Читать книгу Investor Relations and Financial Communication - Alexander V. Laskin - Страница 6

Many people rely on the stock markets and entrust their future to the efficiency of the investment system. Think about it: in the United States alone pension and retirement saving accounts constitute about US$20 trillion in assets, with most of those assets being equities and bonds. Efficient markets require information in order to function properly – corporations disclose important details related to their operations and finances to ensure all market participants, from professional investors managing billions of dollars to a retired teacher in Iowa with a few hundred dollars invested, have the same access to the information they need to make an informed decision about their investments. Investor relations professionals are on mile one of this information highway, enabling timely and comprehensive disclosure in order to help all investors better understand the company’s business and its value, and help investors better understand what they can expect from their investments in the future. In other words, the goal of investor relations becomes not just disclosure of information but educating investors and managing their expectations related to the accurate, or fair, value of the corporations.

The largest professional organization for investor relations, the National Investor Relations Institute (NIRI), proposes the following definition of investor relations: “a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.”

The key part of this definition is the fair valuation – this is what all investor relations activities should be targeted at according to the NIRI’s definition. This focus on fairness is important. It means investor relations professionals, who are often referred to as IROs (investor relations officers), should be eager to disclose negative information as much as positive; information that can pull the stock price down as much as information that can push the stock price up. Indeed, if IROs focus only on positive updates and trying to hide or diminish the impact of negative developments, they may contribute to a phenomenon called overvaluation, which is when stock price is priced above its fair market level. The danger of overvaluation lies in overcorrection: if and when all information finally becomes available, market participants may overreact to the negative news as it would typically come as a surprise, as a leak, or as a discovery by a third party such as a business journalist or a financial analyst, and may send the stock price below even what would be the fair price. In addition, these events tend to undermine the credibility of the company, its management, and its investor relations department, compromising all future disclosures and putting the relationships between the company and the financial stakeholders at risk.

The concept of fair market valuation is based on the efficient market hypothesis, which defines an efficient market as “a market in which prices always ‘fully reflect’ available information” (Fama, 1970, p. 383). Such a market is in equilibrium: all securities are fairly priced, according to their risks and returns. No investors can consistently outperform, or beat, the market, and thus there is no reason to constantly buy and sell shares of companies trying to outperform the average market return. The efficient market hypothesis, however, requires key assumptions to be met: all relevant information about the company and its performance is publicly available, all market participants have equal access to such information on a timely basis, and all investors are rational and capable of evaluating the information available to them.

Thus, investor relations, a function charged with providing information about the company to shareholders, financial analysts, and other market participants, is at the very foundation of the efficient markets. In fact, investor relations becomes a key activity not just for a particular company but for the whole modern economy. The survival of modern capitalism depends on how well IROs perform their task in ensuring equal access to information for various financial market participants. IROs are tasked with ensuring that the key assumptions of the efficient market hypothesis are met through extensive and timely disclosure of all relevant information pertaining to the company and its securities.

It is not enough for IROs just to disclose the information, however, for the share price to arrive at its fair value. Disclosure in itself may not be enough for a successful investor relations program. The efficient market hypothesis requires not just access to information but also understanding of the information and developing reasonable expectations based on such information. It is possible for somebody to have access to accurate information but still make incorrect conclusions based on it or have unreasonable expectations based on that information. A big part of an IRO’s job is similar to the job of a teacher: IROs must educate investors, shareholders, financial analysts, business journalists, and others on what this information actually means for the company – what the implications of the information are for the future of the company.

Today’s businesses are complex structures making money on advanced technological developments, intangible reputational assets, and unique processes they develop over multiple years. For example, it may not be sufficient for the investor relations department of a pharmaceutical company to disclose information about the discovery of a novel chemical compound – for many in the investment community this information may not mean much. Instead, it may be important to explain what the potential of that chemical compound is – maybe it can lead to a new type of medication that will completely revolutionize how certain types of health conditions are treated. Without such in-depth knowledge of this discovery, it may be impossible to know how this compound may make extraordinary profits for the company in the future. Yet, it is important not to oversell and to talk about the challenges as well – how much time it may take before this discovery can become a marketable product, what are the potential roadblocks along the way, and what are the chances of success or failure. Again, people in the financial community, outside of the company, may not have a good understanding of all these details even if they have been disclosed to them. They require more than just an information dump; they require explanation and guidance in order to understand how this discovery can affect the business and value of the company. Thus, it is impossible for anybody to arrive at the fair value of a company without some help from the investor relations professionals doing their job of disclosing the information and educating the investment community.

When the definition talks about fair value, it talks about the fair value of the company’s securities. So, what are securities? In the simplest terms, securities are tradable financial instruments. There are generally two types of securities: equity and debt. Equity securities represent an ownership in a corporation stock. These are usually called shares of stock. People can buy shares in many publicly traded companies – for example, Microsoft, Tesla, or Snap – each share has a price that fluctuates based on all the information available about the company and the resultant supply and demand for the shares of this company. If somebody were to buy every single share of, for example, Tesla, they would own the whole company. Owning shares of companies makes you a shareholder – you become eligible to participate in shareholder meetings and vote on various issues around how the company is run, including the election of the Board of Directors. The more shares you have, the more votes you have. Not all shares are the same and not all give the same rights and privileges; in addition, corporations may introduce their own unique type of equity securities as well.

Debt securities do not represent ownership in a company – instead, it is just a debt, a loan that must be repaid. As a result, debt holders do not get to vote on issues related to how a company is run, but they get their money back as the loans are paid back by the borrower and usually with interest. Both of these types of securities, equity and debt, may be traded; for example, if a debt holder does not want to wait till the loan is due for repayment, they may sell their debt securities on the secondary market to somebody else.

The same is true for equity. However, shares do not have any repayment or expiration date – once you buy a share of a company, you have a share in the ownership of this company forever. If you decide at some point that you would rather part with your shares, you can sell them on the secondary market to somebody else. Although the corporation that originally issued those securities does not typically participate in these transactions on the secondary market, it has a big effect on the price of its securities. Consider somebody who bought a share of Apple stock in 1990 when the shares were traded on a secondary market for about 30 cents. Today, the same share is worth about US$120. Investing a few thousand dollars in Apple stock 30 years ago would have made a significant contribution to the investor’s retirement account balance today. This increase in value is also good for a corporation: if a company decided to raise additional funds and sell more securities, it would be evaluated based on its current price not based on the 30-cent value from 30 years ago – it makes it easier for corporations to finance big projects.

NIRI’s definition of investor relations also talks about the way the fair value is built – specifically, it talks about two-way communication. What makes communication “two-way”? When the company sends out a news release or posts information on its website, it communicates in a one-way fashion – from the company to the outside world. There is nothing wrong with one-way communication – it is an appropriate communication technique in many situations, but it has its drawbacks, and it does not work all the time. For example, the company may be disclosing torrents of information about cost-cutting measures and new business development ideas, but without feedback from shareholders the company cannot know if shareholders actually understand how these new business ideas affect the company’s business model. This feedback becomes the return loop in the communication process and the communication becomes two-way communication.

In other words, in two-way communications both parties have a chance to speak and to be heard, and the information travels both ways – from the company to the stakeholders and from the stakeholders to the company. This puts an extra responsibility on the IROs – they are responsible not just for disclosure, or sending the messages out, but also for listening. IROs must be not only the mouthpieces of their organizations, but also their ears and eyes. Two-way communication is an essential part of investor relations if the goal of investor relations is educating investors and others in the financial community on the value of the company – education calls for two-way communication and dialogue. Investors must have the opportunity to ask questions and ask for clarifications in order to improve their understanding; in fact, IROs should welcome these investor inquiries as they help IROs understand where investors stand and what their expectations of the company are.

But there is more to two-way communication than enhanced understanding. Ultimately, investors are the owners of the corporation and the company’s management has a fiduciary duty to them, a duty to act in the best interest of the investors. Part of this process is for IROs to listen to investors and then to communicate the messages from the investors to the company’s management. Indeed, if the company’s management works for the shareholders, the management should know what shareholders think of their performance. It is the responsibility of IROs to collect this information and communicate it to the company’s management. As a result, investor relations departments must focus on building two-way communication channels to enable dialogue between corporations and a financial community.

The definition of investor relations talks about various skills that IROs must possess in order to do their jobs successfully: finance, communication, marketing, and securities law compliance. In fact, it may sound like four different professionals should be doing this job! Indeed, as an IRO you have to be knowledgeable in all these four areas – you need to be an expert communicator, after all, two-way communication is a foundation of the profession as we have just learned. But the topic of the communication often revolves around financial content – IROs’ communications are often financial communications – meaning communications about sales, profits, expenses, earnings before interest, taxes, depreciation, and amortization (EBIDTA), earnings per share (EPS), rate of return, and other financial terms. It may be challenging even for the best communicators to talk about subjects they know nothing about. So, understanding of accounting and financial concepts in investor relations is important. In addition, all these communications are occurring in a highly regulated environment – there are many rules on what information must be communicated, when it must be communicated, and what channels must be used to communicate it. There are rules against selective disclosure and against trading on privileged information. All these rules require IROs to be knowledgeable about laws and regulations governing the securities markets and make IROs agents of enforcement of these regulations. Investor relations is also part marketing. Investor relations professionals are expected to engage in and build relationships with the financial community – identify investors who may be a proper target for the company’s stock, increase the coverage of the company by the financial analysts, and even promote stock to retail shareholders.

As a result, it is quite common for IROs to have multiple educational degrees. A study that analyzed educational backgrounds of IROs at Fortune-500 companies found that almost 60% of IROs had a second, graduate-level degree. It is not uncommon that if an IRO’s first degree is communication-based, they would earn a second degree in finance or accounting to complement their communications expertise; in some cases, maybe even a law degree. If an IRO has an undergraduate finance or accounting degree, however, then they may complement it with graduate studies in communication or marketing. In addition, NIRI has a variety of professional development opportunities available for its members to enhance their knowledge and skills.

The two remaining terms in the definition of investor relations are “strategic” and “management.” The strategic part of investor relations refers to the proactive nature of the profession. Investor relations is not just reacting in response to the outside world – to the request for information from shareholders, for example. Instead, IROs set goals and objectives, and develop a plan for how to reach these goals. For some companies, IROs may set a goal to increase the financial analyst coverage of the company stock and they would work proactively to identify financial analysts who cover similar companies or companies in the same industry and reach out to them to generate interest. In another case, IROs may set a goal of influencing the company’s shareholders mix – for example, they may try to increase the number of retail shareholders, and would develop a plan for how to achieve this target.

Of course, these investor relations goals and objectives must benefit the company as a whole – all these decisions are rooted in the overall corporate strategic vision. This makes it essential for IROs to be part of the top management and to have a seat at the proverbial table where the top-level discussions are happening. This is where the term “management” comes from. IROs are part of the top management team of a company. It would be virtually impossible to be successful as an IRO without having access to the executive C-suite, also called the dominant coalition – people who run the company. It is important for IROs to be well versed in short- and long-term corporate strategy in order to be able to educate investors on the short- and long-term corporate value. It is also important for IROs to be able to relay investor feedback to the C-suite directly and in a timely fashion. All this makes access to the C-suite a must. There is also another way to look at the concept of management responsibility in the definition of investor relations. The term management also means a certain autonomy and ability to control its own domain. IROs are recognized as having an expertise in the investor relations tasks and thus they have a certain autonomy over managing these tasks. They have an autonomy over how to better communicate with financial analysts or how to better relay negative news to the market, for example. This expertise is recognized and appreciated. This autonomy is not absolute – almost every task in a corporate world is done within a team. The same is true for many investor relations processes – the legal team, treasury, accounting, marketing, public relations, and other departments often get involved – but each is recognized as having their unique perspective and their unique expertise.

This is the meaning of NIRI’s definition of investor relations. It is, of course, not the only professional organization and it is not the only definition. For example, IR Society, the professional organization for investor relations in the UK, has a slightly different definition: “Investor relations is the communication of information and insight between a company and the investment community. This process enables a full appreciation of the company’s business activities, strategy and prospects and allows the market to make an informed judgement about the fair value and appropriate ownership of a company.” It is easy to see the parallels between these definitions – fair value is the key goal in both of these definitions. And this fair value is achieved through full appreciation or understanding of the company and what it does. The main process, the main activity of investor relations is communication between a company and the investment community. So, both definitions, although they use different words, basically talk about the same concepts.

These definitions are not set in stone – they evolve with changes in society. For example, several books on investor relations from the 1990s define investor relations as aimed at increasing the share price instead of aimed at fair value. Even the definition of investor relations that NIRI used in the 1990s calls it a marketing function aimed at creating a positive impact on the company’s value. Thus, to better understand the profession it is important to take a glance at its history.