Chapter 6
As explained above, the roles and functions of investor relations as a profession are closely tied to changes in economy and society in general. The very appearance of investor relation departments was caused by pressure from social movement activists and financial analysts: “Whereas social movement activists framed shareholder rights as a problem and compelled organizations to uphold them, professional analysts subtly coerced organizations to signal their commitment to investor rights by creating boundary-spanning structures.”1
In other words, not only companies increased their shareholder’s base, but social movement activists framed the relationship with shareholders as important and thus called for investor relations. A study of investor relations practices in Japan arrives at similar conclusions when Yoshikawa suggests that changes in the ownership structures and corporate finance practices require companies to engage in communication with their investors.2 It is quite important because it means investor relations cannot be equated with just disclosure. The profession must move beyond mere publishing of financial information. In fact, investor relations ethical obligation becomes upholding the shareholder rights the activists demanded:
Investors truly indeed need an investor relations professional inside the corporate structure to protect their interests:
Ethical problem associated with shareholders arises from the nature of the agency relationship between shareholders and managers. The capitalist system is driven by an implicit assumption that people are driven by their legitimate self-interest. Agency theory, the theoretical foundation of much of academic accounting, assumes that managers are self-interested and are not burdened by ethical considerations; therefore, the central problem for shareholders is to put controls in place to ensure that managers do not expropriate excessively the shareholders’ wealth for themselves.3
Investor relations officer becomes one of such controls. The investor relations job is to represent the interest of shareholders within the management team. When a company is considering a decision that can affect shareholders in a negative way, it is an ethical and professional responsibility of the investor relations officer to participate in a discussion by providing the perspective of shareholders. This can save a company from future shareholder lawsuits or aggressive shareholder activism at the next annual meeting. In a sense, investor relations officers serve as internal activists—if necessary fighting against top management decisions in the board room in order to protect the interests of shareholders. Mark Aaron, VP of Investor Relations at Tiffany & Co. states, “IR is not a role for someone who lacks courage to speak up.”4
The loyalty of the investor relations officers lies not only with shareholders but with the company as well. In fact, investor relations officers are representatives of shareholders in the company’s board room, but they are also representatives of their company among the shareholders. Once the company’s decision was made with the best interests of all stakeholders taken into account, it becomes a job of the investor relations officer to explain this decision to the shareholders and financial analysts. In the complexity of corporate business models, the benefits or drawbacks of different decisions are not always obvious.
Indeed, not clearly understanding a company’s business model is one of the main reasons why investors choose not to invest in a company’s stock.5 It is essential to present all the complexity of the company’s business operations in a simplified and yet comprehensive picture. Executives tend to disclose too little information or disclose too much, overcrowding the data with nonrelevant noise. The professional responsibility of the investor relations officers is to identify and maintain the perfect informational balance that would be the most beneficial for investors and financial analysts.
Once the company made a decision, investor relations officers would need to deliver this decision to investors and explain all the details of such decision and how it will affect the company’s business model in the short- and long-term future. The investor relations officers may be required to educate shareholders on the reasons behind such decisions and to defend the company’s decisions against shareholders’ criticism if such decision is in the best interests of the company.
In a sense, investor relations officers are taking on a role of “devil-advocates”—providing the opposite perspective both in the boardroom and among the shareholders. This is not an easy role, but it is the role that can help a company establish a competitive advantage through investor relations. After all, corporate lawyers, for example, are paid to disagree with the management if the management decision violates laws and regulations. The lawyer who would agree with the management all the time would be useless at best or criminal in the worst case scenario. The same is true for investor relations. By knowing the company’s investors well, investor relations officers can foresee the reactions and objections of shareholders to the corporate plans and thus ensure that top management, when making such plans, takes the interests of shareholders in mind.
The key loyalty of the investor relations professionals, then, lies not with the management of the company and not even with the shareholders, but rather with the profession of investor relations itself and its role in the society. Medical doctors, for example, when treating a patient should not let their decisions be guided by insurance companies or hospital costs, despite the fact that hospitals and insurance companies are the ones paying their salary. Medical decisions should not follow the wishes of a patient, either—no matter how much the patient wants to smoke or drink alcohol, if it puts a patient’s life at risk, it is a professional responsibility of doctors to inform the patient about it and demand the patient stops such behavior. The same is true for the investor relations professionals—it is important to stand up to the management and defend the interest of shareholders as much as it is important to stand up to the shareholders if their actions can damage company’s ability to generate long-term value.
It is also an ethical obligation of the investor relations officers to lead both corporate executives and shareholders to take a note of the important issues left under radar. Today, for example investor relations officers put on the agenda issues of corporate social responsibility and environmental sustainability. Not all investors and not all executives perceive these issues as relevant. Yet such issues as gas emissions, climate change risks, and sustainable social practices may threaten the long-term success or even existence of corporations. Investor relations should raise these issues in the boardrooms and in meeting with shareholders, ensuring that all parties involved understand the importance of these issues and how corporations plans on dealing with them. There is hardly any doubt that eventually such disclosure will be mandated. Presently, however, it is the responsibility of the investor relations officers to ensure their companies are doing all they can to guarantee sustainable growth for centuries to come and educate investors and executives about these issues.
As a result, investor relations officers serve their companies, their companies’ shareholders, and society at large. Thus, developing a sense of professionalism is essential for a successful investor relations officer. Investor relations officers should have an investor relations education, should be members of the professional organization, such as National Investor Relations Institute, and should stay up-to-date with the changing environment of the profession.