No, stock reputation is not just about communication

One of the beliefs about corporate reputation in general and stock reputation in particular, is that it is only a matter of communication. Indeed, the way a company communicates its equity story plays an important role, but stock reputation goes much beyond that. A listed company with best-in-class communication can have a terrible reputation with investors. In my opinion, stock reputation depends mainly on four elements.

Corporate governance

Stock reputation starts from the board of Directors and the CEO. Officially, all boards and CEOs work for shareholders and their goal is to create value but reality can be very different. In many public companies, board members care more about their comfortable position than the value created by the company for its shareholders. Similarly, many CEOs (who sometime also hold the role of chairman) are more focused on enjoying their positions of power than focusing on increasing their share prices. Investors are carefully looking at corporate governance and the alignment (or not) of the board and the CEO with their interests. From what they see, they make up their minds and create the company stock reputation.

Strategy

Strategy is the second major element of stock reputation. All companies claim to have a strategy but in reality, many do not have any vision of where they want to go. They are simply managed on a day-to-day basis and adapt themselves to the environment. They spend their cash and use their cash flow, not taking into account the expectations of their shareholders. They do not think in term of capital allocation and do not have any dividend policy. They use capital and issue shares without thinking about shareholder dilution. They invest and make acquisitions solely for the purpose of growing and without fully taking into account the returns and the risks. They are active in M&A in order to satisfy their egos and not to bring value to their shareholders. All of this cannot be hidden from investors and of course, influences the reputation of the stock.

Finance

Finance plays a major role in stock reputation on several levels. First, finance is supposed to provide management with the right tools for capital allocation, risk management and to make investments but that is not necessary visible to investors. On the contrary, the quality and the consistency of the financial reporting are visible. Investors hate restatements and inconsistent reporting considering that this is a way for companies to often hide poor financial performance. Similarly, the achievement (or not) of guidance plays a major role in stock reputation. Poor controlling will lead to poor guidance and likely result in a profit warning or other unexpected surprises which investors will remember.

Investor relations

Obviously, it will be difficult for IR to save the reputation of a company on its own if a company has terrible corporate governance, a non-existent strategy and/or a poor finance team. Yet, the efforts of the investor relations team is critical.  A top management team which does not meet with investors and does not listen to its shareholders is not likely to help its reputation. Equally, sell-side analysts who are the first stock market influencers need to be properly managed and guided. Just by looking at the quality and activity of IR, some investors make up their own minds on a company.