As the saying goes, markets hate uncertainty.
Since the Global Financial Crisis, global equity markets have experienced significant volatility.
Navigating a listed company through these turbulent times can be extremely difficult for management teams. It can be even more difficult in the small cap resources sector where value is not driven by earnings and yield, but by exploration success and general market sentiment.
In an upbeat market you are typically rewarded for delivering on the strategy and timeline set out to your shareholders. In a downbeat market, however, these fundamentals aren’t always rewarded. Investors, analysts and the media can also pile further pressure on an underperforming stock, while social media is becoming more influential and can amplify immediate criticism of a company.
During these difficult times, management teams of junior companies can be tempted to alter their strategies to appease these stakeholders with quick wins – often at the expense of building longer term shareholder value.
Larry Fink, CEO and Chairman of BlackRock, the world’s largest money-management firm with more than $6 trillion in assets under management, highlights this in his 2018 annual address.
“Fuelled in part by social media, public pressures on corporations builds faster and reaches further than ever before. In addition to these pressures, companies must navigate the complexities of a late-cycle financial environment – including increased volatility – which can create incentives to maximize short-term returns at the expense of long-term growth.”
Fink goes on to confirm that stability and a well-thought out strategic plan plays an integral role in assisting management through the cyclical turns of the business environment:
“Every company needs a framework to navigate this difficult landscape, and it must begin with a clear embodiment of your company’s purpose in your business model and corporate strategy. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
There are many factors that management cannot control. The market understands that. Leaders should focus on the things they can control, such as setting and delivering a clear corporate strategy. They should also focus on putting in place a business model that helps ensure it is more resilient to short term market fluctuations.
Knee jerk reactions and ill-discipline can have a far worse affect by diminishing the trust and reputation of management teams with their investors. In addition, by working to a short-term agenda, you’re likely to attract the wrong investors to your register.
The following key points can help when navigating a business through these turbulent times.
- Stick to the strategy that was agreed between management and the Board – this was a well-thought out plan that will provide the best opportunity to grow and deliver value
- Don’t let short-term incentives cloud the long-term deliverables – continued pressure from various groups due to an underperforming share price should not cloud the focus of long-term growth
- Effective communication – In difficult times and increased volatility, constant communication with your shareholders, prospective shareholders, analysts and the media should be a priority, focused on what you are doing to mitigate risk
- Education is required on all fronts – education to these groups is also always required: education on the company, the commodities that underpin different projects, and the wider macro environment – prioritising investors who don’t understand the wider issues at play
Businesses that stick to their longer-term game plan and keep the market well informed are more likely to attract the right investors to their registers. They in turn are much more likely to remain supportive of management teams through the cycle.