To succeed, US issuers must communicate with investors
Updated: 2012-06-15 08:39
By Robert Schechter (China Daily)
A characteristic of America during the last century was the availability of many thousands of newspapers, business magazines and trade journals. Because of this culture of information, entrepreneurs have a basic foundation of knowledge about business practices, standards and expectations.
Many Chinese CEOs hadn't been exposed to all of this before taking their companies public in the US. Therefore they weren't similarly prepared for the demands of US investors or regulators, and they didn't always hire lawyers and auditors or bring on directors familiar with best practices.
The negative perceptions of Chinese companies' US-listed stocks were in part caused by intentional fraud on the part of a few. Lack of transparency and inadequate reporting at other companies reinforced these negative sentiments. In the US, coverage of bad news is often disproportionate to its impact on the community, so the emphasis on comparatively few problems tainted the perception of all Chinese stocks.
This was compounded by the causative factor of speculative greed. Americans aware that the first investors in China who made lots of money didn't want to be left behind and jumped in ignoring what many books and tutorials recommend: due diligence, research and diversification. When the positive momentum stopped, US media and regulators reacted to investors' cries. So what now? Go private, go dark or continue to take advantage of US capital markets?
Some Chinese companies can repurchase their US shares and go private. Others could "go dark" - failing to file SEC-required documents and ceasing to be public. While short-term calculations may be enticing, the long-term advantages of maintaining a public listing or going public remain.
The benefits of "going public" include facilitating capital development and providing liquidity for original stockholders. Listing in the United States makes a company part of an exclusive club. Regulatory requirements and scrutiny by US investors test public companies. Passing these reviews creates a positive perception.
I have worked with CEOs and CFOs and found that a positive unintended consequence of going public was seeing their business from the point of view of analysts and investors knowledgeable about their industry. Chinese management will find two-way conversation with these groups especially useful. So how should Chinese companies gain these advantages? The short answer is to meet investor expectations for stringent corporate-governance principles, transparency and accuracy in reporting results and communicating business plans.
Careful audits and clear SEC filings are just part of the communication process.
Investors focus on local companies because they can read about goings-on in their newspaper. To enjoy the benefits of being public in the US, Chinese companies must make themselves seem familiar. Companies operating in the US often emphasize a communications tactic overlooked by Chinese companies: public relations. Audiences perceive newspaper and television reports as more credible than ads. Investors are drawn to stocks of companies whose products are featured in the press. For small and midsize companies, news articles may have an impact similar to a report recommending the stock. This may increase revenues.
A challenge for all public companies is helping investors create their own expectations for future growth. The tactics used by many companies vary. The least helpful are statements describing the Chinese market as large and growing as proof that the company's revenues will climb. Our recommended course is for a company to provide insight into its marketing plans, assumptions about competitive advantages and weaknesses, industry trends and macroeconomic influences.
The author is managing director of Dragon Gate Investment Partners LLC, a New York firm that advises on investor relations for Chinese companies.
(China Daily 06/15/2012 page7)