Читать книгу Investor Relations and Financial Communication - Alexander V. Laskin - Страница 9

The 1970s saw the shift from individual retail investors to institutional investors.

On one side, the enormous growth of investment activities in the 1950s and 1960s put pressure on the financial market infrastructure. The growth in individual investors was exponential in the years after World War II: from 4.5 million people in 1952 to over 20 million people in 1965, which represented every sixth adult in the United States. Chatlos (1984) explains:

As the trading and brokerage system creaked and strained under the increasing load of activity imposed on it, Wall Street’s response was less than prudent. Profitable success after success as “the only game in town” proved to be a harsh taskmaster to the system. When problems emerged because sale activities were extended beyond the back offices’ ability to handle the resulting volume, the immediate response was arrogant quick fixes rather than anticipatory long-term business planning.

(p. 87)

When it became painfully obvious that the system could not handle any more transactions, the response was a monopolistic one. Banks stopped taking on any new clients. Brokers became particular in choosing who to work with or whom to drop from the client list. The processing times were long, and the services were not friendly.

Another problem was the track record. The market was growing in leaps and bounds after World War II and shareholders (especially individual shareholders) expected it to continue like this forever. The expectations became too high for the reality to deliver. In other words, “success bred a level of expectations that could not be fulfilled” (Chatlos, 1984, p. 87). The system was destroying itself: the system built on volume of transactions could not handle that volume anymore, and the investors were ready to quit:

Customers were less than happy and did what might have been expected. They walked away. They did not sell their shares. They just walked away. For a system geared to the retail trade – and in many respects it remains so today – it was a devastating blow. The system was geared to volume, couldn’t plan for high volume, and suddenly had very little volume. Again, as could have been expected, broker failures and bankruptcy-avoiding mergers followed. It was a grim sight and the individual shareholder moved further away from the system.

(Chatlos, 1984, p. 87)

Professional investors began replacing retail investors. Consolidation was the name of the game. It was time to take all these retail investors with just a few thousand dollars and pull them together in investment funds. Although mutual funds existed for years, they really became popular only in the 1970s as more and more investors entrusted their cash to the fund managers. The first ever index fund available for individual investors, First Index Investment Trust (Vanguard 500), was launched in 1976 by the Vanguard Group as a response to the changing market demands.

This, however, meant a change for investor relations – instead of retail shareholders they would now face professional investors. Instead of less than knowledgeable individuals, overqualified stock analysts became the main contacts for the IROs The whole expertise previously geared toward private retail shareholders was becoming less and less relevant. Communications through mass media to reach large crowds of retail shareholders or conducting majestic special events to put the company’s name out there were not appropriate anymore: “Because of the legal fiduciary responsibilities to their clients, these institutions have demanded detailed and timely strategic and financial information” (Higgins, 2000, p. 24). They could not be satisfied by gift baskets or tours of company headquarters – they demanded detailed information on the company’s financial performance.

Financial analysts, however, were not valued highly in the corporate world; in fact, they were often regarded as “pests or worse” (Morrill, 1995). Yet, educated and knowledgeable analysts demanded lots of information on the company’s finances, strategy, sales, research and development, and so on. Investor relations practitioners with no or little knowledge of finance were not capable of providing such information and often could not even speak the same language as the analysts did.

In addition, financial analysts themselves were not accustomed to dealing with investor relations people. In fact, analysts were around long before the 1970s. In 1945 the New York Analysts Society already had 700 members and the number was growing fast. IROs, however, did not communicate with the analysts before the 1970s as they were mostly occupied with the retail shareholders, the dominant market force at the time. The job of communicating with analysts often fell to the chief financial officer (CFO), or somebody in the treasury department. As a result, when the 1970s brought the shift from retail to institutional ownership, many of institutional analysts already had their pre-established contacts at the corporations – most often in the finance department. Many analysts were not even aware that they needed to communicate with the investor relations people. They tended to go to the same source they used to go to earlier – a person in the treasury or finance department. Retail investor and professional investor communications were completely separated. Even today, because of this history, at some US corporations there are two separate departments: the investor relations department, aimed at professional institutional shareholders; and the shareholder relations department, aimed at individual retail shareholders.

The role of mass-mediated communications in investor relations suddenly lost its importance. Public relations practitioners were losing their grip on investor relations, while the financial departments were engaging in talks with analysts and institutional investors more and more often. It was not a one-day switch, but a slow transition over the years that eventually brought investor relations from the public relations office to the office of the CFO.

Typical CEOs, however, were still actively trying to avoid the financial gurus of Wall Street in the same way as they had been trying to avoid private shareholders earlier. Executives were used to being the only ones running the show and they did not plan on sharing their powers with either undereducated private shareholders or overeducated financial analysts. However, private shareholders were easy to deal with and could be kept at bay by using mass media and giving them occasional hand-outs. Management succeeded in creating “a nice warm feeling” in shareholders and keeping them “happy and calm” by avoiding “telling them anything that wasn’t legally required” (Morrill, 1995). The financial analysts, however, were far more difficult to please.

Financial analysts were not satisfied by the small amount of substantial information the companies were disclosing. They asked questions, sometimes questions “that management had not asked itself, or for various reasons did not want to answer” (Morrill, 1995). Moreover, institutional investors had power over the companies they owned stock in and perhaps even more power over the companies they did not invest in. Large institutional players could sweep all the company’s shares off the market, pushing the price up, just to unload them several days later causing the stock value to plummet. Chatlos (1984, p. 88) recalls, “The new institutions had so much money to invest that there literally was not enough time to observe the prudent ground rules. The new method was to dump the shares when a sell decision was made and to buy as quickly as possible when that decision was made. This had a severe impact on market price volatility.” If earlier private shareholders at least smoothed out this volatility, in the 1970s with individuals off the market the price was in the hands of the financial analysts. A single word from the company might have changed the price of stock enormously. The management decided they would rather avoid meeting with analysts altogether for fear of saying something wrong.

As a result, the investor relations profession in the 1970s experienced a notable change. Investor relations moved away from the public relations of the 1950s and 1960s. First, there was no demand any more for mass-mediated communications to myriad private shareholders, who moved off the market. Second, institutional investors demanded other communication channels than mass media. In addition, earlier public relations-based investor relations practices had left a bad taste in the mouths of Wall Street professionals, and financial analysts rarely wanted to communicate with this breed of investor relations professionals. Institutional investors and analysts tried to talk with managers of the company directly. The management, however, avoided any direct contact, choosing instead to communicate through the corporate secretaries or forward the calls to the CFO’s office or the treasury department.

In response to these changing demands, a new type of investor relations professional was emerging. Management often saw former financial analysts as being ideal IROs because they were expected to easily find a common language with the company’s financial analysts and professional investors. Wall Street-based firms started offering investor relations services, too. These firms were often an outgrowth of investment banks and thus had strong connections with and deep understanding of the financial markets.

These changes in the investor relations landscape had a strong effect on the investor relations function itself. Powerful and knowledgeable institutional investors evaluated every action the company took and were not afraid to ask questions and provide criticism if they did not believe the action was in the best interests of shareholders. Higgins (2000) describes the new institutional investors:

They have successfully sought an activist role in corporate governance, focusing their institutional power on company’s performance, the proper role of the board of directors, and executive compensation… The overall impact of the institutionalization of U.S. equity markets has been to make the job of the investor relations executive infinitely more challenging and complex.

(pp. 24–25)

From provider of information investor relations professionals had to turn into defenders of managers’ decisions – if investors had criticisms of company actions, investor relations were expected to provide counter-arguments to explain and protect the company’s executives. IR meetings started to become argumentative and, at times, confrontational. Proactive investor relations practices called for anticipating shareholders’ reactions and preparing to respond to them in advance. Financial analysts-turned-IROs prepared their own analysis to counter-act anything that other financial analysts may throw at them. Shareholder research became a necessity. Some IROs simply did not allow negative questions to be asked at conferences and annual meetings, tightly controlling the communication channels. Top executives wanted to stay away from all of this as far as possible.

The focus of investor relations, in addition to protecting the top management, was often on persuasion and making the sell. Marcus and Wallace (1997) explain that investor relations became “the process by which we inform and persuade investors of the value inherent in the securities we offer as means to capitalize business” (p. xi). Ryan and Jacobs (2005), financial analysts turned investor relations consultants, suggest the investor relations contribution is helping the management to “to package their story for institutional buyers or sell-side analysts” (p. 69).

In conclusion, this financial era of investor relations history was focused on professional investors and financial analysts. For the tasks of defending the corporation in front of them, CEOs were hiring former financial analysts and former professional investors who became the new breed of investor relations professionals. They lacked the public relations knowledge and skills, but they understood the numbers and knew the rules of Wall Street. CEOs needed to have somebody between themselves and the professional investment community and decided to give it a try. Investor relations at that time was often viewed as a marketing activity with a goal of having a positive impact on a company’s value. This led to a constant struggle for an overevaluation and pushing a share price up by any means necessary.

The collapse was inevitable. The chain of corporate scandals at the start of the twenty-first century brought down even companies that were once thought to be among the leaders of their fields – Enron, Tyco, WorldCom, Arthur Andersen, and others. CEOs started realizing that investor relations is more than just a financial function and started looking for communication expertise again – the pendulum was swinging back. Yet this communication expertise in investor relations was not easy to find any more.