News
How to give investors what they want? This is at the heart of investor relations practice and the impetus of the communications strategies and tactics employed by IR professionals when telling the company story. But as a new book by Baruch Lev, Philip Bardes Professor of Accounting and Finance at New York University’s Stern School of Business and Director of the Vincent C. Ross Institute for Accounting Research details, when it comes to securing investor backing “there is no magic bullet…no quick PR fix”.
The book is broken down into manageable and succinct sections for those looking to dip in and out for reference although at just over 300 pages it is not overly tome-like. The chapters consider the full spectrum of investor communications including crisis management and earnings disappointments, the importance of outlining and explaining where expectations have not been fully matched and the steps being taken, to communications strategies, new technologies, tricky analyst questions, the differences between hard and soft information, the danger of overvalued stock and untenable expectations, the necessity of credible guidance to give a true and fair investor perception, how it is now “irresponsible not to be socially responsible”, and the global rise in shareholder activism and how best to utilise hedge fund and other driven activists in the company’s best interests.
While often utilising US data and using example of US corporate developments this is not a US centric book. In considering the key challenges for companies in gaining investor confidence Lev highlights universal investor communication truths: namely the importance to “improve the quality and integrity of financial disclosure, restructure managerial compensations systems and governance design and rethink corporate social responsibility”.
Lev convincingly argues the case against an “isolationist attitude toward capital markets” – the misconceptions that investors are predominantly short-term orientated and “myopic” or that dealing with investors somehow undermines companies long-term objectives and growth plans by demonstrating that about half of the typical stock price reflects long-term growth prospects or that undervaluing of a company’s shares potentially curtails expansion or funding.
While the book’s subject matter is concerned with investor relations objectives in general, there is a specific section - “Meet the relatives” - on IR functions. Lev starts this off with a rather disturbing quote attributed to a CEO: “We have superb IR people…they organise our press conferences and road shows well, book great hotels and are effective gatekeepers against pestering investors and analysts”. Fortunately Lev nicely debunks this archaic view by explaining that IRO activities aimed at “enhancing the company’s visibility and managements’ credibility in capital markets and the economic community at large: familiarising investors with the company, its operations, performance and growth potential, targeting the desired investor base and attracting financial analysts to cover the company”. By doing so Lev demonstrates a firm understanding of the objectives of the IR function. He goes on to reference an empirical study (Bushee-Miller) of IR effectiveness that demonstrates the consequences of IR activity as increased media and analysts coverage, a “significant and persistent increase in both the number of institutions and the percentages of institutional ownership” and significant improvements in market valuation. Lev then explains that in order to maintain these positive outcomes it is important to maintain a sustained IR operation. Finally he looks at the role IR plays in delivering the following chain – reduction of information costs > increasing the number of analysts following and institutional investors’ visibility > enhancing share liquidity > stock price and volume improvements. He concludes the IR section by stating that “trained and capable IR professionals undoubtedly facilitate the process from information to higher value, and conserve precious CEO and CFO time”. (One small grumble: Lev at one points comments that “talking to investors in contrast (to other aspects of business) obviously cannot be entrusted to underlings”, basing this on his analysis of quarterly earning conference calls in which CEOs and CFOS were present in all but one call. Leaving aside the truism that a company employing 100,000 people will by this definition have 99,999 “underlings”, the constant analyst calls, one-to-one meetings, road shows, site visits etc undertaken by IROs as the investor-facing personification of the company rather calls into question Lev’s statement! In fairness, he employs a rather fun and jaunty tone throughout the book which perhaps explains the use of “underlings”!)
Overall, this is a very good book indeed with real practical application. It looks at the fundamentals of investor communications and breaks down just what it is that investors want, how to achieve this, what to do and not to do. As Lev accurately states “this book is all about action”. We won’t give the game away by referencing the final meta-instructions but suffice to say Lev’s conclusions are in line with the advice and guidance given by the IR Society through our activities. It’s worth a look.
Published: 5 January, 2012