March 4, 2020
Management effectiveness is often assessed by the market price achieved for a public company’s shares. Not only is share appreciation an important component of shareholder return on investment but also a company’s market valuation is mission critical to the public company’s cost of capital.
In its core business operations, an enterprise may have only a handful of direct competitors. But in the capital markets, that same enterprise competes with thousands of publicly traded rivals – for scarce investment capital.
Yet, more often than not, investor relations functions are under-resourced and thinly run, with activity centred on results presentations. This approach is often informed by the view that, in the short term, stock markets are irrational and don’t reflect fundamentals. Nothing could be further from the truth. Investor relations is a vital means for bridging the time difference between capital investment and economic return in the company’s business operations.
Management’s principal fiduciary duty is to achieve the highest sustainable fair market value for its equity. The mechanism of capital allocation known as the stock market is neither infallible, nor entirely automatic. Based on all available information, investors constantly revise their estimates of future economic value a company might generate. The dynamic and complex nature of the capital markets must, by necessity, challenge management to isolate the effects of effective communications from broader market forces. Sadly, management’s dissatisfaction with its communications effort often arises after an “earful” from one or more outside shareholders.
Effective communication can be achieved by elevating investor relations from being a necessary evil, mandated to only comply with listing requirements, to a strategic function as part of the C-Suite. This will allow for a professional, cost-effective bridge between the company, its management and the financial markets. Similarly, it provides an effective feedback loop back into the boardroom.
This principle has been reinforced by academic and empirical studies. According to Rivel Research, portfolio managers and buy-side analysts attribute a premium of 10% of a company’s valuation to good investor communications and a discount of 15% to bad investor communications. Similarly, analysis has indicated that the stock prices of companies, which are highly regarded for Investor Relations, tend to outperform the broader market by almost 30% on a total returns basis. This performance has widened over the last decade, as investors’ demands for information has increased, especially after the financial market crisis.
Finally, the quality of an investor relations programme should not be a function of the company’s size or available budget. On the contrary, these should matter least, especially in today’s digital age when information is available at the click of a button. What matters more is that the board of directors and management team buy into corporate governance, transparency, accountability and communication.
Although the factors behind share price performance are varied and complex, the quality of Investor Relations can be a real competitive advantage. The market rewards effective communication, visibility and transparency in the long run. Research, and history, has proved that in the long run, markets are indeed efficient. To this end, companies who choose to relegate Investor Relations to regulatory compliance do so at their peril.
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