Ideas & Debate

Listed firms score dismally on relations with investors

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Shareholders at a past annual general meeting. Firms need to come up with means of ensuring their stakeholders are updated. FILE PHOTO | NMG

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Summary

  • There is need for companies to craft an ideal strategy to deal with stakeholders.

There are several stakeholders, both known and unknown, active and potential investors, who are interested in the financial health of a company, and especially publicly traded entities.

They include shareholders, sell-side and buy-side analysts, institutional investors, day-traders (especially short-sellers), retail investors, customers and even the government.

Their interests, largely informational in nature, range from the most plausible to ludicrous.

Yet these groups of people remain important, albeit implicitly, to the performance of a public company’s stock.

To help them gain full appreciation of a corporation’s business activities, strategies, and prospects, the art of communication becomes important.

This communication is known as investor relations (or simply IR) and is largely financial in nature. Unlike public relations (or PR), investor relations deal with a more savvy and switched-on audience.

However, both remain a key communication function in any company and are crucial to cutting a distinct corporate image. However, the two functions tend to go separate ways in most times.

Investor relations is driven by financial reporting and subsequent conference calls and management roadshows (that are used to explain the numbers). Public relations, on the other hand, is driven by an annual messaging (or perception) calendar, corporate milestones, product (re)launches and corporate gaffes (or misdemeanours).

Investor relations activities such as analyst workshops, conference calls and even roadshows have proved to be a big input into the performance of a publicly traded company’s stock price.

Indeed, companies where executive management derive a significant portion of their annual compensation from stock options place strong emphasis on investor relations (for the right reasons).

Locally, publicly traded companies have done well with PR but poorly with investor relations.

Out of the many publicly-traded companies, only about 10 have properly populated investor relations section on their websites. A similar number have a dedicated investor relations desk (or personnel).

Further, only one company has a calendar of investor relations events on its website. When it comes to post-reporting engagements, only about five companies hold regular conference calls with analysts as well as investor roadshows (out of which only two regularly circulate post-call transcripts).

Over the past 10 years, I have only attended two non-reporting analyst workshops intended to showcase a corporation’s business model, strategies, and prospects.

There is clearly a big gap here. For big corporations, investor relations is a long-term enduring activity rather than an occasional function.

It can also be looked at as deal or non-deal. Deal investor relations involve companies preparing for a corporate action, such as an initial public offering (IPO), secondary issues, debt securities issue, mergers and acquisitions or even re-listings.

In such a case, IR opens access to capital, liquidity and may help a company achieve a fair valuation. On the other hand, non-deal IR involves companies maintaining visibility within the investor community while not explicitly ready for any corporate action.

For a listed company, non-deal IR helps support the low cost of capital and a higher share liquidity in relation to its peer group, and also to mitigate risks in financial communication and disclosure (by providing post-reporting clarities).

According to a 2015 study by EY of 876 IR professionals from around the world, IR’s ability to build strong relationships with investing community as well as financial analysts, and the strength of the executive team, are factors considered most critical to the success of IR globally.

Essentially, investor relations remain an indispensable function, especially for public corporations.