Investor Communication Plan
Investor Communication Plan
Background
Western States Electric Components Group, a subsidiary of Consolidated Electrical Company, mistakenly misrepresented its sales income for the past four years. Western has been selling about 55% of its connolator generators to various ConsoE’s divisions at lower internal retail prices. The different divisions resold these connolators acquired from Western to outside companies. Unfortunately, the financial department has been recording these activities as two separate earnings, hence double booking. Upon the revision of the accounts for the four years, profits for the following financial year will come out as big loses hence affecting the prices and performance of its shares in the stock markets.
Issue Identification and Root Cause Analysis
Internal double booking has led to misrepresentation of financial information for the past four years
Revision of profit estimates will result in huge losses for the current financial year, which will lead to a drop in share prices.
Strategic Effect of Investors Communication Plan
Immediately inform all stakeholders and reduce concerns by reassuring them that ConsoE has the capabilities to rectify the problem
Help the investor to understand clearly the circumstances surrounding this situation by answering the how, whens, and whys
Neutralize anger and disappointment
Boost investors’ confidence in the company’s ability to overcome the hardship
Strategic Goal of Investors Communication Plan
Sustain investors’ faith in the performance of the company
Cushion the effect of the revelation on the performance of company’s stocks
Win the support of the investors in circumventing this problem
Environment / Risk Analysis for the Investors Relations
Event - High losses after revision of profits due to misrepresentation of sales earning due to internal double booking. A significant fall in stock prices is expected as a result
Attitude - Investors are disappointed and angered by this development. It seems like a manifestation of incompetence in management or a corporate fraud scheme.
Outside Event that could influence Strategic Communication Plan
Media attention that may overpublicize the situation and instigate negative perception, which can have an adverse impact on stock prices
Possible lawsuit by federal government
Procedural Considerations
The communication plans should consider the fact that ConsoE is not very popular because the public does not understand or are not directly influenced by its products (transformers and generators), which means the error might not have an adverse impact on the stock markets.
Obstacles
Most electrical companies have had a bad experience in the Wall Street, especially involving scandals, such as the Collapse of Enron (management concealed huge losses) (Healy & Krishna G. Palepu, 2003) and bankruptcy of Pacific Gas and Electrical Co. (Weare, 2003). These cases may erode investors trust in the company’s explanation.
Investors may find it hard to understand why the mistake was never captured in audits (suspicion of collusion with auditing firm), because typically, they are performed 2-3 years after filing returns.
Situational Analysis
Reason for Communication Plan
Research shows that use of graphs in communicating financial information tend to misrepresent data because the details are in the financial section rather than in the narrative section. This means that investors and other stakeholders, upon examination of the financial narrative, understand the basics of a financial position of the company because the information has been simplified, but the deep meaning escapes.
(Penrose, 2008)
Research shows that in today’s business environment, trust between the investor and companies has reduced and therefore cannot be assumed. There is a need to build investors’ confidence through proper communication and engagement. A study conducted by Peterson & Martin (1996) indicates that proper communication with investors makes paramount contributions to a company that includes increase in Securities valuation and trading volumes. (Laskin, 2007)
According to the efficient market hypothesis, the price of stocks reflects the available information about the value and performance of a company. Therefore, to influence changes, one needs to control information. Speculations just like the truth can have profound effects on the prices of stocks. Therefore, choosing to sway the markets with truthful information requires timely communication of facts in simple, clear, and precise manner (Clarke, Jandik, & Mandelker, 2001).
Research shows that providing accurate accounting information to stakeholders during a financial crisis helps alleviate the risks and effects. Conversely, it reduces skepticism by painting the exact picture of the problem. This includes public information for investors, government, shareholders, and banks, and private information for internal use. (Scorte, Cozma, & Rus, 2009)
Investors Traits
Investors are angry and disappointed that the financial management could not detect the problems early enough
They are concerned that they would lose much money when the reports are revised
There is general concern that the company may not come out of the problem while still healthy financially, and there might be costly lawsuits
Impact On The Company Financial Future
Clear communication of the problem and measures taken to remedy it will help build confidence and keep investors.
Accomplishment
The plan will encourage engagement of both primary and secondary stakeholders in ensuring that proper and accurate information is communicated to the investors and the public at large.
Obstacles and Barriers
Skepticism – ConsoE does not have the ability to acquire and integrate companies effectively
Blame – Investors blaming the management for the error
Stakeholder Analysis
The key stakeholders in the ConsoE’s Investor Communication Plan include the following:
Investors
Investors are concerned that the error will have a significant effect on their investments. Conversely, they feel cheated and disappointed by the incompetence of the finance department. The strategy was not wrong, but the failure to detect a mistake that seems obvious is unacceptable.
Western States Electric Components Management
Connolators generators are produced and sold by Western, and as such, a significant stakeholder. The management feels that it was not their fault, but that of the finance department. This is because the finance directors of each division remitted sale records separately and it was the role of the VP office to analyze and interpret the accounting information before including it in the financial statements.
ConsoE Management
ConsoE management will be the key face during this communication to the investors, employees, and other stakeholders. They feel that Western was just implementing directives from ConsoE and therefore should not be demonized. According to the Vice President of Operations, the blame lies squarely on the financial department. If they detected the problem early, the Western would have focused on increasing sale by a third to make the numbers.
Financial Community
The financial community has doubts about ConsoE management style and competency of the staff. They will be looking for answers, and the management needs to communicate that they are putting in place necessary measures to remedy the error and to ensure that it does not happen again in the future. Conversely, they need to trust the company will give accurate financial information in their future dealings.
U.S. Securities and Exchange Commission
Needs to be notified immediately to work with ConsoE to rectify the error and make necessary changes in the system to prevent it from happening again in the future.
Strategic Message and Metrics
Acknowledging the Mistake
The mix-up in the recording of financial information was an unfortunate mistake and nothing else. The investors need to know about it immediately from the company’s management and not from other sources.
Main Message One: The error was internally generated
The decision by ConsoE management to allow inter-divisional sales of Connolator generator led to the double recording of sales.
The same amount of money changed hands from other divisions to Western (within ConsoE).
It was hard to detect the problem because, upon sale, every division recorded income.
However, it is at the divisional level that the failure was more evident because they bought and sold at the same price but still recorded income.
Financial Reality
This revelation does not imply that the company lost money during the past four years; it means that the profits were exaggerated.
Main Message Two: Money was not lost, but was allocated inappropriately
Part of the income stated cannot be located, but all the profits made in real sales can be accounted for
Investors received dividends in excess and value of shares have been overstated during the past four years
All these monies can be recovered in the future if the company survives this crisis
Lessen the Impact
Effective remedies have been proposed to help lessen the effect of this error on the enterprise. ConsoE will need the support of all stakeholders to realize this objective.
Main Message Three: ConsoE will reduce the negative consequences
Increase the level of trust between the main stakeholder and the company
Provide accurate accounting information to the investors
Reduce negative headline by communicating correct data to the employees, media, financial institutions, and the government agencies
Internal collaboration by creating a united front by communicating the same message across the board
External collaboration with stakeholders such as the U.S. Securities and Exchange Commission and banks.
Restore confidence to external and internal stakeholders by assuring them that this will not affect performance and the company is still strong
Assure the consumers that our connolators are still the best products in the market
Rectify the error
ConsoE began rectification of the problem immediately it was discovered. We can, therefore, say with authority that the system has been replaced, and sales operations at the company are in full gear.
Main Message Four: Changes are being made
The changes will not affect our consumers in any way because the prices and contacts will remain the same.
Preventing Future occurrence
The centralized administration of a company becomes progressively complex as the size of its supply chain and lines of communication expand. As a result, ConsoE has decentralized control into autonomous divisions. However, there is a notable challenge in the application of transfer price.
Main Message Five: Improve
Consideration of circumstances and factors involved before a price transfer method is implemented.
Investigate, identify, and correct mistakes in the company’s transfer price system.
Use of the market-based pricing rather than negotiated pricing.
Implementation
Facilitate ease access of information to all stakeholders
Message: By increasing access to info, circulation of incorrect and potentially damaging information will reduce.
Objective: Ensure that all stakeholders get accurate information easily and at all times
Stakeholder: Investors, employees, and customers
Tactics: Create a dedicated website where all parties concerned can go and find all information about the issue.
Reorganize the activities of the company
Message: Reorganization of activities to eliminate confusion in the transfer of assets within the company
Objectives: Develop a lean system of asset transmission from one division to another
Stakeholders: Western and ConsoE management
Tactics: Rearrange the current system
Investor communication
Message: Making sure that the investors are fully engaged
Objectives: Open, honest, and direct communication
Stakeholders: Investors & Management
Tactics: Provide investigation results and recommendations and the revised profit statement, regularly update them through SMS, and send annual reports
Announce error
Message: Stakeholders should get the information from ConsoE first and not from other sources
Objectives: Ensure that investors and other important stakeholders are aware of the situation before announcing at press conference
Stakeholders: Investor and stakeholders
Tactics: Call investors, send SMS or email
Internal Communication
Message: Our employees are our greatest assets and as such, appropriate information should be dispersed to the entire organization
Objectives: Make clear what has been happening and answer employee questions
Stakeholders: Managers
Tactics: Distribute memos, eNewsletters, and arrange meetings
Assess/Metrics
Outcome Based Approach
Outcome Measurement Plan
References
Alexander, R. M., & Gentry, J. ((2014)). Using social media to report financial results. Business Horizons, 161—167.
Clarke, J., Jandik, T., & Mandelker, G. ((2001)). The Efficient Markets Hypothesis. Expert financial planning: Advice from industry leaders , 126-141.
Healy, P. M., & Krishna G. Palepu. (2003). The Fall of Enron. Journal of Economic Perspectives, 3-26, 17(2).
Laskin, A. V. (2007). The Value of Investor Relations: A Delphi Panel Investigation. Institute of Public Relations, 1-36.
MCM. (2016). Investor Relations. Retrieved from USC Annenberg: https://mcm.usc.edu/mod/page/view.php?id=36811
Penrose, J. M. (2008). Annual Report Graphic Use. Journal of Business Communication, 158-180, 45(2).
PricewaterhouseCoopers. (2009). Corporate restructuring guidlines: Auditing, accounting and taxation. PricewatershouseCoopers, 1-20.
Scorte, C. M., Cozma, A., & Rus, L. (2009). The Importance of Accounting Information in Crisis Times. Annales Universitatis Apulensis Series Oeconomica, 194-201.
Weare, C. (2003). The California Electricity Crisis: Causes and Policy Options. New York: PUBLIC POLICY INSTITUTE OF CALIFORNIA.
Young, A. (2016). Interdivisional Transfer Pricing. Retrieved from University of Surrey: http://epubs.surrey.ac.uk/755/1/fulltext.pdf
