Reputation to drive share prices in absence of usual earnings guidance

By Robert Brown

One of the unanticipated consequences of Covid-19 is the impact it is having on fund managers’ ability to assess the future outlook for the companies they invest in.

While for some that might appear to be a first world problem for wealthy investors in the stock market, it has important implications for many ordinary people as some of the biggest shareholders in listed companies are pension funds.

Against the background of the unprecedented uncertainty created by this pandemic, many quoted companies have chosen to suspend quarterly earnings guidance, while others have opted for more light touch guidance. Whichever the approach, investors, more than ever, are operating in an unfamiliar vacuum, without the benefit of up-to-date performance data and now must rely on other metrics and indicators.

This trend was highlighted in new recent research from University College Dublin (UCD) which found that more than half of London listed companies’ Covid-19 profit warnings failed to provide investors with enough information to assess how businesses will be affected by the pandemic.

In response to this issue, the UK’s auditing watchdog, the Financial Reporting Council, has called on companies to do more to clearly explain the impact of Covid-19 on their current performance and their future prospects.

In the absence of companies being either willing or able to provide future guidance in this very uncertain world, investors will have to rely on more qualitative than quantitative metrics.

In this respect, we believe that the markets will place a greater emphasis on the reputation and track record of companies and their senior leaders for the transparency and assurances they require to inform their buy, sell or hold decisions.

It is widely acknowledged that reputation contributes to the market valuation of quoted companies as a key component of intangible assets which also includes intellectual property (patents and trade marks) and other reputation-related intangibles such as employer brand, culture and future vision.

Intangible assets, for example, are estimated to account for approximately 80 percent of the market capitalisation (value) of companies listed on the S&P 500, the main stock market in the US.

Reputation is often a key differentiator between companies and the reason why the multiples applied to companies with a strong and sustainable reputation are often higher than those of their peers.

So what do companies and their leaders need to do from a communications perspective to emphasise their strong reputation credentials when the short-term outlook is so uncertain:

1. Be open and honest with all stakeholders about the short-term challenges and the immediate plan of action, especially if this involves difficult decisions.

2. Focus on being absolutely clear about the why, the what and the when around future plans with a particular focus on the why.

3. Be seen to always prioritise the health and safety of employees and customers.

4. Proactively engage with suppliers, partners and connected communities.

5. Carefully consider all internal and external communications to ensure consistency in the messaging and narrative as every word will be scrutinized more intensely in the current environment.

6. Look beyond the current down cycle as investors and other stakeholders will be more interested in those companies that can demonstrate a long-term sustainable future.

In all of this, we cannot underestimate the importance of leadership at this time. The past performance and current actions of CEOs, and how they show up, is now more crucial than ever before.

And finally, one of the other consequences of the suspension of guidance is the refocussing of companies and investors on the longer-term and not the next three to six months.

This perspective is much more aligned with the inexorable shift towards sustainability and a greater focus, even by investors, on how companies deliver for the environment, people, communities, and the wider planet.

Even the Coronavirus may have a silver lining.

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