With all the finger-pointing following the Enron scandal, there have been many proposals to discourage further abuses of trust that could contribute to future failures. A lot of attention has been directed toward cleaning up the most flagrant conflict of interest violations involving stock analysts and accountants, as well as board members and regulators who seem to have been asleep at the switch.
In the midst of all this scrutiny, can we afford to ignore another possible co-conspirator: the investor relations executive? Clearly, the Enron fiasco elevates the role of the IR discipline, which grew up during the 1960s as a specialized by-product of public relations in response to growing interest by individuals in stock investing. It began as a sort of customer service function but as the equity market became dominated by large institutions, the role of the IRO abruptly changed. The position became less about writing annual reports and answering niggling questions about dividend checks, much more about finance and managing earnings expectations of sophisticated market participants who have the ability to influence or invest billions of dollars in assets. Today there are far more MBAs in IR slots than ex-journalists or corporate communications specialists. And the most effective IR practitioners, according to compensation surveys by Niri, command hefty salaries plus rich option packages.
Today, superior institutional relationships are the hallmark of successful IR. Nothing is inherently wrong with this but, in many cases, the relationships entrusted to IROs are programmed to become dysfunctional, to borrow a term from ex-SEC chairman Arthur Levitt. In corporate structures, the primary interface with the financial community has far too many incentives to corrupt full and fair disclosure.
Just as analysts have always helped their corporate finance colleagues across the so-called Chinese Wall, IROs enable analysts in countless ways, from reviewing research reports to providing selective hints, unwittingly or not. Protecting analysts from being embarrassed by unrealistic earnings forecasts has become an end in itself. After all, what good to anyone is a discredited ally with the power to amplify the corporate gospel to fund managers and stockholders?
Option-incentivized CEOs, obsessed with share price, bear much of the responsibility for the corrosive role of their IROs. With options creating value only when the market rises, there has been a tendency to highlight the good news and downplay the bad. Reg FD aside, body language and intonation can guide even the most inept analyst.
As Goldman Sachs and others tighten controls on analysts, and big companies like GE and IBM adjust disclosure practices to the post-Enron environment, corporations also need to strengthen the IRO role – but not in the way practitioners might have hoped. What is needed is a dramatic repositioning of the role, from analyst-enabler to shareholder champion; from corporate protagonist to antagonist.
Incremental solutions won’t be enough. A recent Niri newsletter advocates that IROs routinely make reports to their boards. And regular board briefings about investor concerns, as well as perspective about likely reactions to strategic initiatives or financing alternatives, certainly wouldn’t hurt.
But is this enough? Perhaps the IRO should also be accountable directly to the board, instead of to a Jeffrey Skilling or Andrew Fastow. As for talking to analysts, there must be more transparent channels of communications between the corporation and investors in the future.
First, companies should immediately undertake top-to-bottom reviews of disclosure practices and solicit the outside perspective of institutional fund managers and their analysts on ways to improve.
Second, annual and quarterly reports should become exponentially more informative and readable. Third, board members should be more visible and accessible to the financial community. Fourth, term limits for IROs should be considered to discourage over-familiarity with analysts.
Finally, IROs should be promoting corporate candor and credibility, as well as more realism about valuation. Instead of winking and nodding on behalf of overly aggressive CEOs, they should be monitoring the quality of what is disclosed. In the new world order, integrity should be power.
Thomas C Franco is chairman and CEO of Broadgate Consultants, a New York-based corporate and capital markets positioning advisor
