Investor trust is the biggest issue on Wall Street today. With anyone from past all-star analysts to former A-list CEOs being caught with blood on their hands in the last two years, investor confidence has taken a huge hit. Add an economic slowdown to a crisis of confidence and IROs are facing a double-whammy.
‘The biggest challenge for IR professionals today is the restoration of public confidence in both the numbers and the integrity of management,’ says former SEC chairman Arthur Levitt.
The reality, however, is that investors still trust certain companies to deliver the information they need to make informed investment decisions. Who do they trust the most? According to over 2,700 portfolio managers and analysts surveyed for the US awards, Microsoft, General Electric, Pfizer, Cisco Systems, Intel, Johnson & Johnson, Viacom, IBM and Exxon Mobil are the top companies in the Grand Prix ranking. For the less-than-giant, Cardinal Health, Limited Brands and Millennium Pharmaceuticals were top of the large-cap, mid-cap and small-cap ranges, respectively. Retail investors chose Berkshire Hathaway, General Electric and Microsoft as their top three.
These companies are at the pinnacle of IR status in the US and perhaps worldwide. They are the companies the investment community listens to and relies on the most. Their stories prove that there are groundbreaking new developments happening in investor relations at the most challenging time in the profession’s history.
Hit the road
‘In times of economic and market uncertainty we have taken the tack of providing more information and transparency about the company than we have in the past,’ says Curt Anderson, IR director at Microsoft. Along with the grand prix for best overall IR by a mega-cap, the Seattle-based tech company won best financial media relations this year. The company’s IR department was applauded by one survey respondent for ‘a high level of disclosure and an ability to respond [to questions] by going to internal manager.’
Sure enough, one of the goals Microsoft’s IR team worked on over the last twelve months was increasing its knowledge of the company’s technology by learning from the management of its different business segments. ‘We are a company with several different businesses, some of which are technologically complicated,’ says Krishnan Srinivasan, senior director of IR for Microsoft. ‘So we worked very proactively with business leaders across the company to ensure the IR spokespeople had the right depth of technology, finance and strategic skills to be able to represent the company’.
The IR department also reached out to the buy side more proactively by taking to the road with senior executives to meet with institutional investors. ‘And not just the top five or 20. We went deep into the heartland to visit with investors,’ notes Srinivasan. ‘We sought out investment houses that might be underweight or not own Microsoft to find out what drives their thinking.’
The Street clearly picked up on Microsoft’s adventuring off the beaten path. As one respondent said, ‘Microsoft is accessible. It demonstrates a willingness to visit with institutional investors.’
All-star boards
To find out which US companies excel in corporate governance, the US Awards survey asked investors and analysts which board of directors functioned the best overall in 2002. Two companies – GE and Pfizer – tied for the top spot Pfizer, which has had a separate corporate governance department for over a decade, has long had a rigorous orientation program for directors. In 2002 Pfizer updated its governance charters to ensure they complied with Sox and NYSE guidelines. It also added other important corporate governance initiatives. Among them: ‘Our former CEO was excluded from serving on the board and we limited the number of boards that Pfizer directors can sit on to four,’ notes Peggy Foran, vice president of corporate governance at Pfizer.
The key to ensuring the Street recognizes your board’s performance is communication, says Foran. ‘Talk to your shareholders – this is something Pfizer has done for a long time,’ she says. Corporate governance also needs to be embraced at the highest rungs of the corporate ladder for a company to be serious about representing the interests of shareholders – not management. ‘You can put all these rules in place but the real question is: do you really mean them?’ asks Foran. ‘Our current CEO thinks very strongly of [governance] and we have a staff of 15 people working on it.’
GE’s board spent three months in fall 2002 revamping governance. The effort was overseen by GE’s general counsel, Benjamin Heineman, and aimed to develop a new set of guidelines and practices for GE. ‘The initiative was led and wholly constructed by our board of directors,’ comments Gary Sheffer, general manager of public affairs at GE. The changes included a goal of having two thirds of directors be independent and a requirement that directors attend all board meetings (eight a year). The company also formalized board member roles in the selection, evaluation and compensation of management, the review, approval and monitoring of financial and business strategies, and general risk management.
The Street was impressed. ‘They liked what the board did and they liked the clarity and transparency in terms of being able to access all the guidelines and key practices of our board and board committees,’ says Sheffer. The day GE posted its governance changes on the web site last November, the site had more than 100,000 hits.
Handholding pays off
Gina Price Nugent, senior director of investor and corporate communications for Millennium Pharmaceuticals, learned that investor handholding pays off. ‘Keeping the investment community from panicking when the stock price was moving down [and providing] one-on-one contact’ kept Nugent’s IR team of five very busy throughout the past year, she says.
Millennium’s IR stood out for responsiveness in terms of both speed and content. ‘When we ask a question, they get back to us with alacrity and precision,’ said one respondent. Nugent says her IR department really ‘ramped up its customer service over time’. The company tried to attend all major investor conferences and medical meetings in 2002 and was proactive with the Street, providing information about investment decisions and long-term prospects. (Still a development stage company, Millennium has yet to report positive earnings.)
‘Even in tough times and a tough environment you still have to be in front of people and communicating; in fact it could be more important in tough times,’ echoes Tom Katzenmeyer, vice president of communications and investor relations for Limited Brands. Along with the grand prix in the mid-cap category, Katzenmeyer and Amie Preston, director of IR at Limited Brands, took the prize for best IROs in their market segment. The company also won best senior management communications.
Limited Brands had two major transactions in 2002. In March the company bought out the minority interests of Intimate Brands and merged the two companies. ‘It was a very big transaction and we were very out there in terms of our communications,’ Preston recounts. ‘We had a roadshow and met with all of our investors and all of Intimate Brands’ investors.’ Then there was the sale of one of the company’s major businesses, Lerner New York. As Katzenmeyer notes, communicating these deals kept senior management and IR ‘very visible throughout the year.’ He says the key ingredient to winning investor trust is ‘being available and doing lots of events. For example, we host an annual investor update meeting in Columbus which is a key piece of our program. The investment community and the financial press come and visit our headquarters.’
Spelling out the numbers
Accounting transparency and investor trust go hand-in-hand these days. Nationwide Financial Services didn’t have a lot of good news for the investment community in 2002. ‘But, at the same time, we didn’t try to hide,’ says Kevin O’Brien, vice president of investor relations at Nationwide. O’Brien and Greg Schroeter, director of investor relations for Nationwide, won the award for best IROs in the small-cap category this year.
In 2002 Nationwide led the way in trying to help the Street understand differed acquisition costs (DAC) which are unique to insurance companies. ‘It allows you to differ a portion of your expenses and amortize those into income as profits emerge from the product,’ explains O’Brien. ‘But as the market goes down it puts pressure on your ability to recover some of those costs. Starting with the second quarter of 2002, we led the charge in educating the Street on how we look at that aspect of our financial statement,’ he adds. According to O’Brien, the IR department got calls from competitors thanking them for educating the Street on DAC.
Ken Janke, senior vice president of IR at Aflac, won praise this year for spelling out the numbers in the insurance company’s annual report and for his ability to deliver the right information to analysts and investors. Janke took home awards for best large-cap IRO and best annual report (for the second year in a row) along with several honorable mentions including one for the grand prix. (Lockheed Martin’s James Ryan and Randa Middleton tied with Janke as best IROs in the large-cap category.)
‘Given his over 18 years with the firm, Janke has built one of the best IR programs in the insurance business by providing detailed disclosure to the market, allowing investors to make informed decisions,’ said one respondent.
‘Transparent, candid disclosure is the real hallmark of the company,’ says Janke. ‘Things started that way in the 1970s when we had no sell-side coverage; the mentality was if no-one on the Street would cover us, we’d cover ourselves with very thorough disclosures about our business. We try to do the same with our annual report.’
Aflac produces its annual report in-house and uses a basic framework every year, adding new disclosures as it sees fit. ‘We have always tried to go above and beyond what is required to disclose,’ says Janke. ‘For example, in the financial summary, we have always had a history on not only balance sheet and income statements but other things that the retail investor might like to see like high/low closing prices, earnings ratios and return on equity.’
Big leagues
Which senior executive does the Street trust the most? Two people with strong personalities and distinct management styles: Viacom’s Mel Karmazin, president and COO, and Sumner Redstone, chairman and CEO, were the winners for best IR by a chairman, president or CEO. As one respondent said, ‘Sumner is vibrant and a great strategist. Mel is driven and the great communicator. Together they make the best team.’
‘The biggest contributor [to IR] is that they are very willing to get out there and talk to people and they have different messages,’ observes Marty Shea, senior vice president of IR at Viacom. ‘Sumner speaks to the strategic vision of the businesses and Mel talks about operations and results. Together they deserve the award because they go at it so differently – shareholders never feel as if they are being talked to by the same management; same assets but different message.’
The bright side
As this year’s US winners demonstrate, the current climate is ideal for testing and strengthening your relationship with the Street. Those who stood out this year did so because they continued to respond to investor concerns in a consistent and timely fashion. In doing so, these IROs are spearheading the evolution of the profession.
In her acceptance speech for the award for lifetime achievement in investor relations, Carol Murray-Negron spoke about changes to the IR function. She headed up Avon’s IR department for close to a decade and currently runs her own IR consultancy called Equanimity Inc.
‘When I started in IR,’ Murray-Negron recalled, ‘few companies held conference calls to discuss quarterly earnings; a handful had web sites that served investors adequately; safe harbor was often an afterthought; and there was really little real-time information for individual investors,’ she said. ‘In that short time span, the role of investor relations officer has evolved from messenger, to counselor to the conscience of the organization.’
Murray-Negron’s endnote was the take-home message from this year’s US Awards: ‘IR today is a tremendous responsibility as well as a tremendous opportunity.’
Groundbreaking research
Along with choosing winners, the US Awards research reveals important insight into what the investment community thinks about current IR issues like changes on the sell side, the implementation of Sarbanes-Oxley, stock option expensing, and the current state of IR. The report covers the views of more than 2,700 investment professionals and more than 1,000 retail investors, including their verbatim comments on the winners and IR trends.
For example, sell-side respondents were asked how recent changes (and those anticipated under the global settlement with securities regulators and New York Attorney General Eliot Spitzer, which had not been finalized at the time of the survey) would affect the way they do their job.
– 17.8 percent of sell-side respondents said there would be no or minimal change to the way they do their job.
– 10.8 percent said fundamental research would become more important
– 9 percent believed the rules help them do their job better – 8.5 percent said the rules make their jobs harder
Levitt gets kudos
For the first time this year, we introduced the Niri honorary award for the promotion of best practice IR. Sponsored by the National Investor Relations Institute, the award went to the pioneer of Regulation FD, former SEC chairman Arthur Levitt.
In the late 1990s Levitt pressed for the separation of auditing and consulting arms of accounting firms – pre-Enron, of course. And despite much opposition at the time, the self-described champion of shareholders single-handedly transformed the world of IR and disclosure by insisting retail investors get material information at the same time as the pros.
‘This award means more to me then almost any other I have gotten because it speaks to the constituency that is so important to me and that is the individual investor,’ says Levitt.
In fall 2000, when Reg FD officially went into effect, IR professionals were concerned it would increase volatility and upset analysts and investors used to getting tidbits in one-on-ones. Today, however, the perception of Reg FD among the IR community, along with Levitt’s ideas on accounting reform, are no longer viewed as alarmist but as entirely necessary.
Exploring options
With the controversy around stock options, a series of questions on the subject was included in the survey. The first two questions dealt with the expensing of options. Retail investors feel strongly that options should be expensed on the income statement and buy-side investors lean heavily towards this treatment as well. If given the alternative, sell-side analysts prefer to see options expensed on the income statement as well. To measure sentiment on stock options, respondents were asked to indicate on a scale of one to five whether they agree (1) or disagree (5) with the following statements:
Stock options should be expensed on the income statement
| (%) | Agree | 2 | 3 | 4 | Disagree |
| Buy side | 44.9 | 21.4 | 13.9 | 11.4 | 8.4 |
| Sell side | 30.8 | 27.1 | 13.6 | 12.6 | 15.9 |
| Retail | 57.6 | 19 | 10 | 4.6 | 8.8 |
It’s not important to expense options because their effect on the bottom line is easy to calculate already
| (%) | Agree | 2 | 3 | 4 | Disagree |
| Buy side | 9.8 | 8.9 | 17.6 | 28.6 | 35 |
| Sell side | 8.7 | 14.9 | 20 | 30 | 26.4 |
| Retail | 7.4 | 9.6 | 15.8 | 25.9 | 41.3 |
Word on Sox
One of the biggest changes in 2002 was the launch of Sarbanes-Oxley. To gauge investor sentiment on Sox, respondents were asked to indicate on a scale of one to five whether they agree (1) or disagree (5) with the following statements:
Sarbanes-Oxley will prevent future corporate accounting scandals on the scale we have seen in the last year
| (%) | Agree | 2 | 3 | 4 | Disagree |
| Buy side | 1.6 | 21.8 | 34.1 | 25.7 | 16.8 |
| Sell side | 3.2 | 18.5 | 35.9 | 26.6 | 15.7 |
| Retail | 3.3 | 23.9 | 40.4 | 20.7 | 11.6 |
Sox goes far enough in addressing governance reform
| (%) | Agree | 2 | 3 | 4 | Disagree |
| Buy side | 7 | 20.2 | 34.9 | 24.7 | 13.3 |
| Sell side | 7 | 20.7 | 39 | 22.1 | 11.3 |
| Retail | 6.3 | 17.4 | 29.7 | 28.3 | 18.3 |
Investors overall are not very confident Sox will make corporate America adhere to a higher standard. It is not unexpected, therefore, to learn that a significant portion of the investment community feels the legislation did not go far enough. Interestingly, retail investors, who place the most confidence in the legislation, also express the opinion that it doesn’t go far enough.
Click here to see the winners
Winners of the IR Magazine US Awards 2003 were determined by an independent survey conducted by New York-based Erdos & Morgan for IR magazine. In January and February 2003, the research firm surveyed buy-side portfolio managers and analysts, sell-side analysts and retail investors to find out who they have the most confidence in among US IR professionals and senior management. Thomson Financial provided a database of contacts for the professional investment community while Barron’s Online and WILink supplied the names of retail investors. With an average response rate of 14.59 percent out of a total sample of 30,496 investors, this year’s results are based on the broadest sample and highest response to date.
More information along with verbatim comments on the winners and other IR trends can be found in the IR Magazine Awards US Research Report 2003. The survey measures investor sentiment on key topics including corporate governance, measuring intangibles, earnings guidance and the role of chairman and CEO. For more information on ordering the Research Report, click here.
