Investor Relations and Financial Communication. Alexander V. Laskin
The synergy era requires IROs to be experts in both communications and finance, as well as to have knowledge about securities laws and marketing. The new investor relations professionals are not mere advocates of management – they listen to investors and analysts and bring the feedback back to the company. Shareholder research and collection of feedback from the financial community become of vital importance. Chatlos (1974) suggests that the goal of investor relations is “reaching and hearing from a diverse audience” (p. 3). Investor relations professionals are responsible for the important task of researching “who the shareholders were, what they perceived their needs to be and how best to communicate with them – and for them to communicate with management” (Morrill, 1995).
In today’s investment market, the responsibilities of IROs to the investment community at large are growing. “Investor relations officers should heed marketplace rumblings about earnings measurers and understand exactly what analysts and investors of the company want, but may not be getting, from financial disclosures,” Allen writes (2002, p. 210). Investor relations today is based on a dialogue rather than monologue – two-way communications become a key strategy in communicating with investors.
This feedback serves both the management of the company and the shareholders. Shareholders should have a chance to persuade management to adopt the shareholders’ propositions in the same way as the management should have a chance to persuade the shareholders to accept the company’s course of action. In this two-way communication model, IROs become loyal to both their employers and to the shareholders. The goal of investor relations is to have the interests of shareholders and managements aligned. Indeed, serving investors is the exact work that corporations’ management requires from the IROs. Lou Thompson, the former president of NIRI, explains,
The role of investor relations is to minimize investor risk by assuring that the company is providing information that is clear and understandable through means that achieve full and fair disclosure. The lower the perceived risk in investing in a company, the lower the company’s cost of capital. There is a true bottom line benefit of full and fair disclosure.
(as cited in Allen, 2002, p. 209)
In other words, the more IROs serve the investment community, the better it is for the organization because it decreases investor’s risk and thus decreases the cost of capital for the company. Two-way communications appear to be at the very heart of the investor relations profession.
The previous eras saw IROs as technicians following management’s directions or responding to shareholders’ requests. Rao and Sivakumar (1999) observed that IROs were mostly consumed by technical rather than strategic activities: “an exclusive emphasis on intended technical activities deflects attention from the symbolic nature of investor relations departments and the institutional sources of organizational structure” (p. 30). Investor relations today is becoming a management responsibility with respected autonomy and decision-making power within the corporate structure. IROs are engaging in a growing number of proactive communications through conference calls, roadshows, conference participations, websites, social media, and so on.
As with the previous eras, the shift to the synergy era was caused by changes in the economy. The shocking corporate failures of the early twenty-first century, including the collapse of dotcoms and accounting scandals at the largest companies, put the whole model of corporate America to the test. The collapse of Enron became the wake-up call for the practice of investor relations, which now has to assume more responsibilities than ever before. Suddenly, the unprecedented growth in the stock market was replaced by recession. The competition for capital became more intense. Investor relations became one of the key activities that could make or break a corporation; CEOs saw that investor relations is not one of the auxiliary functions, but an activity that can create a competitive advantage.
The scandals also led to new and stiffer regulations from the Securities and Exchange Commission and Congress, with passage of the Sarbanes–Oxley Act in 2002, aimed at improving corporate governance and making managers and boards of directors more accountable. The Act expanded the scope of required disclosures and changed the disclosure procedures. But despite the expanded disclosure, investor relations must go beyond publications of obligatory disclosure documents. Investor relations is about understanding; investor relations’ task is to help investors understand the company and its business model. The goal is not as high a valuation as possible, but rather a fair value of the stock price. Finding the right investors, building trust and relationships with them, and developing long-term ownership patterns to combat volatility are the new goals for the professionals.
The history of investor relations shows that this is an integrated function. It is most successful when it is not limited to just one expertise. A successful IRO is more than a financial analyst in residence or a publicist in residence – either way, lots of value is being left at the table. Investor relations is a profession in its own right that requires its own set of skills and expertise. At the very least, it combines both communication and financial skill sets. And this is the foundation of the current, third, synergy era of investor relations development.
In conclusion, the shift to the synergy era of investor relations was caused by many changes in the economy, technology, regulations, increased shareholders’ attention to the role of corporations in the society, and many other factors. These changes placed new demands on the investor relations professionals and required investor relations function to adapt. CBS MarketWatch suggests, “Markets do not run on money; they run on trust” (Minow, 2002). To respond to these challenges, investor relations has to move away from being a technical reactive function, and become recognized as its own profession that combines the expertise of communication, finance, and law to proactively devise sophisticated research-based two-way symmetrical programs to facilitate dialogue between the company and the financial community with the purpose of enhancing mutual understanding, managing expectations, and building and maintaining relationships.
Key Terms
Amsterdam bourse
The Code of Hammurabi
Blue chipsBlue sky laws
Blue sky securities
CEO
CFO
Chief executive officer
Chief financial officer
Communication era
C-suite
Debt
Disclosure
Dominant coalition
Dutch East India Company
Efficient market hypothesis
Equilibrium
Equity
Eras of investor relations
Fair value
Falun mine
Fiduciary duty
Financial era
Financial communication
Hot air securities, see Blue sky securities
Investor relations
Investor relations officer
Investor Relations Association
Investor Relations Department
IRA
IRO
IR Society
Management
Mutual fund
National Investor Relations Institute
NIRI
One-way communication
Overcorrection
Overvaluation
Professional period
PRSA