by Paul A. Holmes
By most standards, 1989 was a good year for Air Products & Chemicals, Inc., the second largest industrial gas supplier in the United States. The Allentown, Pennsylvania, company saw sales rise nine per cent to $2.6 billion, earnings per share increase by four per cent to $4.04 and return on equity soar to 16.4%. Cash flow too was healthy, and being used to finance a $560 million capital investment program.
The company was proud of its performance, and of its strategy, which had been refined and refocused in recent years. In 1986, Air Products shed its disappointing engineering services division and developed a ten-year plan that called for global expansion of its core businesses and entry into promising new environmental and energy-related fields. Management believed a new was just around the corner.
Wall Street, however, was not convinced.
With a P/E multiple of 11, Air Products was trading at a 23% discount to the Standard & Poor's 500, and in The Wall Street journal's annual `Corporate Report Card,' the company was rated 15th out of 36 U.S. chemical companies as a "good investment." Management felt its stock was seriously undervalued relative to the broader market, given the company's growth potential.
"Management was frustrated," says Kevin Ramundo, then-manager of corporate/financial communications. "They felt they had made some tough decisions, given the company a new sense of direction, and were not getting any credit for it."
At the same time, however, Ramundo and a small group of others in the finance and corporate communications departments had come across research conducted by Northeastern University business professors Richard Higgins and Brendan Bannister. That research indicated that while strategic ability was important, strategic credibili­ty was perhaps even more important as a catalyst to stock price performance.
Over the next two or three years, Air Products & Chemicals worked closely with Higgins and Bannister, adopting their ideas to create a strategy communications program that was focused and consistent. By 1992, a review of security analyst reports revealed a significant increase in their understanding and appreciation of the company's strategic direction. Sell recommendations had been replaced with buys. The company's P/E had risen four times faster than the Standard & Poor's 500, trading at a three per cent premium com­pared to the 23% discount of 1989. Stock market value had increased 100%, or $2.5 billion, in three years. The Wall Street journal's annual Corporate Report Card now ranked the company sixth among 35 chemical companies, up from 16th.
"No one would claim that these developments were solely the result of well-integrated communication program," says Higgins, now a part­ner, with Bannister, in New Hampshire-based consulting firm Stratcom Associates. "During this period the com­pany continued its impressive financial and operating performance. Global expansion and entry into emerging fields continued at a brisk pace. Quality of management continued to impress ana­lysts and observers. It must be pointed out, however, that all these favorable factors were in place, and well under way, in 1989.
"What was missing was recognition and appreciation within the investment community that here was a company with a clear strategic vision, a company that knew where it wanted to go and had a strong strategic plan to get it there."
The company's turnaround began in 1986, when Dexter F. Baker was named chairman and CEO. At an early meeting, Baker sat down with Harold 'Hap' Wagner, his vice president of strategic planning (and the man who recently succeeded him as CEO), who told him to "sit down and imagine you are writing the company's 1996 annual report. Project what kind of company Air Products will be."
"It turned out to be quite a disci­pline," says Baker, "trying to project what kind of company you are going to be ten years hence."
But his thoughts were the starting point for a process that culminated in a ten-year strategic plan with aggressive growth targets (from a $1.9 bil­lion business in 1986 to $6 billion in 1996) and ambitious return on investment goals. To achieve its objectives, the company adopted four key strategies:
• expand core gases and chemical businesses, continuing to exploit leadership positions in these markets;
• add related new products in gases and chemicals while extending the use of existing products;
• continue international expansion in Europe and the Pacific Rim; and
•  build the new environmental and energy businesses—waste-to-ener­gy, cogeneration and flue gas desulfurization.
Unfortunately, most reports from security analysts who followed the company made little mention of Air Products' initiatives in envi­ronmental and energy systems or to its globalization plans. One report offered the opinion that the company's prospects were "tied to the recovery of American manufacturing," a gloomy prospect indeed, while another recommended sale "on the basis of unfavorable trends in the industrial gas business." Some even saw the restructuring itself as a problem, suggesting that management had "lost control of its new business ventures."
"Recent unpleasant memories of the divested engineering services business may have contributed to the negative impression on Wall Street," says Higgins. "This, along with the company's entry into new and unfamiliar fields, may have caused an analyst to wonder aloud if Air Products hadn't gotten out of control. What seemed to management to be a series of consistent and focused strategic initiatives in emerging and promising growth markets may have appeared as a hodgepodge of unrelated activities to out­siders."
In March 1988, a cover story in Chemical Week presented a comprehen­sive picture of Air Products' strategy and growth potential. A telephone survey conducted by the company's corporate communications department revealed that 85% of analysts said they had a bet­ter understanding of the company as a result of reading the article, 45% report­ed a strengthened perception of interna­tional operations, and 35% had a strengthened perception of the company's growth potential.
"That story made two things clear to us," says Kevin Ramundo. "The first was that our message had not been getting through, and the second was that when analysts did understand what we were trying to do, they supported the direction we were taking."
At the same time, Ramundo was becoming familiar with the work of Higgins and Bannister, which focused on strategic credibility. The two academics had conducted research indi­cating that companies varied widely in their strategic credibility, and demonstrating the difference credibility could make to share price.
"While the investment community can be very unforgiving in the face of sustained poor performance, in the short run there is reason to believe that the firm with highly-regarded strategic capabilities, but experiencing a temporary downturn in performance, will continue to enjoy a measure of strategic credibility within the financial community. This is especially true if the company effectively communicates and dis­cusses its problems and what it intends to do about them."
In fact, Higgins and Bannister had found four key contributors to strategic credibility: strategic capability, as demonstrated over time; corporate performance, again over time; CEO credibility, and in particu­lar the willingness of the CEO to adopt a high profile in the financial community as a spokesman for the company's strategy; and corporate communications, which must include candor and a willingness to dis­cuss bad news as well as good.
The notion that corporate strategy should be at the heart of any financial communication program may seem obvious, but the two aca­demics' research indicated that all too often it was not. Many compa­nies, apparently, felt that communicating too much about their strate­gic vision might give mean handing over competitive information to rivals. Others were sensitive about creating overblown expectations. Others focus their efforts on past successes, preferring not to deal with the uncertain future.
"Even if profitability has been impressive, it's wise to let others know that it is the result of sound planning and not just being in the right industry at the right time," says Higgins. He illustrates with an example: "People Express, despite its phenomenal growth in the early years, failed to convince the financial commu­nity that the strategic reasons for this impressive performance were sustain­able."
On the other hand, Higgins says, General Electric is a company that has enjoyed sustained strategic credibility, convincing the financial community that its success has been planned, not accidental. It is clear that GE CEO Jack Welch understands the importance of communicating strategy. In the late-'80s, when the company's stock was undervalued, he wrote in his annual report that: "Perhaps a strategy that appears to us crystal clear and con­sistent—because we live by it—seems less so to some of our key constituencies in the media and financial community. This is more likely a failure of our com­munications effort rather than one of understanding."
That was certainly the case at Air Products, where the culture did not tra­ditionally place a premium on commu­nication, and where the public relations function had traditionally been orga­nized around product publicity rather than corporate strategy. Says Ramundo: "Left to their own devices, analysts will write about and focus on per­formance quarter by quarter. The communications challenge is to give them a more long-term perspective. Like many companies, we had not always been successful in providing them with what they needed in order to do that."
The company's communications efforts were realigned to focus intensely on strategy. The key message was that Air Products & Chemicals had refined in strategies early in 1987 and that the new strategies fit the company's key strengths while taking advantage of larger trends of business globalization and interest in the environment.
This was particularly evident in the company's annual reports. Prior to 1989, these tended to be relatively traditional documents, character­ized by their high-gloss design, reassuring photographs of senior man­agement hard at work, and vague generalizations. They focused on the past year's accomplishments rather than how they might contribute to the company's future. Since then, however, ARs have been much more focused on strategic issues, with titles such as Building Value: Focused Strategies for Growth Businesses, and Air Products' Culture: A Foundation for Performance. Much of the gloss is gone, the sizzle replaced with steak.
The communications program demanded the involvement of Dex Baker and chief financial officer Jerry White to overcome a culture that was somewhat conservative and not enamored of public relations. White says that the company's founder and those who succeeded him were "not particularly comfortable" in the role of communicators, and that through the '60s and much of the '70s the dominant attitude within the company was to "keep a low people, say as little as possi­ble, and that way people won't misinterpret what you say."
In the early '80s, when White became CFO, the company was just coming to feel that there might actually be a benefit to conducting a more active communica­tions campaign to ensure that all its major constituencies—local communities, employees, customers and shareholders—understood where the company was going. More important, the company felt it had something important to talk about: its vision of a new market that was going to be driven more by environmental forces by economic forces, a market Air Products was well-positioned to exploit.
"My sense of the investment communi­ty is that they are more interested in what you have done that what you say you are going to do," White says. "You can't just talk about your plans for tomorrow without providing some evi­dence that you are taking action today. Strategy communications means talking about the steps you are taking to shape your own future."
White says that two fundamental prin­ciples underpinned the communication effort: candor and credibility. "We said to analysts, `We are going to tell you about our business as it is."' At one time, for example, the company decided to be open about its modest growth projections and belief that profitability would be tight, even taking the message on the road to shareholders in Europe, who were addressed by Baker him­self. White says he was surprised by the appreciation his audience showed at this candor, and the positive impact on the company's cred­ibility. He also comes across as someone who would be uncomfortable with hyperbole and corporate self-aggrandizement, a more flashy approach to telling the company's story.
A March 1990 Wall Street journal article was even more symbol­ic of the change in the company's communications culture. It reported on a soft forecast provided by the company to indi cate what the environmental and energy systems business might be worth in terms of earnings per share and cash flow by the mid-'90s. Within a week of the story's appearance, Air Products' stock price had rise 14%, a market value increase of $300 million. It was the kind of bold prediction the old management never would have made.
Even management changes were used to commu­nicate strategy. When Baker was replaced by Hap Wagner, the company's press releases all focused on the continuity of a successful strategic approach, a message that was communicated in almost all media coverage of the transition.
Another cultural change involved the role of the investor relations and financial commu­nications functions, which became a much more integral part of financial operations. Today, White says, IR is viewed as a "tour of duty" for any executive who expects to rise within the finance department. Everyone is expected to understand the importance of proactively managing the company's relationship with its shareholders and other finan­cial opinion makers.
Throughout, the communications message remained consistent. Ed Orgon, then a counselor with New York public relations agency Creamer Dickson Basford and now a principal in his own communications consulting firm, observes that: "A lot of companies talk about strategy, but very few focus on it the way Air Products has.
It was the starting point for every piece of com­munication. The first question asked was whether the information added to an understanding of strategy. It was a very single-minded, highly focused education effort, and I think that's why the company was so successful in getting its mes­sage out."
Between 1990 and 1992, the program began to bear fruit in terms of analysts' comments. Gruntal Investment Research observed, "Air Products is on the threshold of a major change in business and investor perception because of its entry into the environmental sector," while Anantha Raman & Co. pointed out that "the strategic positioning of the company, as well as its innovative nature, makes it very attractive to hold in a longer-term oriented portfolio."
Even Paine Webber recognized the contribu­tion of the reputation management program: "The stock has responded positively to the long term potential for the environmental and energy sys­tems business," the brokerage wrote in a recent upbeat report. "And the increased visibility was a basic catalyst for the recognition of these issues."