Spring is in the air, baseball has begun here at FCLTGlobal headquarters in Boston, and the public company earnings reporting season is upon us - thus begins that familiar, yet often tedious, quarterly dance done by companies and the analysts that cover them. The quarterly earnings call looms large on most corporate calendars, regularly consuming significant amounts of time to prepare, but are investors and companies making the best use of this venue for regular interaction?
Many of the most commonly asked questions on earnings conference calls follow a predictable pattern, often probing on short-term or quarter-specific topics. Questions around “housekeeping,” modeling guidance, FX forecasts, or “puts and takes for next quarter” all reinforce the idea that investors are only focused on the short-term aspects of the company and that corporate management should focus on and manage toward those short term goals. However, according to Edelman’s recent survey of institutional investors, 86% agree that focusing on short-term results does not benefit their investment strategies. This short-term-focused conversation wastes the opportunity inherent in the quarterly call.
Valuation analysis conducted by McKinsey and others suggests that 70–90% of a company’s value is related to expected cash flows three or more years out. If that is where the value lies, then investors need to be educated and informed with that horizon in mind.
How can all involved stakeholders restructure the quarterly conversation to make the quarterly call a chance to receive an update on a company’s progress toward long-term goals? Asking the right questions is a good place to start. This earnings season, investors may consider shifting the conversation by asking any or all of these questions of management:
1. How has the company’s performance this quarter contributed toward progress on long-term strategic goals?
2. Where are you seeing the most potential opportunity for long-term growth?
3. How are you planning to address risks associated with executing the company’s long-term strategy?
4. How have you adjusted your talent development strategy to anticipate changes in the competitive environment?
5. Describe your approach to capital allocation decisions including major uses and sources of cash over the next 3-5 years and explain how actions taken this quarter have contributed to that plan?
These questions are just a starting point to get the conversation headed in a more strategic direction. The key in any investor-corporate dialogue is to focus the conversation on the fundamental drivers of a company’s business, the strategy management believes will unlock future value, and the steps required to get there. Questions that get us closer to this conversation go a long way toward refocusing the dialogue on the long term.