Wednesday, January 30, 2008

The Regulatory Mindset of Investor Relations

Last week I attended the Rice Marketing Case competition where eight of the nation’s best business schools came to Rice and in the course of 24 hours analyzed a case and made a presentation of their recommendations to a panel of judges.  It was quite interesting to see how the same problem generated significantly different responses.  I am happy to report that students from my business school alma mater, Kellogg, won the competition, besting teams from, among others, Harvard, Yale, Wharton, The University of Chicago and (alas) Rice.


After the competition, I naturally headed for the reception.  Listening to four hours of marketing presentations will build up a mighty thirst.  I was busy easing that thirst on about my second glass of wine, when a fellow attendee I was chatting with turned to me and asked, “What companies do you think do a really good job in investor relations?”  I think she was trying desperately to come up with a topic to talk about because a few minutes earlier when I told her I did investor relations consulting, I was met with a blank stare. (Well, what can you expect from marketing people?)  The thing is, I was stuck for an answer.  My apologies to all of you out there with terrific IR programs, but none came to my mind.  After an awkward pause, I explained that generally I worked with companies that had need of improvement in some area, so I couldn’t name any single company that did everything right.  To keep the discussion going at that point, she then asked me “What is the most common failure in investor relations that companies have?”  Now here was an answer I could sink my teeth into, and I will devote the rest of this post to discussing my answer to her.


The single most common failure that investor relations programs have is that they approach the function as a regulatory function rather than one that conveys strategic information about the firm.  In other words, because the minimum disclosures about a firm are regulated by the SEC, many firms view that as being all that they should say about their business. 


In the early days of my career, I worked as a corporate attorney.  My practice encompassed everything from real estate to corporate law to securities regulation. One of the things I learned about attorneys that work in a regulated industry is that when they are confronted with a question, they have two default positions.  The first is to examine the facts and see if they fall within the language of the regulations.  If the regulations didn’t allow you to do what you wanted to accomplish, the second step is then to see if there is an exemption available.  If no exemption exists, then the answer is “No, you can’t do that”.


To a large degree, this sort of thinking has infiltrated the practice of investor relations.  Disclosures are highly regulated, lawyers and accountants review everything, regulation fair disclosure hangs over everything you say and the threat of lawsuits for misleading statements is omnipresent.  The result is that the default position for most companies is to say as little as possible.  Most lawyers’ advice is that if you stick to saying only what is required by the regulations, you won’t get in trouble.  Of course, your stock is not likely to get much of a valuation, but that’s not their problem.


One of the common frameworks of investor relations is: company performance plus the perception of future performance equals stock price.  If a company is sticking to the bare regulatory minimum of disclosure, I would argue that they are only giving investors the half of the equation relating to company performance.  Regulations do require companies to talk about forward looking initiatives, but frankly, if you’ve ever spent any time reading through Form 10-Ks there is generally so much weasel language and so little meat on those disclosure bones that an investor can’t make a reasoned decision based on what they read.


So my advice is for companies to open up about how they achieve their results and where they see themselves going.  Talk about the key drivers of your business.  Discuss your view of the markets and where you need to go to be successful. Engage in meaningful disclosures between quarterly filings.  Be upfront about corporate initiatives and update them frequently with meaningful statistics.  There will be rough patches - new initiatives rarely go smoothly, but in the long run investors will understand your business better and assign it a valuation that combines both where you are and where your company is going.


I got done with my answer, feeling pretty smug about what I’d said, then I looked at the person I was talking to.  She had a dazed expression on her face, looked at her wine glass, said she needed a refill and wandered off towards the bar.  I guess good investor relations is enough to drive a person to drink.

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