Investor Relations: Misvaluation of IRO Skill Sets

The NFL draft represents a great exercise in talent evaluation. Year after year, general managers typically over value certain traits and skills, while undervaluing important traits and skills. The never-ending focus on drafting the highest upside player, or drafting for need, vividly illustrates the misvaluation of athletic skills in the NFL draft. Many times, top flight talent falls down the draft board e.g., Dan Marino in 1984, Aaron Rodgers in 2004, and Josh Rosen in 2018.

In my view, the lessons of misvaluing skill sets in the NFL draft seems applicable to the hiring of Investor Relations Officers (IROs). Right now, I can relate to the feelings that Dan Marino or Aaron Rodgers felt as they dropped down the draft board, as I am now going on seven months of waiting for my next opportunity in investor relations. The question begging to be asked is what are the best indicators of a top-notch IRO?

What Defines a Good IRO?

In my view, a good IRO can simply be judged in his or her ability to add value. The ability of an IRO to add value revolves around several aspects:

(1.) Responsiveness to investors and management,

(2.) the ability to innovate to drive an engaging and optimal corporate narrative,

(3.) the ability to continuously educate both investors and management, and

(4.) an ability to drive information flow between the company, industry, and investors.

The IRO Two Part Skill Test

The skills outlined above represent a simple baseline for judging good investor relations from bad investor relations. In my view, there are two simple tests that can provide separation among IRO candidates:

Comfort Level with Reg FD: While Reg FD represents an important point of compliance for IROs, the best professionals are not afraid of Reg FD when it comes to engaging investors. The worst IROs are those so scared by Reg FD that he or she becomes gun shy in terms of setting up investor meetings. A top-notch IRO will always go the extra mile to communicate with the investor community.

Furthermore, a top-notch IRO will understand the art of nuanced communication. In other words, he or she can converse with an investor and deliver the right tone and confidence without providing non-public information.

Ability to Drive Information Flow. In a previous article, we discussed how information flow represents the foundation of an engaging investor relations program. The best IROs are well versed in the art of finding relevant and interesting information e.g., industry or competitor news flow, or impactful data sets, in order to further educate investors and better tell the company story. The ability to drive value-add information flow presupposes an active IRO, rather than passive IRO.

Overpaying for the Wrong Skill Set

For the most part, I think public companies often overpay for the easier to find skill sets (communications) and undervalue the hard to find skill sets (capital markets). In my view, the communications / PR and day-to-day operations of investor relations represents the skills any IRO can develop over time. At the same time, I am convinced that true capital markets experience, and the associated value with such a skill set, can only come from spending time working on Wall Street.

Like most NFL GMs, I believe that many C-Suites are enamored with drafting for potential, and ultimately overpay for less scarce or less valuable skill sets. In my view, the determining factor for hiring an IRO would be how does the IROs skill set translate into furthering the economic value of the company, and in turn increase my compensation as an executive? What is surprising to me is that executive compensation does not seem to enter the equation when hiring an IRO.

In my view, there are four main areas that drive the misvaluation of IR skill sets:

An Anti-Sell Side Bias: The anti-sell side bias begins with a management team that has likely been in the cross-hairs of an analyst. The company’s performance likely lagged and the analyst rubbed management the wrong way. These types of interactions are never forgotten, and often lead to the thought, “why hire a analyst that is going to question me?” In some circles, this description is called “sharp-elbows,” meaning a former analyst is not capable of collaborating. In the end, these concerns combined with the entrepreneurial and independent nature of the sell-side suggests that an analyst will not be a good advisor to the C-Suite.

IR Was Traditionally a Communications Role: The second problem lies in the fact that historically investor relations revolved around communications. Historically, the primary focus of IR was setting up meetings and facilitating conversations or conference / NDR travel. Given the communications focus, many IROs lack a true finance background. In my view, this leads to the assignment of tasks such as following research, running comps, staying on top of consensus, modeling the company, to the 12th man on the IRO team.

Focus on IRO Tenure: Just like the Monarchy in Great Britian, executive teams seem to be fixated on IRO tenure when making a hiring decision. The question becomes what represents IR tenure? To some like myself, I believe my time on the sell-side counts as IR tenure. After all, a sell-side analyst’s job revolves around relating to investors on a daily basis. To others, only investor relations experience should count for IR tenure. My issue is that why a long-tenured IRO is likely great at his or her job, how well can one transition those skills to a new company or new industry? In my view, the long-tenured IRO moving on is similar to the Institutional Investor Ranked analyst that leaves the sell-side to become an IRO. Can this former analyst actually roll up his or her sleeves and do the work without a team of five associates?

Glorified Secretary Persona: Many management teams view good IR as investor speed dating at conferences and not getting yelled at or pushed around by investors. Such a view point leads many management teams to erroneously believe they “got this” and that IR is simply a minor function associated with the finance organization.

The IR function should be separate because the finance organization needs to exercise the majority of its energy on running a business day-to-day. Good IR represents significantly more than what I just described. Because of the current “I got this” perception, management teams often view IR as a glorified secretary. In other words, there are several companies that think IRs biggest responsibility is to book travel for the executives to conferences.

Look at the IROs Game Tape

Often times, a scout falls in love with statistics rather than looking at game tape. For example, a scout for the Dallas Cowboys was enamored with Indiana running back Anthony Thompson versus Emmitt Smith prior to the 1990 draft, because Mr. Thompson lead the NCAA in touchdowns. Nevertheless, Jimmy Johnson’s point was Emmitt Smith was constantly breaking 60+ yard runs, whereas Anthony Thompson’s longest run the whole season was 38 yards!

First, executives need to look at the IRO game tape to see if the person in question’s skill set is translatable to a different company. Next, executives need to ask themselves, can the IRO we seek to hire actually play the game? What does the game tape look like? Is the IRO good because he or she sat in the same seat for a decade? Do they have experience across multiple verticals and market caps? Don’t get caught up in the hype when hiring your next IRO, either internal or agency.

What Does My Game Tape Look Like?

When I think of my IRO game tape, I think you find an extremely innovative IR program that provides informative investor materials focused on making an investor’s life easier through concierge service.

Conclusion

Ultimately, like the NFL, selecting the right IRO for a public company is a function of the C-suite, which plays the role of NFL GM. Does the company wan a yes person? Do they want to be status quo? Do they want to innovate? All of these questions determine the traits that have the best value.

Based on MiFID II, I think today, and over time, the most valuable IRO will be the innovative IRO. Right now, I think the innovative IRO represents the least valued type of IRO among public companies.

While I am biased to a sell-side background, hiring the best IRO is about hiring the person who can take experience from whatever walk of life he or she comes from, and can apply that experience for the betterment of the company.