Corporate IR professionals, by and large, tend to practise in a vacuum – their own corporate cocoon – working hard to make their programme value-adding, but never really knowing how successful they have been. Or not.
Certainly, many of them belong to professional IR bodies, such as the National Investor Relations Institute (NIRI), the Investor Relations Society (IRS), or one of the many other societies now established around the world. They attend meetings and share knowledge about investor relations practice with their peers within these groups.
But most IROs do not measure the value of their function to the corporation or hold themselves sufficiently accountable for the success or failure of their efforts.
Those IR departments that do measure the impact of their function tend to do so in isolation, evaluating their progress against the objectives from this year’s business plan or against last year’s norms for investor relations in their company.
‘We increased the number of security analysts who follow us by 20 per cent,’ they say. ‘Our stock is now trading at 15 times earnings,’ they claim, ‘rather than the 13 P/E of a year ago.’ ‘We have made excellent progress in moving our institutional/individual shareholder mix from 60/40 to 65/35,’ they report. Or those that are particularly bold – and willing to claim some credit for an increase in stock price – may say ‘our stock rose 22 per cent in value in the last year.’
While this sort of self-analysis is all well and good, it does not take into account the competitive dynamics of business and IR. In business, companies are competing for market share, sales and customers. In investor relations, they are competing against other publicly-traded companies (as well as other financial instruments) for their fair share of investment capital and for investment community support.
It seems obvious that a company cannot compete successfully unless it understands its competitors and how it measures up against them. To be successful in IR, companies need to measure their programmes not only against their own objectives and past performance, but also against those with whom they compete for the attention and funds of the equity markets. In a phrase, you need to benchmark your competition.
Benchmarking is an important, yet under used, measurement tool for those in the investor relations fraternity. In a recent analysis of competitive IR programmes for a client, we found two-thirds of those surveyed never used benchmarking techniques.
That is unfortunate, because when employed correctly, benchmarking has any number of benefits. It helps you to understand how your IR programme is moving relative to your competition. You perform the function as part of a continuum in which your competitors are trying to become more effective and value-adding, just as you are. You operate in a dynamic investment market place in which, a ‘rising tide lifts all boats’ (and vice-versa in a down market). Benchmarking helps you to understand whether your investor relations ‘boat’ is riding the crest of the wave, or is ‘beached’ while your competitor surges ahead.
Benchmarking can help you to learn from the successes and mistakes of your competitors. And it can help you improve your own programme, because its shortcomings maybe amplified in the benchmarking process. It is also an efficient way of identifying those areas where you can differentiate your company from those you benchmark, giving you competitive advantage.
Finally, the knowledge you gain from benchmarking your peer companies can be invaluable when you put in a request for more resources from your management, or seek its support for a different approach to investor relations programming.
Who do you Benchmark?
Most IR benchmarking is done of companies against whom you compete in the marketplace. They are often the same companies that investors look to as alternatives to investment in your company’s stock.
When your competitors for investors’ dollars differ from your market competitors, you should compare yourself with the companies that are reasonable alternative investments to your company. In a few cases, comparison with peer companies in totally different industries – such as companies of similar size or with similar financial profiles – can be illuminating and informative.
How do you Benchmark?
One truism is that an independent ‘benchmarker’ – not an employee of the company doing the benchmarking – can probably get greater cooperation and more valid results. Competitors, security analysts, portfolio managers, the media and investors seem more willing to be open with a third party, than with the company itself.
That third party – an investor relations firm or seasoned investor relations practitioner – can employ a number of benchmarking techniques. A one-on-one interview with the peer company’s head of investor relations is most desirable. A questionnaire, sent to the peer company to be filled out, is also an effective way to gather information. In both cases, the third party ‘benchmarker’ will be well served if he or she offers the respondent and his or her company anonymity in the finished benchmarking report, and agrees to share the collective results with the respondent.
What do you ask?
The next issue is the content of the questionnaire. The questions you might ask will vary from company to company, from sector to sector, but here are some of the kinds of things a typical benchmarking questionnaire is likely to cover.
How many individuals work in your investor relations function?
What is the title of the functional head? To whom does he/she report?
What is the total budget for IR
How does it break down?
How is your stock dispersed among institutions and individuals, and geographically? Is this the result of a targeted IR effort?
What percentage of your IR budget and time is focused on each of the parts of the investor relations programme mix.
Describe in detail your publications, security analyst contact, individual investor contact, shareholder relations, media relations, financial advertising and investor special events programming?
How do you measure your level of IR success?
One-on-one interviews, in person or by telephone, with security analysts, portfolio managers, institutional investors and the media are also an excellent way to learn how the company ranks in its communications with the investment community, versus the benchmarked companies. You can also learn how the company ranks against competition by reading round-ups prepared by knowledgeable security analysts.
Needless to say, these interviews will demand a totally different set of questions from those suggested above. They probe more deeply into how the company communicates with the investment community or the media versus its competition. The questions will typically deal with areas such as the following.
Familiarity with the company versus its competition
Awareness of the company’s key strategic messages
Effectiveness of the messages
The company’s proactivity in investor relations communications
Its responsiveness to investment community and media inquiries
Drawing out the respondent’s recommendations for improving the communications process
Observations on the benchmarked companies’ public IR performance.
Analysing the quality, quantity and pick-up of their financial media output can be revealing. Is the company being featured in important media seen by the target audience? Are its key messages being repeated often in a variety of media, breaking through to the consciousness of the investment audience through shear repetition?
For example, Nokia, the Finnish mobile telephone company, had nine major feature stories appearing in major financial publications in 1994-95, seemingly all ‘discovering’ Nokia for the first time. Each repeated the company’s basic messages, and contributed to a very significant growth in the company’s share price.
Does the benchmarked company’s message seem compelling? McDonald’s, as an example, speaks of its plans to open 2,500-3,200 new restaurants annually for the next two years, over 50 a week somewhere in the world. Knowing the marketability and popularity of its franchise, that is a real growth message that compels investors to buy McDonald’s stock.
Compare your competitor’s annual and interim reports with your own. Are they more reader-friendly and do they do a good job of informing the ‘quick reader’ in the first few pages? Are they well-designed and well-organised, motivating the reader to open them? Is the chief executive officer’s letter balanced, informative and credible?
Analyse the quality of their financial presentations compared with yours, particularly in a sponsored industry meeting where competing companies present head-on-head in a ‘beauty contest’. Does the benchmarked company have a more informative and compelling story than yours, presented in an interesting and understandable way? How does the audience react to its presentation compared to yours? Many companies survey their audience following a financial presentation, and that is a good occasion to gain a comparative ranking of all the presentations given on the same day.
These benchmarking techniques all focus on what and how peer companies communicate to the investment community. Equally important is a financial measurement, to determine how your company is doing versus competition in a broad range of financial parameters, including cost of capital, sales per employee, return on investment, return on equity, price/earnings multiple and share price percentage growth, among many others. There are many suppliers who can illuminate this data with analysis, charts and graphs, or who can track trading and ownership trends in your stock and that of your competitors.
What do you Benchmark?
The benchmarking process, no matter what techniques you use to gather the data, should look at such issues as how the company staffs the function and to whom it reports, and its budget. It should examine the myriad of communications techniques employed in investor relations, from publications to group meetings, from media relations to annual general meetings.
It should seek to understand the company’s use of communications technologies and how it measures the value of the function. It should gain a sense of the goals of the company’s programme, who it targets, the messages, and how those messages are first delivered and then received.
It should also include a survey of the ‘customers’ of the IR function, assessing the way they receive communications, and the communications themselves. And it should include the comparative financial analysis referred to earlier.
Benchmarking is not for the faint-of-heart. More often than not, it will point out weaknesses and voids in your IR programme. Invariably, however, it will illuminate opportunities for gaining advantage with your programme over your competitors – in such areas as your message, the audience you target, and the strategies and tactics you use to deliver the message.
That advantage should translate over time into a comparatively better stock market performance than your competitors’, and enhanced value for your shareholders.
Philip J Webster is president of The Webster Group, Inc, Philadelphia-based consultants in investor relations, corporate communications and public affairs.
