How to Approach Financial Reporting This Earnings Season
As global markets scramble to adjust to the far-reaching impacts of COVID-19, quarterly earnings season is charging forward. Many companies have already withdrawn their outlooks and moved to shore up capital, cut executive pay and bonuses, suspend share buybacks and forgo dividends. But investors want to hear more. In fact, the April 8th statement from the Chairman of the Securities and Exchange Commission and the Director of the SEC’s Division of Corporation Finance made it clear that they expect companies to be more forthcoming about the impact of COVID-19, as well as about actions taken in response and future plans. Investors are also waiting to hear updates and action plans as outcomes are announced. However, at this time management teams are being asked to provide these insights at a moment of maximum uncertainty.
Given the uncharted waters we’re in, many clients we counsel are having a hard time creating that narrative when they report their quarterly earnings. There’s no one-size-fits-all solution, but we would suggest a few key things to keep in mind as companies prepare to tell their stories to anxious investors.
Transparency is key to preserving your company’s reputation.
More than ever, transparency is critical to keeping investor trust during this difficult time. If the global pandemic has severely altered your operations, address those impacts head-on. Researchers from McKinsey cite behavioral science that suggests an increased human desire for transparency, guidance, and clarity from leadership during crises.
Clearly, investors will want to know what you’re doing with the money you’re bringing in. Is that cash going toward payroll? R&D? Working capital? They want to see a forecast that lays out exactly where the money is going and why. Even if you suspend earnings guidance, as many companies have, the discussion of protecting margins and making the best choices to maximize EPS will still be the center of the discussion. This is a real opportunity to prove to investors not only that you are responsibly navigating the business through these unprecedented times, but showing them the choices in some detail, so they understand the conflicting priorities that your team is addressing.
Investors will also want to know what decisions the company has made about human capital. This is an opportunity for management to discuss how it is living up to its purpose in the way it treats employees and other stakeholders. Did you need to layoff or furlough staff? Are you extending any compensation or health benefits, are you participating in any federal programs to provide employee assistance? A discussion of how you’re helping to protect customers, suppliers and the communities in which you operate is important as well.
Don’t spend too much time looking back at the quarter.
We’re not going back to business as usual for a while, so don’t dwell on the quarter’s performance. Frankly, that’s not investors’ top concern at the moment. Instead, talk about what you’re doing to inspire their confidence that your business will come out the other side of this stronger than before. Investors want more than ever to feel secure in their decision to keep their stake in your company. If your business went into this crisis with strong performance and solid fundamentals, by all means, remind them of that. If the two months before the pandemic struck are good indicators of the strengths you will bring forward into recovery, use the data you have from that period to make the case. But, in general, a plan of action will resonate more than numbers right now. Investors need a glimpse into what business is going to look like over the next few quarters, and insight into management’s expectations for the economic context you expect, the capabilities and the strengths you believe will matter most in the recovery, rather than a recap of your pre-pandemic performance.
Be more forward-looking than usual.
When dealing with any crisis, it’s all too easy to let a fixation on the present take control of our thinking. As hard as it may be, we suggest that you take a couple steps back and a hard look forward. Talk about the lens you’re looking at the world through today. Speak to the principles that guide your decision-making. Discuss what you’re doing to help. Describe the ways you are protecting your economic value chain and taking care of partnerships, customer relationships, and preserving the spark that will get your business under way as soon as possible. Point to the greater purpose of your operations and how you’re staying true to your mission and values. If you have refocused on government as a customer, or used the pandemic pause to redefine the focus for your return to the best portion of your future market, describe that too. All of these things can help define the unique story you can use to frame your short-term financials, and build business momentum again when that is possible.
Leave more time for Q&A with investors.
When you report your earnings, leave more time to answer questions and concerns from investors. This time around, they’re sure to have more probing and pressing questions than normal. Give them the platform to raise what’s on their minds and hear straightforward feedback from leadership about how their concerns will be addressed in the coming months. Use their pre-earnings questions, and their comments on other companies that report sooner than you, as markers for topics to emphasize and questions to prepare for. Ask others in your company who may not always participate in earnings preparation to “red team” or role play in an extended rehearsal for the question and answer period of your earnings call.
It’s OK to admit you don’t have all the answers.
Transparency is important, but it naturally leads to questions, many of which you will not be able to answer yet. As difficult as it is to say “I don’t know” when it comes to what the future of business will look like, that’s OK. You’re not alone. The pervasive theme throughout the business community right now is a significant level of uncertainty – especially about where we go from here. We’re only a couple of months into the effects of this pandemic. We don’t fully know what the fallout will be or how long it will last. If a company claims to have everything figured out right now, it’s more grounds for alarm than reassurance.
Try to remember that building sustainable shareholder value is a long-term process. Over the course of time there will be broader market events that create uncertainty. What really matters now is clearly communicating to your investors what you are doing with the resources and relationships you have – and what you plan to do – to lead your business to recovery in the months to come. And from our experience, the companies best positioned to do that successfully are those that, in good times as well as times of crisis, tell their stories with transparency and authenticity.