For example, a number of years ago I was given the task of explaining executive benefits at a 7:00 AM meeting. Talk about deathly dull topics at a time of day when most people are struggling to wake up. The strategy I hit upon to liven things up enough to keep people awake was to use song lyrics to illustrate my points. I had to work at it – not many songs mention stock options or long term disability insurance – and eventually references ranged from Gershwin to 1960s Motown to Pink Floyd, but I kept the audience interested in what I was saying.

I bring this up because one of the obscure references I like to mention when I discuss the role of communications in investor relations is Sisyphus. Those of you that were blessed with a proper grounding in Greek mythology will recall that Sisyphus was the Greek King who incurred the displeasure of Zeus and was sentenced to roll a huge boulder up a steep hill, only to have the boulder roll back down to the bottom of the hill before he arrived at the summit, forcing Sisyphus to begin all over again. This ceaseless effort very concisely describes the process of communications in investor relations.

When you are communicating with investors, as they used to say in an old Nike ad, “There is no finish line”. The company is constantly moving towards its next reporting date. You are either just reporting results or getting ready to report results. The company and its strategy are continually evolving, requiring you to refresh your message. The composition of your investor base is also routinely changing as the stock is bought and sold, causing you to have to regularly educate an entirely new set of investors. In short, it never stops.

Nor should it. Good investor relations requires continual communication with investors and potential investors. The more you communicate in a transparent manner, the fewer surprises will confront investors and the less volatile your stock will be. When more information that is routinely transmitted to the Street it also means that there is less opportunity for insider trading. In short, as in economics, more is generally better until you arrive at the point of disutility. What constitutes disutility of information is a discussion for another day. For now, I will leave you to roll the rock up the hill.
 

 Investor Relations, Communications and Greek Mythology

When you are an academic, if you really want to make it big, you need to come up with a snappy way to sum up your thinking on your area of expertise.

For example, in strategy, Porter has his Five Forces  – supplier power, buyer power, competitive rivalry, the threat of substitution and the threat of new entry. Similarly, in marketing, Kotler has the four Ps: product, price, promotion and place. So it occurred to me that investor relations should have a way to neatly encapsulate what it does. Seeing this as a hole in the literature on investor relations, I have decided to step into the void and propose (with apologies to T. E. Laurence and the Seven Pillars of Wisdom), the Five Pillars of Investor Relations.

I choose the wording of pillars because they are the skills needed to form a strong support base for an investor relations program (also, I couldn’t come up with a clever acronym or make everything begin with the same letter).  Plus, this allowed me to create a clever visual slide for my class featuring Greek columns to drive the point home. So, without further ado, here is a brief description of what I consider to be the essential skill and knowledge requirements to do investor relations well—the five pillars of investor relations.

• FINANCE – It is essential that a good investor relations officer have a thorough understanding of the components of his company’s income statement, balance sheet and cash flow statement, as well as the accounting treatments they derive from. On the theoretical side, the IRO needs to be comfortable with the different valuation models used by Wall Street to value his company’s stock and the role of investor relations in the efficient markets.
• MARKETING – How to segment the investment universe, target appropriate investors and position the company story to appeal to those investors are basic marketing skills that are critical to good IR. At a deeper level, using marketing techniques to more efficiently use limited resources to focus on the most important investors can help IR have a bigger impact.
• COMMUNICATIONS – Crafting a memorable message that resonates with investors is a critical communications skill that is used in IR. This is closely followed by figuring out what disclosures, above and beyond those mandated by regulations, will assist investors in understanding the intrinsic worth of a company. All of this presupposes a solid understanding of your company and industry. Finally, the skilled use of multiple communications channels is becoming ever more important as new means of communication such as social media proliferate.
• LAW – Everything in investor relations is circumscribed by laws, regulations and case decisions. While this will vary by jurisdiction, generally legal requirements will cover everything from what you say (or at least the minimum of what you must say) through periodic reporting requirements and other mandated disclosures, to when and to whom you say it and, to why you say it. Understanding the ins and outs of the legal requirements is critical to doing things right in investor relations.
• CAPITAL MARKETS – Knowledge of how the stock markets work is an essential skill of the investor relations officer. If you don’t think so, try telling your CEO that you don’t really understand what the markets are doing the next time he sticks his head into your office and asks why the stock is trading down. Understanding liquidity, volatility, auction markets and the other things that impact the way your stock is traded is essential for investor relations. Knowing the key players in the market for your stock, how they may interact and how to access information about them quickly are necessary tools for an IR department.

Well, there you have it: The Five Pillars of Investor Relations. With luck it will give you a framework to think about investor relations in its entirety.

Five pillars slide

 The Five Pillars of Investor Relations

Based on personal experience, the perception among corporate executives is that analysts spend their time in front of their computers doing research and constructing earnings models, interspersed with an occasional phone call and the odd trip to visit company management. Yet this is well off the mark, and its implications can have a serious effect on a company’s approach to investor relations.

I’m not aware of any academic research considering the relations between sell side analysts and corporate investor relations departments, so I am going to confine myself to a few simple calculations in order to make my points.

The first thing to consider is the number 50%. That is the percentage of time sell side analysts tell me they spend on marketing to the buy side, the investment shops that actually buy, sell and hold securities. So if your average workaholic sell side analyst is putting in 60 hours a week at their job, that means at most 50% of their time, or 30 hours, can be devoted to research on companies they follow. Consider next that the average sell side analyst covers between 10 – 15 companies. If we give the sell side the benefit of the doubt and say they cover 10 companies, that means on an average week they have 3 hours to devote to any single company. And that does not allow for any work the analyst may do on industry wide analysis and deals the investment banking department may want input on. What this means for investor relations is that sell side analysts are very time stressed.

Many companies take the position that the job of an analyst is to analyze and the company should not have to spoon feed them information about the company and the industry. In an ideal world this would be true, but the reality is that the easier you make it for the analyst to get good information, the more likely their analysis is to be accurate. This is because they often don’t have time to go out and get good information on their own.  If on average an analyst has three hours a week to produce quarterly notes, chase down buy side requests for information and talk to company management, it doesn’t leave a lot of time for incisive research and writing.

From an investor relations policy standpoint, this means that companies should think about establishing baseline disclosures, beyond what is mandated by regulation, that can help analysts understand the company and the trends it faces. By getting the basics out of the way, this will allow time strapped analysts to focus on what’s important and they have a better chance of getting it right. It’s one of those rare instances where by helping someone else out, you can also help yourself.

 Using Simple Math to Inform Your Disclosure Policy

To recap, where you are in terms of your corporate life cycle is a large determinant in whether you get Growth, Growth at a Reasonable Price (GARP), Value or Deep Value investors. As each of these different styles of investors is willing to pay differing amounts for your future earnings, the valuation you get in the stock market will in no small degree be influenced by where investors view you in your life cycle. To carry this one step further, we will now use the graph to look at how companies seek to avoid the point at which they transition into a mature, and then a declining company and how successful this is in avoiding a declining P/E ratio.

In product development, when a product threatens to become mature, the marketing people move in and try to rejuvenate and refresh the brand by introducing new product features and formulations or market applications. The idea is to boost sales volume and market penetration. Nobody wants to get to the point where a product is mature, verging on stale, and headed for inevitable decline. In graphical terms, what they do looks like this:

Companies do the same thing.  A great example of a company continually reinventing itself via new products and markets is Apple. First Apple was a computer company. Then they introduced the iPod and iTunes. This was followed by the iPhone, Apps and the iPad. Apple has been incredibly successful in this approach—helped by great design and engineering—creating a tightly integrated suite of products that customers love.  And the stock market has richly rewarded them for this, making Apple one of the most valuable companies on the planet.

In addition to new products, companies attempt to prolong their progress up the growth curve through acquisitions, entering new markets, entering new territories, going global, reengineering their work processes, expense initiatives and a raft of other things too numerous to mention. In doing this they hope to extend their growth and the premium investors will pay for their future earnings.  The problem with all of this, from an investor’s viewpoint, is that the new products, programs and initiatives are exactly that, new, and they don’t have a track record. Therefore, the certainty with which future earnings from these programs can be predicted is less than it is for existing operations and the willingness of investors to pay up for the incremental earnings is less.  Unless and until a company can establish a track record for successful entry into new products or markets or initiatives, investors will discount the future earnings at a greater rate than the old familiar type of earnings. Investors just don’t like uncertainty. So revenues may go up; earnings may in fact also go up, but P/Es will fall until a company can demonstrate that it has as one of its core competencies the ability to extend its growth with new initiatives. There is a zone of uncertainty that surrounds the new initiative until things resolve themselves, which graphically looks like this:

Again, if we look at Apple, the first iPod was introduced on October 23, 2001.  Following the announcement of the new product, one that turned out to be revolutionary, Apple’s stock price didn’t do much for the next couple of years. Investors had a wait and see attitude.

This, of course, drives corporate management nuts. They have invested millions of dollars in a new initiative through design and engineering, consulting fees and countless meetings and studies. They are embarking on a bold new strategy to push their company forward for the next millennium. And yet, in their view, the market doesn’t get it. Usually, if you get them off in a quiet room with a scotch or two in them, they will blame this on “Typical Wall Street short-sightedness”.  Yet in this case, investors are really taking a longer term view as they want future uncertainties to be resolved before buying the stock.

Investor relations professionals should learn to recognize this type of fact pattern and be ready to explain to management why the stock didn’t jump when the CEO’s latest initiative was announced. Much heartburn can be avoided if companies take a realistic approach to how the market values new corporate actions. There is no real way around this – companies have to prove themselves to investors on new initiatives to a far greater extent than for existing operations. But as witnessed by Apple, it can be done.

 More on Marketing, Corporate Life Cycles and Investor Relations

Take data presentation for example.

In the brave new world of data journalism, I spend much of my life digging around in corporate websites trying to put together facts and figures.  Usually I don’t care about the surrounding story: just nice articulated figures.

Like carbon emissions: how many plants does a manufacturer have and what are their respective emissions?  Or, supposing I was into IR, what are the business’ product lines and their respective turnover and net profit?

It’s not that the figures are hidden or even deliberately obscured.  It’s just that getting hold of them quickly and easily is like throwing yourself at the ground and expecting to miss: impossible.

Then I stumbled upon a site which made it all so wonderfully simple using one of the simplest of tools around: mindmaps.

It all started, as many of these things do these days, with a Google query .. heaven only knows what it was but I was digging into Canadian mining companies (sorry for that pun).  Up popped this page and after a few minutes’ clicking around I was over whelmed by the ease and simplicity of this solution.

You can be too.  Click on Forbes 2000 Top Mining Companies In The World and .. let’s go for our old friend Anglo American.  If you click on the name a handy little display pops up showing you the Sales, Profits, Assets and Market Value of the business.

Then click on the red arrow next to the company’ name and off you go to another mind map, showing its bases of operations and the minerals mined there.

A few more clicks later you find you can collapse and expand the various arms and access points of the corporate website along the way.  Nice, easy, quick and simple; and very satisfying once you realise all the data and structure is lifted directly from the corporate website.  All that’s missing is that extra level of data:  plant emissions, product turnover, subsidiary profit, country employees, etc.

In an age when corporate transparency is becoming all the more important and more and more people are understanding the value of data journalism, this would be the perfect way for a business to present its data on a website.  In fact, its a wonder no-one’s done it before.

Before?  Ah well, as you may have realised this is not a corporate website and the mind maps are generated using an opensource mind mapping tool called Freemind Browser.  The site itself is called Go Geometry and if you navigate to its main page you’ll find a whole heap of geometry based content from Euclid to Escher.

Quite where mining fits into this is anyone’s guess.  However, given the omni-present Google Ads someone (I’d guess from Peru) is probably making money out of it.  I just hope mining sector webmasters find it galling some of it’s based on their hard work!

^{Picture Credit: A Very Escher Christmas / Bert Kaufmann / CC BY SA}

 Mind mapping website data