Risk & Compliance

Best Practices in Investor Relations

Amid a flow of rules, regulations, and scandals, companies are searching for new guidelines and measures.
Kara NewmanSeptember 18, 2003

As the investor relations function has grown more strategic and complex, IR professionals are seeking ways to measure how well they’re doing.

On one hand, potential yardsticks abound for measuring overall IR success: stock price, the shareholder mix, analyst ratings, and financial metrics such as price-to-earnings ratios. But on the other hand, IR professionals often lack meaningful ways to measure how the wide array of individual corporate practices and processes entrusted to them stack up against other companies’ practices.

“Best practices for IR has a lot of different dimensions,” explains Kurt Fawkes, vice president of investor relations for Sprint Corp., based in Overland Park, Kansas. When quantifying best practices, Fawkes points to two measures: the cost to operate the investor relations department, and a maximum premium for the stock. However, he maintains that “the responsibility of the investor relations officer is to make sure that the investment community is fully informed [about] the pluses and the minuses of investing in a company’s equity. That’s an intangible goal that’s tough to measure.”

Amy Goodman, a Washington, D.C.-based attorney, offers a legally oriented approach that takes into account the practicality of daily operations and realities. “Best practices to me are practices that a large majority of companies use because they are effective [in complying with the law],” says Goodman, who is of counsel to law firm Gibson Dunn & Crutcher. “IR is all about interfacing with your investors. So you want to have an effective program that’s going to do both.”

Why is it so hard to determine how well a company’s investor-relations practices stack up?

For starters, it’s difficult to aggregate even broad information about specific corporate practices. Moreover, what constitutes “best practices” for one company or group of companies may not work for another with a different market cap, industry, or shareholder base.

“There’s nothing specifically published that says ‘this is the way you should do it,’ ” says Leonard F. Griehs, senior vice president of investor relations for Camden, New Jersey-based Campbell Soup Co. “Every company defines [best practices] for themselves, based on the level of commitment of their own management.” For example, if a peer company’s CEO is present at all investor meetings, that may be a best practice, but not every CEO is willing and able to commit to such a schedule. Furthermore, notes Griehs, resources in the form of money, time, and staff can make an enormous difference in what a particular company can accomplish.

Determining a set of “best practice” prescriptions or guidelines is useful for any company, but is particularly critical for companies in flux, such as companies building an IR function for the first time, undergoing a radical change, or embroiled in crises.

“A ‘best practice’ is dictated by a company’s status at any one point in time,’ ” says Campbell’s Griehs, who also is a former chairman of the National Investor Relations Institute (NIRI). “Let’s say you have a major change in management because the company stumbled. You may change the practices you use to go to the investment community in a way that you wouldn’t do if you had a stable management and earnings growth for the past five years.”

“Gold Standard” or Merely Standard

To establish their own investor-relations standards, most companies rely on an unscientific amalgam of talking to other IR professionals, examining surveys and studies issued by trade organizations and consulting firms, and soliciting feedback from institutional investors and sell-side analysts. In the end, many companies walk a fine line between “best practices” and widely used practices — in other words, between the gold standard and the merely standard.

A worthwhile starting point suggested by many experts is to participate in organizations such as the NIRI, Financial Executives International (FEI), or the Investor Relations Association, which can serve as resources for gathering information about other companies’ practices. Sprint’s Fawkes, however, recommends that investor relations officers go straight to the source.

“We talk to the investment community all the time,” he says. “We ask investors, are we giving you the right information to make an informed judgment about [our company’s] investment merits? Are we disclosing the right metrics? Is it timely, and so forth? We rely on the investment community to drive best practices for us. They’re the customer.”

Conference calls are one area where Sprint and Campbell Soup have implemented innovative practices gleaned from such methods. At Sprint, the IR team recently added a “deck,” or slide presentation, to quarterly conference calls. “Investors can see graphically what we are describing in words,” explains Fawkes. “That was something we saw other leading companies doing, and not just within our industry.”

For its part, Campbell responded to requests by institutional investors to include the company’s CEO on conference calls. And for webcasts, Campbell, too, has added slides and video to what were once audio-only presentations, because other companies were fast adopting this as a practice. “It forced us all to say, you’ve got to do as complete a job as you can,” recalls Griehs.

A Snapshot of Current Practices

So, what practices are on their way to becoming the gold standard for conscientious investor relations departments? According to a recent Thomson Financial survey of more than 250 IR professionals, here’s a snapshot of how investor relations officers (IROs) are handling some major responsibilities associated with reaching out to the buy side and the sell side.

  • 24 percent of all IROs surveyed said they travel quarterly to meet with investors; 36 percent travel monthly. However, at mega-cap companies, fully half of IROs travel to meet with investors every month.
  • More than 64 percent of IROs said they plan on holding an “analyst day” during the next year. Within that group, 55 percent now host a half-day. A whopping 94 percent said attendees include both the buy side and the sell side, but not fixed-income participants. Only 35 percent of IROs said they schedule small group meetings at analyst days, and 23 percent schedule one-on-one meetings. Nearly 90 percent of respondents said that Regulation FD has not affected the number of one-on-ones that they hold.
  • 84 percent of IROs said they host group investor meetings (other than a formal analyst day) with management at company headquarters. Nearly 40 percent of respondents said these meetings take place each quarter; almost 30 percent host them once a month.
  • A majority of respondents — 68 percent — feel that sell-side conferences are effective, although mid-cap, small-cap, and micro-cap companies were most likely to express this sentiment. Fully 78 percent of IROs said they are pursuing alternatives to sell-side conferences, such as analyst days, road shows, and trade or industry conferences. Fixed-income investors are out of luck, however: More than 74 percent of respondents said they will not be attending fixed-income conferences during the next year.

IR Monthly Update is produced for CFO.com by Thomson Financial. This information is believed to be true and accurate, and we are not responsible for inaccurate information. If you have investor relations news to share, please send it to [email protected]

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