOs and their investor relations departments to articulate this fresh, ambiguous outlook to investors.
The CFOs are currently grappling with a variety of impacts, ranging from quantifiable impacts within terms of their initial guidelines to the need to remove guidelines entirely and start from scratch.
COVID-19 mentions on S&P 500 conference calls rose significantly in the first quarter of 2020. (Source: gartner.com) To guarantee that their current investor relations practices don’t make matters harder, CFOs should consult an expert and follow their advice.
It must be noted that in January 2020, only 28% mentioned COVID-19 in S&P 500 earning calls. By February, more than half (53%) discussed the virus and the number reached 88% in March.
Notably, during the January-March 2020 period, the number of firms withdraw earnings guidance rose more than 20 times, from eight to 198. (Source: gartner.com)
The new normal
Organizations can help reduce the uncertainty that erodes trust during such situations by relaying to the financial community that executives have an innovative approach and expect to deliver on it.
In addition, there are many immediate and long-term actions organizations should take to better mitigate instability during this pandemic because of the internal obstacles businesses face.
In such times, preparedness will be crucial for companies to progress further. The following points will help in having commendable investor relations during the pandemic:
1. Conduct internal assessments and scenario analyses
For IR professionals, being present in the company’s internal discussions and keeping an eye on the external environment – assessing not only direct but secondary and tertiary risks related to supply chain, inventory, labor, and logistics – is critical to the development of an accurate and specific narrative for your company.
The best practice is to conduct scenario analyses to measure the stress on earnings, cash flow, liquidity, and capital structure.
2. Communicate only the facts and with the right balance
Given the uncertainty surrounding the financial impact, it is important to avoid communicating from a guidance perspective outside of what the company has publicly said.
That said, it is best to practice communicating your organization’s business continuity plan and actions to mitigate financial and operational headwinds, as well as a relevant historical perspective that demonstrates when your business faced a previous global headwind and emerged on the other side.
3. Plan for earnings cycle communication
Ensure that the new figures you send to the financial community are far more optimistic than just one revision.
Feel free to use a minimum and maximum range. Investors understand that business executives cannot make exact predictions and the overwhelming state of affairs make it virtually difficult to define goals.
Talk to the sell-side investors and key shareholders directly after the launch to describe the impacts in greater depth.
Honest Communication is the Differentiator
Moving forward, executives must take it on themselves to share the ramifications of the COVID-19 outbreak; brace for how it might affect the investment thesis of their companies; and figure out how they will communicate to investors the impacts, their reactions, and their recovery plans.
The management may not know all the answers but investors will always remember honest and proactive communication, this is critical in times of crisis like this one.
A pandemic or other similar catastrophe does not endanger the basic economic model of an organization, but it may weaken its financial stability.
In order to demonstrate to stakeholders that the company is not off track and is successfully handling uncertainty, management can continue to emphasize its long-term outlook and key priorities, as well as the proactive strategies to deal with the situation, to identify new business prospects, and most importantly, stay consistent with the core thesis of the enterprise. The right communication is the first step on this path.