Communicating with Intrinsic Investors  679 each quarter, the leading research and advisory firm Gartner discloses a nar- row but highly relevant set of metrics for each of its three business units. As Gartner’s CFO explains, the firm publishes only the most important of the metrics that management uses to examine the performance of the business. Similarly, companies in some industries, such as steel and airlines, regularly disclose volumes and average prices, as well as the use and cost of energy, which are the key drivers of value in these sectors. Home improvement re- tailer Lowe’s provides helpful information about key value drivers such as the number of transactions and the average ticket size, as shown in Exhibit 34.4. Choosing transparency can be difficult. Some companies that have pre- ferred greater discretion hesitate to increase openness. These are often strong performers with good track records. Over many years, that performance re- cord (frequently in the form of steady earnings increases) has provided lever- age to rebuff investors’ demands for more transparency. But it is the nature of every business’s life cycle that growth will slow even after years of success as the business matures or markets become more competitive. At that juncture, the company needs new strategies to keep creating value for shareholders, and these changes should be communicated to investors; doing so ensures that the market share price continues to reflect the company’s true worth. In one situation, a large company didn’t disclose that most of its prof- its came from aging, low-growth products with a large installed base, while its newer high-growth products were far less profitable due to competition and new technologies. In another case, a consumer products company kept its earnings growing by selectively reducing investments in advertising and promotion. Because both companies had long histories of success, any sudden disclosure of these changes would surely cause their stock prices to decline sharply; academic research suggests that when companies in these circum- stances fall, they fall hard.7 EXHIBIT 34.4  Lowe’s: Operating Statistics and ROIC 2016 2017 2018 Comparable sales increase, % 4.2 4.0 2.4 Customer transactions, millions 945 953 941 Average ticket, $ 68.83 72.00 75.79 Number of stores 2,129 2,152 2,015 Sales floor square feet, millions 213 215 209 Average store size, selling square feet, thousands 100 100 104 Return on invested capital, % 15.8 18.8 12.8 Source: Company SEC filings. 7 D. J. Skinner and R. G. Sloan, “Earnings Surprises, Growth Expectations, and Stock Returns, or Don’t Let an Earnings Torpedo Sink Your Portfolio,” Review of Accounting Studies 7 (2002): 289–312. See also J. N. Myers, L. A. Myers, and D. J. Skinner, “Earnings Momentum and Earnings Management” (work- ing paper, August 2006), available at http://ssrn.com/abstract=741244. 680  Investor Communications Executives at such companies need to decide whether their current pre- dicament will be short-lived or if the days of strong growth and high returns are, in fact, over. If the latter, the executives clearly need a quick transition plan. If the former, they need to assess whether they should practice greater transparency and accept the likely price volatility it will cause until they’ve returned to their growth path. Legislation and accounting rules have been requiring ever-greater trans- parency. Even so, results that are transparent enough to meet today’s regula- tory requirements may fail to meet the standard of transparency that satisfies intrinsic investors. Companies within an industry typically start to disclose information more useful to such investors in response to the investors’ explicit demands or the leadership of one or more industry pioneers. For example, the petroleum industry has for many years published detailed fact books that describe oil production and reserves by geography—key parameters that in- vestors want to know when valuing petroleum companies. In pharmaceuti- cals, companies provide detailed information about their product pipelines at every stage of research and development. In these industries, any company that failed to disclose what others disclose would likely lose the market’s trust. In most industries, however, the level of disclosure and transparency has been less standardized, so management must choose how transparent it wants to be. In these cases, managers are too often cowed by fears that a detailed dis- cussion of the issues and opportunities facing their company will reveal sensi- tive information to competitors or make it harder to put the best gloss on their results. One large global electronics company, for example, reports gross mar- gins for both its product and services businesses. But nowhere does it provide operating margins for the different units—information that is crucial to help- ing investors value businesses with differing levels of expenditure on R&D and selling, general, and administrative costs. In another case, a U.S. media conglomerate provides detailed information by business unit on the income statement but leaves it to investors to sort out the balance sheet by business unit. Failing to report such information often gives investors the impression that management is trying to obscure some underlying performance issues. Listening to Investors The final element of effective investor communications is listening to inves- tors. Listening to gain competitive intelligence is, of course, a no-lose proposi- tion. But to what extent should executives be influenced by investors’ opinions about what strategies the company should pursue (expressed either as opin- ions or by the nature of the questions the investors ask), particularly when those opinions run counter to what the senior executives believe is the best strategy for creating long-term value?