Financial Forecasting During a Period of Macro-Economic Uncertainty

When investors evaluate investment opportunities, they look to management teams who accurately forecast and deliver results at or above guided levels. With macro-economic factors placing increasing pressure on financial results and expectations, it is as important as ever for companies to outline a plan they can confidently execute against. Generally, guidance metrics include top-line growth, gross margins, operating expenses, EBITDA, or net income as they allow the Street to evaluate company performance and benchmark across the industry. However, additional levels of detail and qualitative commentary may be necessary when there are mounting macro factors that may impact actual results.

In this blog, we will discuss a few items to help you think about forecasting and guiding Wall Street while navigating a challenging macro environment.

Modeling Internal Scenario-Based Forecasts – Plan the Work

It is important to have a deep understanding of the business and financial strategy to establish a plan to successfully execute against. A detailed financial forecast not only helps you track performance but provides the framework behind establishing guidance that is either achievable or beatable. It serves as a company’s internal roadmap and includes various levers responsible for top- and bottom-line performance. In addition to understanding the magnitude of each lever, it is imperative to know the drivers and how to track and demonstrate progress. That said, forecasts should always remain internal and never be referenced in conversations with analysts or investors.

Providing Achievable Public Guidance – Work the Plan

While internal forecasts influence guidance, additional factors that can impact expectations must be considered to provide a reasonable estimate, or range, for external communication. This is where performing a sensitivity analysis on your internal model can help incorporate a buffer into the guidance, which can be narrowed throughout the year (ideally). That said, while beating and raising top-line guidance was a sure way to drive value in the past, a detailed path to profitability and cash runway is becoming more valuable to investors’ decision criteria. This can include timelines as well as initiatives aimed at balancing growth vs. managing expenses, such as scaling operations and efficiently deploying capital. Companies that can message their ability to adapt to circumstances and execute according to plan will be deemed less risky when institutional investors are evaluating positions. Furthermore, many institutional investors are looking to defend investment theses in existing positions, so providing clear and achievable visibility into operations is important to retaining confidence. Not only is it important to achieve your plans internally, but you must also demonstrate your ability to “do what you said” externally.

Ensuring Consensus Reflects Guidance – Enforce the Goal

This is where effectively messaging future expectations is a key part of the strategy. Covering analysts rely on publicly disclosed guidance, in addition to actual financial results and market conditions, to update their estimates and ultimately the consensus for the company. In periods of uncertainty, analysts may put more weight on qualitative commentary to justify their expectations than the quantitative guidance alone. Since this sets the basis to be measured against going forward, it is imperative to deliver a message that accurately reflects the intended guidance.

Though companies are faced with similar macro factors, the key disclosures to instill investor confidence vary based on the business. It is crucial to understand what metrics are important to your investors and accurately reflect your performance. Gilmartin Group has deep experience and expertise in helping companies disclose key performance indicators that enable informed investment decisions and establish credibility among the Street.

For more information on forecasting, guidance, and consensus, please contact our team today.

Emma Poalillo, Vice President

 

 

 

Understanding Short Interest for Recent IPO’s

It is no secret that newly listed companies face a host of issues that many established public companies do not face. Whether it be a lack of executional credibility or liquidity issues caused by the lock-up period, management teams are often fighting an uphill battle during the early days of being a newly public company. Regrettably, these issues can manifest themselves into short positions. Understanding the true impact of short positions gives management teams an accurate view to build a plan of action to combat a short thesis.

When a recently listed company is evaluating a short position, it is essential to evaluate the position as a percent of float rather than a percent of shares outstanding. As is common with newly listed companies, a large percent of shares outstanding will not be regularly traded in the open market. This is especially true in the early days following a company’s IPO before the lock-up expires. When you put your position in the context of daily volume, as a percent of float/outstanding share, you get a more accurate view of the active short position.

Interpreting the Short Position

  • <5%: Should be of no concern
  • 5%-10%: A developing view the stock will underperform
    • Possible Drivers: Competitive products will limit upside and/or sentiment, expectations set by management are too high, whispers exist that create noise or challenges for new buyers
  • >10%: A reasonably well-defined short thesis exists
    • Drivers: Market participants have a view the stock will significantly underperform peers due to a lack of buyers

How to Resolve the Situation

The threshold for management teams to start actively managing communications around their short position is typically ~8%. At this level, it is essential to recognize there could be a building position on the horizon; management teams should actively work to mitigate that risk. The best and often easiest way to combat a building short position is to execute on your publicly stated goals, which should drive stronger financial performance. It can also be helpful to discuss short views and negative feedback with sell-side analysts to understand what they and the buy-side sees as “headwinds” to investment.  A typical thesis might suggest one of the following explanations: guidance is too high, a lack of confidence in new product expectations, developing competitive landscape dynamics, cash burn issues, dilution concerns, etc. There are times when negative sentiment surrounding a company will lead to elevated short interest but not at a material level; it is only a cause for concern when short interest starts to become a considerable amount of shares outstanding or float. Understanding the perception of your company by outsiders is crucial to addressing the underlying problem.

The flip side of a low float for short investors is that it is very difficult to exit the position if needed. The shorts could be taking liquidity risk with their position, just as large holders do. If short interest is more than five days to cover (i.e., short interest ratio is days to cover), it will take the shorts some time to close out their position at 10-20% of daily volume. When liquidity is low and short interest is high, the short fundamental view will be compounded by the low liquidity of the short position. Shorts need to be right, especially when liquidity is low, so that the selling volume is available for them to cover their positions. If the shorts are wrong, there is not only no selling volume to cover other buyers in the market, but also the potential for a “short squeeze.” This will drive stock higher, mostly due to the lack of liquidity from sellers.

A low float is an unfortunate reality most recent IPOs experience, which usually introduces many company-specific issues. Understanding a company’s float in comparison to active short positions is crucial when thinking about external messaging, liquidity considerations, and business execution. Gilmartin Group can help you navigate floats and determine the smartest moves for your company. Contact us today.

Webb Campbell, Associate

Board Diversity and Wall Street – An Emerging Priority

Over the past year, Wall Street has increased its focus on diversity and its implications for companies. This discussion is reflective of not only a broader national dialogue on social justice, but also an international emphasis on Environmental, Social, and Corporate Governance (ESG) investing. While European-based funds have thought about socially responsible investing for quite some time, this framework has become increasingly important to US-based asset managers.

Below, we take a look at the ways in which different Wall Street institutions and governing organizations are trying to address diversity and its implications for public companies.

New Board Requirements

Nasdaq
On December 1, 2020, Nasdaq filed a proposal with the SEC to adopt new listing rules related to board diversity. According to the Wall Street Journal, Nasdaq found that more than three-quarters of its listed companies would have fallen short of the proposed requirements in a review carried out over the past six months. Around 80% or 90% of companies had at least one female director, but only about a quarter had a second one who would meet the diversity requirements.

If approved by the SEC, the new listing rules would require all Nasdaq-listed companies to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe to meet the minimum board composition expectations set forth in the proposal will be based on a company’s listing tier.

Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.

All companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval. Finally, foreign issuers (including foreign private issuers) and smaller reporting companies, by contrast, may satisfy the requirement by having two female directors.

Nasdaq is also partnering with Equilar to enable Nasdaq-listed companies that have not yet met the proposed diversity objectives to access a larger community of highly-qualified, diverse candidates to amplify director search efforts.

Goldman Sachs
On January 23, 2020, Goldman Sachs indicated it will only underwrite IPOs in the US and Europe of private companies that have at least one diverse board member. Starting in 2021, the company will raise this target to two diverse candidates for each of its IPO clients.

CEO David Solomon referenced how since 2016, US companies that have gone public with at least one female board director outperformed companies that do not, one year post-IPO. He also highlighted how over the two years leading up to this policy, over 60 companies went public in the US and Europe without a diverse board member.

State of California and Subsequent State Legislation
In 2003, Norway was the first country to pass a law that required public companies to have >40% of board seats held by women. Before California became the first US state to pass a board diversity law in 2018, other European countries (i.e., France, Spain) had implemented similar diversity laws.

On September 30, 2020, California Governor Gavin Newsom signed into law a measure that will require publicly-held corporations in California to achieve diversity on their boards of directors by January 2023. This law follows the passage of its 2018 law mandating that public companies headquartered in the state have at least one woman on their boards of directors by the end of 2019, with further future increases required depending on board size.

By the end of 2021, California-headquartered public companies are required to have least one director on their boards who is from an underrepresented community, defined as “an individual who self‑identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender.”

By the end of 2022, the number of diverse directors is required to increase, depending on the size of the board, as follows:

Source: Harvard Law School Forum on Corporate Governance “New Law Requires Diversity on Boards of California-Based Companies”. Posted by David A. Bell, Dawn Belt, and Jennifer J. Hitchcock, Fenwick & West LLP, on Saturday, October 10, 2020.

Companies are also considered compliant with the addition of one or more board seats, rather than removing directors, and in some cases the addition of one board member satisfies multiple requirements.

Although California is facing court challenges, other states have followed suit by passing similar measures. Both Washington and Illinois have passed board diversity legislation. Other states, like Hawaii, Massachusetts, and Michigan are in the process of drafting similar laws to be effective in coming years.

Implications for Public Companies
While some of these requirements have been challenged and it remains unclear if the SEC will approve Nasdaq’s proposal, Wall Street’s interest in diversity is here to stay. Notably Vanguard, State Street Advisors, BlackRock, and the NYC Comptroller’s Office include board diversity expectations in their engagement and proxy voting guidelines.

Companies can address the growing requirements and investor interest in diversity in the following ways:

  • Work with counsel to develop a process for disclosing relevant information on diversity at the board level
  • Prepare to discuss board composition and diversity plans with investors
  • Devise a plan to address or consider board diversity in the context of recruiting
  • Consider implementing an ESG strategy that consists of routine disclosures on a number of areas highlighted by the Sustainability Accounting Standards Board (SASB)

For additional information on how to address diversity as part of a broader ESG strategy, contact our team today. We have helped our clients publish Corporate Responsibility Reports for investors, and we would be happy to support and guide you through this process as well.

Caroline Paul, Principal

What to Consider When Providing KPIs Post IPO

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A public company’s first earnings call is an opportunity to set a precedent with Wall Street on how it plans to report. It is important to be intentional, consistent, and thoughtful with key performance indicators (KPIs).

Metrics & KPIs
Revenue is important for growth companies, but the strategy is in demonstrating metrics beyond revenue to show the business’ traction and acceleration. Metrics are quantifiable measures used to gauge performance or progress. KPI metrics are essentially the kinds of metrics that will help you track your company’s performance over key goals. Most KPIs tend to be specific and measurable so that you can easily gauge your performance. In short, KPIs track whether you hit business objectives/targets, and metrics track processes.

Why are KPIs important?
KPIs help you evaluate your company’s performance where it matters most. As these performance indicators highlight how well you’re achieving your core business objectives, you can easily monitor your organization’s and team’s performance in achieving those key goals.

KPIs show a company’s holistic progress through time and performance. As you transition to a public company, focus on the metrics that best represent how you think about the business. You should be mindful of the balance between choosing metrics that show traction, growth, and momentum in the first year versus the longer-term outlook. For example, you may be excited about providing metrics that are currently showing traction, but do these make sense to be reporting on a few years down the road? Could these metrics become less relevant?

KPIs should be consistent, and you should only retire metrics when you can make an argument that they are no longer the right way to think about the business. Use year-end to reevaluate metrics and see if anything has changed or needs to be retired. This is the time when you can also introduce new metrics.

Changing KPIs
Firstly, it is important to be consistent when giving KPIs (no cherry-picking based on a good or bad quarter). Retiring a metric without explanation can indicate a bad signal, such as not having a good line of sight into the business.

The year-end call is an opportunity to reassess KPIs and determine if anything needs to be changed moving into the next fiscal year. As you grow, the business will change. Your metrics you choose to report on will need to reflect this change, and this is normal. In order for Wall Street to understand (and accept) this, you have to give convincing reasoning as to why this isn’t the right way to think about the business anymore. Being transparent and clear of what to expect going forward will address investor expectations.

For example, due to a shift in core business or revenue mix, previous metrics may not be the right proxy for traction. Point out the factors you are considering or how working with customers has changed, and point to the new metric as a better way to note acceleration and progress.

Here at Gilmartin, we have extensive experience helping our clients through the intricacies of their quarterly reporting. For additional information on navigating the reporting as a newly public company, please contact our team.

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Carrie Mendivil, Principal

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The Enduring Communications Playbook: How A Solid IR/PR Strategy Can Help Win Over Investors During Bull and Bear Markets

Strong investor relations and public relations strategies are core to building corporate visibility among investors of all sizes. Communications must ensure that key stakeholders are reached across a multitude of channels, whether one is preparing for a financing round or IPO as a private company or trying to attract additional audiences as a public company. Prior to a capital raise or exit, it is especially important to create a discoverable track record of success to excite and entice investors and the market. It is crucial to establish one’s brand as a “company to watch” with a strong financial future and leaders who are visionaries in their field.

Click here to continue reading our phased approach to key IR/PR strategies every company should consider and implement to increase Wall Street visibility on PR Daily.

For more information on how you can increase your Wall Street visibility, contact us today.

Caroline Paul is a principal with the Gilmartin Group; Shannon Murphy is a senior vice president with Highwire PR.

How Management Teams Establish Credibility

How do management teams establish credibility and become well-regarded by investors and sell side analysts?

Summary
Well-regarded management teams are generally characterized by their ability to establish credibility with investors and analysts. Credibility is earned through effective and balanced communication, rigorous financial planning, and the ability to respond to, and incorporate change into strategic planning. Company representatives who interact with the investment community are often held personally accountable for the tone and content of the corporate message. The establishment, or lack, of credibility often results in higher, or lower, multiples of the public equity. The achievement of higher equity multiples will generally lead to stock price outperformance, higher employee retention, and a lower cost of capital for the company.

What attributes define a credible management team?
Historically, an important factor in establishing credibility with the investment community was a management team’s ability to deliver consistent financial results, quarter in and quarter out, preferably with consistent upside surprises. Premiums were accorded to management teams that could communicate a reasonable forecast and deliver ahead of said forecast; the “beat and raise” approach to financial guidance communication. Investors favored such situations because they did not have to “worry” about financial results being volatile and consistency was rewarded handsomely.

Following the dot.com bubble, the financial crisis of 2008-2010 and, today amidst the COVID-19 turmoil, investors have recalibrated how a management team’s credibility is evaluated. Over time, investors have become skeptical of “smoothed” operating performance that relies on management’s assumptions and accounting interpretations. If a business is dramatically outperforming peers in a volatile environment, business (and accounting) practices are scrutinized for compliance, legality, and sustainability. If the slightest oddity or inconsistency is found to drive financial performance, heavy skepticism is immediate.

During more normal times, the number of financial metrics used to assess the quality of financial performance are incalculable.  Every investor or analyst has an opinion about which financial metrics are relevant indicators of future financial performance: revenue growth, backlog, R&D spending, operating income, EBITDA, free cash flow, balance sheet quality, accounting assumptions, etc. However, in 2020, during a period of sustained uncertainty, the assessment of a management team’s credibility has expanded. Today, it is of increasing importance to investors and analysts how a management team communicates the company’s approach to financial planning, the outlook on industry dynamics, the focus of internal investment priorities and the resetting of “normal” financial objectives.

During periods of uncertainty, investors and analysts spend a significant amount of time analyzing and corroborating specific individual executive’s statements. There is an intense focus on communication style and personality which drive trustworthiness and influence credibility. These traits have become significant points of focus for investors. How management team members discuss uncertainty, the depth of knowledge regarding the markets in which they operate, and the acknowledgment of key drivers of success for customers and suppliers all help shape the perception of credibility for a management team. Today, it is just as important to communicate awareness and understanding of the key issues impacting the business as it is to communicate what the company is doing operationally. If investors have confidence that management is proactively addressing the “known unknowns,” the management team’s credibility increases.

How do investors differentiate levels of credibility among management teams?
When faced with circumstances like those of 2020, it is imperative for management to articulate the financial planning process and identify the key variables which drive decision making. There are few expectations of management to establish financial guidance in 2020. Yet, it is very important to the investment community that management outline the framework for business planning and highlight metrics which they believe accurately represent the health of the business, both for the immediate and medium term.

A crucial element of establishing credibility is acknowledging the forward-looking uncertainty while articulating a proactive approach to planning.  It is essential to maintain an outlook and framework grounded in realism. The communication of past performance and the framework for the underlying operating assumptions should be clear and concise.  When management can frame and quantify the risks and opportunities in a balanced manner, the investment community will likely embrace an evolving plan.

Proactively addressing challenges and acknowledging an evolving strategy or goals increases a management team’s trustworthiness in the eyes of investors. Unfortunately, if recent success of the business is not expected to continue, a management team will lose credibility by focusing on the past success while minimizing future uncertainty. Keep the message focused on what lies ahead to build credibility with investors and analysts.

How do management teams lose credibility with investors and analysts?
When a CEO or CFO focuses on unsustainable business strengths or defends outdated planning assumptions, the investment community will discount every piece of information communicated from the company. Failure to recognize change in the key planning variables and adjust accordingly will put a management team in the proverbial penalty box with investors. It is almost impossible for an individual to recover their communication reputation once they have overstated optimism about the prospects of the business.

During this period of uncertainty in 2020, there is asymmetric risk/reward to focusing on better than planned performance, minimizing the risk of uncertainty and/or issuing formal guidance given the volume of issues with significant uncertainty. Acknowledge the risks and articulate the plan to address them.

Implications for management and the stock when credibility is lost
Consistently optimistic or pessimistic guidance damages the credibility of the management team. Damaged credibility leads the investment community to speculate on management’s “intentions” which drive “whisper” expectations for financial performance. This speculation will overly influence investor sentiment on management and the business itself which will likely drive trading volatility of the stock.

Increased opinion-based investor speculation is the last thing a management team wants to be saddled with. Without confidence in the message or the people delivering the message, the potential for stock price volatility increases significantly. As a result, entire groups of investors will avoid certain stocks and/or will be limited “renters” of the stock; neither of which bodes well for long term value creation for shareholders or wealth creation for employees.

When investors believe management lacks credibility, the markets respond in the following ways:

1) financial multiples often remain in the bottom two quartiles of peers,
2) investor turnover increases and remains fluid over time,
3) investor speculation on strategy increases,
4) investor interaction becomes less amicable and can turn confrontational, and
5) investor interest wanes with the investment community becoming indifferent to good news.

Establishing credibility with investors will benefit individuals and the company in the long run
Management teams can use this period of uncertainty to establish foundational relationships with investors by being transparent about how they plan and operate the business. Clearly articulating key internal and external metrics management relies on to assess performance goes a long way towards building credibility with the investment community. It is best to acknowledge recent success with an eye towards the outlook and incorporate the obvious uncertainties into commentary or script. Investors will appreciate a candid assessment of facts and reasonable assumptions which will build credibility for when the time comes to issue guidance with a higher level of confidence than exists today.

For more information on how your management team can establish credibility with investors and sell side analysts, contact us today.

David Deuchler, Managing Director

Guidance Considerations for COVID-19

The everchanging news cycle has been accelerated with COVID-19 and the associated onset of daily, if not hourly, updates related to this global pandemic. Feeding into the news has been a set of dynamic considerations that are also continuously changing, such as COVID-19 testing details and evolving guidelines established at levels that stem from global and national to state and local. Furthering the complexity of this situation is the uncertainty of having enough resources to treat the increasing cases of COVID-19, especially with insufficient settings for treatments and broad-based shortages of healthcare providers and equipment.

To say the least, it is difficult and daunting for companies to navigate these times, let alone consider how to effectively communicate the impact of this health crisis (see Managing the Crisis: IR Considerations for Managing your COVID-19 Response). As highlighted in last week’s blog and as part of a company’s response, management teams should reassess their guidance, determine how certain or uncertain they are on the guidance they have provided and develop a plan of communication to update the Street. In this blog, we will look at a few factors to contemplate in deciding whether to update your guidance.

Update or Suspend Guidance

One consideration is whether to update or entirely suspend guidance. A few companies have provided qualitative updates to outlook, announcing general performance effects expected to result from this pandemic, such as, changes to supply chain, impacts to global operations, delays to clinical trials or disruptions to procedures. Some have also reduced guidance, attributing the reduction to the general impact of COVID-19, or pointing to more specific areas affected.

We have also seen more companies within the healthcare sector suspend guidance, which is an understandable response. Each company’s outlook is predicated on a multitude of unpredictable factors, including broad implications of COVID-19 to the economy on a macro-level and the timing of elective procedures coming back in line on a micro-level. Investors and analysts are in the same boat during this evolving crisis, and they do not appear to expect companies to have a quantitative update to guidance readily available.

Consequently, in this period of uncertainty, companies may want to consider retracting guidance altogether rather than risk having to provide multiple revisions.

Timing Guidance Updates

There are no specific rules governing when companies need to provide updated guidance, outside of the normal cadence of earnings cycles. It may behoove some companies to take a wait-and-see approach and suspend their guidance during their next reporting of quarterly earnings, which is right around the corner for many. In other cases, and following suit with predecessors, some may consider pre-announcing updates. In fact, this past month, we saw a number of healthcare companies pre-announce their suspension of guidance. The majority of these companies provided such announcements through press releases, while others did so through 8-Ks.

As timing considerations are made, companies should keep company counsel informed and think through Reg FD obligations, any financing requirements or access needed to capital markets, and the timing of insider trading, particularly in terms of when management developed an understanding of the impact of COVID-19.

Finally, as companies work through next steps on guidance, management teams should consider all available information on the impact of COVID-19, especially since variables are changing day to day.

For more information on guidance and how best to respond amidst this evolving crisis, please contact our team today.

Ji-Yon Yi, Associate

IR Considerations For Managing Your COVID-19 Response

In many ways, a crisis such as COVID-19 demands immediate action. Since January, and particularly over the past few weeks, we have seen a tremendous mobilization of government and private resources in response to the novel coronavirus that has upended society and markets around the globe. This mobilization, along with the implementation of mitigation policies like social distancing and the deferral of elective procedures, have forced healthcare companies to grapple with how to best respond operationally. In turn, it has become obvious that expectations and messaging for 2020 need to be reassessed. Therefore, from an IR perspective, while transparency is key, immediate action, or reaction, is likely not the best prescription for this situation.

In our view, companies should consider the following when planning their response to COVID-19:

  • Don’t hide. Focus investors on the fundamentals and your long-term value proposition. As investors have made a lurch toward cash, there has been immense pressure on the share prices and relative valuations of SMID cap companies. Management teams should remain in close touch with their investors, particularly top holders, as they assess their portfolios and make difficult decisions in the weeks and months ahead. Consider providing high level context around how your company is managing these unprecedented headwinds while dispelling misguided concerns and reasserting that the fundamentals of your business are intact. Executives should also convey that nothing about their business model has changed and that they remain optimistic about the durability of their business. This is especially true for generally countercyclical healthcare companies, which are more likely to emerge as buying opportunities for well-positioned investors. While most elective procedures are being postponed, many physicians and hospital administrators are signaling their belief that a relatively small proportion will be lost indefinitely. This means that healthcare companies will likely benefit later in 2020 and into 2021 from pent-up demand as we emerge from the worst of the crisis. Keep in mind that current valuations may have created a buying opportunity for institutional investors who have been eagerly awaiting a liquidity event or more reasonable valuation to enter a name.
  • Communicate your commitment to both your employees and shareholders. In times such as these, strong leadership is critical. As you engage with various stakeholders, be sure to convey confidence while making your priorities clear. In the nearest term, your company will be focused on the health and safety of your employees. While this may translate into higher than expected cash utilization despite a decrease in revenues, human capital will remain critical to weathering the storm and ensuring shareholder value in the medium to longer term. That said, make it known that tough decisions may need to be made in the months ahead and that you are willing to make them. Remaining transparent about these realities and your priorities will help maintain credibility internally and externally while also levelling expectations from a financial perspective.
  • Avoid quantifying specific short-term impacts. The impact of COVID-19 on global supply chains and on the demand for medical procedures and products is constantly evolving and will impact every business differently. Investors and analysts understand this. While some investors may pressure you to quantify short-term impacts, most understand that a comprehensive assessment takes time and will likely not be possible until the worst of the initial outbreak of the virus has passed. While providing context on mitigation strategies (assuming they are already in the implementation phase) is encouraged, avoid commenting on and/or quantifying specifics.
  • Contemplate suspending FY 2020 guidance. A number of mid and large caps in the healthcare space have already either suspended or signaled their intent to suspend their full year 2020 guidance. Just as investors and analysts have demonstrated their willingness to hold tight for commentary on the specifics of the virus’s impact, they also seem willing to accept guidance suspension. This forgiveness is atypical—companies of all sizes should take advantage.
  • Consider a letter to stakeholders. As investors, customers, patients, and employees all seek information related to your expectations and response to the crisis, a simple letter to all stakeholders may be the most appropriate channel to communicate broadly. Unless there is a need to disclose material information, a letter outlining your latest thinking can be immensely helpful while avoiding the formality of a typical press release. Some key messages could include:
    • “We are watching the global policy responses closely and working with our suppliers and customers to work through this difficult, transitory period.”
    • “We are following the direction of local authorities with regard to public gatherings, and we are working to ensure our employees are compliant but operational.”
    • “As we learn more about the direct and indirect impact from policy decisions and macroeconomic developments around the globe, we will be more informed about the ultimate impact on our business operations and will communicate them appropriately.”
      A letter like this conveys transparency and proactivity while providing reassurances that you are focused and able to tackle the hurdles ahead.   
  • Carefully consider the extent to which you will provide prepared remarks and/or Q&A on your next earnings call. If you are still processing the impact of COVID-19 to your business and contemplating your response, it may make sense to keep your next quarterly earnings call short and sweet. Now there is more flexibility to delay the timing of your quarterly reporting—see SEC guidance here. Discuss your options with company counsel and your IR team to ascertain the best strategy for your company. Sometimes less truly is more.
  • Don’t forget Reg FD requirements. As executives and communications professionals at public companies continue to respond to external audiences, it is critical to keep Reg FD requirements in mind. Carefully plan your talking points to avoid disclosing any material non-public information (MNPI), and keep company counsel looped in. Operating and messaging through evolving times of uncertainty creates even more opportunities to unwittingly provide MNPI and selective disclosure. Remain particularly cognizant of SEC regulations as you continue to engage with key stakeholders.
  • Wash your hands and stay safe. This one should be self-explanatory!

For more information on best practices for responding to this crisis, or if you would like for us to review your COVID-19 response strategy, contact our team today.

Brian Johnston, Vice President

Environmental, Social & Governance (ESG) Part 2: How To Get Started

In part two of our series on Environmental, Social, and Governance (ESG), we will explore ways to jump-start your company’s entrance into this new level of disclosure. There has been a lot of insightful information published on this topic, but many public companies are still left wondering the best, most comprehensive way to publicly disclose their applicable policies in order to address the growing number of investor questions on the topic, as well as improve their relative rating agency scores over time.

First, don’t worry…almost all public issuers are in relatively the same boat – a growing awareness of the importance of identifying ESG initiatives and getting the information on those efforts and goals into the public domain. Similarly, investors and investment banks are in the process of identifying what metrics are important to their investment decisions and how that applies across a wide spectrum of industries (e.g., should the same metrics apply to a financial institution as a manufacturing company?). They also have to consider how it applies to varying corporate life cycle stages (e.g., should the same metrics apply to a newly public, growth stage company that would apply to a mega-cap issuer with thousands of employees?) and what considerations need to be adjusted for corporate domicile (e.g., a company with only one domestic office versus a multi-national footprint with a global employee base).

Keep reading to see the four steps we recommend companies follow for the smoothest transition into getting involved with ESG.

Step 1: Review the ESG framework.

It’s important to understand why ESG seems to have exploded onto the disclosure scene over the past few years. While it seems new to many US-based public company management teams, the topic of ESG has been in the global domain for more than a decade but crept into the limelight largely due to the emergence of several global platforms that highlight important criteria for driving true corporate responsibility. Reviewing these frameworks can provide valuable insight and ideas for determining where your company has already been successful and where you may fall short.

Below is a list of these frameworks.

The United Nations 2030 Agenda for Sustainable Development, adopted by all UN Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. The UN has identified 17 Sustainable Development Goals (SDG), of which participating companies are required to submit annual “Communication of Progress” reports to the UN. Many of the UN issues involved are related to the environment, including global warming, carbon emissions, and water and natural resource use and conservation. But there are many just as relevant issues from labor to diversity to equality to disclosure that are included. How companies address and embrace the 17 goals is entirely up to them.

The Task Force on Climate-Related Financial Disclosures (TCFD) is an organization that was established in December of 2015 with the goal of developing a set of voluntary climate-related financial risk disclosures that can be adopted by companies so that those companies can inform investors and other members of the public about the risks they face related to climate change. The organization was formed by the Financial Stability Board (FSB) as a means of coordinating disclosures among companies impacted by climate change.

The Sustainability Accounting Standards Board (SASB) is a nonprofit organization that sets financial reporting standards. SASB was founded in 2011 to develop and disseminate sustainability accounting standards. While the Financial Accounting Standards Board (FASB) has developed the accounting principles currently used in the financial statements in the United States for the past 40 years, other social and environmental measures are now understood to be relevant. The SASB aims to establish industry-specific disclosure standards across environmental, social, and governance topics that facilitate communication between companies and investors about financial material. This information helps influence decision making.

Step 2: Identify your “ESG” team.

There are a number of people within your organization who can serve as key contributors to your ESG team. Investor relations should have a seat at the table but consider a broader base of your leadership group to form the core of your ESG team. It’s likely you’ll want to include someone from your internal legal team, human resources, and finance as part of the committee. But consider casting a wider net to include sales and marketing, public relations, manufacturing and procurement, community relations, and risk management. People from these organizations can bring new perspectives and invaluable insight into ways that your organization can make meaningful improvements in driving ESG goals.

Step 3: Identify public disclosure source documents.

There are many options for getting your ESG messaging into the public domain – there’s no right or wrong path. The nice thing about ESG disclosure is that it is not tied to earnings or an SEC filing timeline. A company can disclose its information at any time and in any format, though updating the IR website, within a governance or corporate responsibility section, seems to be the most common vehicle today.

A simple option that will give your organization a starting point and the most flexibility to update as you progress is a letter from your CEO or Chairman, which can accompany the Proxy Statement, appear in the Annual Report to Shareholders, or be posted on your corporate website. This letter can cover a general overview of your company’s commitment to ESG and highlight areas that you are pursuing that hold specific importance to your sector, market, and employee base. Other options are factsheets or simple digital brochures that highlight how your company is addressing some of the key topics addressed by SASB, the UN’s SDGs, and TCFD. Some of this content can also be found in Board documents and HR materials that can be brought into the public domain.

We’d recommend avoiding disclosures in public filings such as 10Ks and 8Ks, because they carry more stringent legal requirements. At this stage, the priority is to let the investment community know you are working on ESG goals, demonstrate that your company is “forward thinking and aware,” and then remain flexible in your ability to update public information as you make progress throughout the year.

Step 4: Remember that ESG and the goals are completely company defined.

The most important consideration as a public issuer is to identify what’s right for your organization and start with those disclosures. There is no standard for ESG; rather, companies should have and disclose policies that reflect the relevant key topics and how they are being addressed or pursued for future implementation. Think of ESG as an aura around your company’s culture; the ESG related information is the result of how companies execute business.

If your company is ready to make the first step toward getting started with ESG, we’d love to help. Contact our team today.

Leigh Salvo, Managing Director

Environmental, Social & Governance (ESG) Part 1: Landscape & Scores

Environmental, Social, and Governance (ESG) considerations are becoming more relevant globally, and companies are now being evaluated on “non-financial” criteria alongside more traditional financial metrics. Changing priorities such as climate change and gender equality have become critical issues for the global community, including the investment landscape. As ESG metrics increase in importance, asset managers are increasingly analyzing ESG data in conjunction with traditional financial measures. ESG’s position as a central element of any company’s investment case is the new normal, as several prominent shareholder groups and governance advocates have turned their focus to ESG issues and have been increasingly vocal about their expectations for transparency and reporting on these matters. For example, BlackRock announced in 2018 that it would require that all of its fund managers consider ESG factors when making investment decisions. An uptick in shareholder proposals or other informal engagement on these issues has recently become even more prominent.

In fact, c-suites and boards are already noticing steadily increasing interest from investors in ESG-related risks and value creation. Yet, while the importance of ESG is gaining recognition, this topic has traditionally not been central to the financial workings of companies. In spite of the proliferation of consultants, experts, and service providers, ESG data is non-standardized and only lightly regulated – there is no single authority, no benchmark, no industry standard.

Rather, companies are often being evaluated and rated on their ESG performance by various third-party providers of reports and ratings, such as Institutional Shareholder Services (ISS), MSCI ESG Research, and Bloomberg ESG Data Service (think of these as the Moodys and Standards and Poors for sustainability). Institutional investors, asset managers, financial institutions and other stakeholders are increasingly relying on these reports and ratings to assess and measure company ESG performance over time and as compared to peers. This assessment and measurement often forms the basis of informal and shareholder proposal-related investor engagement with companies on ESG matters. However, report and ratings methodology, scope, and coverage vary greatly among providers. How well a company understands these agencies’ methodologies and how thoughtfully a company tailors its own disclosures to these standards will be increasingly important in the coming months and years.

What is an ESG report?
Corporate ESG reports are externally generated by third parties and are based on company disclosures in the three distinct ESG categories: environmental, social, and governance. In most cases, companies are automatically rated on an annual basis, whether or not the company desires such ratings. Companies are often rated on a scale (typically alphabetical or numerical) according to their exposure to industry specific ESG risks and their ability to manage those risks relative to peers. Scores are then sold by the ratings firms to interested outlets, such as investors. Some investors will follow this recommendation, similar to the way they do for traditional proxy voting measures. However, many of the larger asset managers and going forward, bulge bracket banks, will be doing their own due diligence.

How do rating agencies develop a company’s ESG score?
Rating agencies collect public ESG information disclosed by companies (often leveraging artificial intelligence and alternative data) through corporate social responsibility (CSR) or sustainability reports, government databases, company publications including mainstream filings, publicly available company policies as well as information on a company website. Then, they rank the respective company and its practices on a variety of indicators (sometimes upwards of 150+). Various rating agencies will often invite companies to review and verify their data through routine data verification. That is why it is important for companies to engage with these agencies to improve or correct data.

What are the criteria rating agencies evaluate?
As previously mentioned, ESG scores are based on company disclosures in the three distinct ESG categories: environmental, social, and governance. For example, environmental disclosures include topics such as greenhouse gas emissions, pollution, renewable energy, water usage, and waste disposal, while social disclosures focus on diversity, labor relations, product safety, employee health and safety, and community relations. Governance indicators often discuss ethics, board diversity and composition, executive compensation, shareholder rights, and supply chain engagement. Below are a select handful of the types of questions these firms consider during the evaluation process:

Environmental

  • Are there any specific, salient risks that the company’s activities and business relationships pose on the environment, and if so, how are they being addressed or offset?
  • Does the company disclose a climate change policy or equivalent information that specifically addresses its climate change risks, performance, and opportunities?
  • What are the company’s risk management procedures regarding climate change risks; how far into the future does it monitor risk management procedures?
  • Does the company have waste management and recycling programs? Does the company provide specific targets for reducing hazardous and non-hazardous waste?

Social

  • What specific salient risks does the company’s activities and business relationships pose on human rights?
  • What is the scope of your company’s disclosed training or professional development programs for employees?
  • Does it publicly disclose a diversity strategy or similar commitment to ensure workforce equality beyond gender at the board, senior management, or workforce levels?
  • Does the company have any information on its website regarding corporate social responsibility?
  • What is the company’s approach to identifying and addressing data security risks?

Governance

  • How many women are on the board? What is the proportion of women on the board?
  • Does the board have any mechanisms to encourage director refreshment?
  • Does the company disclose a performance measure for the short-term incentive plan for executives?
  • Does the company have a shareholder rights plan in effect? When was this plan implemented or renewed?
  • Has your company disclosed any material weaknesses in its internal controls in the past two years?

Though several standards exist to provide a framework for how a company can disclose sustainability information to investors in mandatory filings, such as the Sustainability Accounting Standards Board, the SEC has not mandated ESG disclosure. Thus, many companies have not felt required to understand sustainability and ESG. However, as sustainability increases in significance across investors and all stakeholders, companies should be prepared to understand the implications of growing ESG transparency and the opportunities and risks that follow. Tune in next week for our discussion on best practices for ESG disclosure!

If you are looking for a team to help evaluate or develop your company’s ESG practices, contact Gilmartin today.

Audrey Gibson, Associate