Business and Markets

The Case Against Investor Conference Calls

May 30, 2018  • Judy Samuelson

“I couldn’t care less” Tesla CEO Elon Musk said of day traders during the company’s quarterly earnings call last week. “Please sell our stock and don’t buy it.” Later, he called a question about short-term expectations “boneheaded” (the answer was already in the Q1 press release).

Public companies typically host conference calls like these immediately after they release their earnings each quarter. The idea is to provide information that will reassure investors of the companies’ trajectories and dampen volatility in their stock prices.

But Musk does not seem to see it that way. “If people are concerned about volatility,” he noted during the call. “They should definitely not buy our stock. I’m not here to convince you to buy our stock. Do not buy it if volatility is scary.”

Musk eventually tweeted that he should have sucked it up and answered questions posed by anyone who bothered to join the call. But the message he sent is still important: Paying attention to short-sellers and day traders—or even the sell-side analysts—when you’re building a company for the long haul doesn’t make sense.

Why quarterly conference calls don’t make sense   

For decades, companies have tried to manage their stock prices by providing “earnings forecasts” to investors before they release their actual quarterly results. But it doesn’t work and the practice— which exploded in the 90s—is going out of style. The number of companies that offer earnings guidance peaked in 2004, as more companies gave up the practice or shifted to annual forecasts instead.  Yet too many companies still invest a lot of time trying to bend the stock price to the desires of investors looking for short term gain.

Unilever CEO Paul Polman stopped the practice of earnings guidance when he took the job in 2009, pushing the company to adapt a long-term value-creation model that prioritizes growth and aggressive reductions in the environmental footprint—betting, correctly, that the stock price would follow. Jamie Dimon of JPMorgan Chase spoke out forcefully against earnings guidance earlier this year, stating that forecasting earnings leads to short termism—and worse. “It forces people inside the company to bullshit up the chain,” he said. (Ironically, a decade earlier, Chuck Prince of Citibank was reviled for naming the same game.)

The quarterly conference call—a tradition in which the highest paid people on the planet patiently answer questions of analysts who are hyper-focused on ticks in the stock price and adjusting their models—may be due for a similar decline.

Musk can’t contain his irritation at having to spend his precious time answering “boring” questions that are easily communicated in print.  He has no interest helping sell-side analysts explore a “thesis” that has nothing to do with underlying stock value or the long-term game plan. He’s prickly, and displays few of Polman’s more endearing qualities, but, like Polman, he’s unquestionably advocating for something worthwhile. The quarterly earnings call is dominated by the traders.  It has limited value for the long-term health of the company.

How should we fix this? Tim Koller, a Partner in McKinsey’s New York office and our own former colleague at the Aspen Institute, Rebecca Darr, published an article last year that offered one solution within the control of the company: focus on a different set of investors. They interviewed “intrinsic investors,” or funds that focus on underlying value rather than gambling on stock price. “Public-company managers are quick to bemoan the pressures they face to emphasize short-term financial performance at the expense of long-term value creation,” Koller and Darr wrote. “Depending on the day, they point the finger at a range of culprits, including market pressure, economic uncertainty, and investors. But it’s time managers took a harder look at themselves and the tools they have to build alliances against the corrosive effects of corporate short-termism.”

Tactics for shifting focus to investors who are invested for the long term include some that Tesla just demonstrated.

First, Koller and Darr recommend, companies should expect more of investors—or, like Polman at Unilever, they should lean in to those with the most influence over the value of their stock over the long haul. Seven in ten shares are owned by individuals, index funds, and more sophisticated long-term investors, and this last group of intrinsic investors “has an outsize influence on a company’s share price over time.” Koller and Darr suggest companies put the easy stuff in a press release, and reserve the on-air time for connecting investment to long-term strategy.

Serving investors who are the most likely to see the strategy for what it is— long-term value in the making—requires different practices.  It especially means turning down the noise from the traders and active managers. The quarterly earnings call can be a vehicle for educating the real investors, but that requires taking in stride the ups and downs, rather than bending results to meet earnings targets—or worse, forgoing long-term investment to bolster the stock price today.

Finally, a focus on long-term investors means offering real insight into the “intangible” value of how management thinks. Here’s one more example from Tesla: When asked why the company makes its investment in roadside Superchargers available to any user, not just owners of a Tesla Musk replies: “If your only defense against invading armies is a moat, you will not last long.”

Elon Musk is passionate about building a product that helps us realize a different, and, specifically, carbon-free, future. His sight-lines aren’t just long-term, they lead outside the gate to the broader questions at the intersection of healthy business and healthy society.

Value today is revealed less in hard assets, and more in the value of the management team itself. Real investors need to understand, and to be able to follow, the strategy as it unfolds.

This article was originally published on Quartz. Judy Samuelson is a vice president at the Aspen Institute and the founder and executive director of the Business and Society Program.

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