Investor Relations and Financial Communication. Alexander V. Laskin
CEOs, however, were still actively trying to avoid the financial gurus of Wall Street in the same way as they had been trying to avoid private shareholders earlier. Executives were used to being the only ones running the show and they did not plan on sharing their powers with either undereducated private shareholders or overeducated financial analysts. However, private shareholders were easy to deal with and could be kept at bay by using mass media and giving them occasional hand-outs. Management succeeded in creating “a nice warm feeling” in shareholders and keeping them “happy and calm” by avoiding “telling them anything that wasn’t legally required” (Morrill, 1995). The financial analysts, however, were far more difficult to please.
Financial analysts were not satisfied by the small amount of substantial information the companies were disclosing. They asked questions, sometimes questions “that management had not asked itself, or for various reasons did not want to answer” (Morrill, 1995). Moreover, institutional investors had power over the companies they owned stock in and perhaps even more power over the companies they did not invest in. Large institutional players could sweep all the company’s shares off the market, pushing the price up, just to unload them several days later causing the stock value to plummet. Chatlos (1984, p. 88) recalls, “The new institutions had so much money to invest that there literally was not enough time to observe the prudent ground rules. The new method was to dump the shares when a sell decision was made and to buy as quickly as possible when that decision was made. This had a severe impact on market price volatility.” If earlier private shareholders at least smoothed out this volatility, in the 1970s with individuals off the market the price was in the hands of the financial analysts. A single word from the company might have changed the price of stock enormously. The management decided they would rather avoid meeting with analysts altogether for fear of saying something wrong.
As a result, the investor relations profession in the 1970s experienced a notable change. Investor relations moved away from the public relations of the 1950s and 1960s. First, there was no demand any more for mass-mediated communications to myriad private shareholders, who moved off the market. Second, institutional investors demanded other communication channels than mass media. In addition, earlier public relations-based investor relations practices had left a bad taste in the mouths of Wall Street professionals, and financial analysts rarely wanted to communicate with this breed of investor relations professionals. Institutional investors and analysts tried to talk with managers of the company directly. The management, however, avoided any direct contact, choosing instead to communicate through the corporate secretaries or forward the calls to the CFO’s office or the treasury department.
In response to these changing demands, a new type of investor relations professional was emerging. Management often saw former financial analysts as being ideal IROs because they were expected to easily find a common language with the company’s financial analysts and professional investors. Wall Street-based firms started offering investor relations services, too. These firms were often an outgrowth of investment banks and thus had strong connections with and deep understanding of the financial markets.
These changes in the investor relations landscape had a strong effect on the investor relations function itself. Powerful and knowledgeable institutional investors evaluated every action the company took and were not afraid to ask questions and provide criticism if they did not believe the action was in the best interests of shareholders. Higgins (2000) describes the new institutional investors:
They have successfully sought an activist role in corporate governance, focusing their institutional power on company’s performance, the proper role of the board of directors, and executive compensation… The overall impact of the institutionalization of U.S. equity markets has been to make the job of the investor relations executive infinitely more challenging and complex.
(pp. 24–25)
From provider of information investor relations professionals had to turn into defenders of managers’ decisions – if investors had criticisms of company actions, investor relations were expected to provide counter-arguments to explain and protect the company’s executives. IR meetings started to become argumentative and, at times, confrontational. Proactive investor relations practices called for anticipating shareholders’ reactions and preparing to respond to them in advance. Financial analysts-turned-IROs prepared their own analysis to counter-act anything that other financial analysts may throw at them. Shareholder research became a necessity. Some IROs simply did not allow negative questions to be asked at conferences and annual meetings, tightly controlling the communication channels. Top executives wanted to stay away from all of this as far as possible.
The focus of investor relations, in addition to protecting the top management, was often on persuasion and making the sell. Marcus and Wallace (1997) explain that investor relations became “the process by which we inform and persuade investors of the value inherent in the securities we offer as means to capitalize business” (p. xi). Ryan and Jacobs (2005), financial analysts turned investor relations consultants, suggest the investor relations contribution is helping the management to “to package their story for institutional buyers or sell-side analysts” (p. 69).
In conclusion, this financial era of investor relations history was focused on professional investors and financial analysts. For the tasks of defending the corporation in front of them, CEOs were hiring former financial analysts and former professional investors who became the new breed of investor relations professionals. They lacked the public relations knowledge and skills, but they understood the numbers and knew the rules of Wall Street. CEOs needed to have somebody between themselves and the professional investment community and decided to give it a try. Investor relations at that time was often viewed as a marketing activity with a goal of having a positive impact on a company’s value. This led to a constant struggle for an overevaluation and pushing a share price up by any means necessary.
The collapse was inevitable. The chain of corporate scandals at the start of the twenty-first century brought down even companies that were once thought to be among the leaders of their fields – Enron, Tyco, WorldCom, Arthur Andersen, and others. CEOs started realizing that investor relations is more than just a financial function and started looking for communication expertise again – the pendulum was swinging back. Yet this communication expertise in investor relations was not easy to find any more.
Synergy Era
The beginning of the twenty-first century brought in the new era of investor relations that requires expertise in both areas – communication and finance – to be present and co-exist in the investor relations programs. Today’s IROs need to gain proficiency in both areas through dual degrees, graduate degrees, and professional training.
A Harvard Business Review article predicted this synergy era in investor relations:
Aside from those companies that assign to the investor relations function whoever happens to be available (one major corporation, for example, gave investor relations duties to a retired chemist), many organizations make one of two common errors:
1 Some companies will decide that investor relations are properly a part of public relations. They are unaware that many security analysts feel uncomfortable when talking with public relations people because, rightly or wrongly, analysts are generally suspicious of being “snowed.”
2 Other companies assume that the best candidate for the investor relations function is found in the treasurer’s or controller’s department. Security analysts, the reason, are figure-happy, and who is better qualified to throw around statistics than the man who has lived with them? Such reasoning is unsound, and if it accomplishes nothing else, it serves to demonstrate that the chief executive of the company has not got the message of what investor relations is all about. A moment’s reflection will reveal that knowledge of the figure does not, per se, establish ability to communicate that knowledge effectively.
The solution to be found lies somewhere between these two extremes. The best candidate for the investor relations post will have had experience in both public relations and the financial phases of a company’s operations.