Why Is It Important to Explain Key Issues to Investors?
When all the numbers are in the black and the financial reports are climbing steadily, it’s easy for investors to assume that their investments are in capable hands. The longer they invest in a corporation that is continually making money, the more trust they build in the company’s board of directors and managers. Such times may call for nothing more than a cursory look at the financial reports and shareholder announcements.
Accounting Scandals Have Created a Culture of Mistrust Among Shareholders
Investors know that these are uncertain times. As a result, they are taking an intensive look at the financial reports and trends in a quest for some assurance of short- and long-term growth. Sadly, industry-wide, fraudulent-accounting scandals have gnawed away at the long-term trust that corporations and their investors long enjoyed.
Investors want to be able to understand the financial reports. They also want to have a better idea of exactly where the money is coming from and the risks that threaten their investments. Investors also have concerns about larger issues like sovereign debt and commercial real estate transactions, and what impact those issues have on the money they’re investing.
It’s important for corporations to anticipate the types of questions that investors will have and to be able to address them to the investors’ satisfaction because that enhances trust, which creates shareholder value.
Communicating Growth Cycles and Patterns to Shareholders
One of the ways that corporations can begin to overcome the issues of mistrust that their fellow corporations created is to communicate information to their investors about the types of cycles and patterns that create immediate growth and long-term growth. The better they understand the overall strategies, the less likely they will be to panic when there is a loss or if short-term growth is slow.
One of the first rules of investing is that short-term losses eventually result in long-term gains. Investors need to be reminded that investments grow in peaks and valleys. When you keep your money with one company long enough, profits will come eventually.
Companies mainly grow in two ways. First, they must focus on the growth of their current businesses. Second, they need to develop new value by creating new businesses. Balancing the two fronts is difficult for most companies because of shareholder perspectives of their decisions.
Balancing Existing Business with Developing New Business Ventures
Strong competitors and tight profit margins make it difficult for companies to show high short-term profits on a continuing basis. Many corporations place the heaviest focus on successful existing businesses to appease their shareholders with a quick return. This strategy leaves little time and effort for developing new ventures. Strategies that only focus on existing businesses struggle to produce short-term gains.
Here’s the short version of how such a cycle works. A company focuses on existing businesses, but can’t continually exceed profitability, so investors start leaving and the stock drops. Managers make unreasonable forecasts to appease the investors and keep them interested, which creates a growth gap. Companies put cost structures in place before the revenues come in, causing the total revenue to fall short of the forecast. Losses continue and the stock price falls. The CEO takes the blame, and another one is brought in to save the day.
The new CEO believes that the way to reinvigorate trust in the shareholders is to boost the core money-making businesses, and the cycle starts all over again.
Pursuing New Business Ventures Is the Key to Long-Term Growth
To realize continued long-term growth, companies need to get out of their comfort zones and seek out new opportunities for business. New ventures come with risks, which disrupts the status quo, and that makes investors uneasy.
Corporations that work on existing and new ventures simultaneously are more likely to achieve sustained long-term growth despite any financial hiccups along the way. Companies need to communicate short- and long-term strategies, and how they intersect with new business ventures, to win over the shareholders’ trust.
What Are the Key Issues for Investors?
According to PricewaterhouseCoopers, investors want to know about five things:
- Liquidity reporting
- Reporting of risk-weighted assets
- How banks are making money
- Sovereign debt and commercial real estate transactions
- Impairment and own credit
Banking analysts and investors believe that clarifying these issues in the financial reports will help investors understand the big picture, reduce their frustration and restore their confidence in the corporation.
In a more general sense, investors would like additional information and clarification in the following areas:
- Net profit
- Sales
- Margins
- Cash flow
- Customer acquisition cost
- Debt
- Accounts receivable turnover
- Breakeven point
- Personal investment
Businesses that take a hard look at each of these areas and how they communicate information to their shareholders will find that these processes are equally helpful to their business strategies.
Informing Investors Creates Trust and Shareholder Value
Communicating with investors is crucial to helping shareholders maintain a high level of confidence in their investments. Companies will need to find ways to branch out with new businesses to generate long-term growth. As companies pursue new ventures, they need to continue sharing the company’s vision and strategy with shareholders, encouraging them to endure short-term losses in favor of long-term gains. Companies also need to take a look at the specific areas of information that shareholders want more information about and open up discussions about issues that concern them. Creating shareholder value will help to restore the trust between corporations and investors that harsh economic times have lost.
