UNDICTATED: Note to CEOs from Buffett, Cialdini: Trumpet the bad news. It’s the smart call.
My UNDICTATED column for Business Day this week has a look at something very close to the heart. In the mid 1990s, I ran Group Communications at ABSA. Among the responsibilities was media relations, an especially tricky task. The relationship between the bank and reporters was at rock bottom. It wasn't exactly my forte' either. Journalists don't make the best PR people. We are not exactly trained diplomats. As for ABSA, under founding CEO Piet Badenhorst the newly created group (merged from four different banks) had adopted a combative approach towards reporters. Trust levels were about as low as they could possibly get and the share price showed it, bottoming out at R6.70. Two and a half years later I was able to climb back into my own canoe with a clear conscience. The share options cashed in around R25 provided the capital to fund what eventually became Moneyweb. This turnaround required many levers being pulled differently, but within an umbrella theme of open and honest communication, endorsed and driven by the new CEO Dr Danie Cronje. This was done both internally and externally. We stopped hiding warts and when we were wrong, promptly admitted it. Given what I experienced at ABSA, it amazes me how most JSE-listed groups persist in putting a gloss on every announcement. In communications, brutal honesty really is the best policy. And official engagement usually works best when you start with the bad news. – AH
By Alec Hogg*
Closest I came to joining South Africa's emigrants was a dozen years ago.
It happened during a maiden visit to Western Australia. I was there to establish a beachhead and assess a for-sale lookalike business. Timing was unusual, co-inciding, as it did, with the Mother of all Rand Crises.
In the months after 9/11, every Emerging Market currency was fragile, each an accident waiting to happen. Zimbabwean "land reform" sparked the Rand's collapse. In a few weeks the currency's free-fall saw its value dropping from R8 to almost R14 to the US Dollar.
With such chaos at home, safe, clean, boring Perth was appealing. It turned a normal business trip into a "look see".
My mind was almost made up. Then I went for a stroll along the Swan River with a pal from Cape Town. He'd stopped over for a pre-arranged visit en route to Sydney. A couple hours later, my life was back on its original trajectory.
Look at it logically, he urged. Strip away the emotion. It will then become obvious, he added, that South Africa is actually a "screaming buy". A place to move to. Not away from.
I'll always be indebted to Piet Viljoen for that advice.
It wasn't hot air, either. A year later Viljoen resigned his top job at Investec to start Re:CM. He advised his new clients to bet the farm on SA Inc, buying local shares while shell-shocked competitors were still shovelling funds offshore.
His bold approach established Re:CM's reputation for finding value where others saw problems. Quickly transforming a hopeful start-up into a respected money manager.
Viljoen tells me Charlie Munger, the quieter half of Berkshire Hathaway's famous partnership, has influenced much of his thinking.
The US conglomerate's chairman Warren Buffett might be the rock star of the investment world. But lifelong business partner Munger, an acerbic, media-shy "book with ears" has, for Viljoen, been more of a role model.
Munger doesn't pass compliments easily. But at Berkshire AGM in April, he often recommends a book called Influence to the 30 000 attending pilgrims.
Written by Robert Cialdini, Influence provides a unique insight into psychology, explaining how human beings are hard-wired to react predictably to what Cialdini terms Six Universal Principles. It has sold over 2 million copies.
Last month Re:CM held its 10th annual conference. To celebrate, Viljoen brought Cialdini to SA for the keynote. It wasn't cheap. After the speaker fee, airfares and extras, a sponsor wouldn't get much change from R500 000.
But if anyone is worth that kind of money for an hour's talk, it's Cialdini. His distilled wisdom was in the league of that imparted along the banks of the Swan River.
It would be a disservice to try summarise Cialdini's message. Best to buy the book. One part of the contribution that bears repeating here, though, was his reference to Buffett and Munger as "masters of the influence process". Although best known for their investment prowess, Cialdini says these gents read psychology books in their spare time. It has shaped their thinking. Significantly.
Buffett has long been a believer in trumpeting disappointments and playing down successes. This, Cialdini says, it's smart psychology "because the greatest moment of persuasive power comes immediately after you admit a weakness."
Buffett's last nine annual letters to shareholders prove the point. On the first page of each one, the Berkshire chairman describes something that went wrong. Then uses it as a bridge into his strongest argument.
Clearly, Influence isn't exactly prescribed reading in local executive suites.
Here, companies pull out all stops to put a positive spin on profit statements, forcing people like me to sift through mountains of sunshine verbiage.
This week's June yearend results from Cashbuild were a good example.
Reading the company's official announcement, shareholders would only have been a little disappointed. Headline earnings were down 17% and the full year's dividend payment cut 14%. No cause for celebration. But easily explained away. Times are tough.
Take a look behind the façade and a very different picture emerges.
Breaking the financials into half years reveals a 42% earnings collapse from 651c a share in the first six months to 377c in the second half.
Sparking serious questions. Like is the new CEO is up to the job? Is Massmart's Builder's Warehouse eating Cashbuild's lunch? If all is well, why try hide the reverse, hoping nobody notices?
Similar questions arise from Aveng's June yearend announcement.
Headlines shouted revenue 27% higher and net operating profit up 7%. Only a hint of concern with the mention of earnings down 3%. You need to read the fine print to surprisingly discover a passed dividend.
But revisit the interims and there's clearly more to be worried about here than even at Cashbuild. After the first months, earnings were 48% higher. For the full year they're down 3%? Eina.
Result – lots of fresh questions. Especially around the sudden departure of CEO Roger Jardine a couple weeks before the results were announced.
Jardine's story was he wanted to leave soon after arriving five years ago. He was that shocked at the now infamous bid rigging. But felt honour bound to see the Competition Commission inquiry through to its conclusion. With that done, he moved on.
But now different questions arise. Was Jardine actually pushed? CEOs have been fired for a lot less than Aveng's second half reverse. Or if he is telling the truth, is Aveng employing the old trick of writing off everything that moves after a CEO leaves the building?
Investors might take time to work things out. But they do. Best for companies to help them get there before they discover it. Trumpet the bad news. It's the smart call.
- Alec Hogg is a financial writer and broadcaster. He founded Moneyweb and now runs Biznewz.biz. The UNDICTATED column appears on Mondays in Business Day newspaper.
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