The value of investor relations seems to be all over the map. Some executive teams value it highly, whereas others believe there is no need for a strong executive presence in Investor Relations.
According to a Rivel Research CEO survey, the most important trait CEO’s valued in an Investor Relations professional was “the ability to communicate.” At the same time, the survey results suggested finance knowledge was a very distant second.
I am not sure how the above outcome makes much sense. The value of an Investor Relations professional lies in his or her ability to effectively communicate financial information to the investor community.
Given that we disagree with the Rivel Research Survey results above, what framework drives the optimal value of investor relations?
Consider the following, the optimal value of Investor Relations starts with:
Communicating the company and thesis clearly and confidently, through
Engaging and transparent information
The value of Investor Relations increases as the IRO’s or IR program’s ability to communicate financial information in a way that:
Forges long-term relationships with the investor community, and
Convinces investors that management continues to make the best decisions on a day-to-day basis,
To do so, requires strong financial and business acumen, as well as basic communication skills.
Additionally, the value of Investor Relations increases as:
The value of Investor Relations increases as the market cap falls below roughly $10 Billion (anything from Mid-cap on down), and
The value of Investor Relations increases as the company and story complexity increase.
Traditionally, investor relations simply revolved around communications, but Investor Relations represents so much more. Good investor relations must sell the company thesis credibly by understanding, educating, and communicating financial and competitive information in a credible and transparent way.
The Optimal Value of Investor Relations Scenarios
Below, we provide a list of 12 scenarios that drive the greatest value of Investor Relations. The list is not mutually exclusive. The more scenarios a company faces, the more important and more valuable an optimized Investor Relations program will be for that company.
Market Cap Size: The smaller the market cap, the harder it is to make investors care about the underlying story. From mid-cap on down, Investor Relations becomes an important allocator of not only capital, but also investor interest. If investors believe the IR function is closed, not responsive or active, then the money will flow to the IR program that is responsive and active.
Story Complexity: Story complexity takes several forms ranging from numerous business segments, to lack of disclosure, or sometimes crossing dual industry verticals. The more complex the story the greater the effort IR must expend on educating investors. The process of investor education takes significant time, often several quarters. An IR program with solid investor materials can easily overcome the problem. The best IR programs will focus on utilizing its investor materials to simplify the story and make it more digestible.
Dual Industry Verticals: When a company operates across dual verticals it must work extra hard to educate, because investors will likely only have expertise in one vertical not both. Furthermore, it becomes extremely important for executive teams to resist the temptation to focus on one vertical. If your company operates in dual verticals, but only focuses on a single vertical, you will face a lack of buyers if something goes wrong. The great benefit of having dual verticals is that you can always look to use one of the verticals as a safety valve when something goes wrong. A good IR executive can help educate investors across verticals. For example, in the Data Center REIT space, REIT investors love an IRO that can educate them on the technology trends impacting the industry. On the other hand, HCIT investors typically do not value a technology view point, and management teams fail to see the benefit in simplifying their underlying stories.
The Company Does Not Know, Have, or Put Forth the Right Persona: Like people, every company has an individual persona. Sometimes a company knows exactly who and what they are and presents accordingly. Many times, a company may know who or what they are, but for some reason presents differently. Lastly, there are times when a company does not truly know who or what they are, and in turn has no idea how to present optimally. Good Investor Relations can help a company struggling with its identity figure out the right identity in order to present itself in an optimal way to investors
The Company Narrative Differs Greatly from its Competitors: All companies represent independent entities with unique assets and stories. However, each unique story typically fits into a larger competitive universe. When your company fits neatly within a competitive universe there are typically similarities across the business models of each company. Every so often, a company may present its story in a vastly different way from the competition e.g., Switch Data Centers and its positioning as a SaaS company and foregoing REIT status. Other times, a business model may be so unique, significant education may be required, e.g., DuPont Fabros Technology and the wholesale data center model versus interconnection and retail colocation. These situations benefit greatly from an IRO and IR program that can educate investors, while developing a consistent message across constituents.
The Industry of One: When a company seemingly operates with no competition, or no direct competition, the path of least resistance is to think I do not need Investor Relations. Additionally, the industry of one, often results in a lack of effort around describing the competitive set in the company’s 10-K filing. The problem is that companies operating in the “industry of one” represent the easiest targets for activists and short sellers. When you are the only operator, an activist and short seller can easily hijack the company narrative because no third parties exist to substantiate your story. For example, in the early 2010s, there were several Chinese RTO and company frauds because no competitive set existed. On the other hand, there were relatively few Chinese Internet frauds because the industry benefited from a vast competitor set, both private and public, and benefited from credibly third-party information sources. Companies in the “industry of one” must spend significant time educating and providing solid information on the industry, competitors, and how the company fits within this eco-system.
Industry of Many with No Differentiation: Investor Relations becomes valuable when a company faces a strong competitive set with no key differentiators across competitors. The IR function can help figure out how to identify and communicate key differentiators via competitive benchmarking, strategy, industry data, etc.
CEO, or Executive Team, Hates Wall Street: Some public companies suffer from Executives that loath communicating with investors for whatever reason. The view is often that the Executive built a successful business and knows it best, so any questions investors ask are tedious and grating. If the executive team falls into this category, a strong IR program becomes paramount. Good IR can protect management reputation and smooth over the problems that stem from an executive team not liking Wall Street.
Founder with Deep Technological Knowledge: Being public is not about the company, but about the investors. Once a company becomes public it is no longer enough to be the most effective innovator. A public company must not only execute, but put forth and protect its reputation as a group focused on operating a business. An executive or executive team carries deep technical knowledge, bristles at seemingly simple questions, and / or lack of investor knowledge needs strong IR. A strong IR program becomes the necessary intermediary to better prepare investors for management meetings, but also to prepare management for investor meetings, as well.
Poor Perceived Reputation: Strong IR can help a company overcome poor reputation by bringing the standard of consistency. Good IROs are able to create consistency of message across investor constituents, which results in less volatility, and better valuation. Consistency also helps guard against activist and short attacks, as a consistent message applied across numerous sell-side and buy-side analysts and investors, creates a strong narrative and well-entrenched consensus.
Poor Perceived Competitive Positioning: Often times a company faces a perception of poor competitive positioning. Maybe a competitor has the best margins or a business model that exhibits greater appeal e.g., high growth and high margins. A good IRO and IR program can and will utilize its investor materials to change perception.
The Company Uses Commoditized Third-Party Investor Relations Services: For the most part, third-party investor relations services represent a commodity. Companies seemingly chose their vendor based on relationships and fail to really dig into how well a third-party agency can represent a story. Furthermore, the problem with third party agency investor relations is that such vendors are never able to develop a deep enough understanding of the story required to drive an optimal investor relations program. If a company needs to educate or drive investor awareness and engagement, in-house Investor Relations represents a significant value-add.
Yes, Investor Relations is about communicating with the investor community, but good investor relations represents so much more. Executives undervalue the role and value of Investor Relations at their own peril. The difference between good IR and bad IR may just be the length of an executive’s tenure. Therefore, an executive team must always choose to optimize IR!
