Every job carries with it a primary objective or goal. For the most part, the objective or goal represents something that the person in said job can directly impact.
Investor relations professionals primary objective revolves around obtaining a full and fair valuation for their associated company shares. Our argument is based on the National Investor Relations Institute (NIRI) definition, as presented within the Investor Relations Charter (IRC) body of knowledge.
A full and fair valuation as a primary objective represents a false premise. The two primary reasons behind the false premise are:
Investor Relations Officers (IRO) cannot directly impact valuation, as they do not invest capital.
and
There are two sides (positive and negative) to a full and fair valuation.
The Full and Fair Valuation Paradox
When one considers the idea of a full and fair valuation, one quickly realizes both a positive and negative side to a full and fair valuation exists. IROs are well served to remember there are always two sides to the coin.
Consider the following. . .
A full and fair valuation of shares can be either positive or negative.
In a positive growth environment, think the bull market of the last 10 years, a full and fair valuation will be positive. When the company executes and prints a strong beat while raising guidance, a full and fair valuation will be attractive as it is likely increasing.
Conversely, in a negative environment, think the company misses earnings and reduces guidance, a full and fair valuation may be negative.
Sometimes, a full and fair valuation represents a 20% decline in share price when a company reports an earnings miss and then reduces financial guidance e.g., Cerner's (CERN) 3Q18 earnings report.
I do not know of many executive teams that will reward an IRO for a 20% price decline that represents a full and fair valuation.
Fair valuation represents the wrong objective for an IR professional, hence the Full and Fair Valuation Paradox. The IRO really has no ability to directly impact valuation. for the most part, investors do not appreciate management's that explicitly reference valuation in investor materials e.g., the investor deck, earnings call, et al.
The job of management and IR revolves around setting the right clues in place for the investor community to reach the same valuation conclusion as the company.
The True Objective of IR
The primary objective of an Investor Relations program must be something an IRO can directly impact. In our view, the definition of IR we provide below represents a good starting point. An Investor Relations program strategic plan should start with a focus on making sure:
1. The right investor materials exist,
2. Relevant and compelling information is provided and disclosed, and
3. Does open communication exist between the company and investors.
To summarize. . .
An investor relations program should seek to provide a clear and confident presentation of the company's investment thesis, through engaging and transparent communication in order to unlock shareholder value.
The value of IR is then increased as the IRO and company develop (1) long-term relationships, and (2) convince investors management makes the right decisions to run the business on a day-to-day basis.
The IRO can directly impact company materials not valuation. Therefore, the definition of IR should point professionals toward the idea that they need to:
1. Create the right investor materials
2. Consistently engage investors
3. Facilitate information flow about the company and industry with investors
If the IRO focuses on building the right message through the requisite materials and information flow, the share price will take care of itself.
The actual unlocking of shareholder value represents the hallmark of an effective investor relations program. The unlocked shareholder value represents solid long-term relationships, reflects IRO responsiveness, and transparent information flow from IR. Lastly, a world-class IR program will never deliver true value without company execution.
Next we will look at:
How to truly drive better valuation
Who can and cannot impact valuation
A full and fair valuation likely requires non-consensus frameworks
