The CEO's key to a successful earnings call with investors? Crystal clear communication.
Earnings calls are typically held after the release of quarterly earnings, allowing company executives a chance to brief investors, analysts, and oftentimes the media on performance highlights and to field questions. The calls are high stakes — a top executive with a murky message can cause share demand to dry up, or worse, a drop in the stock price, faster than you can say, "Outlook is uncertain."
Imagine, then, the challenge for foreign executives of firms based outside the United States. Many chose to host conference calls in English, placing themselves on shaky linguistic ground.
The recent working paper Capital Market Consequences of Non-Plain English in Conference Calls of Foreign Firms appears to be one of the first studies to examine how language barriers can lead to a poor reaction on capital markets. It was written by Harvard Business School assistant professors Gwen Yu and Francois Brochet, with MIT Sloan of Management doctoral student Patricia Naranjo.
Although targeted at foreign executives, the research may inspire executives using any language to give more consideration to how they deliver important information during earnings calls.
Between The Lines
The research team studied 11,436 conference call transcripts by 4,540 firms based in 41 different countries outside the United States between 2002 and 2010. They were hunting for executive-speak that was highly complicated: the use of many words per sentence that featured a high percentage of complex, multisyllabic words, requiring a higher level of education to understand. These communications were then compared to capital market reaction following the conference call.
What the researchers discovered was that executives who failed to speak plainly in a way investors could understand faced various market consequences, including lower trading volume, restricted price movement, and inconsistent analyst forecasts—all after controlling for the actual earnings news.
“When it's too complex to understand, we find that investors have lower confidence about the information being disclosed”
The reason is easy to understand. The conference call is designed to provide context to the many figures included in financial reports, yet when the information presented is unclear, investors walk away feeling uneasy.
Says Yu: "When it's too complex to understand, we find that investors have lower confidence about the information being disclosed, they disagree more about the information, and they get more confused. This can make the price itself more volatile."
Many executives start their calls with a prepared statement—one that is scrutinized and well rehearsed long before it is delivered—so language barriers don't tend to be much of an issue.
It is during the more spontaneous Q&A section of the conference calls that many executives, particularly those who don't speak English fluently, tend to stumble. When answering questions off the cuff, they are more likely to use complex and convoluted speech that can be difficult for investors to decipher.
"It is this real-time interaction that's the main barrier," Yu says. The prepared text is not of much interest to investors; they are anxious to have more time for question-and-answer interaction. "That's what investors really want. But are [executives] prepared to answer questions in a clear way?"
The paper reports that executives from firms in countries that are "linguistically more distant from English," such as Japan and China, tend to have the hardest time communicating effectively. Also, all industries are not equal in their use of complicated speech. The financial industry has the highest level of linguistic complexity, followed by the telecommunications industry.
In studying conference call transcripts, Yu says the team encountered plenty of bad calls, and it was "mind-boggling" how poorly some CEOs and CFOs communicated.
Take the CFO of one of the largest retail banking groups in Europe, who was asked about a slide in the presentation. He answer included "… over the year we would have wanted our target is still have 275 million euro synergies and to do these synergies we have people leave the firm we change the premises we discontinue using some software and so on."
Although actually sharing good news about its financial standing, the market did not react as positively as it should have, Yu observes. While noting other issues may have contributed as well, "The answer the CFO provided had no substance, and the language itself was almost impossible to understand. If the answer is formed in such a way that the capital markets can't process it, investors will assume the worst. It looks like the company is trying to hide bad news."
Cleaning Up The Message
Some managers may be tempted to simply hire a translator to help smooth out language issues during calls, but translators have not been found to help much, Yu says.
"Hiring a translator has little value. We have a sample of firms that do hire translators, and the things that get lost in translation are actually greater. What is important is having someone who can translate but who also understands the business like you, and that's not easy to find."
It's crucial for executives to prepare long and hard for the Q&A period, anticipating questions investors will ask and crafting clear responses. They should also try to keep the conversation on target, rather than letting discussions drift into areas they aren't prepared to discuss.
"Try to find ways to have a clear and more focused discussion instead of getting distracted by discussions you don't want to get into," Yu advises. "That's where language barriers come out the most, when you're flustered or don't have a clue how to respond. Sometimes it's OK to say 'I don't know' and leave it at that, rather than blather on with obscure sentences that people can't understand."
“Sometimes it's OK to say 'I don't know' and leave it at that”
At the same time, she doesn't want to give executives the impression that they should shy away from in-depth discussions in order to be ultra careful. "I would hate for managers to get spooked away. Transparency still matters, and despite language barriers, you should try your best to get the message out there in a clear and transparent way."
If the CEO has trouble providing a solid answer on the spot, Yu says it's OK to delegate to another official who has a good handle on the business —anyone who can get the corporate message across in a way that investors can grasp.
"It's helpful to have a strong management group that can guide you. A lot of these non-US firms are finding that their operations are becoming more global, but their communication activities are not necessarily getting more global.
"We do have to think about language barriers and what kind of consequences they have," Yu continues. "It's not enough to deliver [good financial] performance. You have to explain the performance."
Yu is now in the preliminary stages of expanding the study to take a look at managers'/executives' communication style in different parts of the world to determine if there are cultural differences both in the way firms communicate bad news and in the way news is received.
With today's technological advances, real-time interactions between executives and investors are likely to increase, Yu says, so it's important for executives to keep in mind that they have a lot more to gain from communicating clearly—and also a lot more to lose when their message gets lost in translation.
"With all the twittering and real-time activities that are increasingly going on, it's important to be able to cater to investors' appetite for information. Investors are no longer happy being fed with only the information that managers decide to give them. There are high expectations for more qualitative information," she says. "There is a tremendous amount of pressure, but if you are a good communicator, you can look at it as a big opportunity.