What is Investor Relations Worth (Revisited)

My wife, who claims that one of the great proofs of her love for me is that she allows me to keep a dog, always buys every member of the family a new calendar at Christmas time. This year she bought me a calendar featuring dog cartoons from The New Yorker. The cartoon on the cover shows two dogs and one is saying to the other, “I had my own blog for a while, but I decided to go back to just pointless, incessant barking.” Of course, sometimes it’s hard to tell the difference.

One of the most common laments I hear from investor relations officers is that it is difficult, if not impossible, to measure the value of investor relations. It reminds me of the old saying about advertising: “Half of my money is wasted on advertising, the problem is, I don’t know which half”. I suppose it can also lead to IROs questioning their own worth, but we need not stray into such troublesome waters here.

Good investor relations is especially difficult to measure, as there generally are no baselines to gauge it against. You try to look at competitors’ valuations, companies with similar characteristics, the market in general and whatever else comes to mind. From that you hope that a pattern emerges, but whatever pattern may be there is often lost in the overall performance of the company. You often feel as if you’re dancing around the issue without really coming to grips with it.

When things go spectacularly wrong, however, there is a chance to measure damage more precisely. Academics call this an event study and crank out hundreds of them in learned papers accompanied by complex mathematical equations of the sort that gave me nightmare during my freshman year of college. My goals here are a bit more modest.

You might recall that Sallie Mae (NYSE:SLM) hosted a conference call with analysts on December 19, 2007 that was one of the worst examples of its kind. On the day of the call, Sallie Mae lost $3 billion of market capitalization. A month has now passed and given that Wall Street always initially overreacts to both good and bad news, I thought that after a month’s time it would be instructive to see where things stand.

Devoted readers of this blog (yes, there are a few) will recall that back in August of last year I quoted a study by Rivel Research where a survey of buy side investors showed that they thought good investor relations could add as much as 10% to a stock’s value, while poor investor relations could subtract as much as 15% from the value of a stock. From this perspective, here is how Sallie Mae’s disastrous investor relations foray into conference calls stacks up against the broad market and the NYSE Financial index:

Date                         SLM      SPX 500    NYSE Financials
12/18/07                 28.87    1454.98     470.55
12/19/07                 22.89    1453.00     471.25
1/14/08                   20.30   1416.25      450.55
first day % chg      -20.7%  -0.14%       +0.15%
One month % chg -29.68% -2.66%     -4.25%
(Note: I have chosen the date of 1/14/08 as the measurement date because that represents the highest price for SLM in the week leading up to the one month mark from the conference call in question.)

So comparing Sallie Mae’s best price against the worst performing index, they underperformed by approximately 25%. I think this lends some credibility to the values that Rivel research assigned to investor relations. Granted, it is a case study of one (and an extreme one at that) and by itself would not stand up to rigorous academic peer review, but it sure points in the right direction and seems to be in the same range.

So, investor relations officers take heart! There is meaning and value to your function! You add value to your company even if you just convince your senior management to prepare for conference calls and not wing it. Remember, the smartest thing you may do is to convince people not to speak unless they have something intelligent to say.

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.