capital Archives - Marc Rudov

Many CEOs of public companies complain privately that equity analysts control their companies' brands and branding strategies. This is a legitimate complaint. Equity analysts -- who tend to be biased, myopic, and flamboyant -- are extremely influential with investors. The result is that these CEOs, fearful of criticism, frequently keep secret their future visions and often forgo executing the underlying strategies to convert those visions to reality. This means that the analysts, not the CEOs, are calling the shots -- and this is unacceptable. Fortunately, there is a solution. Previously, I recommended the cessation of giving quarterly guidance: first, it's part of the analyst-control problem; second, it is not legally required. I recognize that stopping a traditional, expected ritual like guidance is more easily said than done. But, you'll agree, I'm sure, that allowing outsiders to control your destiny is no way to run a company. Moreover, keeping customers in the dark about your company's direction can negatively affect the prices they're willing to pay for your products and services -- thereby impacting your top and bottom lines. Passively Dancing According to researchers, star analysts -- but not "regular" analysts -- not only affect stock prices but also the costs of and timetables for raising capital. According to Boivie, Graffin, and Gentry: We found that a downgrade by a star analyst causes tremendous stock valuation changes that are not offset by the CEO having a good reputation. In other words, star analysts’ reputations overwhelmed those of the CEOs they were covering in terms of shareholder reaction – even when star analysts downgraded firms run by star CEOs. Specifically, we found that a downgrade by star analysts increased the negative market reaction by 40%, regardless of a CEO’s reputation. Thus, when a star analyst issues a downgrade, the CEO’s reputation has almost no effect on the market reaction. Chen and Lu drew similar conclusions in China: Sell-side financial analysts play a key role in collecting, interpreting, and disseminating company and market information to investors. Issuing "buy" and "sell" recommendations is an important part of an analyst's job and one of the most visible ways for them to express their opinions on the stocks and markets they cover. In an information market such as the one of financial analysts, since the product is ex-ante hard to evaluate, investors may reply on outside certification, such as award-wining status of an analyst, to infer the quality of his or her recommendations. In line with this argument, a large body of literature in finance and accounting have documented that investors react abnormally more to stock recommendations by award-winning financial analysts (hereafter "star analysts") than those by other analysts. Canadian economist François Derrien asserts: Not only do analysts influence the price of shares via their investment recommendations and reports, the information they provide also directly affects the cost of the capital of the firms they cover and, more indirectly, their financing and investment decisions. Dos Doszhan, CEO of Stockmetrix, avers: Active trading based on the Wall Street analysts’ recommendations regarding the S&P500 companies turned out to be more profitable than Buffet’s passive investing approach. It seems like you can trust the analysts after all. In essence, the aforementioned paints a picture of CEOs passively dancing to the tunes of equity analysts, who have gained too much power -- power devoid of checks and balances! This unfortunate situation has occurred over time, is counterproductive, and must end. Parting Advice to CEOs Surrendering to star analysts is not a solution for controlling your company's brand and, therefore, its destiny. I recommend emulating Donald Trump and Elon Musk, without the chaos: Circumvent the analysts, legally and wisely, by communicating directly with investors and customers -- frequently and compellingly. Twofold objective: demonstrate your company's unique value and put the analysts on defense. Build a TV studio at your headquarters. Make noteworthy status videos for your website. Provide live and taped video tours of your plants. Conduct interviews with happy customers. Use your imagination and creativity. In other words, change the game. Ideal scenario: Analysts are still involved but no longer in control. You are in control. Or, you can continue your private griping about life as a marionette. POSTSCRIPT #1: SEC Forces Elon Musk to Relinquish Chairmanship Over Tesla Tweet POSTSCRIPT #2: Irate Cleveland-Cliffs CEO Shows How NOT to Deal with Equity Analysts © 2018 Marc H. Rudov. All Rights Reserved.About the Author Marc Rudov is a branding advisor to CEOs,producer of MarcRudovTV, and author of four books

Don’t Let Equity Analysts Control Your Brand