Investor relations is broken. It isn’t the people, it is the process. Most senior executive see it as a department designed to help the company put their best foot forward. The skills needed are someone who is good with powerpoint, knows numbers and can talk to analysts all day long without going crazy. I think this definition misses six key challenges for Investor Relations.
Challenge #1 Investors have no time
Investors are limited by time and attention. Investing is based on financial reports which are both long and redundant, and the amounts of disclosure are not improving investor knowledge (read this). The SEC and the FASB have turned a simple financial statement into a career generating stack of paper. A typical 10k runs 100+ pages and is stuffed with disclosures, reconciliations and accruals.
A typical financial model will go back 10 years and ideally, all the 10k’s & q’s should be read from the entire history. Most are not. I bet that fewer than 50 people outside the company conceivably completely read any 10k document. Most analysts look at changed pages from the previous document, skim the management discussion and update the models with the key data. If you own 50 stocks, your reading load might be the same as knocking off three books a week in SEC filings alone, not including the other material you read to know what is going on in the economy.
Time pressure causes investors to look for shortcuts to the intellectual rigor of a complete and detailed review. Pattern recognition conserves time and brain power. Investments are selected that are similar to past successes. Investors classify stocks by lots of methods (growth, value, etc) to eliminate the time memorizing details about every company. The intellectual demands to obtaining, sorting and absorbing the material means that complicated stories are often ignored or missed. Complicated analysis, the use of a lot of jargon just make the analysts job harder, and therefore less likely to expend the energy to invest in your firm.
Clarity increases comprehension and makes the job of an investor easier. Easier means better analysis and better communication and a better stock price.
Investor relations has to recognize the time pressure and focus on a coherent set of facts that allow a potential investor to understand the business and make a prudent investment.
Challenge #2 It’s not just numbers
For the last fifty years we’ve been training executives in quantitative analysis, and today’s MBA’s know how to deconstruct a business. Because of our emphasis on numbers, today’s executives tend to manage rather than lead. CEO’s and CFO’s certify that the financial reports to the best of their knowledge do not include misstatements, or are misleading. Making both CEO’s and CFO’s more involved in the data and detail.
Investors do not have access to the details of the business, and realistically we can’t share them. Analysts are trying to make meaning out of disclosures, so they ask a lot of questions about management’s impressions or thoughts (or my least favorite “add some color to the numbers”). When analysts ask these questions, they are asking for help understanding the bigger picture and cannot tie in the numbers to a direction or theme.
They are looking for the story behind the numbers. When a senior management team that generates and lives on numbersis selling to someone who is looking for a story, there is a disconnect.
Humans like stories (see here for Paul Zak’s HBR article) and we remember them better than the numbers. The story provides structure to our understanding and helps add meaning and relevance.
Investor relations has to communicate a story that makes sense. It has to be reasonably based on history and explain a direction and purpose for the company. It is more than the just the numbers.
Challenge #3 An Outside Perspective
Investors have one huge advantage in valuing firms that senior managers lack. They have an outsider’s perspective. Working at a hedge fund meant sorting through 2-3 firms a week. You hear what the other firm’s have been saying, you can compare this quarters disclosure to the last 15 quarters, you aren’t sitting on half a million options that are underwater. The outside perspective is very valuable, I have written about it before (see here). Outsiders haven’t drunk the company Kool-aid, they aren’t convinced of the company’s invincibility and they aren’t incentivized to worship the company mission. This perspective is valuable to CEO’s and Boards, but the criticism is dismissed because the outside view often is working off of fewer facts and CEO’s reject criticism of their strategic plans.
In a capitalist system, the investment community is the owners of the business, and we should listen to the owner, even if they are sometimes wacky.
Investor relations needs to be a vital conduit about market perspectives on company strategy. That message has to come back to senior management the board and the CEO in actionable and understandable ways.
Challenge #4 It can’t be delegated.
Management gets a chance a couple of times a year to tell their stories to the investment audience. The simplest way to tell of a management team lacks a coherent strategy is if they can’t get the message across in the 25 minute talk they give before the break-out session. If in 25 minutes you can’t get the message across to the 40 or so MBA clones that make up the ranks of stock analysts, how did you get that message across to the 10,000 high school graduates that make up your workforce? Whenever I hear jargon and business-speak when a senior executive is discussing strategy, I know that strategy is dead on arrival when it gets to the front-line worker.
All presentations should be practiced prior to being given. If we work for the investors, what message do we send when we arrive at our meeting and our report is fumbled and ill prepared? I’ve never believed the stats about how much of meaning in a conversation is non-verbal, but I respect it is very high. Stumbling through a presentation reduces personal and firm credibility.
Investor relations is the responsibility of the CEO and CFO, and hiring a director or VP does not absolve you of the responsibility of being prepared, practiced and ready when reporting to the investors.
Challenge #5 – Authenticity = Credibility
George Burns was quoted “sincerity – if you can fake that you’ve got it made”. Senior executives think of IR as a something that can be faked. After reviewing 100+ companies a year for 12+ years, I’ve seen a lot of pitches. Figuring out what the management team does and doesn’t know is how we made money. If you state that you are #1 in something, you’d better be prepared for us to check.
Most Investor relations staff get the compliance problem. All the numbers are verified, everything is properly sourced. Then the CEO or CFO make an off-hand comment that will end up on a transcript and will be fact checked. I’ve written before about the average experience of stock analysts (see here). New analysts spend a lot of time reconciling cognitive dissonance, which is a fancy way of saying, does management “walk the talk”.
I’d rather a management team was perceived accurately, even if that perception was negative, for example as aloof or uncommunicative, rather than as something they are not.
Investor relations stands for authenticity and accuracy. Senior executives aren’t clones, and should be respected as individuals. Don’t write speeches full of bafflegab and resist the use of jargon.
Challenge #6 – Everyone is an Investor
Most companies incentivize with stock options and most stock option grants are small. Outside of a relatively small circle of high paid executives, most option grants hold little perceived value. They have a cost, but the perception is that they don’t have any value until they are vested and are deeply in the money. The staff needs to hear the story as much as the analysts do. Vendors may make million dollar commitments for a new product line and they need to hear your strategy. Customers, especially when they are making a commitment to a product, need to know whether the company is viable.
The reality of today’s connected society is that the number of people who “care” about what IR has to say is much greater than before, and those listeners have much more influence the firms success.
Investor relations material should be prepared for all the stakeholders, based on their needs. The delivery of employee oriented material may be through HR, but that disclosure should be focused on the key story and theme set by the strategic plan.
Conclusion
Investor Relations needs to play a bigger role within your firm. Helping develop the strategic plan, communicating a coherent story with numbers that provide clarity and understanding. It is time that IR is more than someone who talks to analysts and comes up with a quote.
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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting. I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.