Profit Warnings–Minimising the Damage


(This article previously appeared in my Powerlines Newsletter Number 38 – April 2004)

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As a company with good intentions, how do you communicate bad news such as a profit warning, in such a way that you can minimise negative market fallout.

What goes through most company management’s minds are: “What if shareholders pull their money out? Well, they may or may not.

Today, that decision can depend at least in part on a company’s reputation in the market place – how a company is perceived by shareholders and the public- whether they think it operates efficiently, has credible leadership and has a firm grasp on the industry and its place in the market.

The challenge lies in how you manage and shape those perceptions and get the right message across to the investment community about your company. Especially in the Internet Age when you have no control over the flow of information and rumours.

After all, how can you control perceptions when any investor, large or small, can gather detailed information on your operations with the click of a mouse?

These days, it takes extraordinary knowledge and skill to navigate the territory of managing perceptions and building a corporate image and identity. Not only do you need to have a good understanding of how perceptions are formed and how the investment community operates, but more important, you have to find ways to get your message across in an era of uncertainty!

Indeed companies that once had time to react to a drop in earnings or an internal crisis before breaking the news to the investment community now must find ways to get ahead of the news or stay in a reactive mode and face the consequences.

In today’s high-pressure, nano-seconds environment, a company can’t afford to employ a communications policy that forces shareholders and potential investors to read between the lines when problems are present.

As a company you need to be transparent and communicate consistently and proactively. Some companies want to go quiet during bad news, but they need to communicate regularly in good and bad times.

Many companies have learnt that openness and transparency relates to much more than just financial data. A good example is the increasing interest in for example ethical investing.

More and more investors are looking at measures beyond the “financial statements”. They are increasingly looking at the drivers of reputation such as whether management is capable in running the company, whether the organisation is playing a role in sustainable development and whether it has an adequate record on managing it human capital etc.

So here are some valuable strategies and tips that can minimise the potential damage:

– Open the lines of communication and educate analysts and other stakeholders such as opinion leaders as your business climate UNFOLDS. Keep them in the loop through regular briefings and knowledge sharing LONG before whatever hits the fan, does.

Prepare for any fallout. Message preparation should take place long trouble strikes. In today’s climate a company only has a nanosecond in which to respond. How ready is your company to respond to a news crisis? How quickly can you post new information on your website? How quickly can you communicate DIRECTLY with key stakeholders and influencers? (What about the use of social media? A CEO Blog, Use of Twitter and Facebook?)

Take time to build relationships before a crisis hits. Build relationships with stakeholders, analysts and key opinion leaders. Another way of spelling the word TRUST is “TIME”. It takes time to build relationships and credibility. Start now. Identify stakeholders carefully. Today one person with a PC and a modem can damage your company’s reputation.

Benchmark your communication process both formally and informally. Executives go for annual medical check-ups but they also go and see the doctor when they are feeling uneasy. Conduct regular spot checks. (Use online survey methods such as zoomerang and surveymonkey to track issues and perceptions)

Incorporate maximum disclosure as part of your company’s strategy. That means that it’s not so much what you say; but how consistently you say it. Define what is meant by mandatory disclosure, voluntary disclosure and involuntary disclosure (I deal with that in my Stakeholder Reputation workshops)

Manage expectations. The best way is to be honest and keep people informed. No one likes untimely surprises. No one likes bad news, but it becomes more palatable when it is less likely to damage a person’s personal position.

As a general rule I would suggest that it is better to be honest upfront. Be careful to discern between pure hype and honest information.

If you do have negative news, be honest but concentrate on sharing that the company has a clear focus on its mission and goals and a commitment to follow through on its strategies. When potential investors sense the management team’s commitment, their confidence is strengthened.

Minimising the fallout from a profit warning is an essential strategic planning exercise. It is education of the highest order.

It is an exercise that deals in perceptions and intangibles. No company is immune to this happening.

The only positive lies in HOW your company will respond.

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