The economic recession hit communications-related industries – such as advertising and public relations agencies – particularly hard, and also contributed to the decline of prices and institutional support for many public companies. Corporations as well as PR and IR agencies trimmed staffs to the bone. Then along came the ongoing corporate scandals of Enron, Global Crossing, WorldCom et al, and the integrity of financial disclosure came into question. These scandals pose a more lasting threat that continues to simmer in the corporate and institutional IR communities.
However, despite reduced external and internal IR resources, and what could be called the Enron-Andersen syndrome, the IR effort must go on. There are mandated disclosure requirements, such as earnings and other material releases, as well as interim and annual reports. There is also the need to respond to inquires from analysts, portfolio managers, the business press, shareholders, etc. Understandably, companies have a desire to communicate with the Street in an attempt to boost prices and P/E multiples, as well as expand their institutional followings.
The business climate today demands greater disclosure, more integrity and more credibility. Thus, there are more valid reasons for an ongoing, professional IR program. The problem lies in having to accomplish it with reduced resources. Making matters even more challenging is the simple fact that no-one knows when a broad, sustained economic recovery will actually begin.
More than bare bones
When is more than a bare-bones IR program needed? Some CEOs and CFOs believe they have to have an active IR program in place merely to placate the board of directors and key shareholders. Some others naively think that an expanded IR effort will automatically lift the stock price and multiple, attract new investors or regain previous institutional support.
Under such circumstances – surprise! – even costly IR wizardry will not accomplish very much that lasts. To rise above a sub-par stock price or P/E multiple, or to overcome a tepid, thin following, the corporation itself must possess certain specific attributes before undertaking a substantive IR program. And its IR agency or counsel should at least follow suit and lobby for greater disclosure.
The company needs to genuinely…
– make a case for sustainable sales and earnings growth;
– demonstrate credible, forthcoming and articulate leadership – especially through difficult times;
– launch a breakthrough or a major development that distinguishes the business from the doldrums afflicting its industry and suppressing stocks (for example, the IR and PR efforts in anticipation of Pfizer’s Viagra in the US back in the late 1990s did wonders for the stock); and
– have the patience and means to allow at least twelve to 18 months for the IR program to pay off strategically (as opposed to short-lived stock climbs that fall back towards the starting level).
The wrong firm
When it comes to choosing an IR agency, many corporations make the play-it-safe mistake of only considering those that have specific experience in their industry sector. For instance, an auto manufacturer may only consider agencies that have previously worked for GM or Ford; a semiconductor company may limit its search to consultants that previously worked for Intel, AMD or Texas Instruments.
Companies should keep in mind that a firm’s potential and its ability both trump direct industry parallels. To draw an analogy, a person about to marry for the second time need not look for a clone of the first spouse.
At times companies fall into the trap of selecting only well-known so-called specialists that trade on their reputations and the recommendations of investment bankers and lawyers. Though they may have high-profile names, they may not have the best services, or the long-term dedication, or the ability to execute well in the practical sense.
Although most firms claim to be effective IR practitioners, many are not. Some are IR specialists that are glib and/or formulaic, and are capable of only routine IR practices. Beware of those agencies that make amazing claims and promises; they may have sweetheart relationships with low-tier analysts, brokers and fund managers, capable of only temporarily lifting a stock before it declines even further. Sadly, there are a few firms that are outright shoddy. Beware of those that ask for or accept stock or options in lieu of or in addition to fee payments.
The right IR firm
In contrast, appropriate, competent IR practitioners will be able to demonstrate in plain financial English that they are capable and experienced. They will engage the company in a dialogue about its history and outlook, including such potentially problematic areas as what the Street thinks of senior management, hostile takeovers or proxy concerns, a poor image or questionable credibility among institutions and financial journalists. They will discuss such matters openly and thoroughly, instead of flattering management or ignoring problems. They will ask questions (a good sign) and not make promises (also a good sign) about lifting the stock with certainty.
An appropriate IR agency will document and provide corporate and press references to previous, relevant IR accomplishments. These may include:
– a program that raised a P/E multiple relative to a client’s peer group, or during a flat or down market period;
– a program that diversified and increased the institutional following of an under-followed public company;
– a program that succeeded in analyst recommendations going from swap or sell to hold or buy;
– a program that improved the reputation of a client as perceived by the various segments of the financial community; and
– an implemented strategy or counsel that helped a corporation survive a hostile takeover or ward off a proxy threat.
The right agency will ask intelligent questions that make sense to the CEO and the CFO, and be able to converse comfortably with senior management on the corporate, financial and investor issues the company faces. It will devote more time to listening – rather than presenting – when it is bidding for the assignment. It will also assign senior personnel, rather than juniors, to accounts it lands. But be warned: many agencies use experienced practitioners during the pitch phase, but these veterans end up not working hands-on once the account is secured.
The right agency will not come across as slick, nor will its fee structure be exorbitant, nor will it ask for a retainer commitment of two to three years or more. The wrong agency will brag about investment, governmental and legal rainmakers and contacts; the right agency will provide both Wall Street institutional references and references in the financial media.
A reliable IR resource will stress the need for establishing credibility, and will encourage the corporation to disclose bad news promptly. The wrong agency will urge that bad news be buried or manipulated in some deceitful fashion. Former head of public relations and corporate communications at Hercules, Richard Douglas, may have expressed it well when he said, ‘In the long run, nothing is more important to a company than its reputation.’
Corporations should demand specificity, and even go so far as to engage a trial or sample program recommendation for a fair fee. Companies seeking IR counsel should also interview a number of would-be agencies among major, mid-size and small specialty firms, and gradually weed out those that fail to impress them. They should resist the temptation of choosing agencies strictly based on size – that may be easy to defend, but may not boost the IR effort.
Why so much bother in the selection of an external IR resource? Look at it this way. If a company with 10 mn shares outstanding can utilize the right IR firm to help increase the stock price by $5 a share in one year during a flat stock market, for instance, that is a gain worth $50 mn. If the firm’s fee and expenses come to $100,000 for that year, isn’t the effort well worth it?
Note well that under emergency conditions, such as less-than-friendly mergers and acquisitions or when facing environmental or legal disaster situations, the IR effort has to be in step with PR. This combined effort will be costlier, but will last a shorter period.
At its root, IR is an investment in the company, with a potential pay-off that rivals or exceeds just about any other single corporate activity.
Mark B Leeds is the founder and principal of LCA PR & IR and principal owner of the recently formed firm PR/IR on Call.
