From the Dutch East India Company to a highly respected (and perhaps highest paid) specialization in public relations, Alexander Laskin, Ph.D. explores the investor relations (IR) research base in his section of the Institute for Public Relations’ Essential Knowledge Project.
As Laskin tracks the evolution of IR, he also offers his historical take. It may be viewed as a post-World War II phenomenon, but the roots go much farther back. “The first company that could be called publicly traded is believed to be the Dutch East India Company, dating back to the 17th century,” he writes. “Some sources point to an even earlier company: Stora Kopparberg mining company, dating back to the 13th century, which issued its first share in 1288.”
By comparison, the first US public company – the Boston Manufacturing Company – was a relative newcomer founded in 1814. But with small numbers of shareholders, management would not have spent too much time focusing on investor communications. In fact, 150 years would pass before IR became an important management function. Then came three identifiable eras of investor relations:
- the communications era (1945-1970)
- the financial era (1970-2000)
- and the synergy era (after 2000)
In 1953, General Electric chairman Ralph Cordiner made an important contribution to modern IR by creating a department in charge of all shareholder communications. Other large companies also started thinking more about their shareholders. Competing for investment funds from a growing number of prosperous individuals was new to corporations, so they turned to their proven communications professionals – in public relations.
Of course, public relations itself was not particularly well established in the 1950s. Nor did practitioners possess much financial expertise. They knew publicity better than P&L statements and put little emphasis on strategic managerial communications to the owners of the business. There was little if any research to understand shareholders. The information flow went one-way from the organization to shareholders. Laskin believes this tainted the image of public relations in the financial community for years to come.
Thus came the financial era, along with the shift from individual to institutional investors. IR responsibilities moved from public relations to accountants and financial professionals. “Under the supervision of CFOs, investor relations activities became focused on providing financial disclosure to investors. The focus changed from mass media to one-on-one meetings with institutional shareholders and financial analysts,” writes Laskin. Communications became two-way and professional investors readily provided their feedback. This information could then be channeled into more persuasive messages aimed at raising share price.
Today, says Laskin, investor relations has entered the synergy era. Companies recognize that successful IR practitioners must have both communication and finance skills. Feedback gets heard at the highest levels of the organization and affects corporate strategy. CEOs expect their IR people to make useful contributions to management decisions. And the communication itself must cover both positive and negative news.
“The goal is not high value of stock, but fair value of stock,” says Laskin. “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.”
So today’s IR is less about 10Ks or 10Qs, disclosure standards and obligatory regulatory requirements (as important as it is to get those right). Investors expect to understand the company’s business and value. Professional investors can crunch the numbers themselves. While IR professionals have to understand the numbers too, they increasingly must focus on intangible and non-financial aspects of the business.
Thereby giving CEOs what they really want from IR as a core management function: the ability to acquire capital at the lowest cost possible.
Go to Investor Relations section of Essential Knowledge Project.
