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Investors Want the “3 C’s”
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Transparency, Not Just Compliance
Now more than ever, corporate disclosure is cited among the most important issues to members of the investment community. Anna Dopkin, a T. Rowe Price fund manager, says she has seen repeated instances in which companies that pull back on the information they provided to investors subsequently suffered financial or other setbacks.
Indeed, today’s investors demand transparency, not just compliance. They’re looking to banks to do more than meet minimum reporting requirements and pursue reactive disclosure policies. And, increasingly, investors are citing the integrity of management and their banks’ reporting as factors on par with “making the number” in how they are judged.
The bedrock upon which transparent disclosure and reporting policies is built is the “3 C’s” – candor, consistency & credibility. Following these three interwoven, synergistic principles of investor communications will earn your bank high marks from investors in good times and bad.
The “3 C’s”: Candor
Candor means, quite simply, telling it like it is. It entails institutional honesty and accessibility. By its very nature, it means no surprises.
Candor requires that banks provide a continuous flow of useful information about their operations in good times and bad. It does not allow for “cherry picking,” or reporting only the very best company news. Nor does it provide wiggle room to “spin” bad news when the going gets tough.
No less an investor than Warren Buffett advocates a form of homespun candor in financial reporting. “I would like to see an MD&A that would be put in terms of being like I was sitting across from the CEO and he was telling me what the key factors are that drive value in his company and the kind of issues that keep him awake at night,” Buffett says.
The “3 C’s”: Consistency
Consistency entails managing your investor communications in a fair, regular and uniform manner.
The investment community has a tacit list of expectations they anticipate your meeting every time you report on your bank’s financial performance. In short, investors expect a consistent reporting format: the same financial metrics, reported in the same manner, at the same time each quarter. Consistent reporting allows investors an apples-to-apples comparison of your bank’s critical performance metrics over time.
If a bank’s numbers are down in a given quarter, it’s awfully tempting simply to change the focus in the earnings release from the usual comparison set to one that makes those numbers look favorable this time out. Or to try to “bury” those numbers deep in the release. Such inconsistency and lack of candor will only serve to raise red flags in the investment community and lead to questions about management’s integrity and the bank’s reporting process.
The “3 C’s”: Credibility
To be sure, candor and consistency go a long way toward earning a bank credibility in the investment community. Telling it like it is, on a consistent basis over time, with institutional honesty at the core, equals credibility.
Real credibility and honesty in reporting require banks to critically scrutinize their own earnings in the same way the investment community does – and to acknowledge that the quality of earnings counts more than the quantity.
Credibility is much like political capital. Building up a reserve of credibility with investors helps banks get through the inevitable down cycle, or even the occasional misstep, without suffering as much damage as they would have if they had not had any credibility to begin with. And as we all know, while it takes time and effort to develop that credibility, it can be lost in an instant.