The Modern Art of Investor Relations (1991)
Charting the future of public relations
Holmes Report

The Modern Art of Investor Relations (1991)

A new IR approach, a more scientific approach, uses financial analysis to establish a fair value for the company's shares and then using IR to reconcile market value with that fair value.

Paul Holmes


Traditionally there have been two schools of thought on investor relations. One school viewed the role of the investor relations profes­sional as "selling" the company's stock, using modern public rela­tions, communications and market­ing techniques to project the com­pany's strengths—managerial, mar­keting and financial—to potential shareholders; the second took a more scientific approach, using financial analysis to establish a fair value for the company's shares and then using IR to reconcile market value with that fair value.

Over the past several years, it is clear that the second school has been winning out, with IR practi­tioners placing greater emphasis than ever before on research (ana­lyzing both the stock price and the shareholder base) and on evaluation, adding an unusual scientific dimen­sion to the art form that is public relations.

It is no exaggeration to suggest that IR is considerably more advanced than most public relations disciplines when it comes to both research and evaluation. As far as research is concerned, IR profession­als are generally dealing with a clear­ly defined and limited audience, and information on their behavior is easi­ly accessible. As

far as evaluation is concerned, most investor relations programs—or at least the best of them—com­mence with more clearly defined objectives than most PR pro­grams, and there is generally hard evidence of their success or failure.

In his book Investor Relations, William Mahoney describes the dis­cipline as the child of two parents: public relations and finance. PR, he says, gave it birth, and was responsi­ble for its early development as a promotional function. More recent­ly, finance has become the dominant influence, ensuring that investor relations information is "financially driven."

What this actually represents is the evolution of investor relations from a communications discipline driven by what the company wanted the market to believe to one driven by what its target audience wanted to know.

"When this business first started it was about hyping stock," says Larry Rand, a founding partner at Kekst & Company. "It's evolved a good deal since then."

The first step in this evolution is the development of investor rela­tions as an intelligence gathering function, helping a company dis­cover who its shareholders are, what motivates them and, if possi­ble, how they will act in any given situation.

"Those companies that best understand their shareholders and prospective shareholders, and the professional investors who influence buying, should succeed with higher stock prices, better price/earnings ratios and increased trading activi­ty," says Sherwood Lee Wallace, president of The Investor Rela­tions Company in Illinois. "This means knowing, sometimes to the individual name, a great deal about the wants, desires and investment preferences of each buying group."

Fortunately, massive amounts of information on institutional investors and their behavior is avail­able through their 13F filings, and most of the larger investor relations agencies now have entire depart­ments devoted to researching and analyzing this information.

This kind of intelligence gather­ing became particularly important—in some cases literally a matter of cor­porate life or death—during the merger and acquisition explosion of the late-'80s, but it continues to make good sense even in these less turbulent times.

Kekst & Co. is one firm that built its reputation primarily on the M&A business of the '80s, but has found that the same approach that assisted companies in defending themselves against unwanted bids has equally important applications on a day-to-day basis. Says Larry Rand: "I think what the takeover boom did was focus a lot of compa­nies' attention on who their share­holders were, and whether they could expect support from that quarter in the event of a hostile raid.

"There were two keys to ensuring support. The first was knowing who your shareholders were and why they held the stock: were they there for the long haul or were they looking for a quick profit? The second was value. The best protec­tion against an unwanted bid was to make sure that the company was valued fairly." 

Good research also encourages more cost-effective investor rela­tions activity, enabling companies to target their IR efforts to the most likely to buy and the most desirable. It also helps managements set objectives for their investor rela­tions programs, particularly those that aim to change the composition of the shareholder base, generally seeking more "core" investors who are likely to view the company as a long term investment, and often looking to reduce volatility by ensuring that no one party controls too many shares.

Larry Rand cites an example of a company which, like most on the New York Stock Exchange, had about 60 to 70% of its stock held by institutions, but the largest 15 insti­tutional investors held some 40%, creating a potentially volatile situa­tion. The goal of the IR program was to keep the same level of institu­tional ownership but arrive at a situ­ation in which the top 20 holders owned just 15% of the stock.

Others have attempted to increase the number of individual shareholders owning their stock, on the theory that individuals are more likely to be value-driven investors and therefore more loyal, although not everyone accepts this notion.

Meanwhile several companies, and a handful of IR firms, have embraced the notion that the ulti­mate measure of an investor rela­tions program is the stock price. Others remain skeptical. The ability of communications to close the gap between the actual value of a com­pany and its stock price depends on the efficiency of the market for that particular stock.

Michael Seely, president of Investor Access, explains: "There are two pools of knowledge out there: what management knows about the company, its markets, its strategic direction; and what the market knows about the company. The closer those two pools of knowledge are, the more the market knows, the closer the stock price will be to being a true reflection of value. If the market is efficient, the stock price will be the full value."

Having said all that, there is a question of how much control a company actually has over its stock price. The figure most often quoted is 20%. The other 80% is deter­mined by factors outside manage­ment control, the rising and falling of the market, the performance of industry sectors, trade issues.

Of course, these factors can be taken into account in measuring the performance of an investor relations program. The Financial Relations Board's Ted Pincus, who encourages clients to use stock price as a mea­sure of success, has developed a pro­prietary measurement system that charts the performance of clients' stock against other companies in the same sector, and against other com­panies turning in similar results.

"Clearly you can't take the share price in isolation and be judged on that alone, but you can look at the performance of the share price in comparison with companies in the same industry, and you can identify companies that have performed in a similar fashion and you can measure against those groups.

"We have plenty of evidence to indicate that the companies for whom we work which adopt this approach perform better in terms of price/earnings ratio than other com­panies with whom they should be compared."

Others suggest that such mea­surement devices, however complex and sophisticated, are flawed, but few deny that investor relations suc­cess is more easily measurable than success in any other area of public relations.

Says Larry Rand: "The best idea is to customize your approach depending on the client. Different clients have different objectives. A valid standard of measurement could be increasing coverage, or changing the make-up of your shareholder base, or reducing the volatility of the stock by diversifying the base of ownership.

"You have to make sure you are dealing with a meaningful period of time, say eighteen months to two years," Rand adds. "That gives you one full economic and earning cycle to measure against."

What this approach comes down to, says Jonathan Rinehart, presi­dent of the Adams & Rinehart division of Ogilvy & Mather, is "maximizing shareholding by the kind of shareholders you want to own your stock." At this level, he says, investor relations is getting involved in management decisions, ranging from upgrading from NAS­DAQ to NYSE to stock splits to whether dividends should be paid.

These are legitimate areas of involvement for IR, he insists. "We are currently working with a compa­ny that is trying to decide whether to pay a dividend this year," Rinehart says. "Clearly, that's a decision that has investor relations implications. There are some investors to whom a yearly dividend payment is extremely important, and there are others who are more interested in the long term. It's our job to help the company decide which kind of investors it wants, and therefore what kind of company it wants to be."

Clearly, market efficiency varies from sector to sector and from com­pany to company. The blue chip stocks, for example, are followed by dozens of analysts, whose under­standing of those companies has to have real depth; many smaller com­panies, however, are covered much more lightly, and considerably more effort is needed to ensure that those covering them understand what management is doing.

"For a company like IBM, all we need to do is put out press releases and set up press conferences," says Michael Seely. "There are 65 people covering IBM, writing 120 reports a year, but for less efficiently valued companies we prepare much more detailed information, we help com­municate corporate strategies, we bring management face to face with the investment community."

Certainly there is plentiful evi­dence that there is a direct relation­ship between IR activity and cover­age of a company by the financial community. A study in the late-'80s showed that companies with mem­bers of the National Investor Relations Institute on their staff (and therefore, presumably, and active IR program) had more analysts follow­ing their stock than companies with no NIRI members, regardless of size or industry sector.

There are those who contend that as IR has become primarily an information resource, there is no place for the techniques of market­ing and public relations: self-serving language, flashy graphics, aggressive promotion of corporate achieve­ments. However, there is in fact no conflict between the idea that IR must be value-driven and the notion that it should deploy a full array of communications techniques, many of which may be borrowed from marketing.

Experts respond that any kind of heavy-handed approach is destined to fail anyway, that most members of the financial community are too sophisti­cated to believe the sizzle without a thorough examination of the steak. Deploying a full range of marketing tactics to ensure effective communi­cation, however, is legitimate.

Sherwood Lee Wallace argues that advocacy is a part of the IR pro­fessional's job: "It is in the area of management analysis, particularly where credibility is involved, that the investor relations professional func­tions best as an advocate," Wallace says. "Numbers can say a great deal in themselves, although they don't always say the same things to differ­ent people. The judgment of man­agement, on the other hand, is sub­jective, and responds well to investor relations guidance and support."

Wallace suggests that many tra­ditional marketing concepts have applications in investor applications, citing the

U.S.P. (Unique Sell­ing Point), which trans­lates into the U.I.P. (Unique Investment Premise) in IR: a basic concept that best pro­jects the unique investment values inherent in the company.

More questionable, perhaps, are the tactics of those companies that have organized sweepstakes in which stock was given away as prizes (Dr. Pepper) or offering discounts on products and even coupons (Quaker Oats and others.)

"What we don't do is hype," says Jonathan Rinehart. "We don't distort the truth, we don't put spin on the story. What we do is com­municate the truth as effectively as possible."

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