Materiality and the Little Voice in Your Head

Sailors have a saying: “The time to take a reef in your sails is the first time you think about it.”  What they mean by this is that it is if you think the wind is getting stronger, you are much better off shortening your sails now, before you are overpowered by the wind and the act of reefing becomes very difficult, if not dangerous.  There is a similar analogy that can be made with respect to whether you think a piece of information is material and should be disclosed. That is, if you have to stop and think about whether something is material, it probably is.  Or, to complete the analogy, the time to disclose information is the first time you think about whether it is material. 

 

I know that this goes against the grain of most corporate disclosure policies, which seem to be, “The time to disclose information is when we absolutely, positively have to, and can find no reason to hide behind, and can’t convince our lawyers that this really isn’t as important as it sounds.”  Nor is the legal profession without blemish in this regard.  There is a corollary, unwritten rule which seems to be, “If the Chairman doesn’t think something is material because he really doesn’t want to talk about it, (or he has goofed and let something slip, but now doesn’t want egg on his face by having to make a formal announcement) the General Counsel and outside attorneys will find a way to justify the information not being material. So I thought I would take a moment and wade into the legal thicket of what information is material. In a later post I will discuss when you should, as opposed to must, disclose material information.

 

The classic definition of what constitutes material information was set out by the United States Supreme Court in two cases, TSC Industries, Inc. v. Northway and Basic v. Levinson.  The pertinent language of the court was contained in two statements:  “Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.” And “There must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total” mix of information made available.”

 

This seems relatively straightforward to me, as most of us can put ourselves in the shoes of a reasonable investor, and there is no mention in the Court’s language about the information being either positive or negative – it just has to be important.  Nevertheless, countless billable hours of lawyers’ time has been spent on this issue, which, when you think about it, is pretty silly.  Investor relations officers spent most of their time talking to – you guessed it – investors.  Who better to know what the reasonable investor considers important?  Yet we constantly have lawyers and accountants weighing in on the subject, even though none of them would know an investor if they ran into one.  Does this make sense?

The practice of investor relations involves a high degree of repetition in answering investors’ questions.  It doesn’t take long for an investor relations officer to get a pretty good feel for what investors consider important (of course, there are some analysts who think everything is important, but they, by definition, are not reasonable investors).    Therefore, as a corollary to the Supreme Court’s guidelines, allow me to propose another one of Palizza’s Principles: Something is material if the little voice in your head (or, if you prefer, your gut) tells you that investors would think this is important information. It seems to me that this is no less obscure than the language often used by the Supreme Court.  After all, it was Supreme Court Justice Potter Stewart who was famous for stating; “[I can’t define obscenity, but] I know it when I see it”.

The Trouble With PowerPoint

There was an old Star Trek episode, "The Trouble with Tribbles".  Without going into all of the details of the plot, suffice it to say that tribbles, which are adorable, cuddly creatures, when brought on board Captain Kirk's vessel, reproduce far too often and threaten to consume all of the supplies on the starship Enterprise. So it is with PowerPoint.  It's a (relatively) easy program to use and enables almost anyone to become a designer of graphic presentations. In fact, graphic designs proliferate to the point of threatening to consume all of the useful information in investor relations presentations.

I’ve spent some time lately poking around on the web looking at various companies’ investor relations presentations.  I have not been impressed.  Just about every presentation I looked at had something in it that bothered me. The combination of PowerPoint bullet point formats with bad graphics can be really deadly to good communications.  It’s clear to me that investor relations practitioners are better at verbal communication than visual communication, so I thought that I would share some of my thoughts on the subject. 

Let me start out by saying that I have a bias when it comes to presentations – the presentation should enhance and clarify the data, not distract from it.  To understand how good presentations can work and what constitutes bad display of data, every person that has to make or prepare a presentation should read Edward Tufte’s book, “The Visual Display of Quantitative Information”.  It is the seminal work in this area and it sets out with much greater authority and detail than I can the elements of good data presentation.

Having said that, here are some of the chief complaints I have about the presentations I’ve reviewed:

1.  Cheesy backgrounds – just because PowerPoint gives you all sorts of ugly templates to choose from doesn’t mean that you have to use them.  All they do is distract from the message you are trying to deliver.  My advice is to hire a professional design group to help you set a template, which ties into your corporate design or this year’s annual report.

2.  Runaway fonts – it is not unusual to see five or six different fonts and type sizes on the same slide.  This is sloppy and distracting.  This is a particularly egregious sin of PowerPoint, which will automatically resize type on slides unless you take out a whip and chair and tame it.

3.  Use of acronyms and abbreviations – Corporate America loves TLAs (three letter acronyms).  Unfortunately, while they may be a handy shorthand for those in the know, when encountered later, on a slide on the company’s investor relations website without accompanying commentary, they merely serve to obscure things.

The foregoing, while distracting, are design errors, and can be forgiven as simply in bad taste.  In the parlance of my religious upbringing, they are venial sins, as they don’t really bring into question the integrity of the presenting company. However, some of the things I’m going to talk about now are issues where the visual information is manipulated to make data appear more favorable than it really is, which is something no self respecting investor relations practitioner should stand for. 

4.  Using objects that grow in volume to show linear growth.  Unfortunately, we’ve all seen this one far too many times.  Using pictures to show the growth of say, revenue, introduces a distorting factor as the volume of the object depicted grows much faster than the growth of a linear object such as money.   If you have to jazz up your charts with cute pictures or expanding objects, you probably don’t have enough data for a chart.

5.  Conveniently changing scales on charts to make data appear to fit your point.  Not all charts and graphs need be zero based, but you need to be careful about the scale you use.  It is far too easy to manipulate the visual impact of change by zooming in on a scale, which makes a single percentage point change seem huge.  A corollary to this is changing scales on two adjacent charts to make it appear as if everything is moving in the same magnitude and direction simultaneously.

6. Omitting inconvenient data.  I find it hard to believe that companies would do this, but I’ve seen it with my own eyes.  If a particular year doesn’t fit the fact pattern that companies wish to talk about, they simply omit the data from the chart.  I guess they think that no one will notice the year missing from the bar chart.  A different take on this is to put the inconvenient data on the chart but then assert in words that something different and more favorable is going on.  My favorite example of this is a chart that shows a large dip in earnings in a recent year with an arrow going right past it stating “Continuous growth”.  Last time I looked, continuous meant without interruption, which clearly wasn’t the case for the earnings growth shown on the slide. 

There are more examples of bad and misleading graphics out there, but I think I’ve made my point.  Besides, I have to prepare some slides for a speech I’m giving at the NIRI Southwest Regional Conference next month and if I can just get the dancing 3-D graphics to work, it could be a real triumph of form over substance.

More on Blogging and Investor Relations

There are over 2,200 stocks listed on the NYSE and over 3,000 stocks listed on NASDAQ and guess how many have blogs for their investor relations areas?  The answer is one – Dell Shares is the only corporate investor relations blog that I have been able to find.  I think that the fact there is only one blog in this area (you can find blogs in other areas, be it CEOs, sales or product teams, etc) is indicative of the mindset most corporations have about investor relations.  In most organizations, IR is trapped in a box of regulations and legal liability. Moving outside the box requires more time, effort and political capital than it’s worth.  For example, in one organization where I previously worked, it took a year of lobbying to get the concept of quarterly earnings conference calls approved.  Once approved, the scripts for the calls were reviewed by the CEO, COO, CFO, Controller, General Counsel, securities law counsel, outside securities law counsel, Treasurer, internal auditor, external auditors and at least 6 other people.  Needless to say, by the time the final document was ready, it was pretty bland mush.  Try thinking about how blogs translate into this type of environment and you see why most companies don’t even try.  Blogs are supposed to be quick, spontaneous and resonate with the voice of the writer.  Good luck to that under the foregoing scenario.

Evidently Dell takes seriously its image as a technology provider and is out in front on this development.  I’ve spent some time over the past few days looking at their blog and I think they do some things well.  First, they are timely and responsive.  They seem to write about developments quickly and respond to comments rapidly.  According to a statement made by a Dell spokesman at the 2008 NIRI conference, their position is that in establishing a blog they did not need to change their disclosure policy or get prior approval of each posting from their legal department.  Rather, their view is that the blog is merely another extension of what they do everyday in investor relations, either on the telephone or in person.  They are aware of the things that can and cannot be said and in writing on the blog simply adhere to the same guidelines as they would in other channels of communication.

The communications person in me cheers this attitude.  Phrases such as “IR workers of the world unite!  You have nothing to lose but your lawyers!” run through my brain.  Of course, having practiced law for ten years, the other half of my brain says “Yeah, but if you screw up with an analyst on a phone call you always have the chance to call him back and correct yourself, or, if you’ve inadvertently given them non-public information, to ask him to treat what you’ve said as confidential.  When it’s on the world wide web, it goes out to the whole world and you’ve created a written record of your mistake.”  I guess all technological advances come with attendant risks. 

Secondly, I think Dell is bringing more information to a wider audience.  They refer to this as a democratizing of investor information and I certainly think they are moving in the right direction.  They have made video clips available on the blog with members of management discussing some of their more obscure business initiatives (what the heck is virtualization anyway?).  All of this helps to gets information, which before was available only to large institutional investors out to a wider audience. This is one of the major benefits of the web.  Business school professors refer to this as disintermediation.  To put it plainly, you get your information direct from the source, and not filtered through others.  I applaud them in their efforts to date to get information out to a wider group of investors.

Naturally, in my self-appointed role of investor relations critic at large, there are several things that I think they might be able to do better.  First, in reading the blog, I didn’t get a real sense of Dell as an organization.  I think that Dell has a tremendous opportunity through its blog, to put a human face on a highly complex organization.  Thus far, the posts to the blog have been governed by the issue du jure without any effort that I can make out to explain the organization as a whole, which I think would be helpful to the average investor visiting the blog.  Turns out there is a good introduction to Dell on the Investor Relations web site in the form of an interactive letter to shareholders from Michael Dell, but it required navigating back to the Dell home page and three further clicks to get to the letter.  It seems strange to me that there is no direct link between Dell Shares and the IR web site, as there is a link going the other way. 

Related to this I think that Dell has an opportunity to save themselves a great deal of repetition and time by creating a series of explanatory blogs about the areas of their business that generate the most questions from investors.  I see the beginnings of some of this with the video clips with interviews of business segment managers, but as they are a very large and complex organization, more can be done. 

Next, as you might expect, everyone is relentlessly on message in their posts.  I can understand why this is, but it can make for some bland reading.  If I were an equity analyst, the blog is not where I’d go to try and find any nuggets of information, although it would be required reading.  Maybe it would help if someone would exhibit a sense of humor once in a while. 

To a certain extent, I’m picking nit with all of this.  Dell deserves a lot of credit for establishing their blog.  In tech-speak, they have achieved first mover status.  While I believe that good things will accrue to them as a result, as with many things in investor relations, it may be hard to measure, and probably only in retrospect.

The Ten Percent Rule

Previously, I’ve written about the research surrounding the value of investor relations.  This is a question that constantly bedevils investor relations officers, as senior management, used to seeing quantifiable numbers such as increase in sales, Return on Capital and Return on Assets wants to know their ROIR (Return On Investor Relations).  Put bluntly, they want to know, other than frequent flier miles, what does their company get for the time and effort expended going to visit investors and enduring the often repetitious and sometimes inane questions from analysts who are young enough to be the Chairman’s grandchild?  Unfortunately, it is very difficult to separate the IR performance alpha from the firm’s performance beta or the general market performance (I’m going to resist the impulse to assign a variable to market performance, otherwise this would be all Greek to me).  It’s an intellectually challenging question, so I find myself returning to it time and time again.

There’s some interesting new research out, which I will get to in a minute, but first, just to refresh readers, what I’ve found so far is as follows:

Rivel Research has conducted two studies that touch on this area and are worth repeating.  In their study, “Perspectives on the Buy Side”, conducted during the Spring of 2007, Rivel conducted 243 interviews with Buy side analysts and portfolio managers.  As part of their study, they asked the question: “In your opinion, does good investor relations affect a company’s valuation?”  82% of the respondents to the question answered Yes, while 17% said No.  Further, the median premium assigned by the respondents for “superb IR” was 10%, while the median discount for “poor IR” was 15%.  In a companion study performed later in 2007, “Perceptions on the Sell Side”, the numbers were strikingly similar, with the median premium assigned for “superb IR” again being 10%, the discount for “poor IR”, 18% and 82% of all interviewed Sell Side analysts expressing the opinion that good investor relations helps a company’s valuation.  If you want to read more on this topic, see my post dated August 20, 2007.

I’ve also written about what the academic research has shown regarding investor relations.  In my March 13, 2008 post I talk about the effects that improvements in disclosure quality and quantity have been shown to have on liquidity, bid-ask spreads, volatility, and risk assessments of the firm.  While these studies have been illuminating, there hasn’t been a study that establishes a direct linkage between good investor relations and increased market valuation.  The studies have generally focused on one or two aspects and required you to make the logical inference that the result is better stock valuation.  Additionally, one tricky bit has been to identify who is doing “Good” investor relations so you can measure them against the average.  Now a study has done just that.

Professor Richard J. Taffler of The Management School, University of Edinburgh, together with Vineet Agerwal, Angel Liao and Elly A. Nash have authored a study entitled “The Impact of Effective Investor Relations on Market Value” that every investor relations officer should read.  In their study they use IR Magazine’s “Best Overall Investor Relations” awards over a three-year period as an indicator of quality investor relations.  Their study shows that firms that are seen as having effective investor relations, as indicated by being nominated for the awards, earn superior abnormal market returns both in the year of nomination and the year following the awards. 

The authors state that while superior market returns for stocks could be explained for the year prior to the nomination by analysts nominating firms which had performed well, this cannot explain the superior market returns for the companies in the year following their nomination for an award.  To quote the report: “Consistent with the predictions of information risk and agency theories, which together propose that enhanced corporate communications will reduce information risk or agency problems caused by high information asymmetry, we find that [IR Award] nominated firms experience an increase in stock liquidity, and a lower cost of equity capital.” In other words, companies that do investor relations well, as witnessed by nomination for Best Overall IR awards, are rewarded with better stock price performance and stock liquidity.

Of even more interest is the quantification the authors put on the abnormal risk adjusted stock returns earned by firms in the year following their nomination for an award.  The results show that all nominated companies earned 80 basis points per month superior market returns.  When I pull out my trusty Hewlett-Packard and compound 80 basis points per month over a full year, I get an excess return of 10%.

Based on the foregoing, I hereby propose Palizza’s First Principle of Investor Relations:  Superb investor relations will gain a 10% premium for your company’s stock price.  This rule satisfies my three main criteria for a principles:  1. It’s easy to remember, 2. It involves a nice, round number, and 3. It has at least 3 data points to support it.

Every investor relations officer should get a copy of Professor Taffler’s study and show it to their management, especially around budget time.  A relatively small increase in investor relations budgets coupled with increased transparency and disclosure above and beyond what is required by regulations can pay handsome dividends for shareholders.

Investor Relations People Should Read This Book

Following Stephen McClellan’s speech at this year’s NIRI conference, I purchased a copy of his book, “Full of Bull”.  The book is replete with stories from McClellan’s 32-year career as a Sell Side analyst on Wall Street. His career pretty much covers the arc of Wall Street research, from lonely back office toilers in the 1970s to celebrated visionaries during the internet bubble in the late 1990s to everybody’s favorite whipping boys following the bursting of the bubble in 1999 - 2000.  This book should be required reading for anyone involved in investor relations.  While much of the book is devoted to advice for individual investors, there are certainly plenty of pointers for people on the corporate side to contemplate.

First, the book gives you a good feel for the daily grind and the rhythms and pressures of life as a Sell Side analyst.  This is important to investor relations officers because we often deal with managements that think research analysts sit in their office and think up annoying questions to ask on conference calls while occasionally moving numbers around a spreadsheet.  This is a tough occupation, with many masters, extreme time pressures and a grueling travel schedule, not to mention lots of people willing to tell you that you’re wrong.  In fact, my favorite joke about analysts goes as follows: “Q.  How can you tell the difference between a Sell Side analyst and a Buy Side analyst?  A.  The Sell Side analyst is the guy who has to wait until after he hangs up the phone before he calls the other person an idiot”.

Secondly, if you didn’t think about it a lot before, this book will absolutely convince you that the Sell Side analyst is beholding to the institutional clients, not the company.  The Company is a means to an end, information that will generate investment ideas that institutional investors will use to buy and sell stock, in the process paying commissions to the analyst’s firm.  In today’s environment where much emphasis is placed upon an analyst providing access to management, it is very easy for a company to feel that analysts and their firms are working for them when they set up non-deal road shows and group management meetings.  But they’re not – after all, it’s the commissions that pay the bills.  I had to learn this the hard way back in the early 1990s.  I was speaking at an industry conference sponsored by Salomon Brothers and was sitting in the audience between speakers.  As I sat there, I watched one of the senior equity analysts work the room, stopping and chatting with various portfolio managers and buy side analysts.  I knew this guy, having met him on a number of other occasions and I thought that when he got to my area he would say hello and thank me for coming.  After all, I did represent the leading company in our sector and was a speaker.  No such luck – I wasn’t paying the bills and there were far too many institutional clients to stroke for him to chat with me.  Maybe I’m just slow, but it took me a while to figure this out.  You can save yourself a lot of heartburn just by reading the book for this point alone.

Third, in his speech, Stephen McClellan referred to a 60%/40% rule he uses in assessing companies.  That is, 60% of the analysis of a company is based on the content of what they disclose, while 40% of his opinion of a company is formed by management’s credibility and behavior.  On the content side of the equation, I think some of the subheadings from the chapter “Evaluating Companies as Investments” are self explanatory as to his very practical thinking:

“Look for Stability and Consistency”

“Earnings Quality and Conservative Accounting Are Paramount”

“Healthy, Solid Balance Sheet is a Must”

If your company doesn’t have these qualities, you may have found an explanation for the stock price that never seems to get to where your management thinks it should.

Finally, on the management credibility and behavior side of the equation, McClellan makes the point that everything management does and says come under scrutiny.  (I couldn’t agree more with him on this point.)  He’s not just concerned with the prepared speeches and powerpoint presentations.  Of much more interest to him are the off-the-cuff remarks over a coffee break; the way managements interact with employees in the elevator and loading dock; how they dress and what the headquarters look like.  In short, does the culture match up with the stated goals of the company and does the company walk the talk.  Think about it – as much as 40% of an analyst’s perception of your company may be riding on unplanned banter and the perception of intangibles.  That alone may be enough to cause you to buy a copy of this book for your management.

The title of this book may be “Full of Bull” but the book certainly is not.  No matter if you are a novice or long-term veteran of the investor relations scene, you can profit from reading this book.

Investor Relations is Not a Passive Activity

You get the most amazing insights into companies from luncheon conversations.  Last week I was at the NIRI annual conference and I spent one lunch session chatting with Rick Hans, the investor relations officer of Walgreens.  I happen to have a passing familiarity with Walgreens, having spent 23 years of my career there, during 15 of which I was responsible for investor relations.  I still own a good sized slug of their stock.  I also know Rick Hans fairly well, as I hired him many years ago.  I like Rick and he’s is a good, smart guy, but in this instance I think he’s indicative of some of the failures many companies have when it comes to investor relations.  So Rick, if you’re reading this, my apologies, but it’s your turn in the penalty box.

The story goes like this - during the course of our conversation, I mentioned that I noticed that Jessica Spaly, the retail analyst for Capital Research, had been on a panel discussion on Monday morning and I asked Rick if he had spoken to her.    Rick’s response was “No, I don’t need to - I talk to her almost every day”.  I thought this was an interesting response given that Capital Research owns 77 million shares (7.8%) of Walgreens’ stock. Why would you ever pass up potential face time with a shareholder that important to your company?  Who knows, you might learn something about what they are thinking or you might continue to build a relationship with the analyst by showing that you were willing to go out of your way to say hello.  To do nothing to me is indicative of corporate hubris - you have to come to us, we won’t go to you.  I’ve known Jessica for about 5 years and I made a point of looking her up because I believe that investor relations is a profession build on relationships.   Capital Research certainly doesn’t own stock in my company, but the relationship is important to me,  During my very brief chat, I even got an indication of their thinking about Walgreens. My opinion is that investor relations officers need to be proactive about these opportunities - take every opportunity to get face time with your investors and build your relationships.

Later on in the same conversation, I asked Rick if he had seen the research note put out by Deborah Weinswig of Citi regarding a recent group meeting she hosted at Walgreens headquarters.  It was of interest to me as the first bullet point of the note stated: “Our Take — WAG is focused on five growth priorities, including: 1) protecting its core retail business;...”  The use of the word protecting was of particular interest to me as it sounds as if management is growing defensive regarding its retail store base.  If so, this would mark a significant shift from one of the premier growth companies around.  

Allow me to pause here and say that this is not your run-of-the-mill analyst.  Deborah has been a top rated analyst by Institutional Investor magazine for a number of years.  Institutional Investor rankings may not be perfect, but they are certainly indicative of an analyst having a following on the buy side.  When they write a note, it is worth paying attention to, as it goes out to a very wide audience of buy side analysts and portfolio managers.

What Rick said next stunned me, and I confess that as a result I am just a tad fuzzy on the details.  His comment was to the effect that he either hadn’t seen the research note, hadn’t read it or didn’t get Deborah’s research.  Take your pick, they’re all equally bad.  Regardless of how you feel about sell side research, you have to read it and know what they’re saying.  Not to do so is tantamount to not doing your homework.  Investors are going to read the research and form opinions about your company because of it, and you have to be ready to respond.  It’s part of the basic information gathering function of investor relations.

Maybe all of this could be forgiven if Walgreens stock price and P/E ratio were flying high.  Unfortunately, that’s not the case.  One year ago Walgreens stock was trading at $44.27, today it trades at $35.13, a decline of 20.6%.  The trailing twelve month P/E ratio has suffered even more, declining 26.4% from 22.7 to 16.7 during the same period. Obviously, when you get this type of decline in a stock price, something fundamental is going on, and Walgreens has struggled to control their expense ratios while they have expanded into “adjacent” businesses such as specialty pharmacy (see my blog post of October 8, 2007 for a more detailed discussion of their disclosures around this issue).  Investor relations alone won’t fix this issue, but is sure doesn’t help if you’re being passive in your approach to Wall Street.  When things are tough is exactly when you should be proactive.

Walgreens has just gone outside their organization to hire a new CFO, something that is extremely unusual in this company that believes strongly in promoting from within.  My sources tell me that one of the driving reasons they went outside the organization was because they needed someone who could talk to Wall Street, as none of the senior executives wanted to, or were particularly good at doing so.  Analysts that I’ve talked to who know the new CFO say he’s very good with the Street.  Maybe Walgreens is going to take a fresh approach to how they deal with investors.  I think they could use it.

Blogging and Investor Relations

Blogging seems to be on the minds of many practitioners of investor relations lately.  In the course of the last month, I’ve been on a Webinar on the topic, quoted in an investor relations newsletter, authored an article that will appear in an upcoming issue of NIRI’s IR Update and attended a breakout session on the topic at the NIRI 2008 annual conference.  In addition, blogging was specifically mentioned by John White, the Director of the Division of Corporate Finance of the SEC during his remarks at the opening session of the NIRI 2008 conference.

As one of the few people that are actually blogging about investor relations, all of this is grist for my mill, and I thought I would share a couple of thoughts about where I think all of this is heading.  I start with two premises: first, corporate IR bloggers are at an inherent disadvantage to individual bloggers such as myself, and two, there can be a useful, but limited role for corporate IR blogging in the future. 

First the disadvantages:  1.) Regulatory.  The aforementioned John White of the SEC in his address to NIRI members was quite specific in stating that anything corporations put on their blogs for viewing by the public is subject to the anti-fraud provisions of the securities laws, namely Rule 10b-5.  While this is not new news (he was just reiterating a previously stated position of the Commission), it certainly will prove to be an overhang to the development of blogs that provide meaningful information.  Most investor relations officers that I know are reluctant to answer analyst questions in email format for fear of creating a paper trail, so putting their thoughts in a blog on a public web site with the overhang of antifraud liability is almost beyond the pale.  Why would you do one more thing to create a public record that can be used against you when things go wrong?  

2.) Corporate.  Most corporations function collectively, with information and corporate positions passing through multiple layers of approvals, from the corporate communications department to the general counsel and numerous people in between.  This process means that every phrase is pondered, considered and revised.  The process also means that almost all of the individual’s voice is smoothed away, opinions are eliminated and certainly all of the humor is drained away.  The result is the bland pabulum served up in most corporate press releases - it’s just not very interesting stuff.  Blogging, on the other hand, is a solitary and somewhat spontaneous pursuit.  It is designed to express the individual’s view of events, unfiltered by the editing process (this can be good or bad, depending on who’s writing).  When I get an idea for a blog post, I sit down, write it and post it within a matter of hours.  Nobody reviews it, and my opinions, of which there are many, (hopefully) make the resulting article more interesting. 

3. Bureaucratic  When I sat in on the session on blogging at the NIRI conference, I was struck by the nature of the questions that attendees had.  The questions were not, “What sort of information do you include in your blog?” or “How do you make your blog interesting?” but rather, “Did you have to modify your disclosure policy to allow you to set up a blog?” and “What sort of approvals do you have to get before you post to your blog?”  This type of thinking is very prevalent in corporate America and especially in investor relations, where regulation and legal liability permeate everything.  Things have to be done by the book, with a system for everything.  It also means that for many companies, establishing and writing on a blog are not worth the hassle, unless and until they are dragged, kicking and screaming, into the blogosphere.  On the other hand, in the age of the internet, everyone with access to the web has his own printing press.  Individuals are much more nimble about what they can say, and how quickly it gets said.  It stands the whole system on its head, and size becomes a disadvantage for corporations, which simply cannot react as quickly as the collective individuals on the web.

With all of these disadvantages, where can corporate IR blogs be useful?  First, as restatements of the obvious.  In spite of what it sounds like, this is a useful function.  Much time in investor relations is taken up with answering obvious questions: industry position, product offering, company values and other important, but common matters.  With the decline in annual reports, the web site will increasingly become the source for this type of information.  Investor relations officers should take a proactive stance in writing about such matters.  Or, you can go brain dead and repeat the answers verbally 300 times per year. 

Secondly, as a reporting function.  Not everyone can make it to your analyst day or has the time to listen to 6 hours of webcasts.  Someone who can succinctly write about what you are presenting to the street can help you reach a larger audience.  This can be particularly helpful in reaching smaller money management shops and individual investors.  With the shrinking of the sell side, investor relation departments need to think of alternative ways to reach more of the buy side and also individual investors, and this is one potential way.

Finally, and probably more controversially, investor relations blogs should track and disclose the types of questions they are receiving from investors.  Almost every company has aspects of its operations that investors do not understand particularly well.  This can arise for a variety of reasons, but usually because the accounting in the area is complex or convoluted (think deferred taxes or pension accounting) or the company is doing something new and unusual.  If investors are constantly asking questions about the area, that in itself is important information.  To the company it’s important because it tells them they are not doing a good job on disclosure.  To investors it’s important because it gives them an idea about what other people on the street are thinking. 

 

I would write more, but my editor says its time for lunch…