What's different about financial communication?

 

Actually, it's the same as all communication - the key to success is understanding your audience and knowing their information needs. Unfortunately, more than with other groups I think, the financial community is poorly treated in communications. This poor treatment comes from two 

principal camps, one is advertising and PR professionals that don't understand the level of detail and specificity required in financial communications and other comes from the financial community itself that does not understand that you need a message or story that is at the core of the information conveyed.

 

Let's look first at the advertising side. When I was doing financial communications work from within an advertising agency, we viewed investors and financial advisors much as we viewed general consumers. With consumers, the approach is to communicate the benefits of the product and communicate the brand superiority and then you connect with the buyer. But there is a difference between buying and investing. In buying a product you make a short term commitment and can make another choice next time if you are dissatisfied. You don't count on your breakfast cereal to help you retire. Investors are making a deeper commitment and have specific performance objectives for their investments. Much more detail is required to help them make their decisions.

 

One example of this was our approach to graphs - a key component of many financial documents. Our major concern was with the colour, the 3D shading and whether or not the scale created an attractive trend. Later, when I had the opportunity to work with the users of the information, I saw that they READ the graphs. They did calculations on the graph numbers and extrapolated the trends into the future. By treating graphs as purely visual, even decorative, elements we advertising types were effectively impeding communication. By the way, an excellent commentary on this is found in Edward Tufte's book The Visual Display of Quantitative Information, go here for more information: http://www.edwardtufte.com/tufte/books_vdqi.

 

Sometimes advertising professionals rely on slogans and catchphrases in financial communication. In marketing and political presentations using a hook like "Just Do It" or "Keep Hope Alive" can be very effective in connecting to an audience. It's quite common in Annual General Meetings to present themes like "Connecting to Tomorrow" or "Building the Future" and these are often based on a company's existing advertising program. A very dynamic visual presentation can be achieved when the advertising itself is also included. However, if the slogans and advertising are not congruent with a company's financial performance, it can create a major disconnect with investors. For example, I reviewed a presentation by a VOIP systems provider in which it claimed it was "A leading VOIP supplier." On looking at the rest of the presentation though we saw that the company's gross revenue was under five million dollars. As well, the VOIP systems market is highly fragmented with many small regional players and no one dominant provider. The slogan did not fit the facts and hurt the company's credibility.

 

Why do these kinds of situations occur? Because too often advertising and PR professionals don't "get" the numbers and assume they are too complex or boring for most audiences. You can see this when you start to discuss a company's financials with someone from this camp - their eyes immediately glaze over the minute you start. There is no attempt to understand, they just think "oh no, numbers" and stop listening. Or so it seems to me. I find it equates to when Shakespeare is first presented to a high school English class - many students who have never read a word of Shakespeare groan because they believe the works or boring or hard. You have to give the numbers a chance. Unfortunately, speaking to investors invariably means speaking about numbers and the professionals that can engage the numbers and can use them to communicate will have the best success.

 

How do you begin? For companies that are public (already listed on a stock exchange) look up the documents they are required to file with their governing securities commission. In Canada you can find these on SEDAR's website. Look up the company's last annual report and read the section called Management's Discussion and Analysis or MD&A. This will give you an idea of how management views the company and its results. You will also see the financial ratios they use to measure their performance and discussion for their plans for growth. Another document that is useful is the Annual Information Form which goes into more detail about the company's history, its business and its markets. Use a website like Investopedia to get definitions of the ratios with samples of how they are calculated. Follow this up with interviews with the CEO and CFO to get a deeper understanding of the company. You'll find, with the CFO in particular, that to a large extent, they view their company in terms of its finances. Once you understand the numbers' absolute relevance to the story of the company, you will be able to use them effectively.

In the next entry I'll profile the common errors financial professionals make when communicating to the investment community.