Online Marketing to Investors

Daniel R. Valentine

• Publisher: Business Expert Press
• Year: 2015
• eBook ISBN: 9781631571411
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

"This book clearly explains why Investor Relations is now a highly regarded career choice and demonstrates its value to companies and the investment community."—Helen Parris, Director of Investor Relations, G4S plc "This book is an essential read for Investor Relations profes-sionals, business managers, and anyone interested in corporate relations."—William Sun, Deputy Director of the Centre for Governance, Leadership and Global Responsibility, Leeds Business School The expectations on UK listed companies continue to grow with the expansion of the regulatory framework and an increase in public scrutiny. The investment community continues to demand access to management, regular and meaningful communication, and an understanding of a firm's position relative to its competitors. It falls increas-ingly to the Investor Relations (IR) function to help compa-nies and their management meet the rigorous demands of the equity markets and an evolving set of tools, technolo-gies, legal and governance frameworks. Digital channels present great but underutilised poten-tial to contribute to ever more effective IR. Online platforms offer fast, comprehensive, economical, exible and regula-tion-compliant methods of disclosing corporate informa-tion to investors, analysts and other relevant parties in the investment evaluation and decision making process.

CHAPTER 1

The Purpose of Investor Relations

Financial markets serve an essential purpose in advanced economies. Like markets of every type, financial markets are mechanisms that facilitate mutual satisfaction through exchange. Behind exchange is the principle of specialization (or “division of labor”), the principle behind all economic growth. Economic growth thus relies on specialization, which in turn relies on the existence of a mechanism of exchange which is easily accessible and that market participants regard as fair, secure, and efficient.

This book will examine one particular financial market: the market for equities, or shares, of listed companies. Equity markets give access to almost limitless amounts of capital, allowing companies to grow rapidly. They also contain many traps for corporations and executives. This book has been written to help company executives, and their advisors, get things right the first time.

Equity markets’ expectation levels for information have risen substantially over the last decade as investors and intermediaries have sought informational advantage. The last decade has presented extra opportunities and challenges for all financial market participants, including boards of directors, investors, analysts, and regulators. Investors have acquired new tools of data capture and analysis through the Internet, which has also presented companies with an unprecedented ability to engage directly and frequently with investors, both large and small, as well as with journalists, analysts, suppliers, customers, and other stakeholders. However, there are regulatory restrictions and reputational risks that public companies need to be aware of when communicating with financial markets, especially when using social media channels that give control to information users rather than senders.

Defining Investor Relations

Investor relations (IR) is a specialism that develops within listed corporations operating in advanced equity markets which have experienced a substantial separation of ownership and control. IR is a complex, discreet, and highly context-dependent discipline. It is therefore not a simple task to define IR in such a way that includes all typical tasks and excludes other financial and investor communication functions within the firm.

IR is the corporate function responsible for satisfying both the demands of regulators and the legitimate information needs of the financial markets beyond the financial statements and thereby facilitating mutually beneficial investment decisions and a harmonious relationship with the stock market.

Because of the failure of business schools and the accountancy profession to provide education in IR, new chief executive officers (CEOs) and chief financial officers (CFOs) are likely to receive a “culture shock” on their first appointments. In response to this shock, they may rely too heavily on external advisors from investment banks whose advice is less than impartial. It is the hope of the author that a better system of IR training is instituted so that mid-level executives are introduced to IR and can gather experience over a number of years before they reach board level. The work of IR professional bodies such as the National Investor Relations Institute (NIRI) in the United States, the Canadian Investor Relations Institute (CIRI) in Canada, and the IR Society in the United Kingdom is essential in this regard, although these institutes naturally tend to focus on IR professionals and consultants rather than accountants and general managers. If this book can make a contribution to the challenge of educating managers in the law and culture of the financial markets, then it will have served its purpose.

This book aims to contribute to the production of positive and mutually beneficial relationships between corporate managers and investment managers in order that these two interdependent groups benefit the ultimate beneficiaries: the general public, who rely on the employment, products, dividends, and pensions that corporations provide.

The Purpose of IR

IR emerged as a response to a series of shocks that hit corporate management teams from the mid-1970s. The autonomy of management was being challenged by investors who had shown they were able to directly control corporations. Many management teams that had resisted shareholder demands had been replaced. Management teams started to bring experienced city people in-house to advise them on investor sentiment and prevent investor threats. Mere information provision was no longer enough; management teams needed to form relationships with their largest investors and other opinion formers in the valuation and investment process.

IR is not independent; it is a department of the firm; and yet it derives much of its credibility with the investment community from its sympathy with investors. IR thus becomes an “insider” with both communities, and this dual credibility is the secret of IR success.

Figure 1.1 shows the three corporate goals of IR. These three goals are at the same time complementary and often in conflict. IR combines a sales function with a service function and a compliance function. The IR function provides important services to the financial community; it is also responsible for marketing the company within that community and ensuring that the company does not breach any of the regulations relating to financial market communication. This makes the investor relations officer (IRO) simultaneously a police officer, a salesman, and an inquiry desk. It is this goal diversity of IR work that provides the IR function with much of its challenge, but also ensures a high corporate profile for the IRO.

Figure 1.1 The corporate goals of IR

IR as an Agent of Change

Ivy Lee (1877–1934) is credited with changing the practice of public relations (PR) from one which relied on propaganda-based persuasion to one that focused on the communication of understanding and mutual adjustment. The idea of mutual adjustment has been a feature of the most enlightened PR activities since then, and was defined as such by Lesly in the first edition of his influential handbook (1971): “Public relations helps an organization and its publics adapt mutually to each other.” Likewise, IR at its best can promote communication and change in both directions: from shareholder to management as well as from management to shareholder. The company gains when management receives insight and warnings from investors, and the company also gains when investors develop in their understanding and sympathy for the company, its history, culture, position, and goals. The two parties engage in a continual process of mutual adjustment and find a greater area of common ground where their goals coincide.

The most specific benefit of this mutual adjustment is that management has regular access to informed criticism. The typical failings of corporate management have been well documented:¹

• Excessive growth

• Margin deterioration

• Entering markets without clear competitive advantage

• Remaining in loss-making markets

• Diversification

• Hoarding cash

• Excessive remuneration and benefits

• Strategic drift

• Forecast optimism

• Earnings management

• Excessive charitable/political donations

• Risk aversion

• Preferring collusive agreements to effective rivalry

• Unjustified acquisitions

Investors play an important role in challenging management because of their analytical resource, industry-wide perspective, macroeconomic knowledge, and unique authority to request access to management. Management should therefore welcome the views of investors even when these views are critical. It is essential for corporate success that management teams learn of their own problems before their competitors do, and analysts and investors are a key resource in this respect.

The Relevance of Firm Size

Much of the discussion in this book presumes that communicating with sell-side analysts is a central part of the role of IR. This is true of large- and medium-cap companies, but much less true with small-cap companies, companies with a secondary listing and, companies listed on the Alternative Investment Market (AIM). Analysts have a strong preference for large-cap companies because of the potential commission revenue that this coverage may bring to their firm. While FTSE100 companies typically have in excess of 20 analysts, FTSE250 companies may just have two or three. The challenge for IR is thus very different in these two cases. Large companies will find they have to do very little “marketing”; their size alone will attract more suitors than they can meet, while small companies will have to market themselves in multiple ingenious ways to attract a flow of interested investors.

The IR requirements of a small-cap company are likely to be very different from the requirements of a large- or mega-cap company. The nature of analyst remuneration means that large companies are chased by a large (often excessive) number of analysts while mid-cap companies suffer comparative neglect and small-cap companies total neglect. Mega-cap companies may have in excess of 30 analysts; many of whom are largely regurgitating each other’s work. Management of existing analysts and investors is a major challenge for large-cap companies, as shown in Figure 1.2. Management tasks include handling the steady stream of information requests, requests for meetings and requests for feedback on models, keeping track of analyst notes, and analyst consensus. Large-cap companies try to produce efficiencies with group-lunches for analysts and comprehensive “investor/analyst days” in order to reduce the pressure for one-on-one meetings. Protecting executive time is a major concern for larger companies, because of the sheer number of requests for meetings. At the other end of the scale, smaller companies require a constant marketing focus to attract the attention of analysts and institutional investors.

Figure 1.2 The IR marketing-management mix

The Limits of IR

IR has a number of very serious limitations on its effectiveness. We list six of these below; each of which is common to all practitioners of PR:

1. The limited “voice” that IR has within the organization. IR typically reports to the CFO and has limited access to the CEO or board. IR thus has little influence on corporate strategy or performance. The ability of IR to produce corporate change remains limited, except in a shareholder crisis situation, when IR may have much greater power.

2. Investor heterogeneity. Changes that one investor requests may be resisted by another shareholder; shareholders show considerable diversity in their preference for corporate strategy, risk, or distribution of profits. So “getting close” to shareholders may not bring greater clarity of corporate goals or corporate strategy.

3. Intermediation. Much communication with investors is done indirectly, through analysts and journalists, and the messages that management want to communicate may not be transmitted or may be corrupted. Similarly, the messages that investors want to communicate to management may change as they pass through the hands of intermediaries.

4. The effect of IR activity is not capable of being rigorously measured. Difficulties in measuring IR contribute to its low profile and its low level of resourcing in the business.

5. IR’s lack of independence from senior management.

6. IR’s nature as an art, rather than a profession or science. The IRO is not a semiautonomous professional like an accountant or lawyer who follows long established work methods. Outside of the statutory aspects of IR, IR resembles PR or marketing in its highly opportunistic and adaptable nature. There is little even in the way of universal best practice. The IR activity at different firms varies hugely, and there is little evidence of convergence.

IR is a practice that can make great contributions despite these limits. Understan...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• Preface
• Chapter 1 Purpose of Investor Relations
• Chapter 2 The Development of Investor Relations
• Chapter 3 The Ethics of Investor Relations
• Chapter 4 How the London Stock Exchange Works
• Chapter 5 Marketing and IR
• Chapter 6 Principles of Corporate Reputation and Investor Communication
• Chapter 7 Crafting an Investment Thesis
• Chapter 8 Crafting the Investor Marketing Strategy
• Chapter 9 Executing the Strategy
• Chapter 10 Introducing the Internet
• Chapter 11 Using Traditional Online Channels
• Chapter 12 Using New and Social Media
• Chapter 13 The Future of Investor Relations
• Chapter 14 Case Studies
• References
• About the Author
• Index