Facing Down A Short Selling Attack - Part One
31 March 2016
Responsible short selling, speculating on a drop in share price, has long been part of a well-functioning market. However recent years have seen growth in aggressive short selling; whereby manufactured reputational concerns are used as an opportunity to profit by those short the company. At the most sinister end, this temptation to profit can even lead to claims of paid-for 'hit jobs' from bogus research houses controlled by short sellers seeking to make an impact.
With years of experience in reacting successfully to short attacks and helping boards to protect shareholder value, we believe that the best way for Boards to protect their firm is to ensure that short sellers do not see them as an easy target.
The first place to start is to make your Board and your Reputation Management System central to your daily activities. Steps include:
Making your Board a lynchpin of investor confidence
Company’s need to move away from just focusing on issues of corporate governance and instead focus on leadership. If a company’s Board and its Independent Directors are visible in their leadership and seen to be engaging with the challenges of dynamic, new markets, this can make all the difference. Reactive statements of credibility are often too little too late. If investors know who you are, what you do and why you do it, short sellers’ ability to dent investor confidence is blunted.
Ensuring your reputation management system is fit for purpose
Company Board’s need to understand that the market places a monetary value on reputational resilience. Those who demonstrate that they have the ability to withstand a crisis will hold their value under scrutiny. Putting the right systems in place to ensure that you can predict, detect and deal with reputational problems before your detractors exploit them is the best way to keep critics focused elsewhere. The ideal Reputation Management System is different for each company, but universally allows you to lead the conversation, to deal with problems on your terms and to make a clear statement you are not an easy target.
Allowing the market to understand you
Corporate disclosure has become increasingly opaque, particularly for cross-border entities. In new sectors and emerging markets the correct way to account for revenue is often up for debate. Short sellers seize on the opaque to infer something is being hidden. Therefore Boards and investor relations teams need to be acutely aware of the need for a clear narrative. Where business models are necessarily complex, this is fine. But prepare for the eventuality that this could be used against you, and if needs be, communicate proactively to the market. Investors know the risks, but they do not like surprises.
By not taking the proactive steps to defend their reputation, successful companies make themselves an easier target for a short attack. And yet aggressive short selling tactics need not be the end of the world so long as you have taken measures to build resilience into your company’s reputation.
As Paul Mumford, Senior Investment Manager at Cavendish Asset Management makes clear in our latest Reputation Resilience report; “Short selling makes it more important for companies to manage their reputation better, because an adverse reputational event can trigger a massive slump in the share price”.
To read part two of this short selling series, click here.
To read part three of this short selling series, click here.Receive our monthly newsletter