An investor relations officer (IRO) enjoys nothing more than communicating good news to shareholders. However, the nature of the markets means that there will be a time when they have to impart less positive information. Some might try to spin the news into what appears to be a positive narrative, butinvestors are wise to this tacticand, when the truth comes out, it can lead to a breakdown in the bond of trust between issuer and investor.
This is why an IRO needs to know how to deliver bad news to shareholders. It forms part of a commitment to transparency that is essential for effective investor relations. Shareholders need to know that the information targeted at them is accurate in order to help them understand the performance of their investment.
Theskill that IROs must masteris how to deliver the news clearly, but in a way that reassures investors that the issuer has a road map to rectify the situation and that their investment should remain within the company.
The European Union set out the importance of full disclosure on the markets with its Transparency Directive.It states that:“transparency of publicly traded companies’ activities is essential for the proper functioning of capital markets. Investors need reliable and timely information about the business performance and assets of the companies they invest in.”
Transparency between issuer and investor has always been important in order for market participants to be able to base decisions on solid, accurate data. And, with the rise in significance ofnon-financial factors, such as ESG, it is essential that companies report accurately their efforts regarding their environmental impact, social issues and corporate governance.
AsPwC reports:“This pressure for greater transparency comes together in the search to define common, objective and enforceable standards for non-financial information, a process which is still at an early stage.”
Investors need to be able to trust the information coming from the issuer and not be bombarded with spun messaging that amounts to greenwashing or other attempts to obfuscate the true nature of their non-financial performance.
Types of bad news
There are many types of bad news that can befall an issuer. They could include:
supply chain issues
delayed product launches
suboptimal conditions for your industry
How to deliver bad news to investors
Whether it’s at avirtual press conferenceor at your results announcement, you need a strategy in place to deliver this news to shareholders.
Time your delivery
There are some items of bad news that issuers must release as soon as possible. This includes inside information, defined in theMarket Abuse Regulation(MAR) as information of precise nature“which, if it were made public, would be likely to have a significant effect on the prices of financial instruments”and which“a reasonable investor would be likely to use as part of the basis of his or her investment decisions.”
If the bad news does not constitute inside information, you can time your delivery to ensure that you mitigate negative effects. However, it should also be noted that delaying bad news by too long can lead to it leaking from another source first, which reduces the issuer’s opportunity to place the news into context and communicate a recovery plan. This can also damage trust in the organisation from investors and analysts.
Balance this need for haste with the necessity to ensure that you have enough information to hand about the reasons for the issue and the company’s response before you deliver your message.
Craft the message
Honesty is essential when delivering bad news to stakeholders, but you should also be tactful with how you communicate. Although you want to avoid spinning the information into a false positive, you also do not want tosurprise investors with bad newsand provide only a gloomy picture of the outlook.
Deliver the message clearly and without ambiguity; tell investors what has gone wrong and what it means for the business. Use direct language, getting to the point as soon as possible and not using jargon that could confuse shareholders in a way that makes it seem like you are trying to hide something.
Consider how you will present the information and work on clearly explaining the reasons for the bad news. Help investors understand the circumstances behind the disappointment, give it some context and ensure you have the evidence to back up your reasoning.
You should be able to deliver this information in a relatable and easily digestible manner so that investors understand what has happened and maintain their trust in the issuer to regain momentum in the future.
Deliver the message
Consider how you will present the message. This means thinking about your audience. For example, you might want totailor your messaging differentlyfor retail investors and for institutional investors.
You should also choose the medium that will best allow you to talk to your key investors and allow a dialogue to take place during which investors can voice their concerns and ask questions, and you can reply and reassure them.
Organising awebinar with key investorsto relay the news means that you can deliver the news to as many shareholders as possible at the same time, without having to delay disclosure by hiring a venue or inviting guests to travel to a specific location. Instead, they don’t have to clear a whole day in their calendar to attend, just the duration of the webinar.
This provides the best potential reach from a single event and offers the opportunity for a question-and-answer session that will help build that trust and transparency with your investors.
You can also send out a press release and arrange physical meetings too, but hosting an online event to share the news helps you share the information in a timely fashion and in a manner in which you can control the narrative.
Provide an action plan
As well as imparting the information and the reasons behind the bad news, you should also prove to investors that the organisation has a robust plan to overcome the challenge. In your communication, tell investors the next steps and how the situation will be rectified, giving as much detail as possible to reassure them.
At this point, you can invite them to collaborate on ideas to find solutions. Being able to foster such a relationship with investors helps them feel more of an affinity with the company and that their opinion is valued. This further encourages transparency and trust, which reduces thechances of activismand helps issuers retain investors, even in turbulent times.
You should also make it part of your crisis communication plan to provide regular updates on your recovery efforts. This ensures that investors can monitor the progress that you are making and shows them that the organisation is working hard in their interests.
Examples of communication methods for presenting bad news
Here are three methods of delivering bad news that issuers can use to help mitigate some of the negative effects of reporting disappointing information.
The deliverer of the bad news surrounds that information with positive information as if the difficult news was the filling in a sandwich. This is intended to reduce the impact of the bad news but could also be seen as someone trying to gloss over issues. So use it with caution to avoid making a bad situation worse. Find out more aboutthe sandwich method.
Compare and minimise
This method is an example of using context to provide a true picture of your bad news. If your profits have dropped 15%, this is undoubtedly bad news. However, if the market has dropped 20%, it shows that your organisation hasn’t been hit as badly. This comparison gives investors an understanding of what the bad news means.
Positive spin technique
Positive spin involves turning a negative into a positive, but issuers should proceed very carefully if considering this technique. An example would be an issuer having to make redundancies due to reduced cash flow but reporting it as being a restructuring to drive efficiencies in the future. Investors can be cynical of this approach to handling difficult situations, which can damage credibility.
Legal considerations when communicating bad news to shareholders
When delivering bad news to shareholders, there are several critical legal considerations that companies must bear in mind to ensure compliance with existing laws and regulations. Paramount among these is the issue of disclosure requirements. Various legislations often mandate companies to disclose certain pertinent information to their shareholders. How much and what type of information should be disclosed is determined by the concept of ‘materiality’. If the bad news significantly impacts the company’s operations, finances or overall shareholder value, it is considered ‘material’ and thus must be disclosed.
In addition to materiality, the timing of the disclosure is equally critical. Certain laws and regulations, such as theMarket Abuse Regulation (MAR)in the EU, stipulate when specific information, including inside information, must be made available to shareholders. Delaying or prematurely disclosing such information can lead to legal complications. Misrepresentation or provision of incorrect information can lead to legal repercussions, damage trust and potentially erode investor confidence.
Finally, when communicating unfavourable news, senior management must bear in mind their fiduciary duties to shareholders. These duties oblige them to act in the best interest of the shareholders, ensuring that all disclosures are made accurately, timely and transparently. Balancing these legal considerations when delivering bad news is vital in maintaining the company’s integrity, investor trust and legal compliance.
IROs need to understand the importance of timely communication with investors in negative situations, as well as details of how to deliver bad news to shareholders. Taking control of the situation, providing context for the bad news, encouraging collaboration and open communication, and sharing details of the road map back to success are all important aspects of this process.
As a market leader in webcasting for investor relations, Company Webcast enables you to stay in touch with your shareholders at all times. You can organise hybrid and virtual IR events to deliver both good and bad news in a professional manner, instilling trust.Request a free demo of Company Webcast to learn more.