Scenario: A listed company, widely owned in global markets, sees the challenges of a weak business environment compounded by serious missteps in corporate strategy. Investors, anxious to give the company the benefit of the doubt, eagerly await management’s response to the problem.
But, who within the company will provide that? And when?
There are clearly correct answers to those questions, but first, some background.
Investing is both an art and a science. Investors accumulate information from multiple sources, sift the data according to provenance, relevance, and association with their objectives, and apply their artistic and scientific skills to reach a conclusion.
The science is in the data analysis: stock-specific information about revenues, margins, growth rates, and returns on assets or investment. The analysis also considers such macro information as GDP, inflation, currency values, and interest rates. This data is largely backward-looking, representing what has happened.
The art of investing emerges when contributors offer predictions about what might happen. Companies provide guidance; sell-side analysts offer future estimates; and investors form their own assessments, ultimately backed by the money they invest.
For the institutional investor obsessed with getting these assessments right, contact with company representatives is a key part of the process. While the details of most communications between a company and its shareholders are regulated under Fair Disclosure rules, the seasoned investor looks to build a relationship with key personnel, looking to understand the company’s DNA at a very high level.
This knowledge goes beyond the numbers, to building a relationship with the CEO and other officers; appreciating the quality of their leadership and vision; and creating a picture of the company’s business cycle and its performance in every environment. It is through this extra mile of effort that the asset manager can become a core investor and the company a core investment, positions that are important to both parties.
A vital component of this relationship is, of course, a fully functioning, wholly enabled investor relations team. At the best companies, IR professionals act as surrogates of senior management, allowing executives to fulfill their true purpose, that of actually managing the company. Conversely, the absence of a top-class IR function places an intolerable burden on both the company and its shareholders, compelling investors to insist on meeting with senior executives before they will make a commitment to the stock.
Simply put, investor relations is financial public relations but with greater consequences. It represents an opportunity to combine the reality of numbers and strategic plans with context and narrative that will shed light on the story. The competent IR professional, supported by a proactive C-suite, can describe the company’s data in an understandable and informative context, adding another dimension to the numbers.
I emphasize the role of context to draw attention to the chief investor relations officer’s role of communicator-in-chief, because it is here that much additional value can be provided. But it is also where the risk of mistakes bears a much higher price.
Understanding what can be passed on to investors, and when, requires knowledge of the company, awareness of regulations, and familiarity with various methods of communication. Knowing to whom information should be relayed and how (beyond standard press releases) requires knowledge about investors and the styles of their portfolios.
Many companies get this wrong, sometimes through lack of attention, and sometimes through basic incompetence. But for companies that want to get it right, awareness of the classic mistakes that can jeopardize relationships with investors is a major positive step.
Here are some examples of the mistakes that drive investors crazy, leading to sales of stock or, even worse, indifference:
- Too much information – packing a meeting presentation with as much data as possible in the hope that some of it will be useful
- Too little information – filtering the output based on a vague notion of corporate secrecy or lack of awareness of what’s important
- Topic avoidance – hedging responses to questions about recent performance in the hope that the investor will move on
- Radio silence – failing to respond to problems when they occur; neglecting to follow-up on promises to provide further information
- Not knowing your major investors – every shareholder has different objectives, style, entry points, and requirements
- Failure to add context – no company exists in a vacuum; appreciation of the environment and competition provides valuable data
- Executives as IROs – the C-suite should be managing the company, not investor relations.
Some of these problems may seem minor and be easily fixed, and that’s true. But they all speak to a need for discipline, for being on message, for having a repeatable process, for being respectful to the audience’s needs and to the need for a story.
Company representatives must always remember that these are meetings with the company’s owners, each of whom, regardless of size, has a right to understand the health of their asset. Going the extra mile, developing the context, making the call, and providing the follow-up all help create the relationship that both sides need and desire.
Among all of these issues, the most awkward and potentially corrosive is the over-involvement of senior management in the investor relations function. It is true that the CEO, chairman, and CFO are, and should be, the major contributors to the company’s vision, strategy, performance, and compliance. It is equally true that some major investors will insist on speaking to these luminaries as a condition of ownership.
However, we should all be aware that a C-level executive on the road can undermine the value of the investor relations team by adding depth to a story that the IRO is unable to match. Dependence then shifts to the CEO, who is seldom available when really needed.
Such a situation almost guarantees that the investment community will never have the core relationship with the company that both parties crave: where the shareholder supports management, contributes capital when required, and provides resilience to the stock price when economic and business conditions are poor.
Some executives relish performing the role of chief investment relations officer and perform it very well. Just be aware that when the CEO turns up for yet another meeting with a major investor, those at the table are likely to be thinking, “Who’s running the company?” and “Who should I call when I need some answers?”
Jonathan Passmore is a principal of Valor IR Consulting, LLC.