What Makes for Great Investor Relations?

There was an interesting profile in this Sunday’s New York Times about Jim Collins, the author of a number of well known business books such as “Built to Last” and “Good to Great”.  One of the things that became apparent from the article was that Collins likes to ponder and write about big questions that interest him.  Naturally, after reading the article, I got to thinking about one of the big question that interests me, namely “What makes for great investor relations at companies?”

Over the years, I’ve read my fair share of business books, many of them with multi-step procedures for achieving greatness.  Frankly, I can’t remember most of them, so when I sat down to think about how to convey the essence of great investor relations, I decided to try to keep things simple.  When I was growing up, I used to listen to radio broadcasts of the New York Yankees baseball games.  They were sponsored by Ballantine Ale, and to this day I can still remember Mel Allen advising us that the three rings on the Ballantine label stood for “Purity, Body and Flavor”.  So I decided to try and boil down the attributes of great IR to three key items.  (This might also have something to do with my Catholic schooling – the trinity and all that - but I really don’t want to go there, and besides, I remember the beer commercials much more clearly.)

When I sat down to write out my list, three things immediately popped up: Honesty, Consistency and Knowledge.  

Honesty to me is the most important aspect of what good investor relations is all about.  Investors deserve nothing less.  The Securities laws try to mandate honesty, but what I’m talking about is HONESTY.  If you always deal honestly and forthrightly with investors, it might be painful at times, but you will always be able to look yourself in the mirror.  Further, investors will come to believe you, which will pay rich dividends when things get rough, and the valuation of your firm will more accurately reflect its intrinsic value.

Some people like to think of investor relations as an advocacy position, similar to the way our trial system works.  The thinking is that IROs present the party line and then it is up to analysts and investors to challenge the story, with the truth coming out as a result of the process.  Unfortunately, this also means that you are training investors to believe that there is a significant other side to the story, which the investor relations department is concealing from them.  In my opinion, it is better to acknowledge the other side of the story, the potential issues that your company may face and admit to some of the things your company might be able to do better.  In the long run, investors will give much more credence to your story.

Consistency is next on my list because investors keep notes.  If you are talking to someone about the latest quarter’s results, chances are very good that they have in front of them their notes from the same quarter last year.  Nothing drives investors crazy faster than changing your story or the way you present data or, heaven forbid, the way you calculate your data.  It doesn’t matter if you do it for the purest of reasons – investors will always assume the worst, because they’ve seen many examples of data being manipulated to favor management.  Having a comprehensive set of metrics about your business that you report consistently, quarter in and quarter out, will gain you a lot of traction with investors.

The same principle also applies to the way a company deals on the human side with analysts – consistency in the way you work with analysts day in and day out will earn respect over the long haul.  This means no favorites, no disparaging of analysts with a sell recommendation and equal opportunities for access to management.

Finally, knowledge.  Analysts don’t call up investor relations officers to learn something they already know.  At least, they hope they don’t.  They call because they are attempting to understand what goes beyond the contents of the press release or 10K filing.  This means that the good investor relations officer will be an expert, not only on his company, its accounting systems, its culture and its markets, but also on his industry.  The ability to put developments in context, both for your company and for the bigger picture, will assure that investors will call you before they call the trading desk to place a sell order.

So, with a nod to Ballantine Ale and Mel Allen, the greatest voice in baseball broadcasting, there you have it:  Honesty, Consistency and Knowledge.  Now I think I’ll slip off and have a cold one…

Helping Filter Out the Noise

One of my favorite sayings about Wall Street is: “Over the short term, the market is a popularity contest, while over the long term the market is a discounting machine”.  What this means is that on a day-to-day basis stock prices react to all sorts of noise in the system, whether it’s fears about swine flu or the current political mood of the country, while over the long term stock prices tend to reflect the market’s view of the value of the company’s stream of future cash flows, the intrinsic value of the company.

Fayez Sarofim, one of the great long-term investors of the last fifty years, puts another spin on this.  He says, “Nervous energy is a great destroyer of wealth”, and illustrates the statement with the chart I’ve reproduced below.  

Assuming that a firm’s value rises over time (we are, after all, talking about well run firms here), an investor can potentially lose a lot of money by buying or selling based upon the latest short-term market reactions.  The patient, well-disciplined long-term investor can avoid those pitfalls and the associated trading costs that accompany them by focusing on the intrinsic value of the company.

The holy grail of investor relations is the patient, long-term investor who sees the value of management’s longer-term investments in the business and is willing to let them play out over time.  Unfortunately, in investor relations we spend 95% of our time responding to the other investors, so that’s where I’m going to direct my remarks.  One of the jobs of good investor relations is to engage in the IR version of damage control – responding to the market gyrations and the concern du jour; the large rises and drops represented by the dotted line in the graph.  Good investor relations seeks to squeeze out the volatility of the ups and downs of the market concerns by giving investors a full and complete picture of the company’s intrinsic value so that market value can more closely match intrinsic value. 

This means several things:  First, providing clarity to the numbers.  Mandated disclosure filings are good at telling investors what happened, but less good at explaining why they happened.  A good investor relations officer will fill in the gaps.  Secondly, investor relations can provide context to what is going on.  Many analysts following companies today don’t have a long history covering the company, whereas management has usually been there a long time.  Providing historical context can be very helpful. 

Here’s a case in point:  Recently, Walgreens has announced that it is testing a program to reduce the product assortment in its stores.  The thought process is that by reducing clutter on the store shelves, the company can more prominently feature key items and sales will go up, even though there are fewer items in the store.  Not surprisingly, this assertion has met with some skepticism in the investing community.  Yet Walgreens has an example in its own recent past that proves their thesis.  Back in the early 1990’s Walgreens reduced the number of newspaper advertisements it was running from two per week to one.  Everyone (including company management) thought that sales would go down, but instead, sales increased because better items and ads resulted from the reduced clutter.  If Walgreens were to provide such context to investors, it could mitigate some of the doubts being voiced (you will never eliminate them entirely – this is, after all, Wall Street we’re talking about).

Third, and as important as the other two items combined, good investor relations dampens volatility by providing credibility for the company.  This comes in a variety of forms, whether it’s access to management, consistency and even-handedness in how, when and where disclosure is accomplished or doing what the company says it will do, to name a few.  Every IR officer that has been around for a while has experienced situations where the stock suddenly plunges (or, less frequently, rises) and their ability to say much is severely constrained by the circumstances.   If you have credibility, investors will tend to give you the benefit of the doubt and give less credence to the rumors swirling about.

So that’s it in a nutshell:  lessen the noise, squeeze out the volatility and get your market value in line with your intrinsic value.  Simple, eh?

Getting My Act Together and Taking It on the Road

Over the past two months I’ve been in the active phase of teaching my course on investor relations at the Jones Graduate School of Management at Rice University.  It’s something I really enjoy - combining academic pursuits with the realities of Wall Street and how companies interact with investors.  With the term over for the year, I’ve had a chance to step back and reflect upon the state of education for practitioners of investor relations in the real world. The conclusion I come to is that the profession has a scattershot approach to teaching the fundamentals of IR.  The seminars, conferences and courses that I have seen on the subject are, in my opinion, too expensive, both in cost and participants’ time.  Further, they are usually taught either by volunteer practitioners on an ad hoc basis, or in rare cases, by business school academics with very little experience in the real world.  The result is a very uneven learning experience.

One of the great things about capitalism is that if there is a market that is underserved, a product or service will arise to fill the need.  In this case, I propose to fill the gap in the investor relations education market by offering seminars for the profession.  Over the course of a thirty-year career, I have been involved in investor relations as a lawyer, a corporate practitioner, an officer of a buy side firm and an educator.   As a result I believe that I bring a unique blend of practical experience, knowledge and teaching experience to the field.  The seminars I plan to offer will build upon the lectures and textbook I developed for my investor relations class but will be very practical rather than academic in their content. 

The first seminar I have developed is “The Fundamentals of Investor Relations” and is aimed at the person who is relatively new to IR or who has been in the job for a short period of time and wants to make sure they have covered all the bases.  I believe that the basics of investor relations can be taught in an intensive one-day seminar at a modest cost ($300 - $400 per person, depending on location) and further, in order to be respectful of people’s time by eliminating travel, I think that the seminar ought to come to the students’ home market.  In short, I propose to offer a first rate educational experience in an efficient manner at a reasonable cost.  A second seminar, currently in the planning stages, would be for more seasoned practitioners and would feature “Best Practices in Investor Relations”.

So much for the sales pitch.  What I really need now is some input from my readers concerning your interest levels and where you might be.  Additionally, if you are a service provider and think this is something your clients might have an interest in, I’d love to hear from you.  This could be an opportunity for you to reach out and offer them something unique and a little out of the ordinary.  Please email me at john@palizzapartners.com.  I look forward to hearing from you.