The dominant paradigm within the field of corporate governance views all investors as “owners,” while the managers are merely the agents of the investors. This “Corporate Governance Paradigm” (CGP) has developed in England since the great trading companies of the 1500s onward and is based on shareholders perceiving themselves as owners. The “relationship-marketing paradigm” (RMP) is very different. Investors are viewed as customers rather than owners, and managers have to capture, service, satisfy, and retain investors. In this paradigm, the managers behave like owners and pursue new investors.
Traditional economic theories about stock market efficiency suggest that the active marketing of corporate stock is unnecessary, since the market already incorporates all relevant factors into the stock price. Stock valuation is a highly complex art, however, with significant subjective elements, especially for stocks without significant financial history, and so marketing stocks to potential investors and information intermediaries is now generally regarded by corporations as being as essential as the marketing of their products to consumers. Many studies have shown the financial value of investor relations (IR) to corporations such as Lang and Lundholm (1996); Francis, Hanna, and Philbrick (1997); Holland (1998); Brennan and Tamaronski (2000); Bushee and Miller (2007); Agarwal, Bellotti, and Taffler (2009); Brennan and Kelly (2000); Gruner (2002); and Lev (1992).
There is wide divergence on what marketing is. According to Kotler and Keller (2011), marketing is “the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.”
The marketing concept has been extended by many writers from the 1950s onward1 For example: Drucker (1954), Keith (1960), Kotler and Levy (1969), Lazer (1969), Kotler and Levy (1971), Kotler and Zaltman (1971), Kotler (1972), Kotler and Levy (1973), Kotler (1973), Kotler and Murray (1975), Kotler and Mindak (1978), Krapfel (1982), Houston (1986), McKenna (1991), and Webster (1994).
Unfortunately, the term marketing is often used in a pejorative sense in Europe, and so proactive IR is a more acceptable term among British investor relations officers (IROs). Marketing suggests selling, and selling is regarded as a low and dubious task in the United Kingdom. The term means something more positive in the United States, however, and National Investor Relations Institute (NIRI) has been unashamed to talk of the marketing content of IR from the start.
Investor relations is 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. (Adopted by the NIRI Board of Directors, March 2003.)
Nielsen and Bukh (2011) agree that “IR is fundamentally a marketing exercise in relation to the company’s shares on the stock market.” Marketers are skilled in demand management; this is more than just stimulating demand for their products. During the marketing concept debate of the 1970s, Kotler (1973) identified eight discrete tasks of marketing.
IROs require an understanding of the following four elements, each of which can be regarded as basic elements of the process of marketing and exchange:
1. How the market values stocks (the buying process)
2. How the company makes money (product characteristics)
3. What our investors want (customer satisfaction and retention)
4. The rules of the marketplace (market regulation)
Figure 5.1 A model of marketing exchange (© Kotler and Keller 2011)
A model of marketing exchange (from Kotler and Keller, 2011) is shown in Figure 5.1:
In this exchange, A buys from B a product (that B owns) in exchange for payment (that B receives). The motivation of B is quite clear, while the motivation of A is more complex, but is usually defined as receiving “value.”
The marketing of corporate stock deviates from this usual pattern, since for secondary market sales (the vast majority of stock transfers) the company does not own the stock and will not receive payment for it. Companies, however, do actively promote the second-hand market in their own stock, for a number of reasons. The product has a perpetual and non-deteriorating nature. The purchase of stock starts a legal relationship, not with the seller but with the company. The value of the company is decided in the secondary markets, not the primary markets.
Except in the case of initial public offerings and rights issues when new stocks are offered to the public, firms are not involved in the exchange of stocks to the buyer nor receive any money from the sale of stocks; this is done by the stock exchange itself on behalf of the buyer and seller. The firm acts only in a communication capacity. The secondary market is thus a peer-to-peer second-hand market, like eBay. IR has just two of the common four elements of the marketing mix—product and promotion—as the stock exchange takes care of both the price and the distribution. Figure 5.2 lists some of the key differences between IR and consumer marketing:
Figure 5.2 Consumer and investor marketing compared
IR is an intangible, non-exchange, single-product, secondary market form of marketing.
Effective IR has a large element of marketing in it, although there are also non-marketing roles. The following core marketing concepts are essential in IR: (1) understanding the decision-making unit (DMU) and the decision-making process (DMP); (2) Segmentation, targeting, and positioning (STP; a marketer can rarely satisfy everyone in a market; therefore, marketers segment the market); (3) relationship marketing; (4) aiming for customer satisfaction and repeat business (or retention); (5) matching product characteristics with customers buying criteria; (6) using market research to gather intelligence on all the points above, rather than relying on habit or presumption; (7) that personal selling is an essential part of the investment process for many institutional investors.
Common marketing terms such as marketing, sales, and customer are not customarily used, but this merely shows the ubiquity and specificity of marketing and the fact that marketing techniques are regarded as an essential part of every professional practice, although the word “marketing” is rarely used.
The core of the marketing concept, however, is not an array of particular techniques, but acceptance of the marketing philosophy, which is the recognition within the enterprise of its dependence on the goodwill and satisfaction of its customers for its own survival. Investors from the 1930s to the 1950s were largely taken for granted due to managerial hegemony, poor liquidity, and restrictions on investors. It was the shake-up of the United Kingdom stock exchange by the takeovers of the 1980s that produced a sudden interest by corporate executives in investor opinion and the recruiting of IROs who could interpret the signs of the financial markets and warn of crises before they hit.
Increasing diversity of investors. In classical abstract economic analysis, all shareholders have the same requirements. In fact this is far from the case. Investors are quite diverse, and the trend is toward greater diversity. Several aspects of diversity are worth mentioning:
A) Geographical diversity. That is, the foreign ownership of domestic stock markets. Forty percent of the London Stock Market is now owned by non-UK-registered institutions. This can place an extra burden on the firm as foreign investors may require a general education in the firm’s business model, products, and markets. On the other hand, foreign investors may be very low maintenance since the distance makes meetings with management less feasible.
B) Ethical diversity. The growth of “ethical investing” of different types is a notable feature of the modern stock exchange. The screening methods of such funds differ widely, as do the ethical rules of ordinary funds.
C) Philosophical diversity. This includes a number of other aspects such as focus on income or capital growth, form of pre-purchase analysis (fundamental or technical), usual length of investment horizon, stock picking or index tracking, and the degree of “activism.”
It is this degree of diversity that allows the IRO to engage in the most characteristic aspect of modern marketing, the art of segmentation.
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1 See Valentine (2013) for a summary of the many extensions of the marketing concept and suggestions for further extensions.