Communicating Changing Business Dynamics To Your Board And Investors

We did a call today with our investors and one of the questions was about how the macroeconomic environment is impacting our portfolio companies. We explained that for most of our companies, there has not been much of an impact, but we are seeing several companies bring down aggressive numbers for 2009 to more realistic growth projections. It got me thinking about how those changes are communicated from the CEO to the board and investors.

Our portfolio companies experience both positive and negative changes to expectations on a regular basis. There's not a lot of art in communicating positive changes to expectations. Everyone loves good news and most people are happy to share it the first chance they get.

But there is an art to communicating negative news. Investors and board members can be spooked by negative changes to expectations if they are not handled correctly.

My first piece of advice is to share the news as soon as you have it. There is never a good reason to have information about your business that your board and major investors would want to know and not share it. You could argue that it's time consuming to communicate with investors and that it's more efficient to wait for the regular board meetings to do that. But whatever you gain in efficiency with that approach, you lose in trust and confidence building with an important group of stakeholders in the business. It's not worth it. There are efficient ways to communicate with the board and major investors. A quick email will normally do the trick.

My second piece of advice is to communicate frequently enough that you can gradually lower expectations. Let's say that you are now three and half months into the year and you now know that you aren't going to make your plan for 2009. Well that's not going to be a huge surprise to anyone given that we are in a very difficult economic environment. But if you ended the March board meeting on a high note and you start the April board meeting with "we have to take down our numbers", then you are giving your investors the feeling of being on a roller coaster and that's not what investors want to feel.

The better approach in this situation is to say in the February board meeting something like "it's too early to know how things are going in the first quarter but given the economy, we are on full alert for any negative surprises." Then in the March board meeting say something like "we are starting to see signals that we may not be able to grow as much as we'd like this year, we'll have a recommendation in the April board meeting". Then when you show up with the recommendation in April to take down the numbers, everyone will be expecting it.

My third and final suggestion is when you make a substantial change to expectations, make sure to get that change right. There's nothing that is more of a confidence killer than "death by a thousand cuts." There are some companies where you don't have much visibility. I don't like investing in those kinds of companies and I imagine that most CEOs don't like running them. The truth is most companies have a decent degree of visibility and by the time you are into the second quarter of a year, you should be able to figure out where the year is headed. So if you choose to take down your numbers between now and June, take them down to where you know you can meet them. To do otherwise is just asking for problems.

Most of this is common sense actually. The hardest part for many CEOs is executing on it. Managing a board and investor group doesn't add value to the business on a daily basis. It doesn't make the product better. It doesn't generate more revenues. It doesn't recruit an amazing team. And so on and so forth. So many CEOs blow this off in favor of the things that do move the business forward. A good board will remind the CEO that he or she has to do these things and why.

One final thought. Taking down numbers this year is not likely to get many people fired. It's expected at some level. But mismanaging the process might. In a tough year, set reasonable expectations from the start, do your best to meet them, and be proactive in managing and changing expectations and you'll be better off and so will your team and your company.

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