Investor Communication and its Regulation

[Harri_Sieppi]

I completely disagree with this =D.
It is much easier for small companies to participate in discussions on investor forums than to frequently organize Capital Markets Days. These events cost a fortune, and the level of expectation regarding their content is high. They tie up your own staff and typically partners in the arrangements. As it stands, Capital Markets Days are typically organized in situations where, for example, a company is significantly changing its strategy.

On forums, you get a lot of mud thrown at you, Trust me - I know. But so what? No one needs to answer questions that are inappropriate, mean, or would require disclosing non-public information. On the other hand, it’s worth answering appropriate questions and being present where the company is being discussed.

Eka has hit on that one point that is hammered into CEOs’ heads with a sledgehammer before an IPO or in other Nasdaq training sessions. Never speculate on the company’s valuation. Otherwise, the grim reaper will come for you and take you to a dark alley.

[_TeemuHinkula]

@Harri_Sieppi

Never speculate on the company’s valuation. That’s when the reaper comes and takes you into a dark alley.

Is there any justification for this at NASDAQ other than a funny metaphor?

After all, a rationally operating company takes a stand on the share price when buying back its own shares (stock is cheap) or using shares as currency in an acquisition (stock is highly valued).

Additionally, on an individual level, the CEO signals when buying or selling shares.

I don’t understand why the same signaling couldn’t also be done verbally, as long as one chooses their words carefully.

[Harri_Sieppi]

@Minna_Avellan can answer that better. We ordinary CEOs were just shown mugshots of our predecessors and told horror stories. I have been actively trying to forget everything that happened and, since that day, I have only repeated to myself in the evenings: “never speculate on the share price.” It even haunts my dreams. In Minna’s voice.

[Pohjolan_Eka]

@Harri_Sieppi

@Minna_Avellan can answer that better. We ordinary CEOs were just shown mugshots of our predecessors and told horror stories. I have actively tried to forget everything that happened and since that day I’ve just repeated to myself every night: “never speculate on the share price.” It even comes into my dreams. In Minna’s voice.

Meanwhile, in the big wide world:

https://x.com/YahooFinance/status/1769809498712019116

Significant shareholder value can be created with the share price by buying back shares when the stock is undervalued and using it for acquisitions and performing share issues when the stock is overvalued. That valuation level is just one tool in the management’s toolkit, but in Finland, there’s some sort of stock market meme that management shouldn’t be encouraged to be aware of the company’s fundamental enterprise value. Then we just end up mindlessly paying out dividends, instead of utilizing market cycles by, for example, switching dividends to share buybacks in a weak market or paying off debts with share issues in a bubble market.

I don’t know which consultant in a buzzword-induced haze came up with the idea that the share price shouldn’t be commented on, but this fella has destroyed many generations of Finnish stock market CEOs. If you don’t have an opinion on whether your own company’s stock is over- or undervalued and don’t dare to act on it to create shareholder value, then the CEO role is completely wrong for you and you should perhaps consider a COO role, where you can forget the share price and focus purely on the business

https://www.youtube.com/watch?v=mvhX0Hh4kr8

Fortunately, even in the home market, there are some rare exceptions among CEOs

Even though Biohit is in good shape, mistakes have certainly been made, and the worst blunder of the first quarter is on me.

According to the skeptical school of thought, communication always fails except by chance. And if the message doesn’t get through, the fault is always with the communicator. Since last autumn, I have tried to convey that Biohit seeks profitable and moderate growth. Last year, our revenue grew by 17% compared to the previous year, and our operating profit margin was 10.3% after a long history of losses.

In our own opinion, we delivered a decent result, but on the day the financial statements were published, Biohit’s share price plummeted by 13%. In other words, expectation management failed badly.

According to the guidance we have given for this year, we expect our operating profit to grow compared to last year. This is in line with the story of profitable and moderate growth.

Investors are used to the disclaimer “past performance is no guarantee of future results.” However, it is good to look in the rearview mirror once in a while.

Biohit’s cumulative losses in 2018–2021 were 8.1 million euros, and the average share price during this time was 2.70 euros. Now our business is profitable and the share is a euro cheaper.

I won’t comment on the share price, but I’ll end this blog with an aphorism:

It’s pointless to be right if the market is wrong.

Jussi Hahtela
CEO
Biohit Oyj

https://www.inderes.fi/articles/toimitusjohtajan-blogi-kovaa-ajoa-ja-ainakin-yksi-virhe

[Hades]

@Harri_Sieppi

“never speculate on the stock price.”

Allow me to draft more extensive (and naturally better) instructions for all Helsinki CEOs regarding all kinds of stock speculation. Feel free to use them.

1. Do you have a clear understanding of the fair value of your company’s stock?

• If you answered YES, move to point 2
• If you answered NO, resign immediately and let someone else figure it out

2. Do you feel the need to speculate on the value of your company’s stock publicly?

• If you answered YES, move to point 3
• If you answered NO, proceed with your day as usual

3. Are you buying/selling, or have you already bought/sold your company’s stock using your personal cash?

• If you answered YES, publish a stock exchange release about the purchase/sale and enjoy the successful speculation
• If you answered NO, move to point 4

4. Is your company buying back its own shares for cancellation, or issuing new shares to raise cash?

• If you answered YES, publish a stock exchange release about the share buyback or share issue and enjoy the successful speculation
• If you answered NO, move to point 5

5. You have not sought to maximize shareholder value by decreasing or increasing the company’s share count, nor have you risked your personal wealth by taking a position on the stock’s value. Therefore, you have no reason to comment on the stock’s valuation publicly.

• If you feel your situation has changed, go back to point 1 and start the cycle over.

Hardly anyone gets upset if speculation is used to achieve value creation or if it is backed by the CEO’s own capital. It is a different matter if the goal is just to pump the share price up and to the right—I assume that is exactly what has been warned against?

[Mikael_Rautanen]

In America, investor relations culture is more about “marketing” and hyping the stock, whereas in Finland, I find it to be more about managing expectations and remaining neutral. In practice, the only form of public stock price commentary from management you see is the CEO touting that the share price is too cheap. Do these comments have any value for investors? They certainly get attention. If a study were conducted on how many CEOs believe their share price is too low, I bet over 90% of listed companies would be “misunderstood.” A CEO needs to understand valuation, but even the best CEO’s wisdom is not always greater than the collective intelligence of market forces. As an analyst of 12 years, I can state as an unscientific sample that the CEOs who most aggressively hyped their company’s potential and signaled undervaluation to analysts in various ways often represented the worst stock cases.

Despite all this, a good CEO can, of course—and should—utilize their own view of the stock’s valuation for value creation, working closely with the board; these are not decisions for the CEO alone. Here, too, the decision is often not as simple as just weighing over/undervaluation and then, for example, share buybacks yes/no… many variables must be considered in relation to the company’s strategy, balance sheet, cash flow forecast, insider projects, perhaps ongoing M&A discussions or balance sheet arrangements, etc., etc.

As a CEO myself, I would be hesitant to shout about the stock being cheap, if only because the share price is influenced by many forces that are in no way under my control, especially relative to the public’s time horizon. What happens to credibility if you publicly claim the stock is cheap and then the price drops? What if I comment that the stock is cheap, and then the company releases good news and the price rises? I wouldn’t want to get that call from market supervision. There is very little to gain, but a huge amount to lose for both the company and the CEO. Perhaps this is what is warned about most. It is better to take a stand through actions instead of words, playing one’s own long game, and then leaving the interpretation and rationality of those actions for the owners to evaluate—and if things consistently go wrong, the owners/board will draw their conclusions.

P.S. Minna is very tied up with a couple of projects, so she may not be able to reply for a while.

[jps]

@Mikael_Rautanen

As a CEO myself, I would be hesitant to claim that the stock is cheap, simply because the share price is influenced by many forces that are completely beyond my control, especially considering the public’s time horizon.

A long time ago, perhaps in the 1980s, I remember the CEO of a Finnish listed company telling a journalist who asked about the share price and the company’s valuation that the value of the company and the price of the stock were matters for the owners, and that it wasn’t appropriate for a CEO to comment on them at all—of course, such questions could be directed to the board of directors representing the owners.

[Jussi_Koskinen]

Sometimes a company’s stock is used as currency in acquisitions, so it is good for the management and the board to have an understanding of the company’s value. To ensure that shares are not sold too cheaply.

Another perspective is the Berkshire Hathaway approach — at least sometimes — where it stated the price below which it was ready to start buying back its own shares.

I find it somewhat awkward how some companies buy back their own shares daily for nearly a year without regard for the share price. Especially if it is a financial sector company that sells investment expertise — effectively company valuation expertise — to its clients.

[Pohjolan_Eka]

The result of this thinking is that CEOs do not recognize the use of the share as a tool for value creation, and if a retail investor tries to inquire whether they could even occasionally consider, for example, share buybacks instead of dividend distribution when the company’s share price appears to have a terribly large unjustified discount, the answer is always, “blah blah blah, the board decides on the distribution of profits.”

The example of Nokia is always brought up in these discussions, but there are a few positive examples of value creation using shares in the domestic market. Without taking a stand on whether the Limited Liability Companies Act was fully complied with, Remedy conducted an overpriced share issue in 2021 at a share price of €41.50 to dumb institutional money, which generated over 100% return for other investors in 12 months. In 2020, during the worst of the COVID dip, Gofore started a share buyback program that yielded a 100–200% return in 12 months. How many companies’ standard business investments produce returns like these?

Sometimes the right solution for the company is to put the strategy on pause, put business investments on pause, take a bank loan, and buy back its own shares. Or organize a share issue even if a direct need for the money hasn’t been invented yet. Creating shareholder value is number one on the priority list, and imagined losses of credibility due to ‘flip-flopping’ are not relevant. And this is quite orthodox thinking, the basics of efficient capital allocation. Yet when discussing these with Finnish corporate leaders and boards, the atmosphere is just like presenting fire to cavemen. It doesn’t seem to matter much whether the share price goes up +200% or down -60%, because if a five-year plan for a strategy period and a publicly communicated dividend policy have been established for a Finnish company in the past, in Soviet-style management it must be carried out in full, whether it makes sense in the current situation or not, because otherwise, face will be lost.

Responsibility, employees, customers, insiders, and management’s empire-building. Everyone else often seems to come before the owner in a Finnish company and its communication. It would be nice if, in the future, it could be emphasized to new listings (IPOs) that shareholders are the company’s most important stakeholder and creating shareholder value is the company’s most important task. Since the change in the share price is an investor’s most important source of return, talking about the price is not a threat to the company, but an opportunity to communicate the concrete ways in which shareholder value is intended to be created in the near future.

[Hades]

@Mikael_Rautanen

What happens to credibility if you publicly shout that the stock is cheap, and then the share price drops?

We agree that the CEO’s so-called “empty rhetoric” doesn’t serve anyone’s interest, and there’s no reason for it without risking one’s own or the company’s money at the same time. But what happens to credibility if the CEO cares more about it than creating shareholder value? Credibility doesn’t make owners wealthy if capital is used inefficiently. If, instead, capital is allocated in a shareholder-friendly way to buybacks during a price crash, and the situation is communicated to investors according to management’s best knowledge, how on earth can that be turned into something that erodes credibility? Perhaps if you’re scared to death of making mistakes, but then the CEO position is likely the wrong place to be in the first place.

@Mikael_Rautanen

Very little to gain, but a huge amount to lose for both the company and the CEO.

How so? If the company’s shares are undervalued, and the company starts up the buyback machine and top management pulls out their checkbooks, then there’s plenty to be gained for all parties. Shareholder value is created, management benefits personally from taking a stance, the company’s reputation as a high-quality listed company grows, EPS rises, the share price rises, and suddenly its own stock is more valuable currency for future shareholder value creation. It’s a different matter if the management team doesn’t exploit the mispricing of the stock at all, but instead dithers through a bear market with the same share count year after year. Now that is harsh communication!

I’ll leave you with an example of how a serious CEO communicates undervaluation to investors correctly – they had 149 million reasons to believe that the CEO was hardly talking crap when talking about valuation. Since that press release, by the way, they’ve been blasting good news (incl. M&As!) into the airwaves for a few years, and everyone is still alive.

Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

[Mikael_Rautanen]

I completely agree with everything related to value creation. Still, I strongly believe that if a company’s stock is undervalued, you don’t go shouting to the media about the stock being cheap; instead, you pull out the checkbooks / start share buybacks, etc. Or if it’s overvalued, you hire the toughest sales machine in town to conduct an institutional offering at a premium via an accelerated procedure. Or leverage your own stock for M&A. Actions, not talk.

[Pohjolan_Eka]

I certainly have a bit of a vested interest here. I mean, if companies knew how to communicate the cheapness of their stock to investors themselves, then what would we need analysts and Inderes for?

But it’s absolutely true that we should see more actions, and preferably in a way that they are communicated to investors and don’t just look like lucky coincidences. In foreign companies, discussing profit distribution policy and stock valuation with management is for some reason much more normal, and Finland is a strange exception in this regard.

Perhaps one day this old-fashioned, insular financial sector culture of closed-off “cigar clubs” that fears investors will start to change. We are lacking both words and actions

[Jussi_Koskinen]

I called the largest shareholder of a listed company, who sits on the board, a couple of days ago.

The share price has fallen sharply, and I reminded them of the authorization given by the general meeting to buy back its own shares.

[Juippi]

@Pohjolan_Eka

Sometimes the right solution for the company is to put the strategy on hold, put business investments on hold, take a loan from the bank and buy back its own shares.

In your post, you are setting high demands for the company’s management. Primarily, a company’s job is to focus on running the business. On ensuring that projects progress and the strategy is implemented. Boards, as statutory bodies, focus on ensuring that the company operates in accordance with laws. Individuals like Warren Buffett or, from Finland, Björn Wahlroos are, in my opinion, very exceptional individuals who created significant wealth with their razor-sharp strategic moves. It would be interesting to be a fly on the wall listening to what an average listed company’s board meeting entails. Would they be worried about the stock price development at all, or about something completely different?

When I look at the interim reports of gaming companies, for example, the management of many companies seems to think that money just comes from investors and then our job here at the company is just to monitor some monthly active users metrics and EBITDA so that running costs are covered. Investors fund the investments. Companies’ interim reports must include an income statement, balance sheet, cash flow statement, and a statement of changes in equity in the tables section. Often these do not go further or deeper than what the law requires. After all, Mikael Rautanen has also said that preparing an interim report is a heavy process for a small company.

We investors look at things through different lenses than the company management. If even an average investor looks at the actions of the companies they own through rose-colored glasses (ownership effect, Endowment effect), then what about a CEO who has their own reputation, relationships, history, and self-respect at stake in addition to their holdings? Would they do a DCF calculation in the evening and comment in an interview the next morning that our stock is about 4.3% overvalued? That is, if they even have a degree in business – far from everyone does.

I disagree that taking a loan would be worthwhile for buying back shares. A buyback is a tax-efficient alternative to a dividend, but if the cost is weakening the balance sheet, I would dump the shares. I would do the same if the company went into debt just to pay dividends. As a shareholder, I am most satisfied when management and the board take care of the company.

I’ll take a concrete example from my portfolio company JM (a construction company). At the end of 2021, 23% of the company’s balance sheet was cash. I was pleased with this because I thought like you, that in a poor economic cycle, shareholder value is created through share buybacks. Then came an ice age in new construction, and the company’s cash melted from 3,981 million kronor at the end of 2021 to 417 million kronor at the end of Q2 2024.

Use of funds 2021 Q4 - 2024 Q2:

Was paying dividends worthwhile instead of the company buying back its own shares? In my opinion, it was, because the stock hit rock bottom on October 23, 2023. Neither management nor investors knew where the bottom would be. With cash on hand, one was able to form their own assessment.

[Pohjolan_Eka]

The primary task of a company’s management is the allocation of the capital at their disposal. While for most companies the business is both the main asset and the source of cash flow, reinvesting money back into the business cannot be an automated process. Directly competing with investments in one’s own business are, among others, M&A, balance sheet solutions (the use and raising of cash, changes in debt levels), and profit distribution (dividends, share buybacks). Capital allocation shouldn’t be automatic; it must be done deliberately and with great wisdom.

Yes, proper capital allocation is difficult. That is why corporate executives are at the top of the social ladder and are paid outrageously high compensation compared to rank-and-file workers. In Finland, the principal–agent problem is a huge challenge because it is common to have conventional salaryman managers who are paid a fortune regardless of whether the stock price rises or not. The safest option for an average manager is not to think about the matter at all. Just grow the business by +5% a year and distribute all excess cash as dividends, and you’ll hardly get fired—especially when the owners are pension funds and other institutions for whom maximizing returns isn’t that big of a priority. Then people have the nerve to wonder in the (business) papers why the Helsinki (Hesuli) exchange is so pathetic.

I would recommend reading my previous message again with care. SOMETIMES taking on debt to buy back shares is the right solution. At the peak of the 2021 bubble market, it probably wasn’t. Debt is a tax-efficient tool that shouldn’t be approached too emotionally. Companies and investors who never actively use this great tool in their operations are practically always doing something wrong. Sometimes the right solution is also to spin off the company’s business, sell it, or even wind it down to free up capital for better investment opportunities. Capital allocation into one’s own business is therefore not a given; the business must prove itself worthy of the capital.

Owners must dare to demand a clear plan and evidence of value creation from management, because that is what they are paid for—not for treating business as a hobby or just distributing annual dividends.

[MoneyWalker]

@Pohjolan_Eka

In Finland, investor communication on forums won’t get off the ground as long as

1. IR personnel are clueless themselves about the investor aspects and the business operations and act mainly as first-tier investor customer support.
2. Company representatives do not dare to say anything new that isn’t in publicly available materials because they fear it would be material information.
3. They do not dare to comment on the stock price and the company’s valuation.

I changed the thread’s name to better reflect the current state of affairs. A year is a long time to wait for IR representatives to join the conversation.

Investor Relations and its Regulation - IR - Illusion of Relations?

A year has indeed passed and very few IR representatives have participated in the discussion. It is clear that I am disappointed.

IR representatives, Inderes has provided this great forum for you, where you have the opportunity to publicly discuss the development of investor relations. This is about working together towards a common goal. Your conversation partners are each other and us investors. Do not miss this opportunity.

And then to the matter at hand. After interim reports, Inderes and IR organize video interviews where the analyst asks questions and the company representative answers. That’s fine, but wouldn’t it be even better if investors could also ask questions?

When interviews are organized on the same day the report is released, investors don’t have enough time to familiarize themselves with the report. You have been preparing it for a month. Give us 24 hours to study it. It would help if the interview were on the day following the report or even the day after that.

As a motivator, I’ll remind you that many investors have known your companies for years or decades. We have read annual reports and attended annual general meetings. These investors are capable of asking questions that analysts don’t think to ask.

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[MoneyWalker]

Thank you @Mirko_Sampo_IR I posted my thanks here so that the link to your reply above gets better noticed in this thread as well.

Sampo has been handling IR in an exemplary manner overall.

[Harri_Sieppi]

What?
Don’t you be upset, we will answer.

PS. The number of questions varies quite a lot. At the moment, I think 99% go to that Tecnotree thread, and the rest of us just twiddle our thumbs unless we go grab some popcorn and read other threads.

[Harri_Sieppi]

@MoneyWalker

And then to the point. After interim reports, Inderes and IR organize video interviews where the analyst asks and the company representative answers. That’s all well and good, but would it be even better if investors could also ask questions?

How this actually works in practice is that a few days before the earnings release, the analyst gets in touch and asks if 12:00 PM on the release day would work. Well, it’s one of the most important tasks included in this role, so it always works. The suggestion comes from them and that’s how we’ve gone about it. It seems to work pretty much the same way with all companies. Since it’s such a major news day, I personally understand very well why the interview is held then. On my part, I’ve said that people should post questions on the forum and I’ll go and answer them the next day. This allows time to reflect on the questions, the interviews are available to watch by then, and the company’s closed window ends at the end of that day.

I know not everyone operates this way, but it might help if, for example, analysts encouraged all companies to answer questions on the forum the following day.

[Karhu_Hylje]

@MoneyWalker

And then to the point. After interim reports, Inderes and IR organize video interviews where the analyst asks questions and a company representative answers. It’s quite good, but would it be even better if investors could also ask questions?

Quite a few companies organize a webcast in connection with the earnings results where you can also ask your questions.