As for companies that are already in dire straits, “The most important thing to remember about bankruptcy is that there are no second chances,” says Paul Brown, CFO of Portland, Oregon-based PSC Inc., a supply-chain management company. If a company fails to emerge from Chapter 11, he explains, liquidation is the alternative.
Key ingredients in Brown’s formula — in addition to clear direction, active management, and candid communication — are getting control of cash flow and not allowing any “sacred cows.” Of the five companies that Brown has been called on to help survive bankruptcy, he’s met with success four times. The one failure, he maintains, was a sacred cow — the CEO’s favorite business segment, which he was unwilling to jettison to salvage the rest of the company. Eventually, says Brown, “cash flow problems just rolled over the company and sunk it.”
Building — or Rebuilding — Confidence
Rebuilding credibility with investors is best handled by management, not sell-side analysts, says Peter Ausnit, a San Francisco-based financial marketing consultant. He admonishes executives who issue terse financial press releases and opaque financial filings that barely meet minimum SEC and stock-exchange requirements. This lack of transparency, Ausnit maintains, is the reason that Wall Street became an intermediary between companies and investors.
Executives may be reluctant to release too much information into the public domain for fear of surrendering a competitive advantage — or even of piquing the SEC’s interest in the company’s accounting. Regulation Fair Disclosure also has to shoulder some of the blame for chilling communications between companies and investors, according to John Isaf, a senior vice president at Magnet Communications. But on issues that really matter, counters Ausnit, management always communicates with investors directly. Just take a look, he says, at the full-page advertisements that appear in daily newspapers when a merger needs investor support or a proxy fight breaks out.
One company that seems in step with Ausnit’s suggestion is the nicely named Progressive Corp. Two years ago the Ohio-based insurer became the first publicly held company to issue operating results every month. This summer Progressive captured another public-company first when management announced intentions to release earnings-per-share data every month. Indeed, after earnings warnings in 1999 and 2000 sent Progressive’s stock price on a rollercoaster ride, executives snuffed out the volatility, they maintain, by feeding investors more information, more frequently. Officials at the company also say that additional transparency makes any thoughts of “smoothing” results much less inviting.
The transparency of financial footnotes also could use some sprucing up, says Northeastern University business school professor David Sherman. For example, he supports adding earnings ranges to footnotes that clarify subjective accounting judgments. “You can’t take accounting judgments out of the process,” says Sherman, but earnings ranges can spell out the impact of accounting treatments and provide a rationale for choosing one method over another.
While Wall Street may put the focus on investor confidence, Isaf insists that employees should be the number-one communications target, since they’ll actually be setting the ship aright. He warns executives against placing blame and making up excuses for the company’s woes, and tutors them to be frank about expectations and progress. When management leaves an information void, adds Isaf, the rumor mill will fill it.