IR Monitor – 18th January 2023

This week’s news

Pessimism prevails amongst Wall Street analysts as the full year reporting season gets underway

As US corporations prepare to release their full year 2022 results, Wall Street’s prognosticators predict profits to fall for the first time since the start of the pandemic, reports the New York Times. The S&P 500’s constituents including Apple, Meta and Microsoft are expected to deliver an aggregate decline of 4 percent in Q4 2022 profits. Earnings are also expected to continue falling in H1 2023 before rebounding to finish up 4 percent in FY 2023. What is striking is that these estimates are the lowest in recent history; even worse than at the beginning of 2009. That said, some investors still suspect management teams could “low-ball” their earnings and play down business prospects, in order to surprise on the upside next year. Yet it looks like this year, things are genuinely different: investors are being advised to take caution, and to watch out for the effects of high inflation and interest rates, the likelihood of a recession, layoffs, and the consequences of new taxes on corporate income.

Commissioners object to the SEC ruling against McDonald’s

Two SEC commissioners recently released a statement flagging their reluctance  to support the charges brought by the SEC against McDonald’s for failing to disclose sufficient information over the firing of its former CEO Stephen Easterbrook. The SEC’s order found that McDonald’s had violated certain sections of the Securities Exchange Act by treating Mr Easterbrook’s termination as “without cause”, after finding that Mr. Easterbrook violated the company’s Standards of Business Conduct. The Order found that such discretion allowed Mr. Easterbrook’s stock options and performance-based restricted stock units to continue to vest, which would not have occurred if the termination were “with cause.” In a turn of events, Commissioners Pierce and Uyeda have now published objections against the SEC’s ruling, arguing that disclosure rules do not demand of companies to expressly disclose every possible reason for an executive’s termination. Requiring companies to publish a “hiring and firing discussion and analysis” is deemed to be beyond the rule’s scope and illustrative of an unreasonable regulatory approach. As a result, the two Commissioners are calling on the SEC to publicly articulate its views through formal guidance or rulemaking, so that companies understand the requirements before the Commission starts enforcing them.

Four reasons why CFOs must improve their communication this year

Managing different stakeholders’ expectations is proving a difficult exercise for today’s CFOs. With COVID raising questions around short-term stability and long-term business resilience, many CFOs were left having to steady the ship with all eyes on them. Beyond this, their input is being sought more and more in areas beyond financials, away from what a typical audience of investors, regulators and suppliers would ask about. With greater visibility comes a greater need for effective communication, but adapting to this new – and often highly public – role can be tricky. A recent survey revealed that 40% of nonfinancial executives and managers believe their company’s CFO lacks communication expertise. Forbes has set out four areas where communication skills are more important than ever for CFOs. Whilst board engagement might sound like a traditional CFO responsibility, better management of employee expectations, hurdles posed by hybrid work and ESG reporting requirements are expected to sit high on the new list of CFO objectives. For many it’s do or die, and failing to adapt to this changing landscape might put a number of finance execs at risk of losing their role one day, the piece concludes.

Disney must stop obsessing over ESG issues if it is to halt its decline

Disney is in desperate need of a little magic these days. The entertainment corporation’s stock has been tumbling and the company faces fierce backlash over its clumsy efforts to champion minority rights. Now its latest battle is a spat with shareholder Nelson Peltz, who is demanding a board seat. Whilst Disney has a history of attempting to advocate for social and political causes, critics argue that the company may have made things worse lately, ultimately losing out to cancel culture. The Telegraph argues that businesses obsessed with ESG priorities may leave themselves wide open to accusations from disgruntled shareholders who’d rather have them focus on the bare necessities. In Disney’s case, a disappointing operating performance and deteriorating cash flows have led Nelson Peltz to accuse the board of a failure in leadership and over-the-top compensation practices. They say you can wish upon a star, but it may take more than that for Disney to find a way to balance its social conscience with financial targets if it wants to secure a happily ever after.

Wrestling control: the case of WWE

Power struggles are unpleasant at the best of times, but what happens when the CEO of a company and the controlling shareholder are one and the same? The unsurprising answer: things can get messy. Vince McMahon, the majority owner and former chief executive of World Wrestling Entertainment Inc, retired “voluntarily” last year amid a misconduct probe. But just last week, McMahon re-entered the ring, replacing his daughter, electing himself and two former co-presidents to the board. The move follows months of back and forth with the board, who previously rejected his request to come back as executive chairman. Unphased, McMahon managed to have three board members fired, reappoint himself, and is now considering a possible sale of the business.

And finally… fully deluded EPS

And finally, for the last three years, Terry Smith – manager of the £22.9bn Fundmsith Equity fund – has published an annual shareholder letter taking stock of the last 12 months. El Tel is always on the money. While this year’s focus appears to be on defending the fund’s technology holding, the IR Monitor team was tickled by Fundsmith’s adoption of a new denomination for earnings that are adjusted to take out the cost of share-based compensation and other real and persistent expenses. Goodbye ‘fully diluted earnings per share’, hello ‘fully deluded earnings per share’!

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