The IR Book Chapter Two

Role and Value of Investor Relations

Investor relations contributes to the value of corporations and to the value of investors.

An objective analysis should form the basis of establishing the role of investor relations and determining its value to the company.

Both management and the company’s investor relations practitioners benefit from a mindset that builds the function on an objective basis.

That might mean throwing out some conventional thinking about IR. 

IR practitioners should avoid assuming the role of advocate, selling the virtues of IR.  Too often, CEOs see IROs as promoting what they do instead of delivering strong, well documented data and opinion.  As a result, investor relations is seen as a “soft” function.

IROs should view their dual roles as an adviser to management and implementer of the company’s strategic communications charter.  Primarily, the investor relations officer is a senior adviser to management on corporate valuation and investment behavior.

Investor relations officers should assume a role on the executive team similar to those carried out by the chief operating officer, chief financial officer and general counsel.  The IRO is in charge of communicating the company’s value creation proposition.  That responsibility includes bringing to the senior executive team an expertise on how the equity market values the business, what are perceived by investors to be the main drivers of value at the time, and how company strategies and initiatives will impact future valuations.

In a mutually respectful relationship, the CEO listens when the IRO speaks, recognizing the expertise that is at work.

Bottom line: The opportunity for investor relations to be a valuable contributor to corporate management and investors is more realistic when people can view the function in an objective manner.

As a function, investor relations can achieve that lofty status across the corporate landscape.  IROs should make no apologies for the importance and value of their role.  In fact, to the extent necessary, IROs need to be champions of making sure the role is fully understood and is being allowed to be implemented at the highest levels.  However, this needs to be accomplished through action and education, not by touting the function.

Investor relations influences the value of a company’s securities.  The difference between higher and lower values can have significant impact on a company’s ability to make acquisitions, raise more capital at favorable costs, impress customers and gain competitive advantages, attract and retain top talent.

Creating a Demand for Quality Information

Within this context, the emphasis is on the quality of information.  There has been a tendency at some companies in recent years to emphasize quantity, and often at the expense of quality.

Excess quantity can be evidenced in the rush to publish press releases.  Some companies believe releases are the way to build visibility.  They certainly can, and that visibility may be negative if the releases contain no information of value.  There is nothing worse than developing a reputation for sending out worthless press releases; investors will stop even glancing at the headlines. 

Only disseminate press releases when there is substantial news, an important event or material information to report.  The measure of an effective IR program is not the number of releases distributed; it is the value of the information being delivered.

In the same vein, an excess of meetings, conference calls, phone calls and emails can turn investors away from a company.  Be sure the company has something of value to communicate each time it goes public with information.

Being able to look at the investor relations function objectively can more readily lead to focusing on the quality of information rather than on the quantity.  As a mindset, the two go hand in hand.  This also facilitates examining what the company wants from its investor relations program and what are the best ways to accomplish these goals.

We recommend charting the range between quantity and quality as a useful exercise that can serve the company well by putting a proper focus on the value of information and the wisdom of making sure each press release, conference call, presentation and phone conversation adds to the overall value.

We’re calling the chart the Investor Relations Efficient Frontier.  It can be viewed in economic terms.  We credit research editor Joe Hassett with helping refine the concept in a series of discussions.

A primary role of the investor relations officer is to create a demand for information by the investment market.  This is best accomplished by building a reputation for disseminating only information of value to investors and analysts.

In our efficient frontier, we are suggesting that the “product” of the investor relations officer is Knowledge.  In economics, as supply increases, price and value decrease. We turn the typical economic scenario upside down in that as the supply of knowledge grows, the value rises.  Investor demand for knowledge is constant, especially in the short term. 

The job of investor relations is to raise the demand for its product (knowledge), thereby improving its worth, which increases the value of Knowledge.

By increasing the quality of information and raising demands for it, companies increase the value of information.  At that point, companies can increase the impact of information on their valuation and share price.

We can put a dent in the ratio of primary drivers of a company’s valuation at any time.  Studies indicate that almost 80% of a company’s stock price is determined by macro and industry factors. 

We can raise that 20% attributed to company and management performance by enabling investors to have greater knowledge and deeper insights into what makes the company tick.  Company influence on its own stock price can be made stronger especially by helping investors build more accurate expectations of future performance.

We can chart the IR Efficient Frontier as our illustration demonstrates.  We, in effect, are shifting the supply curve from quantity to quality.  Quantity is at the bottom of the curve; quality is at the top.  The challenge is to get IROs, CFOs and other company managers to view the process objectively in determining the information that yields knowledge.

The intent is to map the content of each IR activity against the Efficient Frontier; that means placing the value of the content of each press release, presentation, conference call etc. on the curve between quantity and quality.  Releases offering little or no value should be tossed aside.  Presentations are evaluated based on their content and strengthened, accordingly.

The Efficient Frontier enables the IRO to develop an overall and precise picture of where each activity stands relative to its opportunity to add information value.  This enables you to make conscious choices in building your value-added communications program.

Basic Role: Delivering Useful Information

An objective analysis of investor relations leads to establishing and running the function on a realistic basis.  A realistic assessment is the logical starting point in laying out an IR program. 

The number one job of investor relations is to maintain a continuous flow of quality information to and from the investment marketplace.  It is easy to define, frequently difficult to achieve, because there is wide opinion on what constitutes quality information. It can vary by investor.  Thus, the scope of quality information is broad and complex.  Or it can be a tough task to get management to be comfortable in providing the information that enables investors to accurately value the company.

Best practices say that the company, through its IR department, delivers an acceptable level of quality information to the investment community worldwide on a continuing basis, no matter what is happening inside the company.  This is the information foundation.  It is marked by and applauded for its consistency.

If it satisfies investor needs, the information flow is adequate, and companies need to do nothing more.  Companies are wise to survey the market regularly to determine if information needs are being met with an eye to filling in any gaps. 

When met, do no more.  There seems to be an attitude among IR practitioners that more must always be done – more investor meetings, more road shows, more press releases, more targeting, more retail programs. That may not be the case at all.  These additional efforts can waste money, executive time and deliver no added value in terms of building market interest and share price.  It’s useful to know when enough is enough.

At other times, the information flow needs to be modified to meet specific needs.  Companies need to know when to step up the program.  There are ways to gauge that need.  Compare the company’s financial performance against peers and then compare share price and market price ratios to earnings, revenues, book value and cash flow.  

Or the company clearly may have competitive advantages, or high confidence in new strategies to grow.  These need to be communicated to educate the market, overcome lack of awareness.

Remember, expectations are driving stock price.  Find out why they are less for your company versus peers.  Ask investors, analysts and brokers. There may be an information gap, or a confidence gap that suggests better information, relationship building and some investor targeting.

Focusing Management on Valuation and the IR Role

The road to reaching the top ranks of corporate management is in the control of the investor relations officer.  That assumes the management team is open to gaining the full measure of value from the function.

If the management is limiting the value of investor relations at your company because it is hardheaded or has misperceptions about its potential, then it’s time for you to move on, if you have aspirations to build the function into something special or build a successful career in IR.

At most companies, with open managements, the investor relations professionals determine the value of the function by their skills and knowledge. Half of the IR job involves coaching management on the investment process and how impacts a company’s value and stock price. The other half involves implementing all dimensions of the function effectively.

One area where CEOs and other top officers can use some education is in how the investment market really operates.  For most executives, their training in the capital markets has come from finance/business courses and from transaction-minded investment bankers. 

Each offers limited dimensions.  Business schools do not cover all aspects of investment.  Bankers mainly cover their self-interest.  The investment market is simply too complex to be taught in its entirety.  It is best learned by working in it, or, in the case of companies, by viewing it as a critical constituency requiring expertise as the basis to deal with it effectively.

An expanded knowledge of the securities markets forms the basis to appreciate the role and value of investor relations. 

By understanding the investment process, executives recognize how quality information leads to fairly valuing the stock.  They recognize the benefits to be gained from always maintaining a highly informed investment market.  They recognize the benefits of getting continuous feedback on how the market views the company as an investment, because, after all, it is the market that determines the company’s stock price.

Investor relations professionals perform all these important activities.

Corporate managements determine a company’s intrinsic value; investors determine a company’s market value. 

Management must understand and accept the reality that the market determines the company’s value. The goal is to closely align intrinsic and market values. That is fair value.

Intrinsic value is calculated on an economic basis, using discounted cash flow methods.  It is the total value of all the assets comprising the business; lf the company sold all the assets of the business, what would they fetch.  It is also called terminal value.

Some observers of the IR practice have suggested recently that the function would benefit from being renamed to align itself more closely with its true role and value.  Such descriptors as chief valuation officer and chief equity intelligence officer have been suggested.

We do not believe that’s needed, but we do encourage investor relations practitioners to seize the opportunity and take up the challenge of making sure that the function realizes its full potential at every company. 

Human nature being what it is, we know that won’t happen at every company, but the extent to which it happens at more companies, the more the value of investor relations will grow.

Indeed, we are confident that superior investor relations programs will give companies an advantage in having their equity fully valued.

What the CEO Expects from Investor Relations

In building an investor relations program, it’s essential to take into account the expectations of the CEO, other highest-ranking officers and the board of directors.

Discussions to determine their expectations also enable the IRO to “educate” these significant constituents on the proper role and contribution of the function.

The process of arriving at a set of goals and objectives is in practical reality a give and take proposition.  As IRO, you must satisfy their expectations and you must be able to perform the function consistent with good-to-best practices. 

Clearly, this is an opportunity to show what investor relations can do to help the market and company realize the fair value of the business, which means optimizing the company’s value, and in many cases, means raising its current value.

So, what does the CEO expect from the IR function?  One word of advice: don’t over complicate it.  CEOs have their expectations pretty well defined and they’re rather basic and straightforward.

For starters, the CEO expects a higher stock price.  Let’s not kid ourselves on that point. While it is true that stock price is determined by many factors, including several major ones that are out of the IRO’s control and even that of the company, management still expects the investor relations function to have a positive impact on stock price.

Your assignment as IRO is to put that proposition into a proper context.  The ideal situation is when the CEO accurately recognizes how IR participates in the valuation process, and how that role is achieved and maintained.

This means realizing that business performance is the main driver of value and stock price, and that such other drivers as market sentiment, the economy, relative status of your industry and other big factors come together to explain a company’s stock price at any time.  It means realizing that investor relations uses information to optimize the opportunity for investors to value the stock fairly.

If you are so unfortunate to have a CEO/senior management team with unrealistic expectations about the IR role, you will need to address the issue aggressively.  The IRO needs the courage to explain it like it is.  You certainly should bring all the tools necessary to this exercise – outside consultants, attorneys, academics, accountants, portfolio managers, surveys, studies.

Investor relations officers confronting executives uneducated or unrealistic about the role of IR or too greedy or with an intent to get rich in a business that is now public have a fiduciary responsibility to shareholders to make an effort to modify their mindset.

This leads to the question of whether the IRO works for the company or its investors.  Our thought is that IR is a unique position, which properly works for both the company and its investors.  In this sense, the IRO has a responsibility to bring reality to the situation. 

An Objective Adviser

Investor relations is one of those jobs where being objective always is necessary and important. Being objective is one of the most fundamental, necessary, and important characteristics of the investor relations role and of the people practicing it.  The ability to remain objective in your thinking and behavior is always critical.

Investor relations officers have responsibilities similar to a company’s lawyers and accountants in representing stakeholder groups and in presenting information about the business in an accurate manner.

However, the investor relations function does have a responsibility and a role to play in achieving a stock price that represents fair value, which can mean working to raise the current price.  It involves functioning in the dual capacity of being a quality information resource to investors and adviser to management on how the market is valuing the company.  Chapter 3 details the IR role.

We are recommending that studies and analysis take place to explain the IR premium.

Thus, IROs should not shirk from accepting the notion that part of their measurement involves stock price in the context of helping the company be fairly valued.  Good things happen when management, the board of directors and investor relations practitioners all understand how this unfolds.

 Management View of More IR Responsibilities

Senior management has a host of other expectations for the investor relations function — less dramatic but still important.

Among them:

  • Relieve executives of the task of handling daily contact with investment community participants;
  • Maintain relationships with analysts, investors, brokers and traders;
  • Interpret market behavior, including trading and price patterns, investor and analyst attitudes, the impact of company developments on stock price;
  • Manage the investor relations function efficiently and within budget;
  • Provide a level of information across the investment marketplace;
  • Help meet disclosure and reporting requirements; and
  • Advise management and the board on value creation strategies and practices.

If this sounds like a partial list of objectives for an investor relations program, indeed it is.

Boards and directors should expect to receive information regularly from the investor relations office, focusing on how the market views the company as an investment, status of communications programs to reach investors, profile of the shareholder base, extent and content of analyst reports, any governance concerns of investors, attitudes toward management and its key strategies and initiatives to grow.

What the Investment Market Expects from Investor Relations

The fundamental goal of an investor is to make money.  That is their purpose when deciding to invest in a company.  Thus, the company’s IR staff serves investors when helping them make money.

To help carry out their mission, here is what investors and analysts expect from investor relations representatives:

  • A consistent flow of valuable information;
  • Fast response and qualitative answers to questions, around the clock when called for;
  • Ability to arrange face and telephone time with senior executives, especially the CEO;
  • The confidence and respect of management in being qualified to speak for the company;
  • Candor, honesty, accuracy, knowledge, financial and business acumen when speaking about the company, industry and competitors;
  • Insights into the character of the business – its strengths/competitive advantages, weaknesses/issues, personalities of key executives, real aspirations/vision/mission, any hidden agendas/problems looming, hint of breakthroughs on the way;
  • To be included in invitations to company meetings and presentations;
  • A reasonable amount of industry and competitive information;
  • An advocate with management when needed.

Investors and analysts can benefit tremendously from an effective investor relations officer inside the company.  In fact, an IRO can build a dependency relationship.  The goal of both parties is to reach a comfort zone where meaningful discussions can take place within the boundaries of disclosure rules. 

CEOs, CFOs and other senior officers are not always, or even, often available, they’re not as likely to be as consistent in their level of information, and most are not as comfortable talking with investment pros as the IRO should be.

The key to being valued by investors is to be Reliable — as an information source, by being consistent in providing truthful answers, by being able to bring executives to the table, and by offering good help in analyzing issues and situations.

An effective investor relations officer can raise the market’s expectations – for the company and for the value of the IR function.

The Ideal Investor Relations Officer

So, what are the qualities of the ideal investor relations officer?  If we could create the perfect model of the IRO, what would the person bring to the job?

We are inviting constituents of investor relations officers to suggest their model of the IRO.  We intend to publish a number of them, offered by professionals in the fields of law, accounting, academia, recruiting, investment management and analysis, CEOs, CFOs and other top corporate officers.  These are the people who have a stake in the quality of your work, who benefit or don’t from what you do, who determine your role and value, whose opinion matters most.

We are starting with comments from Smooch Reynolds, a prominent investor relations recruiter who is chief executive officer of The Repovich-Reynolds Group.  Her book. Be Hunted! 12 Secrets to Getting on the Headhunter’s Radar Screen has guided numerous professionals in a range of business fields.

In addition, we offer our profile of the ideal investor relations officer.

Roles, Capabilities and Responsibilities:

  • Senior adviser to management and the board on the company’s value-creation proposition;
  • Coach to management on the investment process and market behavior;
  • Resident company expert on understanding and advising management on how the capital market values your company;
  • Key source of prime information to the investment community;
  • Efficient manager of the investor relations program.

Investor relations is a unique function, bringing together a diverse set of disciplines: finance, accounting, communications, business operations, economics, law, knowledge of investment process.

Thus, the investor relations officer brings together a unique set of skills and experience.  Unlike most other business functions, investor relations is not framed by a set of proscribed, well-defined practices. 

It isn’t built around a structure of laws or accounting rules or assembly-line procedures or even behavioral practices that can be used to judge human performance.  Information — the product of the IRO — is intangible by definition; even financial reporting within a framework of rules is subject to wide interpretation.

In their environment, investor relations practitioners largely determine their own effectiveness.  It is doubtful there is any other corporate function where a person’s contributions and value are more in their own control than in investor relations.  Bottom line: It’s up to you to determine how well you do.

Thus, the IR role is at the same time highly opportunistic and daunting.

Personality Qualities of the Investor Relations Officer

What does it take for a professional to bring investor relations to this pinnacle level of performance?  We offer a list of personality characteristics that well serve investor relations professionals.

  • A senior adviser to management mindset.
  • Executive demeanor that wins/commands respect among top executives, investment bankers, portfolio managers and other key players to enable you to have “a seat at the table,” functioning effectively in influencing major decisions.  A certain maturity is a prerequisite.
  • Ability to see the big picture, be a strategic thinker, predict outcomes and not get hung up in detail and fragments of situations.
  • Management effectiveness, played out in managing the total work process, time management, budget controls, delegating assignments and supervising people in ways that optimize their output.
  • Knowledge and skills in finance, communications, marketing, human relations, operations, investment practice.
  • A set of strong people skills. The ability to be persuasive, assertive, a good listener, team participant and consensus builder.  Add importantly, courage to say and do what needs to be said and done.
  • The ability to cultivate meaningful working relationships with the widest diversity of people – executives, managers, functional specialists, scientists, product/marketing specialists, assembly workers, clerks, academics, portfolio managers, analysts, traders, sales representatives, lawyers, accountants, the list goes on.
  • Mindset to forever be a student, learning and more learning, in a dynamic, ever-changing environment — corporate operations, finance, investing, etc.  This includes being an avid reader and being able to absorb and maintain loads of information.
  • Maintaining an objective approach to every situation and a healthy skepticism.   This often plays out in not automatically accepting everything you hear.  Be your own analyst.
  • Ability to do good research, covering trends, macro factors, the industry, your company and competitors, the investment market.
  • High energy, to put in long days and weeks.
  • Ability to maintain enthusiasm and a positive state of mind, even while putting in those long days and weeks.

Seizing the Investor Relations Opportunity

About now, as an IR practitioner, you might be thinking, “what does he know?  It is fine to write about the ideal investor relations function, it’s another thing to get there.

You may be saying to yourself I know what needs to be done.  I can’t get my management to think this way or work this way.  They’re not going to give out any information that might give comfort to the enemy.  They’re not going to give me free reign to call the shots on how we work with investors.  They are not going to humble themselves by letting me teach them about how the market works.  They’re not going to let me get cozy with the board.”

If you truly know your stuff, they would be smart to let you do those things.

I know how tough it can be.  I’ve been there – worked in IR for a half-dozen companies for nearly 25 years.  Traveled with the CEO across the country (and world) doing presentations and meetings.  Savored small victories in getting him to listen to my advice on what to say, how to interpret investor attitudes and comments.  Explained the real question behind the sell side analyst’s or portfolio manager’s question.

They’d be smart to let you do all those things.  They would be open to learning more about how the market really works, how investors make decisions and manage portfolios.

There is no end to the learning.  The smartest investors are still trying to figure out how to improve the investing process. Academic papers will never stop being written.  Refinements will continue to be made.  On this website, over time, you will see many new and refined ideas on investing and value creation.

Consider yourself fortunate if you have an enlightened management team that respects, understands and appreciates the investor relations role and people filling it.  You can make a major contribution by being the resident specialist on market behavior, how investors analyze your company and value its securities – function as the chief valuation officer.

Seize the moment, make the most of your time, get the routine activities managed somehow without consuming all your time, and focus on what makes a difference.  We’re offering ideas throughout this book on how to do these things.

More likely, management needs some of the “coaching” about market value and value creation that you can provide.  Few CEOs and other top officers bring expertise on the capital markets to their positions.  By training and experience, they are engineers, finance specialists, scientists or something other than investment professionals.  Don’t be rebuffed by their apparent or self-proclaimed knowledge of the markets.

The fully qualified investor relations officer has a broad range of expertise: on investment process, finance, operations, communications.

The fully qualified investor relations officer has the necessary set of skills to be successful: assertive, persuasive, executive presence, likable, intelligent, widely knowledgeable.  These are fundamental components of the job. 

Go get it, if you need some learning on the market, finance, value-based management, and you want to have a career in investor relations and you want to optimize the role and value of the function.

You need to be multi-dimensional, giving “education” of management as much emphasis as execution of the work product.  You might not want to tell the CEO that you are teaching him or her about investor behavior and value creation; be more subtle than that.  But make it a personal job priority that remains inside you.  And it’s a continuing education; the market is constantly changing.

Patience clearly is a virtue in the field of investor relations. 

So is accepting setbacks and continuing to push ahead. 

You can win executives over; in many instances, they won’t even realize it is happening.  They are learning, little by little, each day, by your actions – a brief conversation about why the market is behaving that day the way it is, report comparing ratios and returns and price and volume against peers along with some interpretation of what they mean, summary of an institutional shareholder’s investment style in preparation for a meeting.

Impress them with what you deliver to them.  It’s the content that matters.

Small victories add up.

In many ways, the responsibility of the chief investor relations officer for a public company can seem to be intimidating.  Corporations, analysts and investment managers have a lot at stake. The stock market today has a huge influence on a company’s well-being.  Professional investors have the responsibility to manage billions of dollars. 

These are serious jobs, and the IRO is right in the middle, able to influence outcomes by your behavior.

Knowledge is Power.  And Control.  As the investor relations officer, you can take control based on your knowledge of company strategies and operations, of investor’s methods and information needs.  Rather than be intimated, you have the opportunity to be a major influence on your company’s value and investors’ decisions.

Continue to Chapter 3.