June 2017 – Bates Creek Consulting

The map is not the territory – Setting up a Chart of Accounts

Accounting is a numerical history of a business. We summarize the millions of transactions into a cogent one page document that tells the status of the business. The financial statements however, are not the same as the business. Alfred Korzybski said that “the map is not the territory”, referring to the object and its’ representation. A financial statement summarizes, and a summary leaves out details. Tracking which data goes where is the job of the general ledger and chart of accounts.

The core of reporting is the chart of accounts. Financial statements summarize sales into one line. Accounting might have half a dozen sales accounts and hundreds of departments, which all roll up to one single number – sales. These accounts are used to better understand the summarized information. Sales are reported net of returns, but accounting departments track the returns in a separate account so that department heads can see if return rate is trending up or down. If your ERP or sales software tracks returns, you probably don’t need a separate account for tracking that information.

However, accounts seem to proliferate. Charts of accounts grow over time – someone wants to know some summary fact of the business and the systems that generate that data don’t supply the summarized data to management. Commonly at retailers it is a POS (Point of Sale) system that runs the cash registers and reports summary data to a sales data warehouse or general ledger. Usually they only report data to the general ledger, so operating data is sourced from accounting records.

In an e-commerce firm it is the order entry and fulfillment systems, which may not be connected with purchasing or payroll systems. In addition, management has come to rely on the controls put in place in a general ledger system. In the 1990s we used a lot of database query tools that would often give different answers based on query design, so one meeting might have three different set of numbers based on who’d written the query.

The use of data warehouses should decrease demand for general ledger detail. Sales splits can be done in more detail using a database with all the relevant sales data, rather than the general ledger which might contain only weekly summary data. However as the needs of the company change, often it is easier to just add an account number than reconfigure a reporting system. Data warehouses – an idea that dates back 20 years – still don’t function as well as they should. So the g/l becomes a stand in.

I’ve typically used a couple of hundred “natural” accounts for businesses from $5m to $500b in revenue. An account like “sales” or “payroll” are called natural accounts. These are modified by department code and sometimes other codes for cost accounting or for projects. This can result in thousands of combinations. In a typical retailer with 100 stores they would support 60-70 natural accounts, for 6-7,000 combinations. Add in district and regional codes you could reach another 1-2,000 combinations. Designed right that level of detail is easily handled by your accounting team. Designed wrong and you spend hours trying to reconcile the source systems to the general ledger. Which adds cost without benefit.

Manufacturers sometimes have additional codes for production cost allocations. If you are running the same line in two buildings, under one department, you might also use a location code. All these codes end up making a chart of accounts pretty complicated. This is worsened if you end up layering on the complexity as you go, rather than plan it in. Knowing going in you will likely need a location or a production line code and planning for it makes a big difference later.

Much of the complexity of the chart of accounts depends on what information you will want to retrieve. Simple natural accounts and department codes can get a business a long way. Accounting codes begin to change if you are running project-level or fund accounting. Sometimes you can keep the reporting structure out of the chart of accounts. For instance, if you have a district manager with 10 units, you likely don’t track the district code in each transaction, but roll up the district report by selecting which units are in a district when you summarize the data. This is the default mode for most firms who report with excel. Changing the unit roll-up when a district manager leaves the firm is not Excel’s strength. Excel’s data summarization and analytical tools have improved, but realistically, converting from a trial balance to report is an area ripe for errors.

If you have online reports, managing the access in an ERP system can be a hassle, unless you have some hierarchy built into the system. Imagine allocating 600 units amongst 60 district and 10 regional managers? If each of the units had an assigned district and regional code, the reporting would be much easier to manage and control. With the rise of reporting dashboards, this feature is almost always built in.

The general ledger and financial statements are summaries but useful ones, where similar data is grouped, analyzed and decisions can be made. Too big a chart of accounts and you will spend hours managing complexity rather than providing information. Too small a chart and you will your time breaking out the details you need. A map is a representation of a territory which can be held in your hand and used to navigate. Good design and a thought for the future of the business will help develop a solid organization for your accounting data so that it will supply you the information you need to navigate.

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Dr. John Zott is the Principal consultant at Bates Creek Consulting. John is the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect consumer businesses. If you are looking for a CFO for your e-commerce/retail/consumer company, or are a former student, colleague or would just like to connect – reach out.

Uber and Reality.

A friend recently interviewed with a startup where the senior management group was upset that the CFO was requiring receipts and documentation for the use of company credit cards. They had decided to replace the CFO because they didn’t want to be troubled by providing receipts.

Sooner or later this company – like so many others – will face reality. When and how they will face reality is unknown. They may run out of cash, suffer a major defalcation or the company is sold, goes public or matures and profits become tougher to obtain. Providing receipts will be the least of their problems.

Facing reality is what Uber is doing now. The Board finds itself without much of a senior management team, no back-up plan and a rapidly sinking investment valuation. Changing CEO’s isn’t easy – I’ve been through the drill a couple of times. Planning is essential and thinking probabilistically is critical.

Thinking probabilistically isn’t hard. Using a decision tree is a good way to start. The tree in this case might have had three branches depending on the outcome of the investigation. Branch 1 would be no or only a minor finding, branch 2 would be a significant finding and branch 3 a major finding. The odds of branch 1, no or a minor finding would be low, they’ve had steady turnover in the ranks and there have been a lot of negative disclosures, I’d estimate 15%. The odds of branch 2 “significant” would be high, I guess 60% . A significant finding would require some senior turnover and changes in the culture.

Hiring a big deal law firm and a consulting firm to probe 3 million documents and survey employees anonymously isn’t cheap. A significant finding is most likely. Finally the third leg would be a major finding where the top management team needs to be fired or a significant restructuring undertaken. That accounts for the remaining 25%.

When the CEO decided to have an investigation of sexual harassment claims in February, there was a distinct possibility that the result would be significant or worse. Facing a 25% potential turnover in the top management group should have focused the Board on a backup plan. When Mr. Kalanick’s mom passed in a boating accident at the end of last month the odds of turnover increased.

Review Covington & Burling’s report recommendations (see here) and then guess at what facts justified these recommendations. The first set of recommendations states that the CEO’s responsibilities need to be reassigned. The second set aims at Board governance; which should have figured out the problem in the first place. The recommendations suggest that they found significant problems with leadership. Uber is facing reality now.

We used to joke about managers who’d used the “force”. The “force” was an unreality field that surrounded the manager, and within that field they could manipulate facts and time to justify whatever they wanted to do. Eventually since there are not Jedi’s in business, reality catches up. I worked for a CEO who ran the business by anecdote even when we had facts. We spent months on the wrong strategies based on incomplete understandings. He’d repeat the same anecdotes in every meeting, certain of his rightness, even as the business crumbled. Reality didn’t penetrate until he was fired in a crisis. The company never recovered.

I am unhappy when capital is wasted, but I really dislike the toll the failure to face reality takes on the people who work for these businesses.

I worked for a company that opened up a Texas operations center, reproducing it’s California central office. The strategy was to be more local in sourcing. After a year or two, the CEO realized this was a bad strategy, and ended up shutting down the office. The sad part was one of the junior people who’d moved their life to Texas was so upset by the closing and the layoff, committed suicide. Obviously there were other issues in this person’s life, but as senior executives, we shouldn’t forget that decisions have consequences beyond return on capital.

VC’s and PE firms are focused on return of capital. Board members are usually required to do what is right for the company. VC and PE firms have come up with investment vehicles which absolve themselves of any fiduciary responsibility to the company. They are held accountable only to investors in their funds, not to other investors or stakeholders. Uber’s board had full confidence in Mr. Kalanick (see here) in March even while turnover of senior executives and the search for the COO continued. The company never hired a COO or a CFO and turnover still continues. All that being said, the “money” Board seats appear to be more rational than the founder’s board seats.

Uber’s board is dominated by the founders with super-voting shares (see here). This structure supports founders regardless of competence. Facebook and Google have this structure but they are primarily technology businesses. Uber is challenged because it is a people business, like Target or McDonald’s and the founders are not competent executives. Uber has 5-10x more employee/drivers than Facebook has employee/contractors, yet Uber is run like it is some sort of “two guys in a garage” startup. The non-founder portion of the Board has as little control as the drivers or employees do. The Board’s failure to take action makes sense, they are powerless. The board can either support Mr. Kalanick or be ignored.

Founderitis is a destructive disease to businesses. When a business outgrows it’s entrenched founder (through special voting shares) there will be a lot of pain, both for capital and for people. The VC’s and PE firms are well compensated for the pain and they don’t want or need my sympathy. My concern is saved for the thousands of drivers, workers, vendors and customers who will deal with the fallout.

Uber has been great for thousands of people. I like the service and it’s made the world a better place. But, I can make an argument that it has been poorly run from the perspective of: capital, management, stakeholders and ethics. Screwing up a company doesn’t just mean you’ve screwed the investors, it also means you’ve screwed customers, employees and vendors.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

He is also the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.

Millenials and Baby Boomers Can Get Along…

Millennial in natural habitat – a craft beer garden

When I started my career we were debating theory “X” vs theory “Y”, baby boomers and the nature of people. Today we debate about what millennial’s want. Millennials are the people who became adults in the early 21st century, so basically they are 18 to 35 right now. The debate about how to manage them reminds me of the debates we used to have about working with the baby boomer generation.

A great bunch of the stuff written about how to manage millennials is so general it is useless. It is slightly more scientific than astrology. For instance, millennials want meaningful work and work life balance. They want to be listened to, they want to dress casually. I am not sure what workers don’t want those things. Fortune has noted that millennials are not all the same in their November 1st 2016 “Millennials are not Monolithic” edition (see here). Fortune says we are more alike than different but spends a whole magazine repeating the same generalizations.

Being treated as a part of the baby boomer generation never described me and I bet at least some of the millennials out there that are being managed via the latest and greatest theory dislike it too.

I never saw big advantages of being a baby boomer. The era of cheap college ended with advent of tuition inflation in the 1970s (1970-1985 12.4% annually). The era of large protests pretty much ended while I was still a boy scout. There were some small advantages to following the bulk of the baby boomers. By the time I came to high school, we could wear our hair past our collars and the assistant principal couldn’t hit us with a paddle.

One thing they used to say about baby boomers was that they lacked loyalty as employees. I graduated from college in Detroit with a shiny degree in accounting and an MBA (accounting graduate fellow) the same year GM laid off 70,000 workers with an estimated 15,000 people in finance. My main clients at KPMG were the city government and a series of weak and getting weaker manufacturers. I left for better climes after I put my time in for my CPA license. A couple of years after I’d moved to California, my father got laid off from a job he’d been at for 20 years. Lesson learned, loyalty was not a two way street.

Millennials are supposedly quick to quit a job. I think this is due to the confidence that they will find another, and realistically, most will find another. They don’t expect a lot of loyalty from an employer, and they show little.

Managing people via a theory has had a long history of failure. I have never been a huge fan of scientific management and Frederick Taylor. My dislike is how Taylor perceived workers. Treating the worker like a machine, transferring control from worker to management and a general sense of contempt of the work force were his key viewpoints . Yes, work flow improvement is important, and the quality initiatives such as six sigma can be traced back to his research, but for the most part, it is the idea of applying science to work, rather than his specific ideas that he is known for. He was virulently anti-union, while the way scientific management was implemented almost assuredly pushed more workers into joining a union.

Henri Fayol was a contemporary of Mr. Taylor. Unfortunately he wrote his book in 1916, in French in the midst of World War One. His book didn’t get translated until 1949, but if you read about his ideas today, they’d make a good primer on how to be a manager. Fayol had the advantage of actually working with people successfully. Something Frederick Taylor struggled with.

Millennials aren’t a different species of worker. They want what we all want, meaningful work, a laugh now and again, decent pay and a convivial office. We get that taken care of and we can stop worrying about what year our staff was born.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.

Bad Growth vs. Good Growth

I believe there are two kinds of sales growth, good and bad. Bad sales growth is unsustainable, and in the end counterproductive. Bad growth maximizes sales growth over optimizing the factors which can lead to good sustainable growth.

Maximum sales growth seems great (who doesn’t want sales?) but it can lead to bad outcomes. A few examples, because the most instructive examples are the bad ones. I was working with a window covering manufacturing company that had a shot at landing a national big-box retailer. The CEO wanted the business and bid hard for the work. His company immediately increased by 50% but within 18 months went bankrupt. In his eagerness to get the business he bid below his fully loaded cost for the product and began to lose money quickly.

Under investing in systems and accounting kept the client from knowing their costs or how deeply they could cut prices. I met them about 8 months after the fateful bid, when I was brought in to purchase a high volume wood blind finisher to support their growth. While doing due diligence, I compared the costs for the target to the base company. Given that the target was specialized, 10x bigger and extensively automated, I was surprised that the target reported 15% higher costs than the base company. Digging into the internal cost data identified a problem in booking inventory that caused this discrepancy. The person in charge of inventory tracking (the owner’s sister) had no accounting training and wasn’t relieving inventory accurately. Her husband ran the manufacturing operation and he’d continually boasted about efficiency he’d gained. Those gains turned out to be spurious. It took only weeks to figure out that the base company inventory was overstated and that the new “big box” business had lost so much money that the equity was wiped out.

I once worked with an insurance company offering our customers the option of purchasing their product. The company was eager to grow the book of business quickly. They suffered adverse selection as the bad risks switched insurance to get the low introductory prices. Risk was significantly under-priced and profits, which were planned for year 2, ended up in year 4. Growing fast meant taking on unqualified and riskier clients. Bigness doesn’t overcome crappyness.

I was the lead auditor on a large auto company’s financing arm. At lunch one day, the top executive at the finance subsidiary said that the front office wanted more loans written and more cars sold. Since the financing division couldn’t access funds cheaply, the loans they offered had higher interest rates than average. Low risk borrowers weren’t interested in high cost loans as they had low cost options. Consequently the only way the company could increase loans was to take on riskier borrowers. Another example of adverse selection. I asked how this would play out. He said they’d write a lot of loans (and sell cars) but in a year a higher than average portion of the new loans would stop performing. Eventually the front office would ask that he clean up these delinquencies. He then would repossess enough cars to drop his delinquency rate to average. Repossessing cars is expensive and after the increase in losses due to the disposition of these vehicles he’d then be asked to limit these losses. If the scenario worked out as he’d foretold, he would likely obtain a bonus every year for achieving his objectives.

Creating growth like this is counter-productive. Yet lots of firms think it is as simple as the CEO ordering growth to happen. Smart growth is about balancing the factors of growth. People, resources, systems, processes, time and management must be balanced against sales growth. The factors must be optimized so that growth and profits continue. Optimization can be complicated, as there can be multiple successful solutions at varying levels of profitability. Some solutions are oriented to throwing bodies at the problem, other solutions might include implementing a computer system. Both ways will work, one way offers more flexibility and the other cheaper long term costs.

Most of the factors of growth can be quantified into costs, so there is a basic cost vs. profit model that needs to be managed, but time is the factor that determines the rate of growth. A firm that grows 10% and 9% in two years is roughly equal to a firm that grows 20% and 0%. The cost vs profit trade-off has to be seen over multiple years as costs often come as a steps. Investing in a new manufacturing facility or a new computer system is a step that will need to be cost justified over five or more years. Finding ways to minimize the height of the steps, planning on when to take the steps and grouping the steps into logical order are a big part of dealing with optimizing the growth rate.

It is easy to delay investment in these factors, but eventually the problem worsens which brings growth to a halt and sometimes worse. I am not suggesting that everything will be perfect before you can start growing – and growing fast. But as much as it is wanted or needed, when the car is doing 180 mph around Le Mans, you can’t change the tires. You can fix a foundation after the building is built, but it won’t be cheap or easy. Smart growth is about about balancing and managing these trade-offs.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

Paying a Price for Certainty

We all want certainty. We want our investments to average 5% return a year (7.375% if you are in the state of California), our children to grow up strong and healthy and it to only rain at night. However, life is uncertain.

Insurance is about creating certainty. A small cost is paid, instead of a small chance at a large loss. Health insurance is part pre-paid services (check-ups) and part joining a purchasing cooperative (in-network pricing is a lot cheaper than out-of-network) and part real insurance. Car insurance doesn’t include oil changes, although they do control where certain repairs are made. Not just insurance companies make money on reducing uncertainty.

I once had a competitor that sold a tuning service for radios and electronics. This advantage was a significant part of his marketing and brand value. At some time in the past, there might have been some value in swapping out vacuum tubes but since the 1960s most marine electronics were solid state. By the 1990’s there was nothing to be done to a solid state radio, and if they didn’t work out of the box, they had to go back to the manufacturer. He sold fear, uncertainty and doubt or FUD.

FUD was made famous by IBM, who would meet every new competitor in the computer industry with comments about reliability, threats of the loss of warranty coverage, rumors of financial difficulty and vague hints about losing purchasing status. For the longest time I’d hear the comment “no one got fired for buying IBM”. FUD works.

People will pay for security – even if the math suggests it is a bad bet. My firm started selling extended warranties on our products. This was a big money maker for Circuit City as electronics extended warranties had a 90-95% margin. For a while the staff wouldn’t sell them, they thought the extended warranties were a rip-off of the customers, and we had a no-hassle money back guarantee. Buying an extended warranty is not a good bet, but people appreciated the certainty and paid for it.

Eating at McDonald’s is not normally a “treat”. We select fast food because of the consistent product, price and convenience. We know what we are getting – uncertainty is reduced. Retailers who reduce uncertainty increase sales. Zappo’s can sell you shoes because they agree to take all returns. I doubt Zappo’s makes much profit on its shoes, the freight has to be killing them (see here) but given that Amazon owns them and Amazon is the worlds largest capital destroyer it is ok.

I see the problems with seeking certainty as a function of information asymmetry, competition and add-ons. The retailer that offers a money back guarantee knows how often goods are returned and when they sell you an extended warranty, the likelihood of your using the warranty. You can’t judge if it is a good deal or not. Those situations are referred to as information asymmetry, where one side knows more than the other. Learning more about failure rates can give you confidence to skip paying an extra 15% for a product, knowing the chance of fault might be 0.02%. A phone with a one year warranty and a three year overall life doesn’t present much time for a failure.

Your car insurance company knows more than you do about the likeliness of an accident and they price the insurance so that they make a profit. The car insurance company is kept honest by a competitive market place and regulators. Competitors push prices towards an equilibrium, which is lower in price than an un-competitive market.

The least competitive market is one where you have little time and no access to competitive prices or data about risk. This happens while standing in line, or in the midst of a transaction when an add-on is offered. Rental car companies are good at offering you several levels of insurance-like services (one full priced for 100% coverage, a second with a deductible, a third with a collision damage waiver) while all levels of coverage are priced extremely high. It is not unusual to pay $5-6 a day for coverage for your new car, and $40 a day for insurance for a rental car. The extended warranty is pitched to you at the register without any time to calculate the costs, benefits or risks.

Seeking security isn’t a problem, and reducing uncertainty isn’t bad. One consequence of a population that doesn’t understand probability is that we will be taken advantage of by providers of certainty. Be a smart consumer, do your research before you buy.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

Six Challenges for Investor Relations

Investor relations is broken. It isn’t the people, it is the process. Most senior executive see it as a department designed to help the company put their best foot forward. The skills needed are someone who is good with powerpoint, knows numbers and can talk to analysts all day long without going crazy. I think this definition misses six key challenges for Investor Relations.

Challenge #1 Investors have no time

Investors are limited by time and attention. Investing is based on financial reports which are both long and redundant, and the amounts of disclosure are not improving investor knowledge (read this). The SEC and the FASB have turned a simple financial statement into a career generating stack of paper. A typical 10k runs 100+ pages and is stuffed with disclosures, reconciliations and accruals.

A typical financial model will go back 10 years and ideally, all the 10k’s & q’s should be read from the entire history. Most are not. I bet that fewer than 50 people outside the company conceivably completely read any 10k document. Most analysts look at changed pages from the previous document, skim the management discussion and update the models with the key data. If you own 50 stocks, your reading load might be the same as knocking off three books a week in SEC filings alone, not including the other material you read to know what is going on in the economy.

Time pressure causes investors to look for shortcuts to the intellectual rigor of a complete and detailed review. Pattern recognition conserves time and brain power. Investments are selected that are similar to past successes. Investors classify stocks by lots of methods (growth, value, etc) to eliminate the time memorizing details about every company. The intellectual demands to obtaining, sorting and absorbing the material means that complicated stories are often ignored or missed. Complicated analysis, the use of a lot of jargon just make the analysts job harder, and therefore less likely to expend the energy to invest in your firm.

Clarity increases comprehension and makes the job of an investor easier. Easier means better analysis and better communication and a better stock price.

Investor relations has to recognize the time pressure and focus on a coherent set of facts that allow a potential investor to understand the business and make a prudent investment.

Challenge #2 It’s not just numbers

For the last fifty years we’ve been training executives in quantitative analysis, and today’s MBA’s know how to deconstruct a business. Because of our emphasis on numbers, today’s executives tend to manage rather than lead. CEO’s and CFO’s certify that the financial reports to the best of their knowledge do not include misstatements, or are misleading. Making both CEO’s and CFO’s more involved in the data and detail.

Investors do not have access to the details of the business, and realistically we can’t share them. Analysts are trying to make meaning out of disclosures, so they ask a lot of questions about management’s impressions or thoughts (or my least favorite “add some color to the numbers”). When analysts ask these questions, they are asking for help understanding the bigger picture and cannot tie in the numbers to a direction or theme.

Santa Cruz cows out standing in their field

They are looking for the story behind the numbers. When a senior management team that generates and lives on numbersis selling to someone who is looking for a story, there is a disconnect.

Humans like stories (see here for Paul Zak’s HBR article) and we remember them better than the numbers. The story provides structure to our understanding and helps add meaning and relevance.

Investor relations has to communicate a story that makes sense. It has to be reasonably based on history and explain a direction and purpose for the company. It is more than the just the numbers.

Challenge #3 An Outside Perspective

Investors have one huge advantage in valuing firms that senior managers lack. They have an outsider’s perspective. Working at a hedge fund meant sorting through 2-3 firms a week. You hear what the other firm’s have been saying, you can compare this quarters disclosure to the last 15 quarters, you aren’t sitting on half a million options that are underwater. The outside perspective is very valuable, I have written about it before (see here). Outsiders haven’t drunk the company Kool-aid, they aren’t convinced of the company’s invincibility and they aren’t incentivized to worship the company mission. This perspective is valuable to CEO’s and Boards, but the criticism is dismissed because the outside view often is working off of fewer facts and CEO’s reject criticism of their strategic plans.

In a capitalist system, the investment community is the owners of the business, and we should listen to the owner, even if they are sometimes wacky.

Investor relations needs to be a vital conduit about market perspectives on company strategy. That message has to come back to senior management the board and the CEO in actionable and understandable ways.

Challenge #4 It can’t be delegated.

Management gets a chance a couple of times a year to tell their stories to the investment audience. The simplest way to tell of a management team lacks a coherent strategy is if they can’t get the message across in the 25 minute talk they give before the break-out session. If in 25 minutes you can’t get the message across to the 40 or so MBA clones that make up the ranks of stock analysts, how did you get that message across to the 10,000 high school graduates that make up your workforce? Whenever I hear jargon and business-speak when a senior executive is discussing strategy, I know that strategy is dead on arrival when it gets to the front-line worker.

All presentations should be practiced prior to being given. If we work for the investors, what message do we send when we arrive at our meeting and our report is fumbled and ill prepared? I’ve never believed the stats about how much of meaning in a conversation is non-verbal, but I respect it is very high. Stumbling through a presentation reduces personal and firm credibility.

Investor relations is the responsibility of the CEO and CFO, and hiring a director or VP does not absolve you of the responsibility of being prepared, practiced and ready when reporting to the investors.

Challenge #5 – Authenticity = Credibility

George Burns was quoted “sincerity – if you can fake that you’ve got it made”. Senior executives think of IR as a something that can be faked. After reviewing 100+ companies a year for 12+ years, I’ve seen a lot of pitches. Figuring out what the management team does and doesn’t know is how we made money. If you state that you are #1 in something, you’d better be prepared for us to check.

Most Investor relations staff get the compliance problem. All the numbers are verified, everything is properly sourced. Then the CEO or CFO make an off-hand comment that will end up on a transcript and will be fact checked. I’ve written before about the average experience of stock analysts (see here). New analysts spend a lot of time reconciling cognitive dissonance, which is a fancy way of saying, does management “walk the talk”.

I’d rather a management team was perceived accurately, even if that perception was negative, for example as aloof or uncommunicative, rather than as something they are not.

Investor relations stands for authenticity and accuracy. Senior executives aren’t clones, and should be respected as individuals. Don’t write speeches full of bafflegab and resist the use of jargon.

Challenge #6 – Everyone is an Investor

Most companies incentivize with stock options and most stock option grants are small. Outside of a relatively small circle of high paid executives, most option grants hold little perceived value. They have a cost, but the perception is that they don’t have any value until they are vested and are deeply in the money. The staff needs to hear the story as much as the analysts do. Vendors may make million dollar commitments for a new product line and they need to hear your strategy. Customers, especially when they are making a commitment to a product, need to know whether the company is viable.

The reality of today’s connected society is that the number of people who “care” about what IR has to say is much greater than before, and those listeners have much more influence the firms success.

Investor relations material should be prepared for all the stakeholders, based on their needs. The delivery of employee oriented material may be through HR, but that disclosure should be focused on the key story and theme set by the strategic plan.

Conclusion

Investor Relations needs to play a bigger role within your firm. Helping develop the strategic plan, communicating a coherent story with numbers that provide clarity and understanding. It is time that IR is more than someone who talks to analysts and comes up with a quote.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting. I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.