In our last article, we discussed 12 scenarios that represent maximum or optimal impact for investor relations. Remember, the more scenarios a company faces on this list, the more important it becomes to have a strong Investor Relations (IR) presence. Prior to that, we discussed why moving to a six-month reporting cycle represents a disaster in the making. Now we look at how market cap seems to impact investor relations in our third part of this series.
The effort required by investor relations is a function of market cap.
As market cap goes above $10B, investors can take meaningful positions and benefit from ample liquidity.
Companies with a position size and liquidity advantage require less work to drive meaningful investor awareness and engagement.
Market Cap Size + Index Membership = Size and Liquidity Advantage, which translates into an awareness and engagement competitive advantage.
Companies lacking position size and liquidity advantages face a more difficult time driving investor awareness and investor engagement.
The Value of Investor Relations
The true value of Investor Relations begins with presenting a company and associated investment thesis clearly and confidently through engaging and transparent communication to unlock shareholder value.
The value of Investor Relations increases as the Investor Relations Offficer (IRO) develops long-term relationships with the investment community, and continuously convinces market participants that management continues to make the right day-to-day decisions to operate the underlying business.
Beyond these two fundamental premises, Investor Relations always carries significant importance for three reasons:
Investor Relations controls the corporate narrative
Investor Relations builds relationships
Investor Relations allows the executive to focus on operating a business rather than communications and relationship building
A Key Investor Relations Value Driver – Market Cap
One of the most impactful variables of the true value of investor relations is market cap. The variable of market cap determines position size and liquidity advantages. Therefore, market cap as a variable will determine the magnitude of impact an IRO will have on his or her company.
When a company reaches a certain size, likely greater than $10B in market cap (roughly $15B for European investors), and reaches a certain liquidity level, both the amount of effort and the magnitude of impact of investor relations efforts declines. In other words, size and liquidity creates significant investor engagement and awareness with minimal Investor Relations effort.
The smaller the market cap, think under $10B (again $15B for Europe), or small-mid cap (SMID Cap), the more work the company, and Investor Relations needs to do to drive investors awareness and engagement. Our hypothesis holds that SMID IROs with a more active investment book drive greater impact and value than IROs at entities greater than $10B in market cap.
Small size and lower liquidity makes it tougher for an investment position to impact a large portfolio. Therefore, SMID cap stories require extremely tactical Investor Relations professionals. The IRO must constantly hustle or risk becoming irrelevant.
As market cap increases, the stock typically experiences greater liquidity as the number of possible buyers increases. Furthermore, the larger the market cap, the more likely the company may enter some sort of index. Therefore, we think there is a two part test as to how market cap impacts the value of investor relations.
The two easiest ways to get an investor to drive awareness and engagement, and ultimately buy stock is to offer size and liquidity. Once these variables cease to exist in your stock, the amount of work required to drive interest increases significantly.
The Market Cap Two-Part Test
We believe that:
Market Cap + Index Membership = Size and Liquidity advantages.
The size and liquidity advantages then provide a company with an awareness and engagement competitive advantage. Here is our two part test:
Market Cap Size: As market cap increases above $10B, the value and impact of Investor Relations begins to decline. As size increases, the company may benefit from index inclusion. As liquidity increases, the stock may become a must own holding. In other words, a company can become so big that even the most minimal of Investor Relations efforts will result in a significant portion of the investor community caring about the stock
Index Membership: As a company’s index membership increases, the amount of effort required to drive investor interest declines. Once the company becomes a member of an index, the company becomes a core holding for any investor tracking said index.
Our hypothesis holds that increasing market cap leads to less required effort to drive investor awareness and engagement. In reality, IR salary data suggests the opposite, as the value of IR for many organizations represents a function of IR team size.
The Investor Relations Paradox
The IR paradox holds that IROs at firms with market cap greater than $10B are paid significantly more than other IROs, despite having less importance and impact on the company because of market cap size.
Proof of our paradox comes from the NIRI/Korn Ferry (requires NIRI membership) salary survey, which vividly illustrates that leading IROs at S&P 500 companies benefit from higher salaries than non-S&P 500 IROs. Additionally, the NIRI/Korn Ferry data vividly illustrates the fact that IRO pay represents a function of market cap size. The bigger the market cap the bigger the salary.
Additionally, we believe that ETFs offer proof as to why the impact of IROs decline as market cap increases. The bigger the company’s market cap the greater the likelihood it may be pledged as collateral to create ETFs. The more liquid the company, the easier it becomes for investors to move in and out of the name. Another attractive feature to functioning ETFs.
Understanding the implications of market cap is important for IR, because what works for large companies offering significant size and liquidity will not work for smaller companies that may not be able to offer the same benefits. IR is not a one size fits all endeavor, and we as a group need to remember this when setting policy for the profession. The “less is more” way of doing investor relations helps no one.
