Their yearly report card or annual physical is how many IR professionals see the investor perception study. Based on a poll of the investment community, these reports offer an independent health check of IR’s performance. ‘Perception studies help us get strategic guidance for our investor communications,’ sums up Mickey Foster, vice president of IR at Memphis-based FedEx.
FedEx has run an annual perception study since 2001 to measure its progress in a number of key areas including management credibility, business strategy, cash flow, earningsper- share and corporate reputation. The study also helps the firm find out how its story is resonating with analysts and investors. ‘It identifies our most important value drivers and allows us to track them over time,’ adds Foster.
Most companies view these studies primarily as a means of gaining objective feedback on management and business strategy from analysts and shareholders. But they are also an effective way to demonstrate IR’s interest in investors’ and analysts’ views. ‘It shows the investment community that you want to be proactive,’ points out Andrew Kramer, director of IR for Interactive Data.
The catalyst for a company’s first perception study is often an unanticipated event like a management shake-up. That was the reason Louisiana-based Entergy decided to hire a third party to conduct an independent performance audit two years ago. ‘There were significant changes in management and we were interested in investors’ views of the company,’ reports Michele Lopiccolo, vice president of IR at Entergy. Impressed with the depth of feedback this first study produced, the utility company continues to conduct an annual investor perception audit.
Don’t DIY
Most IROs say hiring a third party is the best way to conduct a perception study. ‘In an ideal world, it’s better to have somebody outside the company doing the study so investors feel freer to provide an unbiased opinion,’ says Kramer. Informed third parties are simply in a better position to get unvarnished views of management and IR performance.
The choice of which firm is best suited to carry out the study may be based on your resources as well as the scope and purpose of the audit. ‘It also depends on the quality of people at the outside firm and whether they are active in IR,’ comments Chris Lloyd, head of IR at UK energy company BG Group. It uses London-based Makinson Cowell to carry out an extensive perception study every two years. The depth of the firm’s knowledge of IR and the domestic market are big draws, according to Lloyd. ‘And because it carries out studies for half the companies in the FTSE 100, you are being benchmarked against all other performers,’ he adds.
Perception studies are often part of a broader package provided by an IR firm so it’s difficult to break out the cost. BG Group pays around £120,000 ($235,000) for its biannual study and other IR services, for instance. This is obviously too pricey for smaller-cap companies but it’s possible to scale down the size and cost of the audit to fit your budget. ‘And it’s still better to have someone on the outside doing it,’ advises Foster, who uses Connecticut-based Rivel Research for an annual perception study.
More art than science
Deciding who and what to ask is largely a function of what one hopes to gain from an audit. Target respondents are generally current shareholders and sell-side analysts, with the number of responses varying from 15 to 100, depending on the purpose of the study. Entergy, which is heavily institutionally held, aims for 40 responses with two thirds coming from current owners. FedEx similarly shoots for about 50 respondents with the majority coming from the buy side.
Another good audience to tap into is former shareholders. ‘You can find out why they eliminated their holdings – often, it might not be specific to the company,’ explains Kramer. It’s also a good idea to reach out to potential investors and determine what it will take for them to buy in. This is what FedEx does, by pulling names of portfolio managers who aren’t current holders but participated in the company’s most recent quarterly conference call.
‘You have to get the right audience and you have to do it in a way [that allows for] real answers,’ says Patrick Dunne, group communications director at London-based 3i Group, which outsources its annual perception study. Along with planning the correct questions, you need to have people who pick up on the nuances behind the investment community’s answers, Dunne adds.
‘You don’t want a classic box-ticking, mechanistic approach; it has to be a conversation,’ he says. A typical study touches on a variety of topics and takes from 15 minutes to one hour to complete. Questions generally cover the company’s strengths and weaknesses, strategy, performance and the effectiveness of its IR program.
‘We ask for the overall impression of the senior management team strategy in terms of improving our company’s financial performance,’ says Foster. ‘We also ask about our growth strategy both internationally and via business segment, and find out whether shareholders have confidence in our ability to execute our growth strategies.’
Along with these standard questions, IR often includes questions on specific events or upcoming concerns. For instance, Entergy polled its respondents about the devastating effects of hurricane Katrina last year. And FedEx recently asked shareholders and analysts for their views on the best use of extra cash. ‘We wanted to know whether they preferred an increased dividend or share buybacks,’ explains Foster. Use it or lose it
It takes between one and three months to initiate and complete a perception audit. Often the timing of a study’s completion is set to coincide with the end of the fiscal year so IR can use the results in planning investor meetings. Findings are generally given to the IR team, which then presents them to senior management and perhaps the board of directors in a formal presentation.
‘We get all the answers to the questions in a transcript as well as a formal presentation,’ says Foster, who then presents the results to other senior executives. In some cases, IR may have a third party presenting the findings directly. ‘The best thing is for the people who do the work to present it to the senior levels without any spin or adaptation,’ says Dunne.
Not all firms would be comfortable having an outside party present but, like BG Group, Dunne subscribes to the Cadillac version of the perception audit from Makinson Cowell, so it makes sense to hand over responsibility.
Answers to basic questions can form the basis for IR strategy for the coming year. Entergy’s IR team shares results with management and then refers back to the results during planning sessions. The real return on investment from an audit is guidance on where one’s priorities should be and whether key messages are being communicated effectively.
In some cases, a surprise finding can dramatically alter management’s strategy. Kramer recalls one audit on a previous employer that showed serious disapproval of the company’s marketing strategy. ‘The CEO then used that feedback to step aside and bring in new management,’ he recounts.
Kramer recently used the results of his own informal perception study to help Interactive Data’s board decide what to do with the company’s extra capital. Following second-quarter results in July, he spent a lot of time on the phone getting feedback from investors on a number of issues, including the use of capital. ‘The information was fed to our board of directors, which decided to declare a special dividend and authorize a stock buyback as a result,’ Kramer says.
When embarking on a perception audit, it’s important to remember that the whole purpose of the exercise is to come away with information one can use. IR needs to take charge of the process so that results reveal what the market thinks of a company’s story and whether management is doing a good job of presenting key messages. As Dunne concludes: ‘There is really no point in doing a perception study unless you can do something with the results.’
