The free-fall of China’s Sino-Forest (TRE: CO) share price this month provides valuable insight for any corporation which has, or is considering, listing on an international Exchange. While the Sino-Forest case is still evolving, here are the facts.
In just a few days, close to US$5 billion of value was wiped from Sino-Forest Corporation, the Toronto-listed Chinese forestry enterprise. The share price plummeted from C$18.21 (1 June, 2011) to just C$2.60 (29 June, 2011), a fall of more than 85%.
Muddy Waters for Sino-Forest
The reason for the fall in share price was a confidence crash caused by Muddy Waters Research, a specialist analyst of Chinese companies. On June 2, 2011, the research firm published a 39-page report on the company, which cited the stock as a “strong sell”.
The Financial Times headline from 21 June, 2011 says it all – “Sino Forest is hamstrung by its secrecy”.
Among many controversial claims, the report claimed Sino-Forest’s “capital raising is a multi-billion dollar ponzi scheme, accompanied by substantial theft” and that the company “massively exaggerates its assets. We present smoking gun evidence that (Sino-Forest) overstated its Yunnan timber investments by approximately $900 million”. Muddy Waters also made no secret of the fact that it held a short position on Sino-Forest shares.
Sino’s communications did not help, they hindered
So far, so bad. But what made the impact of the report so much greater was the response from Sino-Forest. Aside from taking a day to issue their first statement, the conference call that was eventually held by the company’s management left many questions. Participants did not feel the management dealt with the allegations robustly, leaving doubt and lingering concerns. Despite being under a global assault and seeing value erode, the company refused to identify its “Authorised Intermediaries”: those who purchase Sino’s timber product. The Financial Times headline from 21 June, 2011 says it all – “Sino Forest is hamstrung by its secrecy”.
Three reasons why overseas-listed firms should care about Sino-Forest?
1. One company’s problem is every company’s problem. Since the fall of Sino-Forest, overall Chinese ADR values have been off by as much as 30 per cent. Confidence has been so badly damaged in the company that this has infected the entire market for internationally-listed Chinese companies. Commentators are now looking at Chinese equity more negatively, with an apparent mindset that if it can happen at Sino-Forest, it could happen anywhere. Consider this quote from 22 June from a commentator to the UK’s Daily Telegraph website directly under a Sino-Forest article: “Is this Sino-Fraud a one-off? No I don’t think so. Apparently the Chinese have been littering the S&P with IPO’s in companies like this that then mysteriously disappear with all the cash AFTER the float. Amazing?!”
2. Home rules and conventions don’t (always) apply overseas. Especially in communications. If domestic investors have come to accept and understand a degree of corporate complexity, and even a traditional lack of access to certain information, this does not mean international investors will be so tolerant. A simple rule applies to global investors – if I don’t understand your business, I will sell your stock. Especially in a controversy. Transparency and accessibility are vital when communicating – both in good times and bad.
3. International listing? Prepare for an international communications environment. It must also have considered the reputational risks it faces and mitigate/plan for them well in advance. While Sino-Forest could not have anticipated “exactly” the Muddy Waters report, it could have reasonably scenario-planned a hostile report and how it would respond. It could have gone one step further and asked an in-house researcher to play “devil’s advocate” and identify all the vulnerabilities the firm might face if subjected to hostile scrutiny.
So could Sino-Forest have handled this better?
Yes, by managing communications more deftly and realizing that in today’s marketplace, companies are lucky to have a couple of hours to figure out their response to a reputational risk event. I know it is always easy for a third-party to point at a case after the facts. But Sino-Forest’s initial response fuelled the controversy surrounding their case. Rather than waiting to issue a response, and then offering lack-luster, often defensive statements, there is another approach they could have taken. One that any CEO concerned about his or her company’s reputation and share price may wish to consider.
Another communications approach: understand, research, plan
1. Understand the speed and structure of the new environment. The only way companies stand a chance of retaining the initiative and defending their reputations in a controversy, is to think and plan ahead, especially in a digital world. I reference digital media specifically as this is, in 99% of the cases, where news or rumours first appear and where increasingly trusted commentary appears. The Financial Times’ FT Tilt, Street Insider, Tech Crunch and Motley Fool are all real-time, respected and followed sources of financial news. These are just a few major sites: there are hundreds of thousands of other commentators whose opinions are respected. Make no mistake, bloggers from the other side of the world can influence a share price just as much as mainstream media, sometimes even more so. The difference is speed: an idea, a keyboard and a posting is global in seconds.
2. Research your vulnerabilities. Undertake comprehensive vulnerability audits from a news and information perspective. Who has written previously? Which blogs are most influential? Data-mine conversations, news and search streams to ensure potential risk factors are understood and identified. Many companies also create real-time social media dashboards that quickly identify and track any data or traffic “spikes” allowing them to obtain immediate context, analysis and response recommendations. The value of this? Companies can often identify an issue early, ensuring they have the answer to the question before the phone rings wherever possible
3. Plan ahead. When “it” happens, it is critical that the company quickly implements pre-prepared communications plans that put the right spokespeople in the right place at the right time to make decisions with the right processes to mitigate/disrupt the kinds of crises that might arise. This pre-work goes right to message development around potential threats prior to when they occur.
Aside from contingency planning, the best advice right now to any CEO studying the Sino-Forest case, and how to avoid it happening to them, is to consider being even more transparent about what your company does. It is no longer viable for a corporation to just say “you can trust us” because we have a top international audit team and a global bank who do all our work, therefore we are a good company.
Trust starts from personal relationships, so it is important to go out and build these relationships. Profile your management in the international media. Invite stakeholders from the US and Europe to come and visit operations in the domestic market. Hold regular investor calls. Invest in a fully-functional investor relations programme, backed by a multi-lingual website.
Five billion reasons to learn from Sino-Forest
Let’s look back at Sino-Forest. What really happened? Simple: one man managed to bring down a US$6 billion dollar company to less than US$1bn in two weeks. This is probably the best ever case study management will ever have to study Asian companies operating in the US or European markets and losing it all. Would Sino-Forest’s share price have been so badly battered if they had had sophisticated communications planned and in place? I would hypothesise that the company would have weathered the storm much better, and would have appeared much more transparent and accessible.
Something nervous investors badly need at a time of crisis.
(Disclosure: Sino-Forest had a relationship with Edelman Hong Kong prior to the current controversy from June, 2010 to September, 2010.)
By Charles Lankester, MD, Corporate Practice, Edelman Asia-Pacific