Chapter 4
Today the role and scope of investor relations are undergoing more changes. Protecting the company and its management through persuasion and advocacy gives way to dialogue and development of long-term understanding. As with the previous eras, the shift to the current era in the development of investor relations, synergy era, was caused by changes in the economy and society.
The shocking corporate failures of the early 21st century, including the collapse of dot-coms and accounting scandals at the largest companies, put the whole model of the corporate America to the test. Indeed, scandals with financial accounting practices at Enron, Tyco, Global Crossings, Williams, and other corporations called for more scrutiny of disclosure standards and investor relations in general. Laskin suggests that the collapse of Enron was the wake-up call for investor relations practice that now has to assume more responsibilities than ever before.1
Suddenly, the unprecedented growth in the stock market was replaced by recession. The competition for capital became more intense. Investor relations became one of the key activities that could make or break a corporation; CEOs saw that investor relations is not one of the auxiliary functions, but an activity that can create a competitive advantage.2
The scandals led to stiffer regulations from the Securities and Exchange Commission (SEC) and Congress with the passage of the Sarbanes-Oxley Act in 2002, which was aimed at improving corporate governance and making managers and boards of directors more accountable. The Act expanded the scope of required disclosures and changed the disclosure procedures. But despite the expanded disclosure, investor relations today has to go beyond publications of obligatory disclosure documents. Investor relations is not about the amount of information provided. Rather, it is about understanding. Investor relations’ task is to help investors understand the company and its business model. The goal is not to have as high a valuation as possible but rather a fair value of the stock price. Finding the right investors, building trust and relationships with them, and developing long-term ownership patterns to combat volatility are the new goals for the professionals.3
Investors themselves are changing. They are not satisfied with information in the obligatory disclosure filings despite the increased amount of such information. They want to know the company’s strategy, management team, its vision, and role in the society. Today, communications targeted at investors “have to be able to explain not only the numbers, but also the nature of the business, its long-term strategy, and non-financial information, as investors have learned to incorporate these higher-level questions into their buy and sell decisions.”4
The long-known equation return on equity (ROE) is being transformed into return on expectations, and managing these expectations becomes an important part of investor relations programs:
Prevailing wisdom is that inasmuch as it [investor relations] deals largely with financial data it is best left in the Financial Department and, perhaps, staffed by ex-security analysts, lawyers or others comfortable with numbers… This may be yesterday’s rationale. The ROE analysts are really interested in Return on Expectations. We submit that too often missing from the “quants” communications is any sense of corporate vision; or long range strategic rationale; or corporate competence; or leadership—all subjective values better left to broad-gauged PR [public relations] people to communicate.5
Although it is doubtful that public relations professionals will be much better at investor relations than ex-financial analysts, the importance of communicating both “quants” and “quals” cannot be doubted. Thus, perhaps, instead of arguing that investor relations is better left to communication specialists as was the case in the earliest era of investor relations history or that investor relations is better left to financial specialists as was the case in the second era, the profession can start working on integrating both areas of expertise. And as such enters the third (synergy) era of investor relations development.
Today’s investor relations cannot suffice with only financial disclosure—investors are not interested in seeing 10-Q or 10-K. Rather, investors are interested in understanding the company, its business model, and its value-generation capabilities. If it involves reading a 10-K, investors will read it. But typically it requires more than that. This is exactly where investor relations can earn its mark—helping investors understand the company. In turn, it means that “the communication skills of the IR specialists will be more important than ever.”6 It becomes important for investor relations officers not only to be able to know the words of the investor relations language (financial terms) but also to know the grammar of this language and the proper ways to use these words (strategic communication). In other words, both areas of expertise, business and communication, are essential to the modern practice of investor relations.
The changes in the media landscape and communication technologies also brought changes to investor relations. Today one can hardly isolate messages intended for shareholders from messages intended for consumers—access to media channels and instantaneous widespread communication technologies make information a commodity. From the information age, when information was the most treasured asset, we are now in the postinformation age, when information is widely available to everybody and in fact commoditized. Communication professionals can hardly limit their messages to a specific geographic region, demographic group, or type of public. Employees, investors, consumers, suppliers, and others can easily gain access to the messages intended for other types of publics.
As a result, investor relations officers might take into account the impact of investor relations messages not just on investors but also on employees, consumers, and others. People who represent their companies today must “possess extraordinary public relations skills and understand the implications of upcoming announcements for all of the company’s major stakeholders—including employees and the community—and not just the shareholders.”7 In this environment, integration of all communication functions, such as investor relations, public relations, marketing, community relations and similar, under one umbrella can create a competitive advantage for a corporation. David Silver goes further saying that “the convergence of IR and PR has become so important that not combining those functions could have negative consequences for a public company’s share price.”8
This shift demands a return of communication expertise back into the investor relations profession. In fact, today’s investor relations requires expertise in both areas—communication and finance—to be present and coexist. Such investor relations practice will finally be what pioneers of investor relations envisioned as communication and finance merger to create sophisticated and successful investor relations programs. Investor relations officers will need to gain proficiency in both areas as well through dual degrees, graduate degrees, or professional training.
A Harvard Business Review article discusses the need for this new era of synergy:
Aside from those companies that assign to the investor relations function whoever happens to be available (one major corporation, for example, gave investor relations duties to a retired chemist), many organizations make one of two common errors:
1. Some companies will decide that investor relations are properly a part of public relations. They are unaware that many security analysts feel uncomfortable when talking with public relations people because, rightly or wrongly, analysts are generally suspicious of being “snowed.”
2. Other companies assume that the best candidate for the investor relations function is found in the treasurer’s or controller’s department. Security analysts, the reason, are figure-happy, and who is better qualified to throw around statistics than the man who has lived with them? Such reasoning is unsound, and if it accomplishes nothing else, it serves to demonstrate that the chief executive of the company has not got the message of what investor relations is all about. A moment’s reflection will reveal that knowledge of the figure does not, per se, establish ability to communicate that knowledge effectively.
The solution to be found lies somewhere between these two extremes. The best candidate for the investor relations post will have had experience in both public relations and the financial phases of a company’s operations.9
The synergy era requires investor relations officers to be experts in both communications and finance, as well as to have knowledge about securities laws. The new investor relations professionals are not mere advocates of management—they listen to investors and analysts and bring the feedback to the company. The shareholder research and collection of feedback from the financial community becomes of vital importance. But it is not enough to passively listen to shareholders—proactive activities are required to encourage investors and analysts to share feedback with the company. Proactive activities are also required to learn about the companies’ shareholders themselves: Why do they own the stock in the company? How long do they own the stock? Where did they acquire it, and under what conditions will they sell it? What other companies and industries do they own stock in? How would they like to receive information from the company? What other sources of information they rely upon? Investor relations officers must have programs in place that would ask and find answers to these and many other questions to make sure that company knows its shareholders and analysts following the company and knows them well.
This feedback serves both the management of the company and the shareholders. Investor relations facilitate the exchange of ideas between the management and the financial community. Shareholders should be as likely to persuade management to adopt the shareholders’ propositions as management is likely to persuade the shareholders to follow management’s recommendations. Similar to the two-way symmetrical communication model10 or mixed-motive model,11 investor relations professionals become loyal both to their employers and to the target publics. The goal of the investor relations is to have the interests of shareholders and managements aligned. Indeed, serving investors is the exact work that corporations’ management requires from the investor relations officers. Lou Thompson, former president of NIRI, elucidates,
The role of investor relations is to minimize investor risk by assuring that the company is providing information that is clear and understandable through means that achieve full and fair disclosure. The lower the perceived risk in investing in a company, the lower the company’s cost of capital. There is a true bottom line benefit of full and fair disclosure.12
In other words, the more investor relations officers serve the public and the investment community, the better they serve the organization because it decreases investor’s risk and thus decreases the cost of capital for the company. Two-way communications appear to be at the very heart of the investor relations profession.
In addition, in today’s investment market, the responsibilities of investor relations officers to the investment community are growing at large. Investor relations must become pioneers in efforts to change the rules of financial disclosure or change other aspects of financial markets if they learn investors’ dissatisfaction with the current practices. It is a job of investor relations officers to ensure the markets operate smoothly, providing companies with access to capitals and investors with understanding how that capital is being used.
The previous eras saw investor relations officers as technicians following management’s directions or responding to shareholders’ requests. Investor relations officers were mostly consumed by technical rather than strategic activities: “An exclusive emphasis on intended technical activities deflects attention from the symbolic nature of investor relations departments and the institutional sources of organizational structure.”13 Investor relations today, however, is becoming a management responsibility with certain autonomy and decision-making power within the corporate structure. Investor relations professionals are engaged in more proactive communications than before through meetings with analysts and investors, roadshows, conference participations, and so on.14
The modern synergy era of investor relations was caused by many changes in the economy, technology, regulations, increased shareholders’ attention to the role of corporations in the society, and many other factors. These changes placed new demands on the investor relations professionals and required the investor relations function to adapt. “The methods of investor relations are continuing to undergo changes in the wake of scandals, revised government regulations and legislation, increased knowledge levels of investment community, new technology, the global investment marketplace, and overall societal desires for transparency and ethical business operation.”15 To respond to these challenges, investor relations has to combine the expertise of both communication and finance to devise sophisticated two-way symmetrical programs to facilitate dialogue between company’s management and the financial community with the purpose of enhancing mutual understanding. Loss of investor confidence resulting from scandals, newly imposed regulatory requirements, and shareholder activism should be addressed by open and clear communications.16
Indeed, “success in investor relations requires the companies to extend the scope of investor relations from a mere publication of obligatory annual and interim reports to more frequent, extensive, proactive and diversified two-way interaction and communication.”17 Investor relations is not about numbers anymore; today’s investor relations is about building and maintaining relationships. Investor relations officers must become proficient communicators with knowledge and skills of both public relations practitioner and financial analyst. Thus, the synergy era calls for integration of communication and financial components of investor relations. Investor relations officers in the synergy era have expertise in both finance and communication. Investor relations activities in the synergy era focus on long-term relationship building activities. Investor relations becomes a managerial proactive activity based on research to anticipate the relevant issue rather than a technical reactive function. Such investor relations is based on two-way symmetrical communications between the company and the financial community.
It is possible to conclude that the modern state of the investor relations profession is a direct result of the investor relations history. The profession of investor relations and investor relations professionals went through significant changes over the last 60 years or so. As described earlier, the first era of investor relations, the communication era, was characterized by the lack of financial expertise among investor relations practitioners. Investor relations tasks were assigned to publicists who were largely press agents and technicians focusing their job on putting the company’s name into mass media. Investor relations in this period lacked strategic and managerial activities. The organizations did not conduct research to understand their shareholding patterns. The feedback from shareholders was not collected. It was a one-way stream of information: from organization to the investors, mostly through the mass media channels.
The second era, financial era, saw the shift of investor relations responsibilities from communication specialists to accountants and financial professionals. Under the supervision of CFOs, investor relations activities became focused on providing financial disclosure to investors. The focus from mass media changed to one-on-one meetings with institutional shareholders and financial analysts. This changing nature of communications enabled two-way information streams. Feedback was gathered. It was, however, rarely used to modify the activities of corporations. Rather, it was used to craft more persuasive messages to “sell” the organization. The “selling” approach positioned the goal of investor relations in increasing the share price to maximize equity value: the higher the stock price the better. This might have been one of the reasons for the “creative accounting” at Enron and other corporations.
Currently, investor relations enters the third era, the synergy era. Both communication and financial skill-sets are valued equally high for their contribution to investor relations. The goal of the function is the improved understanding of the company among investors and analysts. Investor relations officers are looking for a fair value rather than high value—overvaluation is perhaps as bad as undervaluation. It is two-way communication with information traveling from organizations to investors and back from investors to organizations. Feedback from investors is actively sought, and shareholder research is conducted. The feedback is analyzed at the highest level of the organizational hierarchy and is used in the decision making and strategic planning. CEOs expect their investor relations officers to be actively engaged in the corporate decision making and supply the information from shareholders and about shareholders to the management team.
The focus of the synergy era on the improved understanding of the company requires investor relations to provide both positive and negative information. The goal is not high value of stock, but fair value of stock. To create better understanding of the corporate business value, companies have to expand their communications with shareholders from obligatory financial disclosure to include the information beyond U.S. generally accepted accounting principles (GAAP), the information “that supplements and complements a firm’s financial statements.”18 More and more, the focus of investor meetings shifts to intangible and nonfinancial aspects of business. The Centre for the Management of Environmental and Social Responsibility explains, “Investors increasingly consider non-financial aspects in their assessment of companies.”19 The quantity and quality of information investors require today to make proper valuation of a company is constantly growing. With that, demands on the investor relations officers are increasing as well—professionals are required to understand every aspect of their company’s business, understand its position in the industry, and be able to discuss this information with investors and analysts in compliance with variety of laws and regulations that govern the financial markets.