Chapter 2
The professional organization of investor relations officers, National Investor Relations Institute (NIRI), adopted the latest definition of the profession in March 2003. Investor relations is defined as “a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.”1 This definition was a significant step forward from the previous version adopted by NIRI in 1996, where investor relations was labeled “a marketing activity” with the purpose of “providing an accurate portrayal of a company” in order to have “a positive effect on a company’s value.”
The current definition moves away from the narrow marketing focus on sales and promotions as it now includes finance, communications, and law to the mix of investor relations activities. This is indicative of the changes that the field of investor relations experienced at the start of the 21st century with the wave of corporate scandals and changes in securities regulations (described later in chapter 5). Indeed, today investor relations cannot be a simple marketing activity—rather, it is a strategic management responsibility. Investor relations is not concentrated within the investor relations department—the whole company is run with the interests of shareholders in mind. Investor relations officers must be members of the top management team and be present whenever key corporate decisions are being made rather than simply communicate, or market, these decisions to shareholders after they have been decided upon. The investor relations officer’s responsibility is to make sure the interests of investors and shareholders are taken into account and, in the event they are not, raise this issue in front of all corporate managers and the board of directors to ensure that decisions that do not meet the interests of shareholders are not accepted.
Another important change in the definition was the addition of two-way communications. Two-way communications was added to the definition of investor relations to substitute one-way flow of providing information about the company. Previously, investor relations was often equated with disclosure—we put information out there, the rest is not our business. The shareholders, however, demanded to be heard. The feedback loop in communications is a necessity. As the influence of shareholders grows, the companies that refuse to listen to shareholders suffer.
In fact, companies should demand from their investor relations officers to conduct shareholder research in order to learn who owns the stock, why they own the stock, and what shareholders think about the company, its management, and the decisions that management makes. NIRI recommends, “The company’s investor relations officer… should be required to meet with an independent committee of the board… to report feedback from investors and analysts.”2
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. Indeed, it is vital for the management of the company to know who the organization’s investors are as such knowledge enables the company to serve investors better. Kevin Rollins, former president of Dell Inc., explains, “We’ve also charged our investor relations team with sharing and interpreting feedback from the investment community for us… ultimately, my job and Michael’s [CEO Michael Dell] job is to lead Dell in a way that drives sustainable, dependable shareholder value over time.”3
The third important change in the definition concerned the overall goal of the investor relations activities. Earlier, the goal was to have a positive effect on the share price—the higher the better. Enron’s disaster can arguably be attributed to such a view on investor relations. Current definition of investor relations emphasizes the need for a “fair value” as opposed to a “high value.” The goal is to help investors and financial analysts understand the true value of the company’s business and to help them adjust their estimates no matter if it means decrease or increase in the stock price. In other words, mistaken overevaluation can be as dangerous for the company as underevaluation as it can be a source of sudden volatility in stock price and trading volume. Effective investor relations becomes the foundation of the capital markets that depend on the complete and timely disclosure of relevant information. Investor relations cannot hide any information, either positive or negative, as it will lead to mistakes in the evaluation of the company’s stock.
Investor relations practiced in the way described above—integrated into the top management decisions process, based on two-way communications, and aiming for a fair stock valuation—can become a source of competitive advantage for a corporation. And this competitive advantage is quite important. Indeed, companies are accustomed to competing on the product markets. Companies producing TV sets know other producers of TV sets, their product lineups, price points, major production facilities, and technological innovations. The competition is typically contained within one industry, and it is quite possible to track the changing landscape of this particular industry. Investor relations, on the other hand, is responsible for competition for capital. This competition is not limited to any particular industry. In fact, a company on the capital markets competes with any other publicly traded company from various industries and from all over the globe. This competition is extremely complex and tracking this changing environment is an enormous task.
Yet the shareholder capital is a scarce resource, and not every business can get access to the financial resources. So if a company needs capital to finance growth or enter new markets or simply needs resources beyond its cash flow, it becomes a job of the investor relations departments to identify investors for the company, target them with company’s communications, create opportunities for the investors to acquire stock in the company, and establish and maintain relationships with them.
It is a constant effort—it is not sufficient to attract investors and then abandon any communications with them. Investors have an opportunity to sell the company’s stock. One also cannot rely just on its performance—actions do not always speak for themselves. Marcus and Wallace compare investor relations with a hoop: “It keeps rolling only as long as you keep hitting it with a stick. The minute you stop, the hoop stops and falls over.”4
The modern concept of investor relations is part of the efficient market hypothesis. The efficient market hypothesis assumes that all markets are in equilibrium: all securities are fairly priced, and all provide equal returns. In this situation, no investor can consistently beat the market, and thus there is no reason to constantly buy and sell shares of companies trying to outperform the average market return.
The efficient market hypothesis, however, requires key assumptions to be met: all relevant information about the company and its performance is publicly available, all market participants have equal access to such information on a timely basis, and all investors are rational and capable of evaluating the information available to them. Investor relations is charged with providing the information from the company to shareholders, financial analysts, and other market participants.
In this situation, investor relations becomes a key activity not just for a particular company but for the whole modern economy. The survival of modern capitalism depends on how well investor relations officers perform their task in ensuring equal access to information for various financial market participants. Thus, investor relations is charged with the task of ensuring that the key assumptions of the efficient market hypothesis are met through extensive and timely disclosure of all relevant information pertaining to the company and its stock.