PATIENCE WHEATCROFT: The human factor - The successful manager knows that the key to sustaining good relations with the City is the careful management of expectations. Eventually, performance counts too, but investors can be remarkably tolerant so long as

by PATIENCE WHEATCROFT, business and City editor of The Times
Last Updated: 31 Aug 2010

The successful manager knows that the key to sustaining good relations with the City is the careful management of expectations. Eventually, performance counts too, but investors can be remarkably tolerant so long as they are not subjected to nasty shocks.

Disappointments shared with shareholders at an early stage are upsetting but bearable. Disappointments that are allowed to turn into disasters before investors have any idea of the problem will almost certainly spell the downfall of those responsible.

Just imagine that, a year ago, Lord Simpson of Dunkeld said that the downturn in telecommunications markets looked likely to cause a major setback to Marconi's short-term performance. He remained confident that the long-term strategy was right, but there was no escape from the pain that world recession was causing. Instead, his response to the growing fears in the City was to intimate that he could see no cause for alarm.

Only in July did he own up to the grim condition of the business, eliciting an understandably furious response and ensuring his speedy departure.

The market alone was not responsible for Marconi's difficulties; management had made some appalling errors. Yet investors want to believe in the management they have chosen to back and can be surprisingly charitable if that management tells them the market has turned nasty. The warning, however, must come early.

It is no good waiting until March to tell expectant shareholders in a retail chain that Christmas failed to arrive. Let them know in mid-December that the shoppers are staying away and they might even be inspired to rush out and do a little bit themselves to help boost takings. Tell them in January and at least they know not to expect too much when the March profit figures come. But wait until the last possible moment and the effect on the share price will be magnified.

Retailers have largely learned to avoid dropping nasty surprises on their shareholders. Although in the UK we do not yet have regular quarterly reporting, the larger retailers have now accepted the need to give trading updates, thus keeping the City well apprised of what to expect.

Some retailers have proved particularly adept at managing expectations so that a new management team may have the best possible start. Colloquially known as 'a kitchen sink job', this is simply the practice of a new management taking a deeply pessimistic view of the business in order to produce cheering results in the future. Shareholders who have already accepted that their company is in a bad way tend to be relatively sanguine when told it's even worse than they thought and eternally grateful when, a couple of years later, it is restored to health.

Archie Norman exploited the technique brilliantly at Asda. The new team at Iceland, or what is now called The Big Food Group, has embarked on a similar exercise. Bill Grimsey, the chief executive recruited from Wickes, said when he agreed to take over that he thought it would be a question of getting his hand on the tiller and redirecting the business. Once inside, however, he realised that it was 'a capsized boat. And I've got to leap into the water and sort it out.'

What shareholders would not feel indebted to someone prepared to take such dangerous steps on their behalf? That they had not realised how bad things were is a reflection on the former management, as are the hefty provisions that have been required. By putting shareholders in the picture (painted, as one analyst observed, in the blackest shade on the palette), Grimsey has ensured that his efforts will be seen in the best possible light.

Incumbent managers, however, often view their businesses through dangerously rose-tinted forecasts. They are reluctant to admit the potential difficulties until they are all too apparent. This verdict may be unfair but it tends to stick. Graham Wallace at Cable & Wireless is still struggling to win back City confidence after his shock profit warning last March. It was not the scale of the warning that was the problem but the fact that he had previously appeared remarkably upbeat when talking to analysts and journalists.

Companies must be careful when divulging trading information. The Financial Services Authority has warned that it will be watching and intends to ensure that private shareholders are not disadvantaged by being left out of the loop. But, apart from facts and figures that will be useful to competitors, the more that companies can keep their investors informed, the more chance they have of keeping them loyal.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

What Lego robots can teach us about motivating teams

People crave meaningful work, yet managers can so easily make it all seem futile.

What went wrong at Debenhams?

There are lessons in the high street store's sorry story.

How to find the right mentor or executive coach

One minute briefing: McDonald’s UK CEO Paul Pomroy.

What you don't want to copy from Silicon Valley

Workplace Evolution podcast: Twitter's former EMEA chief Bruce Daisley on Saturday emails, biased recruitment and...

Research: How the most effective CEOs spend their time

Do you prefer the big, cross-functional meeting or the one-to-one catch-up?

6 rules for leading a remote team

Our C-suite panel share their distilled wisdom.