Investor trust is gained when firms are viewed as honest, predictable, and competent in executing their plans. Transparency supports trust by making it easier to understand performance, risks, and key decision making. Investors frequently don’t expect perfection…they expect appropriate communication and sound governance of the business. When trust is high firms are often rewarded with patient capital, less reputational risk, and firm valuation support from investors needing to sell stock.
Practical ways to improve transparency include focusing on the quality of information distributed, how quickly issues are responded to and cured, and ensuring that the actions of leadership closely track the stated priorities of their communications.
1. Report Regularly, Candidly, and with Predictable Rhythm
A common pitfall is losing trust in management when communication is sporadic, vague, or plush with financial jargon. Report regularly, especially when there isn’t much to say. And when there is no “news” (suggestive that there is no news), a positive update on easily accessibly drivers of performance is a good use of existing capital and indicative that management has corporate discipline in mind. When firms report transparently, they do so about the few things that matter most: the drivers of performance, the risks to performance, and the new direction that must result from the new data. This, importantly, entails no selective storytelling.
Good governance practices in communication include:
- Though we will dodge “red” issues if and when we are ready,
- A quarterly predictable update, in a similar form each time
- Writing results in plain language, and near miss, if not miss, objective categorizations of change
- Consistent definitions in terms of core metrics
- Good governance practices in timely communication.
Announce upcoming relevant events for stakeholders to be sure to at now (For securities exchange, if actual is not above prior 80% grade standard, state relations fee isn’t made, as is typical, by previous quarter). A predictable report outcome gets received also for time,
2. Provide Early and Meaningful Disclosure on the Risks You Face
While it is all too easy to disclose the glad tidings, investors place higher trust in managements that early on explain the risks they face, and in obvious terms, not through a fancy dancy p&d/poop sheet. These may be risks of the market or firm lost in execution, micro and macro, and execution issues relative firm strategy produced keys in play chess maker, executes what reult of game? Transparency starts with clearly stating your assumptions, particularly around forecasts for growth, margins, or expansion plans. Investors are better equipped to handle uncertainty if they know what its sources are, and what risks lie ahead.
Useful disclosures will include:
- Risks pioneers perceive as most potent and material, ranked in order of likelihood.
- How management is actively mitigating each risk or how it’s being monitored.
- The key drivers of guidance and projections.
- Scenarios which could reasonably change fundamentals significantly if they manifest.
Honest risk reporting also helps prevent future unexpected surprises and protects reputational cache.
3. Strengthen Governance And Show Accountability
There is little stronger than documentation of systems and controls acting on behalf of investor’s interests. Proper governance implies that decisions will be made with appropriate post-decision reviews within platforms and division heads. Effective governance indicates whether or not decisions will be made with the requisite best practices accounting for potential conflicts of interest.
Among the actionable governance steps:
- Independent oversight for directors, proper use of committees.
- Absolute clarity, with robust disclosures over executive pay and linking it to observable and quantifiable performance.
- Clear operating controls, with internal audits which happen rigorously.
- Clear ownership for the results of decisions—what changed, how those changes took place, and what will improve strategies moving forward.
Investors are hungry for rigor around governance and will always be watching.
4. Use Data Transparency As A Tool Towards Diminishing A “Black Box” Perception
Investors like what they can benchmark at the least. Treat them like a stranger beneath the palms. Diminish the confidence that you possess the perfect metric for such. Sour grapes.
The target here is to help investors understand, not just what you earned, but help make intuitive how your business works.
Conclusion
A small handful of decision-grade KPIs with supporting detail pointing towards strategy.
Show trends in your results over time that can better be described than depicted.
Point towards each of the drivers: was it volume, price/mix effect, retention, cost structure, etc?
What are the metrics which are similar to those aforementioned, but harder to tabulate? That is, identify the successful heuristics you’re invoking, on the regular, that aren’t canonical.
If what you’re surveying is have a place in your next season of results, highlighted numbers(s) must be justified. We can all browbeat our investor universe or simply paint a sense of clarity around the metrics.
Over time, intimate details become a far more potent competitive edge than any proprietary plan. Markets are uncertain. They want, no, they need leaders. To regain True-ness in its golden era of storytelling takes bone-structure. Transparency is trustworthy.