This article provides a brief summary of what we know today about investor relations based on the academic and professional research. It allows us to define investor relations, provide a brief overview of the investor relations evolution and discuss the current state and future trends in the investor relations profession. This paper also lists some of the most influential investor relations publications, Web sites, and blogs.
Introduction
In the first half of September 2008, the share price of Apple Inc experienced a notable decline. Financial analysts, however, did not attribute this drop in price to the poor financial standings of the corporation, bad strategy of business development, or weakening U.S. economy. The drop was largely attributed to the fact that Apple’s CEO Steve Jobs looked too thin during his recent public appearances…
Investor relations is the most important specialization among all other sub-functions of public relations, at least based on the salaries investor relations practitioners earn. In fact, several salary surveys document investor relations as the highest paid specialization of public relations. 2006 salary survey sponsored by PRWeek and Korn Ferry identified investor relations as the highest paid of the eight specializations, or disciplines, measured. The median salary for practitioners specializing in “financial/IR” was $165,620, followed by “crisis management” ($150,000) and “reputation management” ($143,000). Salaries for the remaining specializations ranged from $98,500 for “public affairs” to $59,910 for “community relations.”
Professional and academic literature readily documents the importance of investor relations for survival of corporations and even for the whole model of corporate America. Perhaps one of the key differences between investor relations and some other public relations functions is the fact that CEOs do not view investor relations as an auxiliary function, but rather a key business process of acquiring capital at the lowest cost possible. Allen (2002) summarizes the importance of investor relations and Laskin (2007) (https://instituteforpr.org/research_single/value_of_investor_relations) descries different ways in which investor relations contributes to the corporate bottom-line.
This article provides a brief summary of what we know today about investor relations based on the academic and professional research. It allows us to define investor relations, provide a brief overview of the investor relations evolution and discuss the current state and future trends in the investor relations profession. In conclusion, I list some of the most influential investor relations publications, Web sites, and blogs.
Definition
The professional organization of investor relations officers, National Investor Relations Institute (NIRI), adopted the latest definition of the profession in March 2003. Investor relations is defined as “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” (http://www.niri.org/about/mission.cfm). This definition was a significant step forward from the previous version adopted by NIRI in 1996, where investor relations was labeled “a marketing activity” with the purpose of “providing an accurate portrayal of a company” to have “a positive effect on a company’s value.”
The current definition moves away from the narrow marketing focus on sales and promotions and adds finance, communications and law to the mix of investor relations activities. This is indicative of the changes that the field of investor relations experienced at the start of the 21st century with the wave of corporate scandals and changes in securities regulations.
Another important change in the definition was the addition of the two-way communications. Two-way communications, a concept well-known to public relations professionals, was added to the definition of investor relations to substitute one-way flow of providing information about the company. Investor relations was previously often equated with disclosure – we put information out there, the rest is not our business. The shareholders, however, demanded to be heard. The feedback loop in communications was necessary. As the influence of shareholders grew, the companies that refused to listen to shareholders suffered.
The third important change in the definition concerned the overall goal of the investor relations activities. Earlier, the goal was to have a positive effect on the share price – Enron’s disaster can arguably be attributed to such a view on investor relations. Current definition emphasizes the need for a “fair value” as opposite to a “high value.” The goal is to help investors and financial analysts understand the true value of the company’s business and to help them adjust their estimates no matter if it means decrease or increase in the stock price. In other words, mistaken over-evaluation can be as dangerous for the company as under-evaluation as it can be a source of volatility in stock price and trading volume.
Evolution
Investor relations is a young profession: its history is usually recounted from post-World-War-Two period. However, the first company that could be called publicly traded is believed to be the Dutch East India Company, dating back to the 17th century (Britannica, 2006). Some sources point to an even earlier company: Stora Kopparberg mining company, dating back to the 13th century, that issued its first share in 1288. In the United States, the first public company was the Boston Manufacturing Company, founded in 1814. Nonetheless, the shareholders were small in number and the issue of communicating with investors did not command much attention of executives until another 150 years later. Three eras can be identified in the history of investor relations: communication era (1945-1970), financial era (1970-2000), and synergy era (after 2000).
The modern profession of investor relations originated with Ralph Cordiner, a chairman of General Electric, who in 1953 created a function in charge of all shareholder communications. In fact, in early 1950s a number of large companies started thinking about their shareholders. Economic boom of the post-World-War-Two years created extra income in the hands of American public; an income that could be invested. Corporations found themselves competing with each other for this cash – a competition companies were not accustomed to. In this situation, the management turned for help to proven professionals of communicating with individuals – public relations. Unfortunately, in 1950s public relations was not a well-established practice itself. Only the largest companies had internal public relations staff and the functions and roles of public relations were limited. This era was characterized by the lack of financial expertise among practitioners. Investor relations tasks were assigned to publicists who were largely press agents and technician and focused their job on putting the company’s name into mass media. Investor relations in this period lacked strategic and managerial activities. The organizations did not conduct research to understand their shareholding patterns. The feedback from shareholders was not collected. The stream of information was one-way: from organization to the publics and mostly through the mass media channels. Simply speaking, public relations profession that still did not earn its stripes to strategically manage itself was suddenly charged with additional responsibility of investor relations. This responsibility just came too early and tainted the image of public relations in the financial community for years to come. A good historical account of that period is presented at NIRI’s Web site by one of the founders of the organization, DeWitt Morrill (http://www.niri.org/about/origins.cfm).
The second era, financial era, saw the shift from private shareholders to professional investors. The U.S. market was becoming institutionalized. Investor relations responsibilities were also shifting from communication specialists to accountants and financial professionals. Under the supervision of CFOs, investor relations activities became focused on providing financial disclosure to investors. The focus from mass media changed to one-on-one meetings with institutional shareholders and financial analysts. This interpersonal nature of communications enabled two-way information streams. Feedback was gathered. It was, however, rarely used to modify the activities of corporations. Rather, it was used to craft more persuasive messages to “sell” the organization. The “selling” approach positioned the goal of investor relations in increasing the share price. Ryan and Jacobs (2005) propose that the goal of investor relations is to maximize the stock price – the higher the better. This might be one of the reasons for the “creative accounting” at Enron and other corporations. Another NIRI’s founder, William Chatlos, describes this period quite well (Chatlos, 1974).
Currently, investor relations enters the third era, the synergy era. Both communication and finance skill-sets are valued equally high for their contribution to investor relations. The goal of the function is the improved understanding of the company among investors and analysts. The communication is two-way with information travelling from the corporations to investors and back from investors to the corporation. Feedback from investors is actively sought and shareholder research is conducted. The feedback is analyzed at the highest level of the organizational hierarchy and is used in the decision-making and strategic planning. CEOs expect their IROs to be actively engaged in the corporate decision-making and supply the information from shareholders and about shareholders to the management team. This focus of the synergy era on the improved understanding of the company requires investor relations to provide both positive and negative information. The goal is not high value of stock, but fair value of stock. Overvaluation can be as negative as undervaluation because it can lead to a sudden drop in price as well as to increased price and volume volatility when additional information becomes available.
Modern day investor relations professionals realize that investors are not interested in seeing a company’s 10K or 10Q, but instead are interested in understanding the company’s business and its value. To create this better understanding, companies have to expand their communications with shareholders from obligatory financial disclosure to include the information beyond US GAAP, the information “that supplements and complements a firm’s financial statements” (Wiesel, Skiera, & Villanueva, 2008, p. 1). Many academics and practitioners emphasize the importance of non-financial information in investor relations (Gelb & Siegel, 2000; Greenspan, 2002; Orndoff, 2004; Lev, Sarath, & Sougiannis, 2005; Laskin, 2006). More and more, the focus of investor meetings shifts to intangible and non-financial aspects of business. A recent drop in Apple’s stock price, caused by concerns that CEO Steve Jobs looked too thin, comes to mind once again, to emphasize the importance of non-financial information to a company’s valuation.
State of the Profession
However, the state of the investor relations profession is only beginning to change. Today finance still dominates heavily. Two-thirds of investor relation officers have backgrounds in finance or accounting rather than in public relations or strategic communications. In other words, public relations expertise in investor relations is significantly underutilized, at least on the corporate level. NIRI membership surveys suggest, however, that it is more common to find expertise in public relations among investor relations professionals working in agencies or as independent consultants. Thus, agencies are able to supply corporate communication expertise to companies’ internal investor relations departments.
The existence of these internal investor relations departments is quite an encouraging factor. Earlier, it was not uncommon for the investor relations function to be housed in finance or treasury department. Today, however, more than half of corporate investor relations officers report working in a dedicated stand-alone investor relations department. On the other hand, Laskin in his 2008 dissertation reports an astounding finding – despite being housed in a stand-alone investor relations department, investor relations officers still often report to a CFO rather than to a CEO. This chain of command might just be the remnant of the previous era or, perhaps, it indicates CEOs’ unwillingness to take on additional responsibility. Whatever the reasons are, this situation limits investor relations strategic capabilities.
It does not come as a surprise, then, that investor relations’ communications are more often than not focused on financial information. Investor relations officers also perceive financial information as more important than any type of non-financial information. Indeed, if investor relations officers have backgrounds in finance and their supervisor is a finance person, it is unreasonable to expect any other outcome. I just cannot but wonder how well they can handle a gossip of Steve Job’s thinness.
As for the non-financial information, it is not all rated equally by the investor relations officers. The most important and the most frequently communicated is information about corporate strategy. Indeed, financial indicators provide information about past performance, while information about corporate strategy focuses on future earning potential of a company and thus such information is valued quite highly by investors. Several studies of financial analysts and professional investors indicate that investors assign high value to non-financial information. Ernst & Young, for example, concludes that information about top-management is the most important for the financial community when making decisions about buying or selling a stock (here enters Steve Job’s gossip again!). Yet, investor relations officers do not view this information as the most important, rather they place the information about top-management in the middle of the pack based on its importance or based on how often this information is actually being communicated. This disconnect will need to be addressed by the profession.
Investor relations is also predominately an interpersonal function. The most frequent channels of communication are one-on-one meetings. Media relations are generally the least important. This paves a road for listening and receiving feedback from investors. This also paves a way for relationship-building – perhaps transforming investor relations into investor relationships. This change is vividly described by Bill Nielsen, a former VP of Johnson & Johnson, who proposed referring to investors as share-owners rather than share-holders, thus emphasizing the long-term aspect of investing.
For more information about the modern state of the investor relations profession, NIRI membership surveys can be quite useful and provide a wealth of information. An outstanding academic study of the profession was also conducted by Petersen and Martin in 1996 with the goal of finding out the role and place of investor relations in the corporate hierarchy. The drawback of the study was its limited geographic area – the study analyzed only companies based in Florida. A more recent and national in scope study was conducted by Laskin (2006). The study investigated who performs investor relations tasks at Fortune 500 companies, whom investor relations officers report to, what activities are the most common in the profession, what audiences investor relations officers communicate to, and several other key variables.
Future Trends
In addition to the changes that the profession is experiencing now, investor relations profession is likely to endure a few additional ones in the nearest future. Among them, I would like to specifically mention three: the advent of XBRL, the evolution of investor relations on the Internet and the continued globalization of investment markets.
Imagine a press-release where each word has an invisible tag. When a person receives this press release, every word is automatically placed in a proper cell – a row for nouns, a row for pronouns, a row for verbs and so on. Now imagine instead of a press-release it is a quarterly financial report. And instead of every word, every number has an invisible tag. When a financial analyst receives this information, numbers are automatically placed into proper cells in the financial analyst’s Excel file, database or a financial model. This is XBRL in the simplest terms – eXtensible Business Reporting Language. The financial reporting becomes automated and computer-processed – the data can be streamed from the CFO’s database straight to investors’ or financial analysts’ databases.
I remember a heated discussion at NIRI’s conference when XBRL vendors described the possibilities it brings. In response, investor relations officers asked for ability to expand the tags and add additional tags. No doubt, investor relations professionals foresaw that it would be a challenge to try to fit their company’s finances into predetermined codes. After all, don’t we see notes to financial statements getting larger than financial statements themselves in terms of both size and importance? XBRL is extensible, hence it provides this opportunity of adding additional fields or tags. In fact, one of the vendors explained that investor relations professionals will be able to add tags, text fields, graphs and even pictures, if necessary. But then financial analysts joined the discussion and asked to have that extensibility limited, because it might render tags, and XBRL in general, useless. Indeed, computers might have troubles understanding those extra tags, text fields, graphs and will definitely have troubles with pictures. Thus, financial analysts were afraid to end up with same old manual analysis of information as we had before XBRL.
The same day at NIRI’s evening reception, the discussion slightly changed its focus. Will we even need financial analysts in the future? If the data is automatically standardized, transmitted and coded into financial models, then investors should be able to read the output for themselves. If the analysis is done automatically, financial analysts could perhaps be substituted with a sophisticated piece of software. Others suggested that it is the investor relations officer’s job that might be in danger not the one of a financial analyst. Indeed, if the data can flow from the computer of a CFO directly to a government-controlled database (the new EDGAR) or directly to investors’ computers, there might be no need for the investor relations intermediary. All the necessary information about XBRL can be found at the XBRL International Web site (http://www.xbrl.org).
Now, that all still does not answer the question about Apple’s stock plunge caused by Steve Job’s thinness. I doubt any XBRL vendor has a tag for it or any financial model traces correlation between inches of CEO’s waist line and the dollar amount of company’s future profits. It seems to me, there still will be a place for both investor relations and financial analysis but the focus of the job may change to include more of “what does it mean?” versus “what is it?” – non-financials will play more important role in communications with investors.
Investors’ meeting themselves may also look differently in the nearest future. Conference calls already cut down the travel budgets, but the next wave of shareholder interaction tools may push the envelope even further. Securities and Exchange Commission encourages the usage of electronic communications between companies and their shareholders by enacting a number of amendments about blogs, proxies, and electronic shareholder forums. The electronic communication tools allow companies to gain valuable information about their investor and solicit feedback, but they also demand somebody who is very savvy in public relations as the access to information and the speed of communications increase exponentially. It won’t take long before investor relations officers will face negative and even obnoxious postings in their electronic communication channels – visible to everybody and sometimes coming at the worst possible time. How prepared will a person with financial background be to deal with this situation? How qualified an accountant is to answer questions about Steve Job’s thinness posted on the company’s blog?
Finally, globalization is still here. It did not go away; in fact, it probably grew even stronger. But is the focus of globalization changing? Just ten years ago, companies from all over the world could not envision a better outcome than listing on NYSE. The programs of American Depositary Receipts were flourishing. Today, we had the first American company to conduct its IPO in Europe on London Stock Exchange. Even the companies trading domestically on NYSE or NASDAQ have increasing amount of shareholders from all over the world. Now combine it with electronic shareholder forums and XBRL. An investor in Asia will wake up to a fresh data set received through the XBRL-enabled channels and posts something erroneous at company’s electronic forum at 1 am EST. By the time, investor relations officer has a chance to react half of the world read that posting on the company’s own investor relations forum, no matter how offensive, negative or erroneous that comment might have been. Too much moderation or pre-moderation won’t solve the problem either – Dell learned it the hard way, when the discussions of Dell’s customer service moved from Dell’s official site to an independent blog. Shareholders could also find their ways of communicating to each other independent from the corporate oversight – across the world and instantaneously.
Conclusions
Investor relations started in early 1950s as a public relations function of communicating to retail shareholders. As financial markets institutionalized and financial audiences experienced the disappointment in poorly qualified publicists, investor relations moved under the supervision of a CFO. Financial expertise became the entry point to the job. Today, however, investor relations profession seeks the middle ground – where public relations and financial skill-sets will be combined to complete and support the sophisticated investor relations of the 21st century. Increased transparency requirements, instantaneous communication, access to information and advent of XBRL demand changes in the way investor relations is practiced.
References
Allen, C. E. (2002). Building mountains in a flat landscape: Investor relations in the post-Enron era. Corporate Communications: An International Journal, 7(4), 206-211.
Chatlos, W. (1974). What is investor relations? In A. R. Roalman (Ed.), Investor relations handbook (pp. 3-19).
Ernst & Young (1997). Measures that matter. Boston: Ernst & Young Center for Business Innovation.
Greenspan, A. (2002, February 27). Testimony of Chairman Alan Greenspan: Federal Reserve Board’s semiannual monetary policy report to the Congress. Retrieved January 1, 2008, from Federal Reserve Board Web site:http://www.federalreserve.gov/boarddocs/hh/2002/february/testimony.htm
Laskin, A. V. (2007). The value of investor relations: A Delphi panel investigation. Gainesville, FL: The Institute for Public Relations. Retrieved January 1, 2008, from The Institute for Public Relations Web site: https://instituteforpr.org/research_single/value_of_investor_relations
Morrill, D. C. (1995). Origins of NIRI. Vienna, VA: The National Investor Relations Institute. Retrieved March 1, 2007, from The National Investor Relations Institute Web site:http://www.niri.org/about/origins.cfm
Orndorff, C. N. (2004). The information investment managers want from public companies. In B. M. Cole (Ed.), The new investor relations: Expert perspectives on the state of the art (pp. 221-233). Princeton, NJ: Bloomberg Press.
Annotated Bibliography
Books
Taparia, J. (2004). Understanding financial statements: A journalist’s guide. Oak Park, IL: Marion Street Press.
Truly a must-have for any public relations professionals who found themselves assigned to communicating investor relations messages. This book is not intended for accountants or financial analysts, but rather for journalists who have to cover financial markets or corporate world. In other words, you won’t be able to balance the books, but you will be able to look at financial statements, understand them and communicate company’s financials to the outsiders. After all, isn’t it what an investor relations officer does quite often?
Marcus, B. W., & Wallace, S. L. (2005). Competing for capital: Investor relations in a dynamic world. Hoboken, NJ: John Wiley & Sons.
This is, in my mind, one of the best books about investor relations. It covers variety of aspects of investor relations – public offering, shareholder relations, relations with financial analysts, relations with outside investor relations counsel, etc. It might be too complex to use as a text-book but as a professional resource it is irreplaceable. The only drawback is, perhaps, the fact that the book was originally written in the 1970s and, although the content was updated throughout the years, the format still follows that 1970s book’s format to a large extent.
Rieves, R. A., & Lefebvre, J. (2002). Investor relations for the emerging company. Hoboken, NJ: Wiley Finance.
This book is an essential reading for any company considering going public. If you are a public relations practitioner at a small company and your CEO thinks about IPO, this is the book to read. What would you need to do to provide communication support for the IPO, where to list your stock, where to find investors, how to get on a radar screen of financial analysts, what rules and regulations you would have to comply with and many other valuable topics can be found in this book. It is a very practical and useful guide for launching an investor relations program. It is only weakness is the publication date – 2002. The profession of investor relations experienced quite a few changes in this short time period.
Magazines/Journals
Investor Relations Update. A publication of NIRI, it is a monthly newsletter of this professional organization usually centered around a key topic.
IR Magazine. This magazine is not affiliated with NIRI, but, nevertheless, it is probably the best resource for the investor relations practitioner. The issue typically has key feature stories, best practices, strategies for buy-side and sell-side, as well as discussions of various reporting issues. The magazine also conducts IR Magazine US Awards – prestigious award given to the best investor relations officers.
I do not know of any academic journals that would focus on the investor relations. One or two articles appeared in Public Relations Review, Journal of Business Communications, Journal of Communication Management, and Journal of Financial Research.
Web sites
http://www.niri.org – National Investor Relations Institute is the professional organization of investor relations officers primarily based in the United States. Most of the information is for members only, but there are occasional news bulletins available to the general public.
http://www.ir-soc.org.uk – Investor Relations Society is the professional organization of investor relations officers from the United Kingdom. This organization has much information in the open-access and is a wonderful resource about all aspects of investor relations. If you are looking for best practices in building investor relations Web sites, designing annual reports or preparing investor presentations, you should visit this Web site.
http://www.iirf.org – International Investor Relations Federation is a federation of national professional investor relations organizations. Now it unites 25 associations from all over the world. It can be used to find local professional organizations and comparing the standards of investor relations around the world. In addition, IIRF has quite a substantial library of investor relations resources available in free access.
https://instituteforpr.org/research/investor_relations – The Institute for Public Relations has a collection of five research articles dedicated to investor relations and covering such topics as measurement of investor relations performance, contribution of investor relations to the company’s bottom-line, understanding the behavior of retail investors, and reading between the lines of annual reports.
http://www.xbrl.org – XBRL International is a not-for-profit consortium of companies and agencies building and promoting the XBRL language. The site has all the information about XBRL one might need including legal documents, case-studies, products, as well links to XBRL vendors.
http://www.annualreports.com – This Web site has an excellent and up-to-date collection of annual reports of publicly traded companies. The best part, anybody can download these annual reports absolutely free.
Blogs
(the earlier version of this list was published on Dr. Alexander Laskin’s blog,http://www.IRresearch.org).
Investor Relations Musings. A blog written by John Palizza, a practitioner and educator in investor relations, who now runs his own consulting company. A blog is updated about once a week. The blog has a general focus on various aspects of investor relations. Texts are written in “plain English” and are highly readable.
IR Web Report. A blog managed by an investor relations consulting company. The focus of the blog (and the company) is online investor relations and online corporate communications. The blog is updated almost daily, written very well and has a lot of useful information.
Neville Hobson. A personal blog by Neville Hobson, a public relations and corporate communications practitioner from Great Britain. He is a pioneer in using new technology, so the blog pays much attention to the online communications and virtual reality. The main focus is various aspects of communications, not just investor relations. The blog has a very busy design, however, tags can help readers find the information they are looking for. A blog is updated daily (or several times a day!). Easy-to-read, great source of information about European investor relations.
Dix & Eaton Corporate Blog. A corporate blog by an independent communication consulting company Dix & Eaton. The blog has a general focus on various investor relations issues. It is not updated very regularly, but there is a post at least once a month. However, the posts are usually valuable and provide good summary and analysis rather than just a link to information. It is definitely worth reading.
TheCorporateCounsel.net Blog. Now this is the destination to discuss everything related to legal aspects of investor relations. The main focus is legal environment of corporate governance, corporate communications and securities regulations. The texts are, perhaps, not as user-friendly as some other blogs, but subject matter is probably to blame for that. The blog is part of The Corporate Counsel web site, a provider of educational and consulting services. The blog is updated daily.
JeffMatthewsIsNotMakingThisUp. This is not strictly an investor relations blog as it focuses on everything related to Wall Street. However, the blog discusses investor relations issues quite often and it is always a pleasure to read. The blog is written very professionally (but with a tendency to have somewhat longer posts) and is updated at least two-three times a week. In addition, the blog has many readers – it probably has the most comments among all the blogs mentioned here.
Risk and Governance Blog. A blog is managed by Risk Metrics Group, a company specializing in various aspects of corporate risk management. The blog mainly discusses issues of corporate governance and is updated once or twice a week. In addition, this blog has links to other corporate governance blogs from around the world.
Anil Dilawri Blog. A blog from Hill & Knowlton investor relations group’s director Anil Dilawri. The blog is not updated very often, about twice a month. Yet, it has a very professional design and provides a valuable point of view on investor relations from an executive of a large public relations agency.
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