How To Deliver Bad News To Shareholders

An investor relations officer (IRO) enjoys nothing more than communicating good news to shareholders. However, the nature of the markets means that there will be a time when they have to impart less positive information. Some might try to spin the news into what appears to be a positive narrative, but investors are wise to this tactic and, when the truth comes out, it can lead to a breakdown in the bond of trust between issuer and investor. 

This is why an IRO needs to know how to deliver bad news to shareholders. It forms part of a commitment to transparency that is essential for effective investor relations. Shareholders need to know that the information targeted at them is accurate in order to help them understand the performance of their investment. 

The skill that IROs must master is how to deliver the news clearly, but in a way that reassures investors that the issuer has a road map to rectify the situation and that their investment should remain within the company. 

The importance of transparency

The European Union set out the importance of full disclosure on the markets with its Transparency Directive. It states that: “transparency of publicly traded companies’ activities is essential for the proper functioning of capital markets. Investors need reliable and timely information about the business performance and assets of the companies they invest in.”

Transparency between issuer and investor has always been important in order for market participants to be able to base decisions on solid, accurate data. And, with the rise in significance of non-financial factors, such as ESG, it is essential that companies report accurately their efforts regarding their environmental impact, social issues and corporate governance. 

As PwC reports: “This pressure for greater transparency comes together in the search to define common, objective and enforceable standards for non-financial information, a process which is still at an early stage.”

Investors need to be able to trust the information coming from the issuer and not be bombarded with spun messaging that amounts to greenwashing or other attempts to obfuscate the true nature of their non-financial performance.

Types of bad news

There are many types of bad news that can befall an issuer. They could include:

• disappointing financials
• supply chain issues
• delayed product launches
• cybersecurity issues
• suboptimal conditions for your industry

How to deliver bad news to investors

Whether it’s at a virtual press conference or at your results announcement, you need a strategy in place to deliver this news to shareholders. 

Time your delivery

There are some items of bad news that issuers must release as soon as possible. This includes inside information, defined in the Market Abuse Regulation (MAR) as information of precise nature “which, if it were made public, would be likely to have a significant effect on the prices of financial instruments” and which “a reasonable investor would be likely to use as part of the basis of his or her investment decisions.”

Unless you meet the three criteria for delaying the disclosure of inside information, you must issue it straight away. 

If the bad news does not constitute inside information, you can time your delivery to ensure that you mitigate negative effects. However, it should also be noted that delaying bad news by too long can lead to it leaking from another source first, which reduces the issuer’s opportunity to place the news into context and communicate a recovery plan. This can also damage trust in the organisation from investors and analysts. 

Balance this need for haste with the necessity to ensure that you have enough information to hand about the reasons for the issue and the company’s response before you deliver your message. 

Craft the message

Honesty is essential when delivering bad news to stakeholders, but you should also be tactful with how you communicate. Although you want to avoid spinning the information into a false positive, you also do not want to surprise investors with bad news and provide only a gloomy picture of the outlook. 

Deliver the message clearly and without ambiguity; tell investors what has gone wrong and what it means for the business. Use direct language, getting to the point as soon as possible and not using jargon that could confuse shareholders in a way that makes it seem like you are trying to hide something. 

Consider how you will present the information and work on clearly explaining the reasons for the bad news. Help investors understand the circumstances behind the disappointment, give it some context and ensure you have the evidence to back up your reasoning. 

You should be able to deliver this information in a relatable and easily digestible manner so that investors understand what has happened and maintain their trust in the issuer to regain momentum in the future. 

Deliver the message

Consider how you will present the message. This means thinking about your audience. For example, you might want to tailor your messaging differently for retail investors and for institutional investors. 

You should also choose the medium that will best allow you to talk to your key investors and allow a dialogue to take place during which investors can voice their concerns and ask questions, and you can reply and reassure them. 

Organising a webinar with key investors to relay the news means that you can deliver the news to as many shareholders as possible at the same time, without having to delay disclosure by hiring a venue or inviting guests to travel to a specific location. Instead, they don’t have to clear a whole day in their calendar to attend, just the duration of the webinar. 

This provides the best potential reach from a single event and offers the opportunity for a question-and-answer session that will help build that trust and transparency with your investors. 

You can also send out a press release and arrange physical meetings too, but hosting an online event to share the news helps you share the information in a timely fashion and in a manner in which you can control the narrative. 

Provide an action plan

As well as imparting the information and the reasons behind the bad news, you should also prove to investors that the organisation has a robust plan to overcome the challenge. In your communication, tell investors the next steps and how the situation will be rectified, giving as much detail as possible to reassure them. 

At this point, you can invite them to collaborate on ideas to find solutions. Being able to foster such a relationship with investors helps them feel more of an affinity with the company and that their opinion is valued. This further encourages transparency and trust, which reduces the chances of activism and helps issuers retain investors, even in turbulent times. 

You should also make it part of your crisis communication plan to provide regular updates on your recovery efforts. This ensures that investors can monitor the progress that you are making and shows them that the organisation is working hard in their interests. 

Examples of communication methods for presenting bad news

Here are three methods of delivering bad news that issuers can use to help mitigate some of the negative effects of reporting disappointing information. 

Legal considerations when communicating bad news to shareholders

When delivering bad news to shareholders, there are several critical legal considerations that companies must bear in mind to ensure compliance with existing laws and regulations. Paramount among these is the issue of disclosure requirements. Various legislations often mandate companies to disclose certain pertinent information to their shareholders. How much and what type of information should be disclosed is determined by the concept of ‘materiality’. If the bad news significantly impacts the company’s operations, finances or overall shareholder value, it is considered ‘material’ and thus must be disclosed.

In addition to materiality, the timing of the disclosure is equally critical. Certain laws and regulations, such as the Market Abuse Regulation (MAR) in the EU, stipulate when specific information, including inside information, must be made available to shareholders. Delaying or prematurely disclosing such information can lead to legal complications. Misrepresentation or provision of incorrect information can lead to legal repercussions, damage trust and potentially erode investor confidence.

Finally, when communicating unfavourable news, senior management must bear in mind their fiduciary duties to shareholders. These duties oblige them to act in the best interest of the shareholders, ensuring that all disclosures are made accurately, timely and transparently. Balancing these legal considerations when delivering bad news is vital in maintaining the company’s integrity, investor trust and legal compliance.