Monday, August 20, 2007

What is Investor Relations Worth?

Last week I attended and was privileged to speak at the National Investor Relations Institute Southwest Regional Conference in Austin, Texas. This was the second time I have attended the Southwest regional conference and I like it a whole lot better than the National conference. The scale of the conference - 150 attendees versus 1,400 at the National conference – is much more manageable. You can get around and talk to most people. In addition, the scope of the conference – 1½ versus 2 ½ days at the National conference – causes it to be much more focused. I found the subject matter and the quality of the speakers uniformly better at the Southwest regional than at the National conference.

It is about one of those speeches that I want to share an interesting statistic. Brian Rivel of Rivel Research Group gave a speech discussing a study his firm completed earlier in the year entitled “Perspectives From the Buy Side”. In the study members of the buy side were asked to give their opinion as to the impact good or bad investor relations has on the valuation of a company. As this is a subject that every investor relations officer struggles with (particularly around annual review time), I perked up when Brian trotted out this statistic.

It turns out that members of the buy side say that good investor relations can add 10% to a firm’s valuation, while bad investor relations can subtract as much as 15% from a firm’s valuation. These are startling numbers. If your firm has a $10 billion market capitalization, by doing investor relations right you can add $1 billion of shareholder value to the owners of the firm. On the other hand, if you consistently get your investor relations efforts wrong, you can destroy $1.5 billion of share value.

At first blush this seems to go against what I was taught in business school: that markets are efficient at valuing future cash streams. After all, the regulatory and disclosure requirements are the same for all firms, so the way that they speak to the markets shouldn’t result in a 25% difference between the best and the worst. Then I got to thinking about it and I think it makes perfect sense. My recollection of the efficient markets hypothesis is that the market rapidly incorporates all available information about a firm into the price of its stock. The key here is all available information. The best firms go beyond the requirements of the regulations to add context, clarity and confidence in management to the reported results. This additional information is then incorporated into the firm’s value. On the other hand, the worst firms in terms of investor relations view the disclosure regulations as the maximum amount of information they will disclose. By using the securities regulations as a shield rather than a guide, companies create uncertainties about future earnings causing investors to discount the value of the company.

What this suggests is that investor relations is an underutilized function. After all, how much more effort would be required to raise a firm’s valuation by 10% through additional sales and earnings compared to presenting the firm’s earnings and prospects with clarity, candor and consistency? Every investor relations officer should take this statistic and show it to their management. It may help you get more time, attention and resources devoted to the function. More importantly, it may help get managements thinking about dealing with their shareholders proactively rather than reactively.

Alternatively, investor relations officers could take a page from the hedge fund managers and ask for a percentage of the valuation increase caused by their management of the function over the average for their industry. That would get some attention.

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