Times change and practices evolve, but good IR must always include the ‘five Cs’ of communication: commitment, consistency, credibility, clarity and continuity. With sound communications, a well thought-out strategic IR plan and careful targeting to the right audiences, a company can realize its full and true valuation.
A well-known 2002 study by Oxford Metrica and Ernst & Young, ‘Risks that matter’, demonstrated that a company’s IR skills are a key factor affecting analysts’ and investors’ perceptions. Indeed, poor IR is often found to be one of the most important sources of sudden and major drops in share value. Investors demand responsiveness and accessibility and they want intermediaries who are able to discuss operating issues, markets and the competitive environment fluidly.
Why is transparency important?
Transparency provides the context that validates a company’s financial projections, including details on strategy, plans, risk management and corporate governance. It is a key determinant of shareholder value, and the demand for transparency rises whenever investor confidence wanes.
Take the banking industry. Back in the mid-1990s banks were still black boxes. The common attitude of bankers toward investors was ‘Follow me and I will provide great ROE, but don’t ask me how!’ Investors rightly balked, and enlightened banks, led by top-tier US institutions, decided to change their reporting and put a spotlight on their activities. They began to provide much greater granularity in reporting their operations, and this was well received by the marketplace.
Banco Santander is a case in point. In 1996 it instituted a policy of reporting more complete information by lines of business, and by mid-1998 its stock had soared 276 percent versus 176 percent for the Ibex 35. Of course, a lot of other things were happening at the time – Santander was becoming the largest bank in Latin America and was well on its way to becoming the largest bank in the euro area by market capitalization – but this refreshingly open and transparent reporting stance unlocked value for the bank.
Eduardo Suárez, IRO at Santander, says: ‘Commitment to financial transparency served us well during our international expansion by highlighting the excellent operational efforts that were being realized by the bank.’
One example closer to home is the MIM Corporation, now BioScrip, which in early 2000 was an unknown pharmaceutical healthcare management organization. It had produced consistent financial results and growth, but was still unknown to the market and was valued at a significant discount to peers.
‘We instituted a proactive and strategic IR program in 2001, a year that coincided with enormous tensions and downward pressure in financial markets,’ recalls Barry Posner, an executive VP at BioScrip. ‘We based our effort on peer analysis and perception studies, and then developed analyst and institutional target lists and created investor materials communicating our strategy, our results and our benchmarks to the financial community.’ The result was that BioScrip was the second best Nasdaq performer in 2001, with more than 1,800 percent appreciation in share price.
Strategy and perception’s key role
Perception and benchmark studies, as well as peer analyses, are the tools a company needs to improve its marketplace perception and to determine whether its business strategy is resonating with investors. A company should seek to have a marketplace perception that is aligned with its true operational reality.
Companies change over time, and investor recognition of transformation can be fundamental to unlocking shareholder value. If a company’s strategy calls for a substantial transformation of its operating units, the marketplace may be slow to perceive the change or may fail to detect it altogether. The task of the IRO is to help communicate the change by crafting the right messages and developing a calendar of IR activities (press releases, roadshows, conferences, trade events, etc) that convey the new operating reality and help shape a new perception in the marketplace.
Lukoil, one of the world’s largest vertically integrated oil and gas companies, is a good example of how to unite strategy and perception. Gennady Krasovsky, deputy director of strategic planning and investment analysis at Lukoil, comments on the key role played by investor relations as the company transformed itself: ‘Last year we unveiled our new strategy of transforming the perception of Lukoil as a Russian company into a perception of Lukoil as a global energy company. We intensified our investor and financial media communications with the help of a leading agency and focused on establishing Lukoil as a thought leader in the energy sector by providing strong sectoral research, which we are continuing to this day.’
Ever-increasing disclosure
Regulation FD brought about the ‘democratization’ of disclosure, requiring a level playing field among institutions, analysts and retail. Sox also increased the speed of disclosure and requires communication of all essential elements of a company’s performance. With all this regulatory attention, the distance between transparency and formal disclosure is narrowing. The regulators’ view is that better disclosure builds marketplace credibility.
One non-US company that has decided to embrace this view is Israel’s Bank Hapoalim, which recently announced a level 1 ADR program. Dr Nadine Baudot-Trajtenberg, head of IR at Bank Hapoalim, notes: ‘We have conducted a thorough benchmark study reviewing best practices to help us improve our communication with investors. We have greatly intensified our investor targeting and outreach and, wherever possible, we have underscored our strong commitment to being an international bank as well as the leading bank of Israel. Our decision to begin trading in New York reinforces our determination to be a global player and helps us to access the deepest capital market in the world.’
Gone are the days when CEOs, CFOs and IROs could sit back and say, ‘We’ll just perform as a company and the stock price will follow.’ Competition for investors’ attention is massive and global, and today’s investors have no incentive to put their money in companies that perform well but do not provide acceptable levels of transparency and communications. Like it or not, investor expectations of transparency have taken firm root over the last decade, and there is simply no other way forward in today’s capital markets.
