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Is It Worth Waiting For A Crisis To Realise Investor Relations` True Value

April 25, 2022

Much has been written about the value of investor relations (IR), with many concluding that the discipline is capable of delivering a competitive advantage and enhancing value through efficient communication, enabling companies to effectively compete for capital.


In a 2020 study1, for example, IHS Markit found that “Highly effective IR maximizes valuation by supporting a premium of 15% and lowering volatility by 5%, as measured by Beta”, that “ineffective IR leads to a discounted valuation of 10% or more”, that “valuation has a direct impact on the company’s access to (and cost of) capital”, and that “these factors taken together, provide companies with a significant competitive advantage over time, enabling the firm to invest in business growth for the future.”


The purpose of investor relations is to efficiently communicate accurate, timeous, useful information when it is needed. IR provides investors, shareholders, analysts, and the overall financial community with a true and proper account of a company’s affairs, financial performance, governance and strategy, as well as insight about the company’s leadership. This helps private and institutional investors derive value and make informed buy and sell decisions.


The role of IR is not to “spin” or obfuscate or manage the company’s share price. It is not going to fix underlying issues in the business or make up for a lack of reporting or strategic clarity. If a company has a good story to tell, IR will tell it widely and effectively. If something goes wrong, IR will contextualise the new information and manage expectations, as well as ensure continued communication. But if the story is tenuous, IR is not meant to
invent a narrative. Effective IR therefore works for well-run companies with sound financials, working in good faith to create value.


The real value of IR


The real value of investor relations becomes apparent during a crisis.


When times are good and there is no chop on the water then the job of an IR professional is reasonably straightforward. There is ample time to communicate as needed, sufficient bandwidth between management, the IR function and analysts, and clarity on the information to be transferred. It is when the wind and seas rise that the true value of an IR function is displayed, and the calibre of the IR team becomes apparent.


When serious issues arise, the experience, trust, access and standing of the IR team within the analyst and investment community are tested and can mean the difference between successfully navigating a crisis and running aground.


Effective IR during a crisis allows companies to retain shareholders who might otherwise panic. It provides potential new investors with an entry point. It also limits the ability of hedge funds or other actors to take advantage of adverse conditions to short the stock.


When a large Aprio IR client experienced an emergency of global proportions, the relationships we’d built with shareholders proved invaluable. The largest shareholder at the time consulted with us before responding to media queries, and publicly showed support for the company in terms of how we were engaging shareholders on the matter. This allowed management to focus on the issues at hand, knowing full well that they could trust IR to communicate effectively, with sufficient detail, while remaining compliant with regulations.


In turn, the market was comfortable with IR as the primary touchpoint, allowing management to focus completely on resolving the problem. Crucially, seasoned IR was able to advise management on adhering to JSE Listing Requirements, as most information pertaining to a crisis is price sensitive. Throughout the crisis, analyst coverage remained balanced and objective, and by the time it had been resolved the top 20 shareholders remained unchanged.


Preparing for the unexpected
The trap into which inexperienced management teams often fall is that because they haven’t yet been through a crisis, the true need for an experienced IR function hasn’t become apparent, and hence they believe there is no need at all. By the time crisis hits, it’s too late.


In times of crisis, consistency is key, but so is flexibility. A switched-on and engaged IR professional, who has deep-seated and established relationships with the market, will enable well-informed and timely transitions when messages need to be honed or updated. They will provide clarity and perspective and will facilitate the crucial feedback loop between the company’s management team and the market.


The key attribute in a crisis is trust. The ability to weather a crisis depends on the trust already established with stakeholders. An important measure of a well-managed crisis will be a steady share register together with new entrants. Although the court of public opinion will create noise and uncertainty, consistent engagement with existing shareholders, debtholders, potential investors and covering analysts is key to building trust and ensuring the investment proposition isn’t lost in the context of the crisis.


In fact, for the right management and IR teams, a crisis is not something to fear, but an opportunity to build additional trust and leverage market attention. As Stanford economist Paul Romer said, “a crisis is a terrible thing to waste.” It means that one has investors’ attention – regardless of the reason – and so it is an opportunity to tell one’s story, in context, with all the facts and figures. Rather than relying on media commentary and speculation.


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