General Electric (GE) in the 20th century was known for the implementation of many successful business and management practices, including the lesser-known origination of the modern day investor relations (IR) function. It was apparently pioneered by a guy called Ralph Cordiner, who was GE's CEO and Chairman from 1958 to 1963.
The roots of IR were evolved in the early days due to the need for companies to compete for capital in a systematic and strategic way, beyond the customary one-directional promotional advertisements. Money markets back then were a lot less developed with far fewer investors, and the large part of' IR work was subsumed under public relations, which was primarily focused on getting word out into the market and letting investors decide for themselves whether they wanted to buy the stock of a company.
Over time, the tactics for investor targeting have grown increasingly sophisticated, characterised not only by demonstrating financial competency, but also the need for bi-directional communication and interaction. The fierce competition for capital also required companies to 'up' their game with the goal of optimising cost of funds to deliver higher shareholder returns while adapting to the changing tides of the capital markets.
There is obviously a lot of art and science in IR today, from analyzing changes in shareholding patterns, proactive capital markets management, to dancing the tango between the company's management team and investors brokered by securities firms and investment banks.
Because share price is often taken to be the holy grail of a company's success, IR functions are often expected to be part of corporate decision-making process, with investor engagement being an extremely core part of that consideration.
Rightfully speaking, this dialogue with investors should guide towards a true and accurate reflection of a company's fair value, but the world is more complicated than that.
As many business units within the firm including C-suite functions tend to be graded based on share price performance, there is almost always a natural incentive to curate and design the short-term narrative towards a high value, which sometimes comes at a cost.
Beyond the obvious moral hazard, this ultimately results in share price and trading volume volatility. In the textbook context, these attributes are conventionally perceived as risk, which in today's market can be capitalised and profiteered by creative investment managers seeking to take advantage of the wild swing in prices. And the swing in share price can sometimes put a lot of pressure on those in IR roles.
I recently 'counselled' a couple of colleagues on the above, hoping to help them put things in perspective, and more importantly, not to beat up themselves too much if things don't go according to plan.
There are things that you can change and there are those that you can't. The world is that complex a place.
"When something that previously didn’t work suddenly does, it doesn’t necessarily mean the people who tried it first were wrong. It usually means other parts of the system have evolved in a way that allows what was once impossible to now become practical." - Morgan Housel
Because of all these moving parts, any success or failure in an IR function becomes incredibly difficult to measure. For example, should the KPIs of IR teams be penalised by the overall decline in share price of a public listed company? Conversely, should all credit be given to that same team if there is a two or three fold increase in share price over the same period of time?
Is a company's share price performance a core competency indicator for an IR team?
These are sometimes the result of fundamental reasons ranging from revenue and profit (which are partly driven by the business and macro environment), to irrational and unpredictable events such as someone firing a missile from a certain peninsula in Asia. Both of which are not within the direct influence of the IR function.
The reality is that changes in share price are subject to multi-dimensional catalysts. And if these are mis-read, can unwittingly lead management down the wrong path of decision-making.
"You don't have to have every single answer. It doesn't matter how many blue trucks a company owns. More important is what can you do in the business, in the the 20% that will really drive the results and drive the outcome" - Talks at GS, Henry Kravis
Examining financial statements can be tricky and tedious.
From an accountant's point of view, the ledger has to be always complete and accurate, even if it means laying out a few hundred lines of items. From a banker's point of view, we tend to be only interested in the top 3 to 5 items that affect the top and bottom line. There is always room for uncertainty and nothing is ever absolute. Unlike accountants, we talk about numbers in ranges and what-ifs. Nothing is ever precise. Sometimes we bankers talk too much as well.
There is a lot of art in balancing uncertainty and precision when it comes financial modelling. One must be careful to avoid being caught up in too much detail such that it hinders decision-making and deviates from what we hope to achieve from building the model. This is where the 20-80 rule is useful.
This rule can apply to cost cutting initiatives too. Conventional wisdom and numerous precedents dictate that the elimination of jobs should start at the top where it takes up presumably the bulk of costs.
But removing the top brass could be potentially detrimental to an organization, especially if senior managers are instrumental in steering the business. The case here being: Better and more cost-effective to remove the head of a business unit than three or five cogs in the wheels.
On the flip side, by removing the cogs i.e. shaving away a huge number of "low-cost" people, we also run the risk of overburdening remaining managers and employees with more work, which can lead to dampened motivation and workplace fatigue.
Aside from headcount measures, firms tend to also cut back on business travel, entertainment and other petty expenses as part of cost saving initiatives. While prudence is a commendable attribute, if we put too much focus on the small items, this will ultimately hinder business development initiatives in the bigger scheme of things and sometimes limit creativity and innovation.
So to sum it all up, no easy way out. And all of the above fundamentally relates to cost savings - a convenient way to justify improving profitability to shareholders.
However, most companies tend to neglect that the short term cost savings provided by a layoff are often overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation — all of which hurt profits in the long run [link].
In times like these, it is even more important for the firm to be upfront when communicating to staff. In late 2010 with the onset of the Eurozone crisis, I remembered my entire team being rounded up in a meeting room to be given a brief "heads up" of the looming uncertainties. No promises were made. The job cuts came about 3 to 4 months later. It was a difficult time but that short briefing gave everyone sufficient time to get mentally and logistically prepared.
No one benefits from such a situation - the folks who are departing obviously lose their jobs and the ones who stay on shoulder more work and responsibility. But as much as possible, you want to avoid having huge clouds of uncertainty hanging over everyone's head.
It is of course also hard to be encouraging but still absolutely necessary for the firm and managers to communicate the facts to the team in terms of what to expect, rather than soldier on silently. Employees will be employees and 99% of them will always feel victimised in a situation like this.
There is also another good cause for initiating cost-cutting from the top - solidarity.
Collective hardship and pain are a good band aid for fostering some camaraderie during turbulent times, and this needs to be communicated well. Just take a look at Sea, JD, BABA.
Perhaps more important than solidarity is trust. The relationship between a firm and employee extends beyond just a contractual agreement but a psychological one. Most employees who have been laid off don't feel that they should be penalised for the underperformance of the company, especially if the employee isn't in a leadership or senior management role. There is a perceived disproportionate balance of risk and reward, in which the employee is involuntarily placed in a weaker bargaining position, subject to the whims of their employer i.e. the firm ultimately reserves the right to terminate them during a period of economic uncertainty.
These feelings of negativity and distrust can be contagious and can spread quickly within the rank and file.
In the strictly commercial sense, profitability and shareholder value are both important metrics to measuring corporate performance. There are no jobs without the existence of a company, no company to speak of without the investment of capital. No capital without shareholders / stakeholders.
But even as we strive to maximise profitability, it is equally important to ensure sustainability in generating profits, to go beyond the numbers and dive into corporate culture to examine the quality of earnings being generated.
By solving for profitability in the near term, are we putting the longer term strategy of the firm at risk? In the words of the founders of 3G Capital:
“Culture is not about supporting strategy, culture is the strategy.”
People are at the heart of all businesses.
The Lamborghini brand sixty years ago was not known as the luxury car brand it is commonly associated with today. They were actually well-known for making tractors. Apparently its owner Ferruccio Lamborghini was unhappy with the fact that the clutch on his Ferrari car wasn't working as well as he expected and decided to give this feedback to Enzo Ferrari, who tells him off that he is better off sticking to manufacturing tractors. Insulted, Ferruccio later went on to build the first Lamborghini supercar a year later. Fast forward a series of technology innovations and many years later, both Lamborghini and Ferrari are now associated with the league of prestigious car brands.
So when Apple announced last week that it had hired someone from Lamborghini to lead its electric vehicle program, it got me thinking: how does one go from high-end consumer products into cars? And is that even possible? Why would any veteran in the right frame of mind and who spent the last few decades of his life working in a zone of familiarity jump into a totally new business?
Can you imagine the kind of conversations he would possibly be having with the engineers on the ground: Calibrating watts to kilowatts. Migrating from small iPhone and Mac enclosures to designing large car chassis. To top it off, ensuring the religious compatibility with the entire Apple ecosystem - which I am sure will be an important part of the design process. This guy has to basically get management's buy-in to look and do things in potentially a whole different way.
How do you convince someone in management who has done things a certain way their whole careers to get out of his comfort zone and embrace a totally different way of doing things?
And had it been another company not as big as Apple championing such an initiative, would they also be able to headhunt and convince someone of similar calibre to drive this innovation?
Viruses are important.
Businesses in their early phases struggle with sourcing for capital and achieving profitability. But once they have crossed that chasm and survive, they then have to deal with grabbing other important resources such as attracting and retaining talent.
You can use capital to buy talent. But to keep talent, you need more than just money. You can retain the existing employees and management teams that have been comfortable with a certain way of doing things, keep the status quo, and you may most likely continue to survive.
But to get to that next level, you will need introduce a change agent, a different way of looking at things and someone who dares to challenge conventional wisdom. Sometimes I like to think of it as introducing a virus to the system.
Vaccines work that way: Bring in a small enough dose of a foreign agent to the body without killing it, allowing the host to learn and adapt. There will be discomfort. But over time, you will grow and acquire immunity.
Professional experiences, both good and bad, follow a person around for a long time.
Well established companies like Apple have better leverage over smaller companies to attract and inoculate talent because of their brand equity. Branding doesn't necessarily apply only to consumer or retail facing businesses. It is how people outside the firm view the company - the customers and suppliers (existing and future), as well as employees: past, present and potential.
Are existing and past employees proud to say that they have worked at a particular firm? Despite the expected grunt of having to work long hours under tremendous pressure and high expectations, do they feel a sense of accomplishment and pride after leaving the firm? Do these people feel like they have learned something or contributed to something during their stint within the company? Do past employees simply drop off the radar once they leave the company or does HR make it a point to keep it touch with them? An example of those who make it a point to keep in touch with past employees or alumni include KPMG, Goldman Sachs, McKinsey, the list goes on.
Most alumni who reminisce their time within the firm over drinks tend to mostly remember the struggles, the tough times and the nasty people. For good or for bad, these moments represent shared experiences. And no matter what kind of impact it has left on them, these shared experiences inevitably shape their professional outlook and approach towards their future careers. Those experiences and intangible skills acquired form a sense of identity - much like how people feel a sense of loyalty to their countries although the majority will continue to complain about taxes and how their governments are not doing enough to help them.
This sense of identity in the context of the corporate world is basically brand equity.
But how do you nurture brand equity?
Encourage people to embrace discomfort as a normal
Dare to try (and fail) attitude - don't over-penalize for the lack of results from trying, penalize for the lack of trying.
Encourage idea generation and reward execution - it's good to have ideas, but remember that execution is everything
Hire well - Test for ability and skills, but once employees and managers come onboard, be genuine in understanding what drives them deep down and make an effort to help them achieve their personal development goals
All employees (past & present) are brand ambassadors for the firm. It's ironic that a lot of firms invest relatively more time to ensure that they hire well but spend so little effort when the employee is formally onboarded and during their exit from the firm. Never under-estimate how much advertising (good or bad) employees can do when they are no longer at the workplace
Customers, suppliers, employees and basically anyone who comes into contact with the company directly or indirectly needs to form an impression of the business that resonates with its values and corporate culture. But culture cannot be built overnight.
Like a good habit, it is formed from months and years of iterating and improving. A distinctive company culture sticks long after employees have come and left. And with all things in good time, culture becomes brand equity.
"We only incentivize performance" - that's impossible... performance is a result. You can only incentivize behaviour. And so the best companies are aware of their own values... and build a culture around those values. The ones that go toxic, they forget about those values, they think it's performance at all costs. - Simon Sinek
Any new product or venture has risk, but beyond a strong balance sheet, the companies who are most genuine, willing to adapt and embrace change with a little discomfort to build a good culture and brand equity will find themselves in the best position to attract talent and succeed in the long run.
"INVEST ALWAYS – AND ABOVE ALL – IN PEOPLE. Better to give talented (if unproven) people a chance, and endure a few disappointments along the way, than to not believe in people. The number one ingredient in their secret sauce is an obsession with getting the right people, investing in those people, challenging those people, building around those people and watching those people experience the sheer joy and exhilaration of achieving a big dream together. And, just as important, stay with your proven people for a long time. " - Jim Collins ["Dream Big (Sonho Grande)"]
[Disclaimer: I hold shares in AAPL]
[The story of Lamborghini and Ferrari can be found here.]