Shareholders, Uncertainty, and the Super Committee

Elliott Suthers's picture

On Monday morning, the Congressional Joint Select Committee on Deficit Reduction — or Super Committee — announced that it had failed dismally to find the $1.2-1.5 trillion in budget cuts it had been charged with implementing. The word in D.C. is that the parties were never even close.

Unsurprisingly, disagreements seem to be centered around revenue increases and entitlement cuts. Democrats want more taxes and less cuts and the Republicans the reverse. No revelations there. But when the dust has settled and neither party has compromised, what we’re left with is the dreaded sequestration.
 
Sequestration, or “the trigger” is essentially D.C.-speak for across-the-board cuts to discretionary spending. Half would come from defense and the remaining from entitlements.
 
Perhaps the most disturbing feature of this outcome is the fact that under current law, cuts must be applied in equal measure to all aspects of the Pentagon’s budget. This means that the services — or even Secretary Panetta — will have zero say in where savings are made.
 
But there is light at the end of the tunnel. Just recently, White House Budget Director, Jacob Lew, all but admitted that should the sequestration take effect, the results would be politically toxic for both parties. Additionally, Sens. Graham and McCain have both already begun staking out hard lines against the provision, and with the support of Secretary Panetta and moderate Democrats, it’s easy to imagine a formidable coalition forming to rally in opposition to the cuts.
 
What this means for the defense industry is indecision. Even if the triggers do take affect, they won’t be implemented until the 2013 budget. This leaves lawmakers, lobbyists and pressure groups more than a year to water-down, circumvent or destroy the provisions. In the meantime, defense companies – and their shareholders – will be on unsure footing.
 
There are few things that the public likes less than indecision, and 2012 will be full of it. As a result, effective communications planning will be more important than ever. Thinking beyond the core defense community, communicators will need to project an outward image of stability and steadfastness, even though behind the scenes, chaos reigns.
 
Nowhere will this be more important than dealing with shareholders. The Street needs to hear that a company it’s investing in is in control of its own destiny. Otherwise there are plenty of other options available to them. A good deal of analysts were already bearish on defense stocks before the Super Committee. Now most are downright fatalistic.
 
To get around this, companies and their marketing communications departments will need to get creative. Demonstrating technologies at investor days will be important, but actually having something to say will be more so. Messages will need to stress the upside of defense, namely the inherent low-risk nature of business strategies, huge amounts of cash on hand, and the long-hold potential of the industry. Defense stocks will never offer the short-term potential of tech IPOs, but they’re not expected to either. Institutional investors will particularly appreciate the long-term perspective.
 
For communicators, this all amounts to nuance. Yes, technology and innovation will be all central themes for the customer, but pushing out supporting messages to Wall Street will be equally important. Will your company be a leader or a laggard? Does your five-year plan hold enough contingency to navigate the sequestration? Are you diversified sufficiently to avoid the downturn? And how quickly can you ramp up production if the proposed cuts don’t eventuate? These are all questions that shareholders will ask. Will you be prepared?
Elliott Suthers, is a vice president at Spector & Associates and a registered government lobbyist. He specializes in the defense and technology sectors. Prior to joining Spector, Elliott worked in government relations for the United Nation’s Development Programme in Washington, D.C, with the Republican National Committee during the 2008 Presidential cycle. He has also advised two successful senatorial campaigns. Elliott is a current political contributor to Forbes.com and can be reached at Elliott@SpectorPR.com.