Winning 'em over

Chetan Parikh, director, Jeetay Investment

Published 12 years ago on Jan 21, 2012 3 minutes Read

It has been one of the more unfortunate trends of the last few years—companies and their stewards have shaken up investor trust rather rudely. Winning Investors Over is positioned as a survival kit for managers who want to regain and sustain investor confidence. It certainly does not, at first glance, appear to be a book for that long-suffering investor. But it is. No, really. Baruch Lev, distinguished professor of accounting and finance at NYU’s Stern School of Business, has some deep insights to offer on the right ways in which a company can engage its investors. Lev challenges business leaders with short-term goals to rethink their beliefs. He does this with concrete real-life examples and irrefutable data. 

The book deals with three broad themes. The first relates to handling emergencies: when performance levels come to an abrupt and unexpected halt, earnings start to slow down, forecasts are missed and there are event-driven downsides. It then takes a long-term view of regaining and maintaining investors’ trust. Finally, it deals with corporate governance issues, including ‘myths’ on short-termism, the pitfalls and methods while dealing with activist investors, and issues of managerial compensation. 

To Lev’s credit, a critical, empirical and exhaustive discussion illuminates each subject. Lev suggests that while elevated stock prices can temporarily lower the cost of capital and make a company attractive to employees, it’s better to resist the temptation to ‘ride the tiger’ and cool-off investor enthusiasm. In the long run, he says, credibility wins over manipulations like sales dumping, cost cuts or ‘earnings management’.

The author calls for communication that combines hard (quantitative) and ‘hardened soft’ (‘soft’ being that which can be hyped) information. Always augment the narrative with numbers, he advises. The focus should be on enhancing credibility with investors through frankness and integrity.

Managers should be given operating instructions to always resist the temptation to manipulate, no matter how easy or non-consequential it may look, and told that they must keep frank communication open during tough times, and come out with the bad news quickly.

Surprisingly, overpriced shares are as hazardous as grossly undervalued shares because they lead to a vicious cycle of corporate overspending and earnings manipulation. As for the argument that overpriced equity makes for cheap acquisition currency, Lev points out that when goodwill is impaired in the longer term, it only leads to massive ill-will.

In India, listed companies (especially some subsidiaries of multinationals), hoard cash because they fear no attack. They use it to fund growth plans of their fully-owned subsidiaries. They signal that they are unwilling participants in Indian capital markets even though in today’s hyper-communicated world their loss of credibility here will ultimately tarnish their parent company and its cost of capital. A whole chapter on ‘hoarding’ shareholders’ money would, in fact, be a good lesson on ethical corporate behaviour. 

Empirical studies have proved that long-term investors dominate the capital markets. Lev shows how successful managers, like successful investors, manage both the short and long term. Voted by Accounting Today as one of the 100 most influential people in the accounting profession for four years running, Lev’s wisdom is pithy and profound by turns.