Communicating headwinds and tailwinds

| Article

The old, apocryphal curse about “living in interesting times” seems more pertinent now than ever. Over the past several years, companies have had to confront seismic developments—including the COVID-19 pandemic, geopolitical tensions, supply chain stresses, social protests, accelerating climate change, and inflation at its highest in decades. It’s no wonder that investor relations would address the effects of external events on business performance. Even during the relatively tranquil years before COVID-19, investors wanted (and regulators required) executives to explain how broader material forces affect company performance. When global events dominate headlines, it’s almost impossible not to highlight them in investor communications.

One might, however, expect more balance in discussing positive and negative forces. After all, depending on particular conditions, the performance of some companies may actually receive a boost during challenging times. For example, large discount retailers outperformed during the Great Recession of 2008–09. More recently, stock prices of energy companies rose after Russia invaded Ukraine.

Yet remarkably, in good times and terrible ones, companies across industries tend to talk a lot more about headwinds than tailwinds. Most recently, we studied 14 consecutive quarters of public-company reporting, from third quarter 2018 to fourth quarter 2021. We analyzed not just investor relations messaging but also company performance and market responses.1 What did we find? Management teams blamed external events for poor performance roughly three times more often than they credited external events for helping them. They did so even when total shareholder returns (TSR) trended higher during the period studied (Exhibit 1) and the wind, as the Irish blessing wishes, was at their backs.

Companies mention headwinds far more than tailwinds during earnings calls.

We found, too, that almost every company resorts to finger-pointing. The highest and lowest performers in the Fortune 500 were equally likely to blame a specific negative outcome on exogenous occurrences such as changes in regulations, political developments (international and domestic), and the COVID-19 pandemic. The phenomenon of using events outside of company control more to explain why something goes wrong, and less to credit them when results go right, applies within industries and across them.

It’s possible that business leaders may choose to talk about headwinds to mitigate negative responses from the market. If a company misses its targets, there can be good reasons for explaining—this time—how exogenous factors affected planned improvements. Sometimes, the dog really does eat the homework. But on the aggregate, highlighting headwinds more than tailwinds (even given changes between 2019 and 2021) neither helps nor hurts stock performance. Our research finds little to no correlation between how frequently, in investor communications, company leaders attributed business outcomes to headwinds or tailwinds, and how well, as measured by TSR, their companies actually performed (Exhibit 2).

There is little correlation between company performance and headwind versus tailwind communications.

From our experience, it’s often the case that investors simply don’t see the links of external events to internal operations as clearly as management does. Investors therefore appreciate companies that can clearly and consistently explain the companies’ value proposition and the external and competitive forces that its businesses face.2 McKinsey research shows that consistent, clear, and transparent messaging is essential for companies to maintain and enhance credibility with shareholders.3Avoiding the consensus-earnings trap,” McKinsey, January 1, 2013; and Tom Kolaja and Tim Koller, “When investors call: How your business should talk about coronavirus,” McKinsey, March 30, 2020.

No less important, senior managers should themselves understand the relationship between headwinds, tailwinds, and the company’s unique value drivers. Ensuring that capability, in fact, is an essential element of performance management—and long-term value creation.

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