Governance data: Listening between the lines on earnings' calls

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Every time a major crisis happens, governance emerges as the significant risk — whether it is the current pandemic or the various financial meltdowns, governance in general, and corporate governance in particular becomes a focus area. Bank failures, debt recasts, bailouts and write-offs, and bankruptcies follow just as we are seeing now and we will see more soon.

Investor confidence in companies will soon evaporate although the current stock market rise is probably the irrational exuberance in India, given the other options for investments such as real estate markets and hawala markets are in tatters.

In many parts of the world, demands are being raised on CEO pay capping as a ratio of average employee pay. Scandals of the past might emerge to haunt more companies on the brink of shutdowns. And many promoters are actually stashing up funds and waiting for a clean shave from government-owned banks through IBC provisions. As industrialist Harsh Goenka tweeted recently, this should be stopped with a stronger regulatory mechanism, here and now, before more minority investors get wiped off their investments.

Given the major changes that enterprises are embracing in a manner never witnessed before and the general uncertainty all around, investors are in need of governance data in a transparent and accurate form. Analysts can play a very active role in bringing out these details, both qualitatively and quantitatively, in the form of clear, actionable insights that give a peek into corporate governance aspects.

Analysts normally hold quarterly calls with the enterprises once they announce the quarterly earnings results. That's four calls in a year. There is a new movement being mooted for the fifth analyst call, which does not involve any analysts at all. This is proposed as a conference call with a select group of major institutional investors in the enterprise, two weeks before the annual meeting of shareholders.

For public companies in the US, quarterly 10-Q filings and earnings calls are part of the eternal investor relations campaign, working to put a happy face on company results. For the CEO and the CFO, sticking to the planned script is essential. For the analysts, at least in the US, trying to get the C-Suite off-script is important. In India, however, most analysts don’t probe powerful business families much if they are holding executive positions.

The tactics, structure, and psychology of earnings calls are specialised domains that we won’t cover here. However, there is one aspect that is of direct interest to board members: When listening in on a call, what clues and intelligence can they pick up on how the results are being presented (and perceived) by the external audience? This would help better governance in the boardroom to avoid embarrassment later.

• Management’s opening comments for the call are surely pre-scripted (and increasingly, pre-recorded), which means the boards should be able to get a preview of what will be said. Invest some time reviewing the quarterly financials and trends that your board signed off on. Note what you consider to have been major points, trending indicators, or potential warning flags. Then sift through the numbers and milestones the executive team has highlighted in the earnings call script. How closely do the two versions match? If there are any differences, what do they suggest?
• During the actual call, usually, the management will stick to its script, so pay more attention to the Q&A time. The questions by some sharp analysts can inform directors on what investors are really interested in and focussed on. How closely do these questions track with the items stressed in the Q&A internal script, if any? Is there notable interest in an area that the executive team seems to be avoiding?
• The problems of the management during the Q&A session are not just limited to saying too little or being evasive. Though your CFO and CEO should have sound knowledge of what can and can’t be said, it doesn’t hurt for directors to listen in for slip-ups. Board directors sometimes think that management is giving more information than they should. Possible regulator-related issues or other disclosure rules could be violated, often inadvertently. Board members who bring past savvy in dealing with analysts can be invaluable in coaching young management teams to stay out of trouble.
• The questions and comments of analysts are also good for helping you gain outside context on the company. Analysts are helpful as third parties to give directors an outside-in read of the company. Directors could visit factories or plants before the pandemic, but that’s hard to do now. Analysts are also busy vetting other companies in related industries and will help get a peek into the issues that are current. Their queries and comparisons on “why is your company doing this when the other company is doing that?” give thoughtful context.
• Earnings calls are just one end of the disclosure process: What are those analysts saying to their clients after the discussion? Look at the analyst reports for intelligence on how well the management addresses company issues, what is really being communicated, and how the company stacks up to ts competitors. In addition, how consistent are the various analysts’ takes on your company: Are there any notable outliers among their reports? As a director, you will want to know if the executive team is doing a good job of guiding the street.

There are so many benefits in having a good set of sharp analysts asking tough, uncomfortable questions. Just as in politics, where media should play the role of asking tough questions for better governance from the government, analysts have a role to play in averting the Satyams and other scams in the future.

About authors: Muneer is co-founder of the non-profit Medici Institute and a stakeholder in the Silicon Valley-based deep-tech enterprise Rezonent Corp. Ralph is global board advisor, coach and publisher.

The thoughts and opinions shared here are of the author.