May 16, 2022
The modern era has seen an increase in job specialisation across almost every professional field. From an investor relations perspective, an external third party brings an independent lens, benchmarking and global best practice. Moreover, as investor relations teams know all too well, the extra pair of hands are a welcome relief as statutory reporting deadlines loom large. Having experienced different practices across our client network, we have set out some guidelines on how to get the most out of a professional mandate and develop a mutually beneficial partnership.
Used effectively, professional service providers can significantly enhance in-house teams’ value, internally and externally. They provide well-informed and world-class counsel and if used smartly, become an extension of your team and an invaluable resource.
Much has been written about the value of investor relations, 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 study, for example, IHS Markit found that “Highly effective investor relations maximises valuation by supporting a premium of 15% and lowering volatility by 5%, as measured by Beta”, that “ineffective investor relations 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. Investor relations 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 investor relations 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, investor relations will tell it widely and effectively. If something goes wrong, investor relations will contextualise the new information and manage expectations, as well as ensure continued communication. But if the story is tenuous, investor relations is not meant to invent a narrative. Effective investor relations therefore works for well-run companies with sound financials, working in good faith to create value.
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 the investor relations team to communicate effectively, with sufficient detail, while remaining compliant with regulations.
In turn, and in this instance, the market was comfortable with the client’s investor relations team as the primary touchpoint, allowing management to focus completely on resolving the problem. Crucially, seasoned investor relations professionals were 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.
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 investor relations 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. An alert and engaged investor relations 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, over a period of time. 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 investor relations 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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