Running an Effective Investor Relations Department

A Comprehensive Guide

Steven M. Bragg

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470630303
• eBook ISBN: 9780470642559
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

The ultimate guide to investor relations

Your one-stop resource for everything pertaining to your company's dealings with the investment community, Running an Effective Investor Relations Department provides investor relations professionals with essential day-to-day information. From creating and properly communicating a company's investment story, to dealing with both the sell side and buy side of the investment community, to providing guidance, and the form and frequency of that guidance, this authoritative resource covers it all.

• Addresses every possible area of the investor relations profession
• Includes chapters covering disclosure, forward-looking statements, guidance, event management, and twenty other topics
• Other titles by Bragg: The Vest Pocket Controller, Accounting Best Practices, Sixth Edition, and Just-in-Time Accounting, Third Edition

Practical and thorough, this book offers the world-class guidance you need to effectively manage your investor relations department.

CHAPTER 1

Managing Investor Relations

THE WORK OF THE investor relations officer (IRO) centers on communicating the company’s current and potential market value to investors. IROs achieve this by targeting a specific set of goals and using a broad range of tools to attain them. They must also be conversant with the methods for constructing a viable investor relations budget. Furthermore, proper management of bad news defines the character of the IRO, and is a key driver of investor faith in a company. All of these topics, and more, are addressed in this chapter.

WHY HAVE AN INVESTOR RELATIONS DEPARTMENT?

A public company is not required to have a public relations department at all. There is no legal requirement to engage in any communications with the investment community, outside of the required SEC filings. However, when there is no investor relations function, investors must rely solely on media, Internet, and SEC reports, which are all based on historical information or sometimes on conjecture. With this limited pool of information, investors are less inclined to acquire a company’s stock, and will certainly not bid it up above the average market valuation of the peer group against which the company is usually compared.

Given this lower stock price, a company’s cost of capital tends to be higher, since it will obtain fewer funds per share sold. Also, without strong demand for a stock, its price will tend to be more volatile, with many upward and downward transactions over short periods of time. Further, without a consistent investment message being promulgated by a company, short sellers will be more inclined to feed erroneous information into the marketplace in order to trigger short-term price slides from which they can earn profits.

A low stock price will also attract hostile takeover bids. A case can be made that management’s primary objective is to obtain the highest possible stock price for investors, so it should welcome even a hostile tender offer. The problem is that the potential acquirer will undoubtedly offer a price below what the company could have obtained if it had actively worked to achieve a higher stock price!

Thus, the key reason for building an investor relations department is to maximize the company’s market value. The IRO does this by continually communicating a company’s unique value proposition to the investment community, and specifically through the goals noted in the next section.

INVESTOR RELATIONS OBJECTIVES AND GOALS

The first step for the IRO in creating an investor relations department is to determine its objectives and supporting goals. The IRO should be very clear about these issues in order to avoid wasting resources in the pursuit of other activities.

Ultimately, the only objective of the investor relations function is to maximize a company’s market value. By doing so, the company can obtain the maximum amount of cash in exchange for the fewest number of shares. Also, a strong stock price will keep away hostile takeovers, because the company is too expensive to buy.

IROs should therefore direct considerable attention to the goals that support higher market value:

• Alter perception of the company. If a company has historically been compared to a peer group whose valuation multiples are low, then the IRO will have a difficult time increasing the stock price to a level above that of the peer group. One solution is to reposition the company story to align it with a different peer group whose multiples are higher.

• Increase analyst coverage. The opinions of analysts carry considerable weight with investors, so obtaining coverage from a moderate number of analysts is a key objective for the IRO. Favorable analyst reports will very likely increase average sales volume, which, in turn, tends to drive up the stock price.

• Increase geographic coverage. If a company’s stockholders are limited to a few geographic areas, then it does not take long before everyone who wants to hold the stock is already doing so. This results in reduced stock trading and minimal upward pressure on the stock price. The IRO can avoid this by scheduling road shows in new regions to meet with an entirely new group of analysts, brokers, institutional investors, and retail investors.

• Reduce stock price volatility. If there are institutional investors who constantly buy and sell large blocks of company stock, then the stock price may swing considerably. Volatility is not a desirable condition, since it drives away some investors and attracts short sellers. To reduce volatility, the IRO can work on attracting retail investors, who hold smaller blocks of stock and tend to retain their holdings longer.

• Manage existing investors. If current investors sell their holdings, then the increased supply of stock will likely cause a price reduction, as well as increased price volatility. The IRO can reduce this risk by generating a high level of communication with them, using one-on-one meetings and newsletters. The result should be longer-term retention of investors.

Clearly, the IRO must delve into a broad array of activities to achieve a high market value. The tools available to reach this objective are described in the next section.

INVESTOR RELATIONS TOOLS

We have established that the primary investor relations objective is to maximize a company’s market value. Before attempting to enhance the price, we must first determine what factors influence it. Two key factors are the condition of the general economy and the condition of the industry in which a company competes. Neither one can be altered by specific company actions, which means that a stock’s price will, to some extent, fluctuate irrespective of any investor relations activities. In addition, a stock’s price will be governed by a company’s operating and financial results, its strategic direction, and the quality of its management team. The IRO can do a great deal to favorably present these later items to the investment community using the tools described in this section.

IROs have a broad array of tools at their disposal, which can be categorized as basic, intermediate, and advanced tools. A basic tool is one needed to accomplish the basic investor relations goals, while more advanced ones are layered on top of the basic tools to achieve the highest possible level of communications with the investment community. The basic tools are as follows:

• Annual report. The IRO is expected to manage the creation of an annual report that shows a company’s results for the past year and explains its goals and future prospects. A more basic variation on this report is the wrap report, which is the annual SEC Form 10-K, accompanied by a letter from the chief executive officer. The wrap report is increasingly common, but conveys no investment message to stockholders.

• Annual meeting. The IRO is responsible for organizing the stockholder annual meeting, at which stockholders vote for a board of directors. The IRO can greatly expand on this minimal agenda by including manager presentations, additional decisions to be voted upon, and question and answer sessions.

• Proxy solicitation. The IRO is responsible for issuing the annual proxy solicitation, in which the company asks investors to vote for a slate of candidates for board of director positions, and possibly a variety of other motions involving corporate governance.

These basic tools achieve only the most modest level of communication with the investment community. The proxy solicitation and annual meeting are designed to fulfill legal requirements, rather than to enhance communications, while the annual report tends to be a dry recitation of historical facts. Thus, the IRO should use an additional set of intermediate tools to engage in a more active level of stockholder communications:

• Press release. A key IRO tool is the press release. This is a brief summary of information about a key company event, such as an acquisition or a major contract award. It is issued through a press release distribution service. The IRO may choose to also issue the same information through a Form 8-K filed with the SEC.

• Web site. The investor relations section of a company’s Web site is capable of imparting an enormous amount of quality information to investors. If properly constructed and maintained, it can be the primary source of investor information.

• Fact sheet. This is a two- to four-page document that lists the essential facts about a company, including its key customers, managers, recent press releases, and mission. The fact sheet can be posted on the company Web site and is also a useful document to bring to external meetings of all kinds as a handout.

• Reports. The company Web site can include an offer for any site visitor to sign up for a variety of reports, such as new product notices, product pipeline reports, management newsletters, and earnings releases.

• Speech transcripts. If a company officer makes a major speech or presentation, then the investor relations staff can record it, have it transcribed, and post it on the company Web site.

• Advertising. An advertising campaign can introduce a company to an entirely new group of potential investors, though it can be expensive in relation to the number of new stockholders obtained. It is not an effective tool for smaller firms with limited investor relations budgets.

These intermediate-level tools are primarily designed to create new information and present it passively for consumption by the investment community. However, an additional level of activity is needed to bring the company face to face with investors and analysts. This requires much more personal involvement by the senior management team, since management must be involved in the presentations. Also, the company is (in some cases) paying for meeting rooms and meals for all participants, which can involve a considerable expense. The advanced tools are as follows:

• Road show. The most effective of the advanced investor relations tools is the road show. This is usually a series of meetings in which the CEO, CFO, and IRO present the company to a variety of audiences. The expense of an ongoing series of road shows can be considerable, but it results in the best possible face-to-face contact with the investment community.

• Conference calls. It is standard practice to schedule a conference call immediately following the release of a company’s quarterly 10-Q report. During this call, company officers discuss the earnings release, and usually allow some time to field questions from attendees.

• Investor day. The company invites investors and analysts to a formal series of presentations by company managers. This may be located near the investment community, or at a major company location (in which case a facility tour is expected).

All of the tools noted in the preceding bullet points are described in more detail in Chapters 5, 6, and 7 on public communications, publications, and Web sites.

Once an IRO has set up the most appropriate mix of tools to achieve the objective, the IRO should also create a measurement system to evaluate the effectiveness of those tools. Examples of appropriate metrics are changes in the stock price, the number of requests for financial information, changes in the mix of investors, the number of analysts following the company, trading volume, and the price/earnings ratio in comparison to the market or a peer group. Investor relations metrics are addressed in Chapter 23.

INVESTOR RELATIONS BUDGET

When constructing a potential budget for investor relations, the best approach is to build it in layers that are based on the need for a variety of activities. The bottom-most layer of the budget should always address entitlements. These are the bare-minimum activities required of any public company. The key item is SEC compliance, where a company must pay for adequate attorney, auditor, and valuation services to file the required number of SEC reports within the designated timelines. The cost of this item may be located within the budget of the accounting department, rather than the investor relations budget—but it has to be addressed somewhere.

The minimum-level investor relations budget should also include a salary sufficient to retain the services of a qualified IRO. A company may try to reduce costs by hiring a clearly unqualified person or by promoting a low-level manager into the job. Since the IRO is the primary interface between the company and the investment community, the company is clearly stating how poorly it values investors! If the IRO is of exceptionally low quality, investors will either sell off their holdings or find alternative means of communicating with the company through other managers.

A minor item that is generally included in the bottom layer of the budget is the cost of buying back stock from excessively small stockholders. There are significant proxy costs associated with each share held, including the printing and mailing of a proxy statement and the tallying of annual votes for directors. Depending on the proxy cost per share and the market price per share, it may be cost-effective for a company to offer to buy back its stock from smaller stockholders. For example, if the total proxy cost for a single stockholder is $20 per year, and the market price of the stock is currently $4, then the IRO can reasonably conclude that buying back the holdings of all stockholders owning five shares or less will result in full payback within one year.

The next layer of the budget is for the minimum amount of investor communications required to keep the investment community aware of the company. This usually includes the cost of responding to investor inquiries, a stockholder hotline, an annual report, a Web site, periodic press releases describing major events, conference calls, and occasional media contacts. Many companies budget only to this level and stop.

At the top layer of the budget is active communications, such as road shows, investor days, and a plethora of reports that are pushed out to a mailing list of investors, analysts, and media contacts. This level of budgeting can be expensive, but also can propel a company into the upper ranks of public companies in terms of investor perception.

An additional defense for a fully funded investor relations department is that the investment community may extrapolate the performance of this department to how well the entire company is run. If the company handles its customers as well as its treats its investors, then it would appear reasonable to an investor that the company’s customer base must be satisfied and loyal. When the investment community’s sole point of contact is the investor relations staff, it is not unreasonable for them to make this assumption. Thus, a small but well-funded investor relations department can have an inordinate impact on investors.

The layering approach to the investor relations budget is the most logical and easily defended budgeting technique, since it directly ties expenditures to the performance of a specific set of activities. There are other methods for setting the budget, such as a percentage of the total company market capitalization, or a cost per stockholder. However, these methods are far too general, and cannot be tied to specific performance. Also, they fluctuate too much—for example, a company’s market capitalization can change so much from year to year that the IRO could see her budget, to which it is tied, slashed or doubled from year to year.

There is a defensible high-level justification for an investor relations budget, which is to compare it to the cost of a line of credit or an inv...

Table of contents

• Title Page
• Copyright Page
• Preface
• About the Author
• CHAPTER 1 - Managing Investor Relations
• CHAPTER 2 - Investor Relations Officer Position
• CHAPTER 3 - Creating the Company Story
• CHAPTER 4 - Event Management
• CHAPTER 5 - Public Communications
• CHAPTER 6 - Publications
• CHAPTER 7 - Investor Relations Web Site
• CHAPTER 8 - Management Discussion and Analysis Section
• CHAPTER 9 - Disclosure
• CHAPTER 10 - Forward-Looking Statements
• CHAPTER 11 - Providing Guidance
• CHAPTER 12 - Dealing with the Sell Side
• CHAPTER 13 - Dealing with the Buy Side
• CHAPTER 14 - Dealing with Credit Rating Agencies
• CHAPTER 15 - Dealing with Short Sellers and Activist Investors
• CHAPTER 16 - Dealing with the Board of Directors
• CHAPTER 17 - Major Stock Exchanges
• CHAPTER 18 - Monitoring the Market
• CHAPTER 19 - Blue Sky Laws
• CHAPTER 20 - Proxy Solicitations
• CHAPTER 21 - Dividends and Stock Buy-Backs
• CHAPTER 22 - Outsourcing Investor Relations
• CHAPTER 23 - Investor Relations Metrics
• Index