For the past few years, Carol DiRaimo, head of IR at Kansas City-based Applebee’s International, has met with Erline Belton, chair of a sub-committee of the board’s compensation committee, for about 90 minutes to discuss issues that include what analysts and investors are saying about the restaurant chain. This meeting is part of Belton’s information gathering for the compensation committee’s evaluation of CEO Lloyd Hill. ‘[Belton] asks a lot of questions about Wall Street’s perception of the company’s performance and its strategies on behalf of the compensation committee,’ says DiRaimo.
This scenario is not that common. IR doesn’t usually meet with a director without management present to provide information for the CEO’s assessment. But this might change as the push to have a regular investor relations presence in the boardroom heats up. Around half of analysts and investors say they would like IR to report directly to the board, according to the Investor Perception Study, US 2005, an IR magazine-commissioned report of a survey of 4,043 buy-side portfolio managers, buy-side analysts, sell-side analysts and retail investors.
Industry bodies including the National Investor Relations Institute (Niri) in the US and the Canadian Investor Relations Institute (Ciri) are also eager to define the relationship between the board and IR, but exactly what that role should be is a source of controversy. As some experts point out, there is an inherent conflict for IR in this role, given that the IR function reports to senior management.
Presumably the board would like IR to provide unedited insight into what investors and analysts are saying about management and company performance; this isn’t possible for IROs reporting to management because all information is filtered through that party before it’s presented to directors.
Straight story
Investors and analysts certainly want IR to give the board an unedited report. Those responding to the Investor Perception Study, US 2005 specify they would like IR to give directors unvarnished feedback about their feelings toward senior management and corporate performance.
‘IR should report to the board on concerns that institutional and individual investors have about the way the company is being managed,’ says one respondent. ‘Ideally, IR could present opinions about the company that come from investors and aren’t clouded by conflicts of interest – if you’re a CEO, you don’t want to tell the people who set your pay that you did a bad job,’ echoes another respondent. Overall, the investment community wants IR to act as an independent ombudsman and part-shareholder advocate in presenting its views to the board.
That’s not what IR is typically doing, however. Most of the information an IR person gives the board – whether face to face or on paper – is vetted by the CFO and CEO. Outside of her meetings with Belton, DiRaimo prepares a quarterly report for the board and reviews earnings releases with the audit committee every quarter to discuss the potential reaction from the Street – information that is first sent to her CFO. Michael Murray, head of IR at Montreal-based Jean Coutu, has a similar arrangement. ‘I report to the CFO and don’t have a direct link to the board but I have set up IR as a resource for the company,’ he says. ‘You set it up as a center of knowledge and periodically report to the board on an informal or formal basis.’
According to today’s corporate structure, it’s most common for IR to interact with the board via management, whether it is vetting the IR person’s presentations or presenting the information itself. Some IROs don’t see any difficulty with this structure.
‘We do not see communication through our CFO as a problem,’ comments Martin Gottlob, head of IR at Denmark’s Danske Bank, where IR reports to the board through the CFO and also directly with the executive board. ‘The board receives written reports summarizing the activities within the IR department, including roadshows, presentations and conferences, as well as consensus estimates, ratings and share price movements.’
‘If you have the IRO reporting directly to the board, you lose a lot,’ cautions Maher Al-Haffar, head of IR at Mexican cement giant Cemex. ‘IR is not an auditing function; it’s the turntable of communications.’ Al-Haffar doesn’t report to Cemex’s board and doesn’t see a role for investor relations in the boardroom.
A direct line
Some feel this role is better filled by other functions, such as the corporate secretary, the internal auditor (who reports directly to the audit committee under Sarbanes-Oxley) or the lead independent director. ‘The primary function of supplying information about investors to the board should be the responsibility of either the senior independent director (Sid) or the company secretary – the role of the IR individual is a completely different one,’ says Geoff Lindey, strategic corporate governance adviser to the UK’s National Association of Pension Funds (NAPF), speaking on his own behalf rather than on behalf of NAPF. ‘It is part of the responsibility of the Sid to know what the institutional investors are thinking of the company.’
Still, some IROs regard direct boardroom communication as an integral part of their IR strategy. Steve Stratton, IR director at Xansa, a small-cap UK outsourcing and technology provider, reports to his board almost once a month, providing a summary of trends and a breakdown of the top ten buyers and sellers. ‘As part of my summary I provide a précis of all the analyst reports,’ Stratton says. ‘We also use our brokers – UBS – to get anonymous shareholder feedback after roadshows, and analyst feedback about issues and concerns that also goes into the report. This report then goes entirely unedited to our board members.’
The real challenge, says Stratton, is knowing what information to include and what to leave out for different board members. ‘Our executive board members see my report in the raw, while the non-execs get a summary,’ he explains. ‘This is because you have to manage their time more carefully. Even so, many of our non-execs ask for the full report afterwards. We’re fortunate to have non-execs who really understand these matters; one is a former managing director at Merrill Lynch and I will either pass reports to her or she will pass on reports to me.’
Stratton benefits from direct relationships with board members in a way IROs at larger companies might not. According to Richard Singleton, director of corporate governance at London-based Isis Asset Management, large-cap companies often have more complex reporting lines and greater demands on executive and non-executive time that can prevent direct IR access to the board. ‘This is very much a big company, small company thing,’ he observes. ‘With a small company it is relatively easy for shareholder feedback to make its way directly to the executive and non-executive directors because they have fewer filters and the channels of communication are more direct.’
Boardrooms at large caps occasionally grant IROs an audience out of sheer ‘politeness’, Singleton jokes, but could be receptive to more regular contact if they realized the potential benefits. ‘A good company would welcome this,’ he says. ‘It is something worth trying out to see if anything new can be learned. It seems to me that once they start doing it they will like it, and institutions would be very happy to use IROs as a conduit, knowing their views will go directly to the board.’
Hot seat
But when meeting with the board it’s possible the IR person will face uncomfortable questions about senior management or strategic decisions. It’s essential to address this issue before going into the boardroom.
‘Set the ground rules for what is doable and what isn’t with the board and management,’ says Mary Beth Kissane, head of Corporate Perception Research, which provides independent shareholder perception research to boards, management and their advisers. ‘Take a Morgan Stanley situation, for example. You may be called on to answer questions to the board about shareholder perceptions of management that you will not be comfortable answering. This is an area riddled with conflicts for IROs.’
This is why Al-Haffar thinks it’s risky for IROs to report to the board, because it threatens their status with management, which is key to best practice. ‘If I were to lose that embedded status with management, I would lose my value added to investors and reduce my position to little more than a mouthpiece to the board with regards to what the sell side and investors are saying about the company.’
Still, some experts insist IR should have a seat at the table while still defining the parameters of its presence with management and the board. Lou Thompson, president and CEO of Niri, is a proponent of having IR take on this job, but he also feels it’s important to define what exactly the role entails. ‘The IR person should be the intelligence link between the investment community and the board and he or she should report in person so that the board and independent directors have an opportunity to ask questions,’ he says.
Thompson also thinks there is a way to navigate the conflict issue, and outlines four key areas for IR to take the lead in governance matters including director education, contentious proxy issues and acting as a type of ‘corporate consciousness’ in informing the board of shareholders’ best interests. ‘IR needs to be an advocate for companies on proxy issues, particularly those that might be contested,’ he explains. ‘And if you can’t carve out a strong rationale [for management’s position], maybe it is on the wrong side of the issue.’
Toronto-based Ciri similarly supports IR and board relations. The institute brought up the issue of shareholder-board relations in response to a request for comment on governance proposals from the Ontario Securities Commission (OSC), Canada’s largest regulator. The OSC then incorporated provisions addressing board and investor communications when it released its second set of proposals in December 2004; Ciri hopes those will remain when the final rules come out. ‘It is so much more critical for boards to have this information,’ explains Roxanna Benoit, president and CEO of Ciri. ‘Directors are having to ensure they get the information they need from wherever they need to get it.’ Ciri is currently in the early stages of drafting best practice guidelines for IR and board communications.
Set the ground rules
‘If you’re the IR officer, the trick is for management to clearly know and understand that you have a job to do [in providing feedback from investors to the board],’ comments Dr Chris Bart, principal and lead professor at the Directors’ College, which is based in Toronto and provides a certification program for directors. ‘IROs are not out to get management or promote their careers at the expense of management members.’ In cases where an IRO is faced with negative perceptions about management, Bart thinks he or she should give management the information first, allowing it time to respond, and then go to the board. ‘Give management due notice,’ he says.
Lindey admits there is some advantage to having the IRO supply shareholder feedback to the board, especially when there is a conflict with the only other conduit for feedback. ‘If smaller companies – despite better advice and all best practice guidelines – happen to have an individual who is both the finance director and the company secretary, somebody else would have to do it,’ he notes. ‘If there isn’t a separate company secretary advising the board through the chairman, the IRO would certainly have to have a hand in it. The IRO is also closer to the market, especially to those investors that aren’t investing in the company at the present time. Even if the Sid is available there’s no way he or she could do that.’
‘Every time the board meets there should be a section called ‘the report’ from the IR officer summarizing the various reports on the Street, and the board can get a clear understanding of how investors view the company,’ adds Bart. ‘The board needs eyes and ears both inside and outside the company; the internal auditor is on the inside and the IR person should be the eyes and ears when it comes to seeing how investors view the quality of their investment in the corporation.’
Informing the board
According to a recent Niri trends survey, a majority of IR professionals provide information to the board via written reports, with smaller numbers presenting directly to the board or through written reports and direct presentations.
Report to the board directly via presentations 45%
Provide information through written reports 78%
Do direct presentations and written reports 27%
