Just as Corporations have individual personas, Investor Relations Officers (IROs) exhibit their own individual personas, too.
No two Investor Relations (IR) programs are the same.
IROs and IR programs vary across market cap, corporate strategy, industry, budget, and team size, among other variables.
My thoughts focus on companies looking to optimize the IRO role, much as a company would focus on optimizing the head of HR, Technology, or Sales. Think the best IRO to solve The Ferris Bueller IR Problem.
If optimizing IR can increase market cap by 10% to 20%, then what company is not interested in optimizing IR?!
Therefore, the primary question for a company revolves around whether to optimize or keep the status quo?
There are four dimensions to consider when thinking about the right IRO and IR program persona, including: philosophy, program type, background, and costs. These four variables drive the IRO and IR program persona.
The Optimal IRO Persona
The best IRO persona takes an active approach, exhibits versatility, and benefits from capital markets experience. Active IROs seek out ways to educate the market on their company, focus on developing and providing the necessary investor materials, and are extremely accessible, but more importantly responsive. The best IRO persona exhibits the versatility to work in any type of setting: plug and play, repair, build from scratch.
In our view, a great differentiator is capital market experience. The capital markets skill set represents the hardest part of the IR job skill set to learn. Living and breathing Wall Street is an extremely different experience than traditional corporate finance. If I had spent the last 10 years in corporate finance, I would not have the knowledge or skill set I do today.
IRO Fundamental Philosophy
There are two primary philosophies of an IRO or IR program: active or passive.
Active IRO / Program: The active IRO and IR program constantly seeks out ways to interact with the investment community. An active IR program focuses on making sure that the company constructively addresses key investor debates. Operates an open and welcoming IR website that provides the most pertinent information in as few clicks as possible. The fundamental driver is the IRO wants to engage and control, rather than sit back and wait to react.
Passive IRO / Program: The passive IRO or IR program represents the status quo, and represents the historical way of looking at the IR role. A passive IRO or program simply waits to react to investor questions or key investor debates. The company likely suffers from the Ferris Bueller Investor Relations Problem. These programs primarily focus on setting up meetings between investors and management and often provide a minimum of investor materials.
IRO Program Type
There are three primary IRO and IR program types: plug and play, remodeler, and builder.
Plug and Play: The plug and play IRO represents the most common. Essentially, the company seeks to place someone in the role focused on making minimal changes to the IR program. Ultimately, the IR program works fine, the company just seeks someone to run the program.
Remodeler: The remodeler focuses on optimizing and improving an investor relations program. This type of IRO fits best when a company suffers from the Ferris Bueller IR problem. Essentially, the company may think and show that it is open for business, but actual investor materials may be significantly lacking.
Builder: The builder type of IRO and IR program best fits a company looking to do an initial public offering (IPO). In this scenario, the IR program needs to be build from the ground up, as no infrastructure exists. We believe investing significant time and resources in the IR function at the IPO can either make or break a company over its toddler years as a public company.
IRO Background
The third dimension of the IRO and IR program persona revolves around the background of the IRO.
There are four types of backgrounds IROs come from, including: sell-side, buy-side, corporate finance, and communications.
In our view, the best IRO represents an executive that can bring to bear his or her learned knowledge over the course of a career for the benefit of his or her company. Our personal bias holds that the sell-side represents the best IRO background, we recognize that our view is not necessarily widely shared by the IRO community.
The Sell-Side Background: Our bias falls toward a sell-side background, but the best background can be generically described as capital markets experience. The sell-side may offer the best capital markets experience for investor relations because of the selling nature of the role. Sell-side analysts need to be on the phone daily dialing for dollars and interacting with investors. As a sole-proprietor, the sell-side analyst quickly learns to be a utility executive, as he or she is not only responsible for the published product, but also planning, infrastructure, marketing, etc. Nothing beats a former sell-side analyst willing to roll up his or her sleeves and work. Having this background will allow IR to branch into other areas such as competitive intelligence, strategy, and even FP&A to some extent.
Overlooked benefit: The sell-side IRO can help teach the executive team, or junior executives, how to successfully navigate Wall Street.
The Buy-Side Background: The buy-side investor represents an attractive background for the same reasons a sell-side investor is attractive: capital markets experience. Learned process represents the key differentiator between a buy-side investor and sell-side investor. The buy-side investor typically has a more internal or secretive focus. The buy-side often is very careful to ensure that all learned information and underlying thesis is not shared with the outside world. The more who know results in less alpha. Investor Relations should operate in the complete opposite manner. All valuable public information should be shared and disseminated to investors in order to (1) control the narrative, (2) develop a high-quality consensus, and (3) guard against short/activist attacks.
The Corporate Finance Background: The corporate finance background IRO represents another highly prevalent IRO background. The primary benefit of a corporate finance background revolves around strong institutional knowledge. These types of IROs likely benefit from a significant tenure at the company and knows all the inner workings. Additionally, the career corporate finance person is likely well-versed in the financial modeling or accounting intricacies of the company.
The Communications Background: Historically, the communications background represents the most prevalent background for an IRO. These types of IROs are focused on media relations, press releases, and ensuring that investors and executive meetings are happening. Essentially, the goal is to make sure the executives are in front of the right people and the executive team is happy.
The Cost Dimension
The fourth dimension of IRO and IR persona revolves around costs. Some IR programs benefit from extremely large budgets, whereas other IR programs face extremely limited resources. The amount of resources and allocation of those resources can dictate the success or failure of an IR program. In my view, an IRO with limited resources will have an easier time moving upstream versus an IRO or program with significant resources moving downstream.
Common Pitfalls
When looking to optimize the IRO position, a company needs to be mindful of some of the pitfalls that exist. Some of these shortcomings may be more common to certain backgrounds than others.
Financial Analysis: Often there is a lack of focus on heavy financial analysis, these types of programs farm out the heavy financial analysis to the lowest level of the IR team. If your IR person cannot explain the company model or help analysts learn how to model the company, you are not optimizing the role.
RegFD: Clearly, compliance with RegFD is of the utmost importance. The problem is that the fear of Reg FD seems to be the primary driver of how active or passive an IRO or IR program may be. A Wall Street background prepares you to communicate meaningfully via ambiguous terms or ranges. If the IRO suffers from Black and White numbers disease then he or she will be reluctant to talk to investors. The problem here is that if you fundamentally fear RegFD, then you will hesitate to interact with investors.
Investor Messaging: The problem is that knowing all of the above does not mean the candidate can optimally translate the knowledge to the investor base. Working in corporate finance does not always provide the skill set necessary to provide compelling information via vague statements or ranges. Being a corporate numbers person can often lead to a very black and white view around numbers.
Black and White Disease: The black and white view around numbers can cause the problematic view of putting any calculatable metrics that look good into the deck or script. A major difference between corporate finance and the sell-side revolves around training on how to craft an investment thesis and tie several key topics back to that thesis to lead investors to that thesis.
Versatility: The ability to jump across industries and even competing companies could be difficult. These types of IROs often exhibit lengthy tenures within an organization. The longer one stays somewhere the harder it is to (1) leave, and (2) pick up and adapt to the new organization.
Secrecy Bias: Most common to the buy-side background, but also exhibits itself via fear of Reg FD. While secrecy has value, the primary function of IR is to ensure that the widest majority know and understand the underlying company thesis, which leads to high-quality consensus.
What Is Maximum Value?
Maximum IRO brand value comes from an active focus and sell-side background. These two characteristics seem to be the least prevalent across IROs. Furthermore, an active approach coupled with a sell-side background can yield the greatest return on investment for the corporation.
My IRO Persona
As an IRO, my persona takes an active focus, fits best with rebuilding or builder programs, and benefits from a dominant capital markets background, which is complimented by extensive investor relations and corporate finance experience.
Much like an NFL coach, the best IROs are able to explain his or her fundamental IR philosophy and outlook. If he or she cannot articulate a personal IRO brand, then the candidate will not likely optimize your program.
