CFO: Communicating with Investors

We haven't touched much on the capital markets' responsibility. How do you see that has changed in the last 10 years? I know you mentioned that investors are very short term focused, unfortunately, but how would you advise CFO’s to deal with that pressure?

One, first of all, always understand the business and be able to discuss it in broad terms. Not just number terms but be able to explain the drivers of the business. I had one CEO that never did investor relations meeting. The best practice I think is for the CFO and CEO to be able to finish each other's sentences or alternate the same sentences in giving an investor presentation. That's point one. Make sure you have a deep understanding of the business, which is consistent with the CEO, and make sure you have the capacity to explain it to outsiders.

Once you've got that, then presenting the aspects of the business that are important to a given group of stakeholders. And I say that because it could be talking to senior bank debt providers, you could be talking to the bond market, you could be talking to the rating agencies, you could be talking to the equity capital markets and your existing investors. Each of those has a particular set of needs. Clearly, lenders want to make sure that debt capacity is strong. Equity holders want to make sure that growth is going to be good. So, although all of those conversations have to dovetail, there's a bit of a different emphasis to each of them. So, I think it's two things: understand the company but then understand your audience.

How do you balance giving investors what they want to know and hear i.e. EPS, free cash flow, whether it's net debt, whatever it may be, versus not giving them too much information and providing hard targets that can put the business under more pressure?

Actually, for EPS, you obviously have to report. I think what you're talking about is guidance - to what extent you give forward-looking guidance. I'm a big believer in the theory that you should not give guidance. But the reality is most companies are brave enough to do that or they lose that discipline or they lose that view when times get tough. When you're growing and you're able to meet, say, a comment like "We expect growth to be in the range of 7% to 10%", and that's how the business grows over time and your margins are pretty constant, then not giving guidance might actually work.

When times get tough, or when companies are complicated and transitioning, managements tend to give more and more information. By the way, I guess there are two things I'm not talking about. One is forward-looking guidance. But then that also relates to how much information you provide unrelating to finance, so what other KPIs you report externally. I think there should be some operational KPIs. When things go badly, i.e. if you're hitting recession or a downturn, or one of your businesses is doing poorly or is going through a transition, again, management start to explain more, and they give more data. And sometimes it's actually hard to go back from that and say, "I provided you this additional detail during a time when it was particularly relevant. I'm not going to provide it anymore because analysts always want more information."

So you have to be careful about what you decide to disclose at those tough times because invariably, the more you disclose, the more hampered you are, the more questions you have to answer, and the less people will focus on the long term. Implicitly what I'm saying is some key KPIs are temporarily very important, some are strategic and fundamental to the business. Those are the ones you want to report. The other ones that may be temporary such as the turnaround of a given division or the underlying demand for a particular part of the business that's been struggling.

One last question is what would be a couple of key best practices of communicating with investors and what are the lessons that you've learned over the years in your interactions?