OVERVIEW OF THE INVESTOR RELATIONS FUNCTION
THE IRO: SENIOR ADVISER ON MARKET BEHAVIOR AND VALUATION
Investor relations functions as an integral part of a company’s value creation framework/structure.
IR is intimately linked to a company’s value. They are inseparable.
IR is not a function onto itself. It is part of a bigger process.
That’s why efforts to place a value on IR without putting it into its proper value-creation role leave managers unsatisfied.
It’s not about running an IR website or holding meetings with investors.
It’s about understanding the information that enables institutional investors to do a better job of valuing the company.
It’s about helping the company’s executive team know at any moment how the market is valuing the company and why as a way of putting management’s strategies and operations in a better value-creating context.
In that role, importantly, it’s about helping the executives and board of directors create and sustain value over the longer term.
At his or her best, the IRO is an objective adviser to management, not the mouthpiece for management.
To succeed in this role, the IRO needs to view the job as an objective adviser, expert on the capital markets, have convictions and the courage to state them at any time. It often requires not thinking like management, but on a broader, external level, bringing independent opinion and evidence to a situation and decision.
The investor relations officer becomes a trusted adviser to management, functioning as an objective, independent resource and expert on how the market views the company as an investment, and indeed, as a growing, viable business entity.
In a tough situation, for example, what makes the IRO feel good about his contribution may not be that you and the CEO are on the same wavelength or that the boss agrees with you. It may be that you have the courage to disagree with the boss, make a convincing case based on the practical reality of the knowledge or evidence you bring to the situation, and then get the company to take a different action based on your argument.
Winning your place in the inner circle is not done on the basis of telling executives what they want to hear, but because you have won their respect on the basis of their understanding of the value you bring to the process.
The IRO truly has a seat at the table when his or her advice is accepted because you are respected as the expert and the source of value for what you bring to the party – expertise on capital markets behavior – just as the CEO and board respect the advice of their general counsel or investment banker.
It may be necessary to get past the notion of always trying to please the CEO and senior staff that causes you to say or do things you believe the executives want to hear instead of what is in the best interests of the company.
The IRO needs to command the position and respect to a level where he is listened to and his recommendations are followed. IROs must be well qualified to function at that level. That’s the mark of value of an IRO.
FUNDAMENTAL IR JOB: UNDERSTAND HOW THE MARKET VALUES YOUR COMPANY
Much of the investor relations function today is driven by the perception believed by the CEO and CFO. Often, it can be too limited, or worse yet, inaccurate in terms of what they think IR can do for the company. Common misconceptions include seeing the function mainly as putting out the party line, hand holding analysts and investors, issuing press releases, educating the market through the sell side, sending out information kits, getting the annual report done, arranging meetings, answering the phone, taking care of the website.
Here’s the real proposition. Companies create and sustain value for their investors, customers, employees, and other stakeholders. Investors evaluate business performance. Information, knowledge and insight are the keys to optimizing the investment market’s understanding of the company and its opportunities to grow.
That’s a process that starts with information and leads to knowledge and insight.
Everyone strives to be objective. The goal is to bring forth the best information, do the most effective analysis, and arrive at the potentially most accurate conclusions in terms of the company’s business and financial performance going forward. Along with such macro factors as the economy and how well the industry is doing, the company’s performance determines its value and the price of its stock as set by the investors.
Of course, the many factors that come into play in determining stock price can and do change every day. They are likely to be more macro than micro. The intrinsic value of the company doesn’t necessarily change; in fact, it likely doesn’t change much from day to day unless something big happens, such as a breakthrough product development, giant contract won or lost, a new CEO taking over.
Still, in doing the analysis, in an imperfect environment, there are opportunities to excel, be average and be below average. Intelligence comes into play. So does how studious the analyst, money manager or investor relations officer wants to be. A universe that includes a mix of investors from very bright, insightful and exhaustive in their research, to superficial and distracted is sure to bring a diverse valuation analysis spectrum for any company at any time.
Add Perception, which can be bigger than Reality; so big, in fact that it drives the current stock price more than reality.
The picture we have just painted illustrates why information and knowledge can make a difference. And why the investor relations role is so important.
Business performance is the basis of value given to a company, and it makes up the largest portion of the expectations of future value. The market creates those expectations. So does the company, based on its most recent results and what the company is saying about its operations, strategies, prime initiatives, financials and other things.
Expectations then become the melding of those of the market and company. They always exist in the marketplace, to a lesser or greater degree of visibility.
The market may have a vague notion of the expectations of a smaller, lesser-known company, while virtually every analyst and investor probably has a keen sense of the expectations for such household names as Microsoft and Coca-Cola.
Various Valuation Approaches
Intelligent, experienced people don’t agree on how best to measure a company’s value. That’s mainly for two reasons. Fundamentally, investment analysis is aimed at forecasting a company’s future, and no earthly creature can do that with total accuracy. Second, investment managers and analysts are highly intelligent people with some ego, quite able to build approaches and models they believe will produce better results than others can in identifying companies whose future performance will cause their stock prices to rise.
That’s why there are as many investment models at work today as there are investment managers working.
Still, the market has agreed on a few fundamental measures. Ultimately, it says cash is the truest measure of business performance. Thus, investors pay close attention to the amount of cash in the till, whether cash flow is growing or shrinking, amount of cash available after expenses and taxes are met to reduce debt, pay dividends, buy back shares, make a strategic acquisition, or spend on capital projects to continue growing.
Proponents say cash is best because it is an economic measure and doesn’t get distorted by accounting. Experience shows, they argue, that accounting frequently is manipulated to make results look better than they actually are.
However, it often appears that Earnings move the market, indeed, move prices much quicker and further than cash flow. On many days, that’s certainly true for the market as a whole and for specific companies reporting earnings higher or lower than market expectations. The market appears much more conscious of/sensitive to earnings reports and because of that, earnings contribute more to market volatility.
Clearly, accounting practices and the media focus on earnings has caused earnings reports to have a more immediate effect on stock prices. But studies have always shown that stock prices ultimately tend to reflect their companies’ intrinsic value, which gets measured in cash. Intrinsic value calculations are readily made by investors and corporate finance managers.
What this tells us is that the market is of two minds: seeking to track business progress and results based on both earnings and cash. Oversimplifying the proposition, this suggests investors have a short- and longer-term focus, using earnings as the immediate barometer and cash flow to better understand the company’s longer-term, economic performance.
It’s a Highly Complex Market
While true, what also makes sense is to recognize the complexity of the market. As indicated, investors are paid to outperform the average returns of the market. On that basis, they get handsome fees, retain business, win new contracts, and enrich their own portfolios.
Thus, what we have is a highly complex stock market with several basic approaches to investing and numerous modeling refinements in the continuing search for higher returns.
There is a handful of basic modeling approaches, built around earnings, cash flow, revenue, margin improvement, return on investment, economic profit, recent market behavior, replicating market performance and the like. But every money manager has refined their basic model, adding inputs and changing the relative importance of each continuously in trying to keep up with how conditions are changing, resulting in literally thousands of models at work today.
How the market is behaving at the moment holds a huge influence on investors’ approaches and methods. Investors’ models are driven in large part by capturing the relative performance of the market, industries and specific stocks.
Growth and momentum investing styles are built on relative performance. To wit: Earnings and revenues are higher than last quarter or last year. The revenue growth rate of the company is better than peers. This way of investing is popularly called the Comparables method. The metric of choice in gauging relative performance is earnings.
In contrast, investors trying to gauge the absolute value of a company are more likely to have more patience and longer-term horizons. They are more often found in the Value investing style camp.
A sizable part of this book is devoted to describing the investment market and process. It’s our belief that investor relations people need to know more about the investing process than anyone in their companies. To the extent that investor relations involves marketing your company and securities to investors and analysts, the most fundamental knowledge that you need to possess is the knowledge of the market – who are the players, how do they behave, what do they want to accomplish, how do they measure success.
It’s the first principle of marketing – Know your audience.
ELEVATING IR VALUE STARTS WITH MEASURING IT
It’s important for investor relations practitioners to have sophisticated levels of understanding about investment models and measures to evaluate corporate business performance.
An essential part of this to be able to distinguish and separate what’s relevant and irrelevant, so you can focus on what matters and get rid of the “noise.”
Noise has two dimensions. There is noise in the stock market – information that doesn’t add any value to the analysis and forecasts of an industry or company, and investing styles that don’t really help investors gain knowledge or insights into the market behavior and investing process.
And there is noise in the investor relations process. The way in which it has grown up has brought a lot of noise to investor relations. This noise occurs in a couple of key ways: the retinue of activities that comprise the practice today, and efforts to measure IR.
Investor relations has been built up over the last four decades centering on activities. IR staff can easily keep themselves very busy performing these many activities.
However, there hasn’t been much effort devoted to analyzing and measuring their value, a process that starts with defining what that value is as the basis to evaluate the contribution of the activity.
We can suggest some values: a better-informed analyst or investor, enhancing an investor’s ability to make the best decision on whether to buy, hold or sell shares in the company, a truer valuation of the company’s securities, a higher stock price.
Can we determine how to apply measures that get at quantifying the value of such activities as sending out information kits, issuing a press release on an executive appointment, holding meetings with money managers in St. Louis, spending an hour on the phone with an analyst?
Ways to Measure the Function
That’s brings us right to measuring the IR function. We have a chapter devoted to measuring IR that goes deeper but we want to deal with it now in the context of understanding the role at its highest value level.
It can be argued that it is foolish to try to correlate investor relations to stock price. It can be argued that it is very necessary to try to correlate IR to stock price.
Why is it foolish? Because IR is not the primary driver of value and share price. Business performance is. That means revenue, earnings, cash flow growth, margin improvement/cost reduction, new technologies and products, strengthening customer relationships, increasing employee productivity, markets that are growing, competitive advantages.
Whether the economy is strong, flat, or weak is another driver ahead of IR in terms of its impact. The market itself is more important than IR. It’s tough to have a rising stock price when the market has fallen by 30%. It may not be any great tribute to management to have a higher stock price when the market is up by 30%.
Why is measurement necessary? Because senior management demands it, and that’s only fair. We can argue with real validity that investor relations shouldn’t be judged on stock price, but management expects the function to make a positive contribution. When a budget is given or raised, an appropriate return is demanded.
IROs at many companies are frustrated by their inability to gain full recognition of the function’s role and importance. Perhaps the reason is management’s perception of the value of the function. If IR people aren’t willing to step up and be measured against stock price, then what are the values of the function?
Positive statements in analysts’ reports? More institutional shareholders? Investors satisfied by the answers to their questions and in getting materials sent to them? A well-functioning website? Lots of meetings. A better-informed market? Realistic feedback to management on investor views of the company? Yes, these are all worthwhile activities.
Press releases being distributed. Meetings taking place. Necessary activities occurring. Questions being answered. Requests for information being fulfilled. Management actions and communications that respond to investor interests. Yes, these are all good accomplishments.
Information Quality Makes the Difference
How is all this contributing to the company’s value as a business, its valuation by the investment market, and its share price?
Answer these questions, and we’re starting to measure the value of the investor relations function. It’s a first step in the right direction to win the IRO a place on the executive committee. But it may also be more a confirmation of what management already believes — that investor relations is exactly where it belongs. It is filling a role that’s necessary, has some value, helps inform the investment market, takes the burden away from us. It’s an upper middle management function.
The big question is how to take the next step and earn a seat at the table, which was the theme of NIRI’s 2004 annual conference.
We ask portfolio managers all the time who they want to talk to in the company to get useful information. First named almost always is the CFO, then the CEO, president, operating business heads, chairman of the board. The CEO would be first, but portfolio managers are realistic. But at small companies, they insist on talking with the CEO; the fortunes of the company likely rest with his/her capabilities and leadership.
The IRO doesn’t get mentioned. When asked, the IRO is identified as an arranger of meetings, source of basic information.
There are exceptions, and they are leading the IR practice in moving toward executive row where it belongs. In fact, these IR executives are already there. We need more of them.
When pressed, portfolio managers will admit that there are some IROs who are better sources of information than the CFO or CEO. Typically, the reasons given are the IRO’s knowledge of the company and industry and their understanding of what investors want. Effective IROs know how to walk that thin line — often better than the top executives—in tailoring information needs to an investor or analyst without crossing into materiality or confidentiality territory.
The essence of the investor relations function is to provide information. IR professionals elevate their role to the level of influencing value and stock price by delivering the kind of information that enables their two constituent groups – management and the investment community – to make the best decisions possible.
For executives, these are decisions that serve to sustain value improvement. For investors, these are decisions that serve to improve their portfolio returns.
PREMISE: THERE IS AN INVESTOR RELATIONS PREMIUM
Is being in upper middle management, filling a host of activities necessary to being a public company good enough? It shouldn’t be. Not when you consider the potential of the profession.
The true role is at the center of the company’s value-creation proposition. This book is intended to show you how to accomplish that, while also providing information and “how to” help on the basic functions expected to be performed by the investor relations staff.
In the meantime, at many companies, the IR practice is holding itself back by accepting something less. Too many IR people appear to be satisfied with writing releases and annual reports, arranging meetings, running the website, working with vendors, traveling with the CEO and CFO, and, at a higher level, making presentations on behalf of the company.
That latter activity is a step in the right direction, as long as the content and discussions that follow focus on meaningful information, and as long as the CEO understands that the IRO is a top executive filling a vital, CEO-like role at that moment.
So, what should we do about it? Start by demonstrating that IR does impact share price. Then, set out to prove it. We believe that serious work should be done to document the Investor Relations Premium. The notion of an IR Premium is a reasonable way to look at the situation.
Investors and corporate managements are comfortable with the concept of a premium. The idea is to include it in breaking down the components of a company’s value. Can it be quantified? Not precisely, but neither can the quality of management, or the impact of a company’s brand or reputation and a host of other intangible drivers of value.
Investors firmly believed that such stalwart CEOs as Jack Welch at General Electric, Robert Gouzieta at Coca-Cola and Warren Buffett at Berkshire-Hathaway represented a realistic portion of their companies’ value. A 10% to 20% premium was most often attached to these leaders.
Good corporate governance is said to contribute 5% to 10% to a company’s value. CoreBrand and other firms have built models to quantify the contribution of brand and reputation. The firm publishes its calculations of the brand contribution to some 1,000 companies and describes the components making up the formula. BNY Jaywalk includes the brand score and a description in its research reports on companies. Other research houses are looking at it as well. Microsoft is always at or near the top in rankings of the amount of market value attributed to its image.
Virtually all professional investors today use some form of a factor model in running their portfolios. Very few are single-factor models. They all combine factors as inputs, weigh each factor on its perceived importance. Elaborate models can contain 50, 75 or more factors. Factors typically include revenue/earnings growth rates, returns on capital/assets, ratios, and other financial indicators. Increasingly, brand power and governance are being included. So, why not add investor relations?
People experienced in modeling can figure out how to quantify the IR contribution. In a future chapter, we suggest a host of reasonable components that can be used in producing the formula and model.
Will it be precise? Of course not. But nothing is precise when extrapolating historical data and past performance to make projections. Even the most factual, reliable numbers available that form the basis of those projections can’t be guaranteed going forward. And in the recent age of accounting manipulation, those numbers were even less reliable.
We think it’s time for Investor Relations to step up and be counted. Clearly, numbers produced from professional modeling based on intelligent, reasonable assumptions, should be just as acceptable as brand, management contribution, governance, and, indeed, some of actual financial numbers that come out of accounting these days.
The IRO on the executive committee? IROs becoming members of the board of directors? Better ways than we have today to measure the contribution of the function sure helps to be there. The IR Premium notion is a definite way to tie the function to value.
MAKING THE TIME TO DO WHAT MATTERS MOST
Our contention throughout this book is our belief that the highest value of the function is achieved when investor relations is integrated into the company’s value creation proposition and ongoing endeavors to sustain value growth.
That brings us to the second basic concern about the function — the high level of activity that keeps IROs very busy. It relates to the measurability issue. IROs can easily find themselves too busy managing the many activities that comprise the function to concentrate their energies on where they can bring the most value to their companies.
The IR department can be a very busy place. Just answering people’s questions and responding to their requests can fill a day. They come from all manner of people – analysts, brokers, traders, portfolio managers, reporters, individual investors, vendors, company executives and more.
Add a host of routine, daily tasks: writing press releases, leading/participating in preparation of the annual report, setting up and running meetings, preparing scripts and Q/A and arranging the quarterly conference calls, putting together investor presentations, updating the investor kit, working on the 10Qs/Ks and other SEC filings, conducting regular shareholder analysis, gathering market and competitive intelligence, preparing reports for management and the board. The list goes on.
IR also has become something of a supplier-driven activity. Vendors distribute news releases, generate material for the company’s IR website, run the conference calls, produce summaries and transcripts, deliver shareholder ownership and institutional portfolio profiles for tracking and targeting purposes, handle the proxy preparation/voting process, provide sell-side analysts’ earnings estimates and stock buy/sell/hold recommendations, and more, more, more.
All this must be managed and the job falls to the investor relations director.
There easily can be very little time left to focus vital energies on the activities that enable the IR function to operate at its highest potential, in that value context. Some IR people seem to believe that the total job consists of carrying out these various activities, essentially managing vendor relationships, answering requests, preparing materials, facilitating communications with executives. Their sights could be set higher.
If IR is essentially a collection of activities, the risk is too much focus on quantity and not enough on quality.
This has caused some people to worry that the phrase investor relations has picked up too much negative baggage over the years. They worry that the CEO, CFO, analysts and portfolio managers have placed the function at a level that is less than it can be, and they aren’t inclined to help raise it, most likely because they don’t understand its highest value contributions.
(Investment professionals certainly can help management recognize and support an effective IR organization by showing executives how a highly useful information flow contributes to a stock price that represents fair value. It is in the best interests of the investment community to do this, simply because it is the investor relations department that has the charge and the time to devote full effort to elevating the information factor. No one wants to see CEOs and CFOs operating as full-time investor relations officers.)
If the CFO and/or CEO believe that they (and their IRO) are practicing investor relations at its highest level by meeting regularly with key shareholders, institutional prospects and analysts, then the function is not going to reach its potential.
These have suggested two alternate titles in recent years: Chief Equity Intelligence Officer and Chief Valuation Officer. Bottom line: This officer, whatever the title, serves as senior advisor to management and the board on market and investor behavior and how the market values the company.
We don’t think a change in title is necessary. We’re here to suggest that it’s an opportune time for investor relations to take its rightful place in the corporate pyramid and fulfill its potential.
Using the IR Budget Wisely
Further, investor relations is not a costly practice. In fact, it is one of the least costly of the corporate functions. Most of the IR budget goes for compensation. Other main cost items include acquiring market intelligence, outsourcing website content and navigation, release dissemination, meetings/conferences management, conference calls.
The more costly items are tangential activities: the annual report, annual meeting and proxy voting processes, and governance. These often come under the finance, legal, corporate secretary, or public relations budgets.
Time is the most precious commodity that professional investor relations people have. How they spend that time determines the function’s effectiveness. The goal should be to minimize the time spent on administering and managing activities so that the maximum time can be spent as an integral part of value management.
Truth is, more money can be invested in IR, if it is done so wisely. Or funds can be diverted from practices that make minimal difference to those that can make a sizable difference.
Key IR spending should go toward:
- gathering market intelligence, including shareholder and institutional investor feedback on their views of the company, its strategies and value-creating status;
- analyzing institutional portfolios to better understand what money managers believe are the company’s principal drivers of value;
- keeping the website chock full of timely information;
- ongoing research into market and investor behavior; and travel, to grow the IR practitioners’ knowledge of company operations, the industry, and relationships with investors and analysts.
LINK INFORMATION TO VALUATION
How do you get management to fully understand and appreciate the value of the function? Deal with the issue face to face. Start with a dialogue with the CEO. “Mr. CEO, what do you want investor relations to do for you and the company?” The answer and ensuing discussion should be very helpful, maybe even enlightening, to both of you. It may enable you to understand his/her perception of the function; where the CEO’s expectations stand. What activities should comprise it? What are the highest expectations? How does he measure it?
It also may enable you to begin a dialogue about the real role, tied to creating and sustaining value. Be prepared to document your case. This takes real evidence. There are corporate experiences of investor relations professionals linked with value creation. There are academic studies. There is intelligent discussion, hopefully included in this book.
There also is a need to build a body of intelligence and knowledge on integrating investor relations into valuation, because it simply hasn’t been done enough to date. The first step is for IROs and companies to think this way. For IROs, that means accepting the challenge to prove the function’s value as a contributing partner to the company’s shareholder value proposition. Executives should be eager to give IR practitioners the opportunity to do this.
The basic need is to get everyone to think about investor relations objectively –get rid of the baggage and see the function for what it can do. Discuss with the CEO, CFO and other executives what that means. Is management willing to recognize, understand and then supply information of highest value to investors?
Some of the content of corporate presentations and discussions that managements are willing to engage in offer limited content of value to investors. These meetings deal more with a lot of “noise” and less with substance.
How do we separate the substance from the noise? Our strong recommendation is to create an Efficient Frontier of information. Show the company how to map its activities against it. Create a basis to evaluate each activity, piece of information on a grid based on its importance to gaining true understanding, insight. Give each activity a score or rating or weight based on its relative importance.
A major part of this process includes tying the information back to the significance of the event. By event, we mean activities that are an integral part of running the company, of business performance. Events are operational and financial. They involve operations and administration. Examples: product introductions, new marketing programs, technology developments, customer contracts, plant cost reduction initiatives, new financing arrangements, 10K and 10Q reports, press releases, conference call content.
Some companies have a long way to go in elevating the quality of information. Getting over the notion that it is proprietary from a competitive standpoint is the first step. It isn’t. Competitors know. And even if something new is revealed, in most cases, what are they going to do about it?
You must get management past the other objections as well. Maybe the biggest is a general reluctance to reveal things to the outside world. It’s an attitude that says “we’re better off keeping our business to ourselves. We can operate more freely, conduct more trial and error, make mistakes and correct them, change our mind, make adjustments – that’s the nature of business.”
There is an ongoing fear, in effect, of making promises that management won’t be able to fulfill. It’s part of management responsibility at a public company owned by equity and debt investors to share progress in detail. It is good governance
Imagine the payoff from being more forthcoming. Most managements don’t appreciate the value. The goal of executives is to have their stock fully/fairly valued. Quality information leading to informed, knowledgeable, insightful investors helps make that happen.
Fair valuation has lots of benefits: rewards employees and management, bolsters recruiting and retains valued employees; facilitates acquisitions at less cost; lowers the cost of financing; attracts customers; enhances corporate/brand image.
Managements constantly complain that the company’s stock is undervalued. Maybe part of the problem is the information gap. Investors even make efforts to quantify that gap. Many models include an information ratio, or an information co-efficient. It seeks to measure the amount of confidence investors have in their expectations of future business performance. That level of confidence is a direct result of the amount of confidence they have in the amount and quality of information being used to support their expectations.
The information ratio serves to measure investor relations relative to the company’s stock price.
RAISE THE MARKET’S DEMAND FOR INFORMATION
Investor relations is an information business. Knowledge is the IR product. Its value rises as its supply rises. The investor relations job is to raise the demand for knowledge, to make people want it. The supply/demand equation applies to IR. IROs must build demand and part of the way they do that is to supply quality information. Investors will recognize the value of the information and increase their interest in getting it.
How to convince investors that it’s worth their effort to pursue the information becomes the big challenge for IR. The most fundamental motivation for an investor is the opportunity to make money. There’s only reason someone buys stock in your company – anticipation of making money.
Thus, the most fundamental question to answer is how your company makes money—revenues and profits, earnings and cash.
The information that matters is multi-dimensional. For sure, there is common information that matters to everyone, but beyond that, it is specific to each investor and analyst. How do you determine it? First, do your homework. Study their investment style, portfolios, and models. Be always tuned in to investors buying and selling shares and understand their reasons.
Second, ask them. Engage each manager and analyst in the richest dialog that will allow, focusing on their methods and the vital information they need.
Having that in-depth knowledge of investors’ information needs also enables you to document those needs with management. You can readily show how certain information impacts the company’s equity valuation by closing the information gap.
IT’S ALL ABOUT EXECUTION
It’s all about Execution. It depends on being able to make the time to achieve the full value of IR. This requires organizing and managing the function efficiently to free up precious time. The IR Personality comes into play. Effective IR professionals are driven to be an integral part of executive management. They are confident of the function’s value and of their ability to relate with people at the highest levels.
They separate routine from valuable activities, find ways to get the routine handled while still managing those activities to make sure they are implemented well. They focus their time on the valuable activities, getting professional help and advice when needed to complete them effectively. They recognize the differences in value provided by each activity.
They realize the difference is Execution. What matters is to execute at the highest levels day by day. Every day matters. Every day, hour, every meeting with the CEO or major institutional shareholder is an opportunity to excel.
Each day must be free to perform at this high level. All the routine must be under control and implemented by others, with a minimum amount of personal time spent ensuring quality implementation.
What are the keys ingredients of performing the IR function at this senior adviser/high execution level?
- Keep up with changes, trends, new regulations/laws.
- Maintain an in-depth knowledge of the essential investment market as it evolves.
- Be an expert on your industry, competitors, company as they change.
- Execute day by day on the important activities.
How to do all this.
- Be a student of all aspects – the market, industry, company.
- Have daily interaction with executives, managers, employees, specialists, industry leaders, trade group officers, leading investors and analysts, academics.
- Possess the ability to absorb, learn and retain information.
- Be assertive and diplomatic.
- Work on having the ability to get along well with everyone as the fundamental way to gather vital information and learn.
- Work on having an executive presence.
Translated another way, IR professionals need to: 1) network effectively; 2) do a lot of research to learn and keep up with the market and their industry and company; and 3) be able to relate to powerful, high level people in order to give them information and advice.
Indeed, there is a successful Investor Relations Personality. Characteristics include intelligence, curiosity, energy, courage, being likable, persuasive and assertive at the same time, having an executive bearing and style, possessing communications skills and financial acumen, and staying objective and independent.
It’s up to the investor relations person to make investor relations matter. That’s how you can help the CEO make it matter.
REASONS FOR NOT BEING FAIRLY VALUED
Here’s a proposition: If the investor relations department is providing enough qualitative information for the market to value the company fairly, then the company’s equity must be valued fairly. What’s wrong with this equation?
There are a couple of possibilities. The information may not be sufficient. Or it may not be clearly understood. Or it may be a combination of the two realities. Or it may not be reaching the right people. A company meeting the criteria of a value investor needs to reach out to or be found by the appropriate value investors.
Or the market doesn’t believe the company can sustain its current performance or achieve its targets. Perhaps that performance isn’t as good as management thinks it is.
Or the company is fully valued, and management just doesn’t realize it. Management doesn’t understand how the market values the company. Or the market isn’t doing a good job of valuing the company. Performance in the future will tell. Better information may fill that gap.
Or the market believes management is using “fuzzy” math. There is very little tolerance today for suspicious accounting, and a higher sensitivity toward it. Any hint of accounting gamesmanship will cause investors to back off.
IR IS MORE THAN AN ADMINISTRATIVE FUNCTION
Some people argue that investor relations has limited value. They say it is essentially an administrative function consisting mainly of generating press releases on results, maintaining the latest information on the website, running the quarterly conference calls, fulfilling information requests.
In a column in Forbes magazine in February of 2003, investment manager A. Gary Shilling suggested that the investor relations function had very little to do with stock returns and price appreciation. The lead in sentence to the article read: A novel way to boost your company’s share price: Fold the investor relations department. Send those guys out on sales calls instead.
The article was more focused on the uselessness of dealing with sell-side analysts. Shilling wrote that a company’s market value is based on its “earnings power and prospects.”
He describes a couple of companies with rising stock prices that don’t make an extra effort to talk with analysts, including one without an IR website. He even cites problems that can occur from trying to manage earnings above analyst consensus forecasts and mentions class-action lawsuits that sometimes result from stock price plunges when earnings miss the mark. “Corporate managers have only themselves to blame for painting bulls-eyes on their own backs,” Shilling wrote.
Our contention is that all these various administrative activities form the fundamental layer of investor relations. They meet the mandated disclosure requirements and then extend the information available to investors in line with management’s intent to provide information at a certain level.
We agree that this fundamental layer is a mature practice today that is necessary inside public companies and businesses in the same way certain legal requirements must be met, companies must keep the accounting books, they must hire and train and compensate people – in short, they must run all the basic functions that comprise the business.
IR for a public company is one of those functions. At a basic level, it can be learned by people, implemented professionally, and fit as an integral part of a company. Virtually all public companies with a dedicated investor relations department are performing these activities, at varying degrees of effectiveness.
But there is opportunity beyond that administrative level for investor relations to contribute to a company’s value-building process. In the next chapter, we suggest how to do this.