Within the life of every publicly traded company will come a time when the stock market will discipline it for actual or perceived shortcomings. Punishment shall be meted out in the form of a downward sloping stock price if not a sudden, gut-wrenching plunge. While it is nothing to seek out, bad stock market news cannot become the elephant in the room that everyone avoids and no one talks about. And executives should not let it weigh upon them while they clean up the corporate balance sheet.
Whatever the problem, bad quarterly earnings report, hostile takeover attempt, proxy fight for the board of directors or possible stock exchange delisting, the news needs to be communicated in advance to employees if the company controls the timing. If the company is not in control, the information needs to be communicated as soon as possible to employees after the news gets out.
Communicate Early and Often
When it comes to bad financial news, everyone inside the company must know as soon as possible. Not only is this important for employee morale but also for operational effectiveness. If employees can rest assured that they will hear the good, the bad and the ugly from the executive leadership team (ELT) first, it will build trust and give ELT benefit of the doubt in times of turmoil. All involved will pull together and work as a unit.
As an example, look at 1961 geopolitics. The Kennedy Administration orchestrated one of the worst planned military operations in U.S. history: The Bay of Pigs invasion of Cuba. Rather than sweep the bad news under the rug, President Kennedy got in front of the newspaper editors, acknowledged the pathetic outcome, took full responsibility and promised to do better in the future. In the opinion polls taken immediately afterward, his popularity rating soared to a level not seen since the days of World War II and President Franklin Delano Roosevelt.
On the other hand, if ELT does not have an open communications policy employees will believe any adverse information not challenged or put into context. Nature, including human nature, abhors a vacuum. And if this communications breakdown becomes a pattern, employees will begin to distrust if not become outright suspicious of ELT motives and competence. The last thing ELT wants is to be perceived as a coven of self-dealing corporate vampires.
Ire-Raising IR Scenarios
In a worst-case scenario, the investor relations (IR) department of the company will have no choice but to respond to bad news to fulfill requirements of the stock exchange, Securities and Exchange Commission (SEC) or its own corporate bylaws. IR may need to deliver this response in real time, perhaps in the wee hours of the night or over a long weekend, leaving no time for employee notification. This is understandable. Then internal communications needs to be conducted on a best-efforts basis. However, if there is time, the employee comms team should be notified and given enough information to dispel misconceptions and position the news in the best light.
What is unacceptable is that the employees are not given any information of any kind and informed by third parties. The worst possible informers would be customers who email or call salespeople or support personnel with pointed questions regarding the financial condition of the corporation. Without having any talking points in hand, what are these frontline contacts supposed to say?
The next worst scenario is allowing competitors to use true-but-unflattering information about the company against itself in the press or social media. Utilizing the classic tactics of fear, uncertainty and doubt (FUD), competitors will make insinuations about and sometimes call out the company by name in publications. In social media, individual representatives of competitors may make ugly postings seeking to undermine the corporation. By extension, the most dreaded blowback of all is the propagation of FUD in behind-closed-doors sales calls. In these confines, competitors can and will use FUD and distortions bordering on lies against the corporation. Customers need to know your side of the story to enable you to have any chance of them resisting the onslaught.
Not just Public Companies at risk
In truth, not just publicly traded corporations are subject to the risks of failure to communicate. In some circumstances, privately held corporations can be at greater risk if financial information is not shared as freely as possible. For example, a venture capital (VC) backed company may be undergoing a gap in funding rounds, management buyout or recapitalization. If employees see rumors of these in business journals or trade verticals, they may have no reputable resource for counterintelligence. Then it is completely up to company ELT to inform employees accurately, because there are no legally required financial filings to which insiders can refer.
Rank-and-file skin in the game
In the end, it is not just out of respect or corporate self-interest that employees should be fully informed. Rank-and-file employees often have a voting stake in the company.
They have skin in the game whether through an equity-sharing or employee stock ownership plan (ESOP). So not only do they need to know the true financial position of the company as employees but also as investors.
Words of Jack Ma and Ray Kroc
In the wake of the recent initial public offering (IPO) of online commerce giant Alibaba, executive chairman Jack Ma has been quoted as saying, “It’s customers No. 1, employees two and shareholders three.” While the order of the stakeholders is debatable, no doubt exits that employees are in the mix and deserve to be in-the-know financially.
And even as investor driven as many corporate CEOs claim to be, they should always remember a simple axiom of the stock market. Paraphrasing Ray Kroc of McDonald’s hamburger franchise fame: Look after the customer and the stock price will take care of itself.
Derek Handova is a freelance journalist, blogger and content marketer in the high-tech industry with an emphasis on social media and related channels. He received his masters in business administration (MBA) and bachelors in journalism from California State University, Long Beach (CSULB).