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The Credibility Gap

Do analysts think you're a lightweight?
Eila Rana, CFO Europe Magazine
July 26, 2007

A CFO gives a reasonably good presentation to analysts but botches the question-and-answer session, or doesn't go much beyond the P&L and cash flow statement to provide operational insight into the business, or fails to tailor information to take into account the varied needs of investors. These are some of the telltale signs of a lightweight CFO, according to analysts.

Given that many CFOs now devote as much as 30% of their time to investor relations, being branded a lightweight by the investor community can be a heavy burden to bear. Ask Bodo Uebber, who became CFO of DaimlerChrysler in 2004. While analysts have spent the past few years grumbling about the general lack of leadership talent under CEO Dieter Zetsche, they often singled out Uebber because of — in the words of one buy-side analyst — his "inability or unwillingness to answer questions fully," among other communication flaws. While the analyst says the market's perception of Uebber has improved recently, it hasn't happened overnight.

So where do you stand with analysts? If you're not sure, you're not alone. While companies often use post-presentation exit polls and third-party advisers for feedback about their IR efforts, getting individual feedback is not so easy. "The signs are not always that obvious," says Angus Maitland, managing director of Maitland, a UK financial advisory firm. "Analysts don't want to jeopardise their access to the company. So criticism will come through the gossip channels, which of course can reach the ears of shareholders."

Fortunately, very dramatic cases are rare, asserts Maitland. "CFOs aren't [appointed] to that position without credibility," he says. "Some CFOs are simply less user-friendly than others, but it doesn't mean that they aren't credible."

A lot of a CFO's credibility hinges on quality of communication. "If your presentation of the numbers [to analysts] takes 20 minutes and then [you have] a one-hour Q&A, there's something wrong with the way you're communicating," contends Ralf Frank, managing director of DVFA, the German Society of Investment Professionals. What's more, he adds, "it's not good enough to just deliver numbers."

Therein lies a challenge. CFOs need to manage a persistent tension between their companies and analysts about the information that should be disclosed. Analysts can perceive a CFO's unwillingness to divulge information as arrogance or ignorance. So Maitland advises that "along with deciding what information to present, prepare good, credible reasons about why you're not providing a particular piece of information that you might be asked about."

So who gets the thumbs up? Last month, IR magazine unveiled the results of a poll that asked 150 UK buy-side and sell-side analysts to rank five CFO characteristics in order of importance. "Chartered accountancy qualifications" came first, but "integrity" and "experience and expertise" weren't far behind. And while "responsiveness to regulatory and other changes" and "willingness to talk to the investor community" came in at the bottom, several respondents noted that top CFOs must master all five characteristics. As one of the analysts put it: "These guys wouldn't keep their jobs otherwise."




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