Predicting the future is a fool’s errand. But I can say with 100 percent certainty that 50 years from now, small-cap companies will continue to issue press releases that try – in vain – to obfuscate that their recent financial results underperformed investor expectations.
As a former institutional investor, who has also advised many pre-IPO and small-cap boards, I think I’ve seen most of the variations by now.
- The extensive use of italicized headline subtitles that exhaustively call attention to everything remotely possible going on in the company – other than, you know, the results.
- The earnest, 500-word quote from the CEO setting forth how “unbelievably excited” they are about some of the “extremely transformative” things the company is working on that make them “incredibly optimistic.”
- Fawning over non-GAAP results, and even discussing them to the exclusion of GAAP results.
- Changing the comparative reporting periods to opportunistically highlight sequential results, since the year over year comparisons are bad.
- Introducing completely new reporting metrics – just for the quarter – to highlight results that might distract investors from the results they actually care about.
- Lengthy, bullet-pointed lists of “business highlights” that are predominantly comprised of immaterial information.
- The poignantly timed introduction of sweeping new initiatives that investors don’t hear much about thereafter.
- Notice that authorization is being sought for a stock buyback – typically of an inconsequential number of shares, or in companies that have no EPS, or worse, in companies that subsequently issue new shares in a capital raise.
- Long-winded quotes from other officers confirming all of the foregoing.
Here are three, frank takeaways for officers and directors to consider in this regard.
It doesn’t work. Smart investors have seen this movie before, and it ends badly. Every public company has bad quarters. Great companies face bad news directly, and succinctly, because nothing they say is going to undo the bad results. Every other path destroys trust and erodes value.
Modifiers. Great companies communicate factually, and deliver transparent financial results. It’s up to investors to determine whether the results are “super exciting,” “game-changing,” or “paradigm shifting.” Great CEOs rarely use that language, because experienced investors all know that the use of modifiers is almost always inversely proportional to corporate performance.
Proof. If service providers are cajoling your company into this type of communication, ask them to show you examples of companies that have succeeded over the long term in this regard. It will be a brief conversation.
Sometimes companies have bad quarters, but things are actually going well on many different fronts, and officers and directors are legitimately confident in the company’s future.
If that’s the case: (1) let future results speak for themselves when announced; and (2) in the meantime, consider buying stock in the open market.
This post was originally published on LinkedIn Pulse.
The author, Adam J. Epstein, is a former institutional investor, and now an advisor to CEOs and boards of pre-IPO and small-cap companies through his firm, Third Creek Advisors, LLC. He speaks monthly at private corporate events, and corporate governance and investor conferences, and has appeared internationally more than 100 times since 2012. Mr. Epstein is a key contributor to Nasdaq’s new Amplify small-cap content initiative, a mentor at the Nasdaq Entrepreneurial Center, and a National Association of Corporate Directors (NACD) Board Leadership Fellow and faculty member. He writes the “Entrepreneurial Governance” column for Directorship magazine, he’s the author of The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies (New York: McGraw-Hill, 2012), and he’s a contributing author to The Handbook of Board Governance: A Comprehensive Guide for Public, Private and Not for Profit Board Members (New Jersey: Wiley, 2016). In June 2017, The Perfect Corporate Board was the #1 ranked corporate governance book on Amazon.com, and, in June 2016, The Handbook of Board Governance was the “#1 New Release” in corporate governance on Amazon.com. Connect with Adam on LinkedIn or learn more at https://adamjepstein.com/.