Consensus Management: Why does it matter?

The short answer is – because a lot is at stake for your company. And more often than not, the consequences and implications of not having a well planned consensus management process are overlooked.

When it comes to near-term financial results and longer-term outlook, a proactive and regular dialogue with analysts can be extremely effective in managing market expectations.

In the case of near-term financial results (e.g. upcoming quarterly results), it is advisable to connect with the analysts who cover your shares, as well as your key buy-side analysts, a few weeks before announcing your company’s results. The purpose of this is to steer the narrative and guide their thinking in the right direction on how you think performance may likely trend, without disclosing any material, non-public information. Tools at your disposal include, to name a few:

• industry-specific indicators such as quoted commodity price indices and market demand trends,
• previously communicated guidance,
• competitors’ and/or your subsidiaries’ results (in case they were publicly traded), and if they had already announced their results.

Typically, analysts independently verify your feedback and then refine their estimates for the upcoming quarter into a hopefully-narrower range that is more reflective of actual performance trends. Once you have a full set of estimates, sharing the key statistics with analysts would ensure that in their reports, they reference company-compiled estimates as opposed to database-compiled ones which are often outdated. This approach will help you to significantly limit, or completely avoid earnings misses or substantial earnings beats. Earnings misses are often perceived negatively by the market and may have an undesirable impact on the share price almost immediately. Similarly, significant positive earnings surprises may prove negative for share price performance in the long term, if the drivers of the underlying financial performance were temporary or non-recurring. Investors and analysts are not big fans of surprises.

Looking past near-term results, tracking analysts’ valuations, price targets, and multi-year forecasts have clear benefits for issuers. Firstly, comparing market forecasts with your own business plan will often reveal areas of substantial deviation.

• Is the market less or more optimistic than the company about the outlook? Is the company’s strategy unclear, or perhaps too complicated?
• Is it the right strategy for the company?
• Should the company revisit its own assumptions?
• Is there not enough confidence in management’s ability to deliver?
• Should the company provide additional forward-looking guidance or cut back on the level guidance provided?

These are some of the tough questions that all issuers, including their boards of directors, need to look into and actively work to resolve for the ultimate benefit of maximizing shareholders’ value.

Secondly, tracking changes in estimates, valuations, and price targets over time would give issuers a clear indication of the change in sentiment. This can be especially constructive following events that are likely to affect issuers such as M&As, changes in strategy, emerging disruptive technology, pandemics, force majeures, or changes in the fiscal regime. Assuming issuers had already conducted the suitable due diligence, they should be in a position to assess whether the market has overreacted, underreacted, or appropriately reacted to the news. Communications programs could then be tailored accordingly. Otherwise, issuers risk a lingering disconnection between actual share price performance and internal aspirations.

There are also many other benefits to consensus management. Some of the analysts who follow your shares may not be experts in your particular industry, or are not as close to the story as others. In a way, they are likely to be more receptive to your views as you help them navigate through the intricacies of your investment case, strategy, and outlook. Last but not least, the process of consensus management allows you to spot factual errors and modelling mistakes which may adversely skew consensus estimates. Promptly addressing these inaccuracies with the concerned analyst(s) can have a positive impact.

In capital markets, both time and capital are scarce resources. When competing for capital, issuers must not overlook the fact that investors have plenty of investment opportunities to evaluate, and that sell-side resources are limited. You can almost always be sure that markets reward issuers who are proactive with their investor relations and communications.

Let us help you establish and implement a world-class proactive consensus management process today by reaching out to diana.estupinan@instinctif.com.