The first earnings season of the COVID-19 pandemic and the filing of proxy statements sees corporate executives under a level of pressure unfamiliar since the Global Financial Crisis. Although activists look poised to give companies a pass at least for the first half of this year, poor communications work could have a more lasting impact than in normal times.
Fortunately, CEOs trying to put their thoughts into words can turn to Lawrence Cunningham’s latest book, Dear Shareholder. The founder of George Washington University’s New York City-based program for ambitious corporate law students has compiled Warren Buffett’s letters and written several other books on value investing and business history, but now broadens his remit to look at how other CEOs have communicated through annual letters to their investors – optional, unregulated letters found mostly in annual reports.
The Bedford Park Opportunities Fund returned 13.5% net of all fees and expenses in the second quarter of 2021, bringing its year-to-date return to 27.6%. Q2 2021 hedge fund letters, conferences and more In the fund's second-quarter investor letter, which ValueWalk has been able to review, Jordan Zinberg, the President and CEO of Bedford Read More
"Outstanding shareholder letters are well-written, honest, and consistently focused," he writes. "They reveal the good, the bad, and the awful, not ducking hard problems. They embrace long-term thinking, manifested by charting results over long periods of time, which means acknowledging tough patches put in the context of stronger returns over longer time spans."
Communications In A Time Of Crisis
But what of communications in a time of crisis? The very word appears only 14 times and mostly in hindsight. Focus on long-term goals is all very well, but Dear Shareholder’s cast of characters is necessarily a demonstration of survivor bias.
Cunningham himself is well aware of the impossibility of matching the current crisis. "If a CEO has intelligent information to share amid staggering uncertainty, such as we now face, it would be wonderful to share it," he told me by email this week. "In reality, I cannot think of anyone on earth who might possess even a modicum of certainty at our current moment in history and would consider it foolish arrogance for any CEO to think otherwise."
Nonetheless, and while trust is built not over minutes but years, the book has some good examples for erstwhile Buffetts to follow. Some admit mistakes, which "CEOs as fiduciaries... should aspire to do," Cunningham said. A particularly apt example might be mistimed buybacks, which do not stop bosses promising more redistributions of capital in the near future.
Acknowledging The Work Of Employees In Time Of Crisis
Another is acknowledging the work of employees. "Outstanding CEOs know that treating employees well is vital to long-term corporate prosperity and the creation of long-term shareholder value," Cunningham told me. "Tributes to the troops appear frequently in the collection in the ordinary course of business. My own view is that is no less important in a time of crisis, though it is obviously far more difficult to compensate and reward people when the economy has been essentially shut down."
The ghosts at the feast are activist investors, who are not addressed directly in the letters, even in the excerpts from PepsiCo’s Indra Nooyi (who emerges as a visionary on the subject of sustainability, long before it became the hobbyhorse of BlackRock’s Larry Fink).
In our interview, Cunningham pointed out that CEOs face plenty of organic opportunities to answer activists but debates that executives may prefer didn’t exist should not necessarily be ignored. "If any particular shareholder has offered useful suggestions or provoked particular debate, it would be wise for a CEO to address the point, whether that shareholder is an activist, an indexer, a long-term holder, or an employee group," he told me.
If any part of the book is to be pinned to the wall of the home office, the most apposite for this year at least might be a quote belonging to Steve Markel and Tom Gayner of insurer Markel Corp. "The best thing we can say about 2008 is that it is over," the pair wrote. "It is also a year when we learned a great deal about volatility, resilience, flexibility and margin of safety. We look forward to applying those lessons in 2009 and beyond."
eBay Announces Its New CEO
This week eBay announced its new CEO; Jamie Iannone will return to the company he worked at between 2001 and 2009 from Walmart’s e-commerce division, where he was most recently chief operating officer. Analysts at Guggenheim greeted him as, "The strong hire eBay was looking for," while those at Banc of America and KeyBanc emphasized his credentials on innovation. Eric Jackson, a former activist and long-time watcher of the tech world, wrote in an email this week that he thought the online marketplace will be "one of the best defensive names in the tech world" if the market continues to head south. "The bottom line is that eBay is a great deal at current levels, especially if the economy holds in there," he concluded.
Even more notably, eBay is now outperforming the Nasdaq for 2020 – a reversal of recent years. The appointment was enough for Starboard Value to back away from its plan to install four new directors on the company’s board. The activist issued a joint statement with eBay yesterday, in which the company said it expects to name a new director to its board in the next few months and will consider those Starboard nominated.
Quote of the week comes from Third Point Partners’ first-quarter investor letter, which like an Elliott Management investor letter seen by Reuters, revealed the hedge fund to be bearish on stocks. Third Point CEO Dan Loeb wrote:
"Our base case scenario is that a return to ‘normalcy’ will be structurally difficult and complex, with the likely recovery being shaped like a Nike swoosh, as some economists have described it. Today, we believe equity markets are expecting a much sharper recovery, the high yield market prices a more moderate recovery, and the mortgage market is trading as if recovery will be slow."