2.4 Qualitative Factors
Even with this additional information, as just described, the enterprise value can frequently deviate distinctively from the actual market value. Qualitative factors evidently also play a role. The University of St. Gallen has summarized this in a study as follows:
- Quality and interaction of the management
- Comprehensibility of the strategy
- Quality of the corporate communications and Investor Relations
- Public reputation of the company
- Corporate governance
A lot of investors include these factors in their analysis and assess- ment. This is because the reliability of the financial projections and also the reliability of the underlying company data are sometimes massively influenced by these qualitative features. The estimation risk falls and the reliability of the forecast increases when there is credible, trustworthy management, the company enjoys a good reputation, the corporate governance is exemplary, the reporting is transparent and of a high quality, and there is a clear, coherent corporate strategy.
Quality Means Not Only What but Also How
As far as the quality of the corporate communications and IR is concerned, it is precisely not only the substance that matters but also how and when the information is presented. Studies show that the priority given to information, for example how prominently pro forma figures are presented, or the adjectives that are used to de- scribe the financial figures have an influence on the valuation.
How can non-financial, qualitative factors be effectively employed?
- Where possible, underpin statements and arguments by verifiable facts and figures: “Where is the evidence?”
- Use a communication style and tone to place facts and figures in the right context: Honest, clear messages create trust. This is important not only for personal but also for written communication
- Investors are people! Good personal relationships help in the ongoing communication and most especially in sensitive situations
- A media presence can help small companies to gain more attention among investors
- Demonstrate the relevance of the business model
- A great deal of what is involved in Investor Relations is serious and dry, but there are times when it can be original
In this respect, the letters to shareholders from Warren Buffet are recommended as a source of inspiration. They contain stylistic idiosyn- crasies of all kinds, such as this one that he used to describe the mort- gage business: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”