Archive for the ‘The value of IR’ Category

How IR adds value for investors

March 6, 2014

NIRI KC 3-6-2014 Hancock & BurnsAt the NIRI Kansas City chapter’s “IR and Governance Bootcamp” today, Debbie Hancock, vice president of investor relations for Hasbro, Inc. did a great job – with an assist from Bruce Burns, director of investor relations for Westar Energy – marching us through “a day in the life” of an IRO, skill sets we need and the role of IR both internally and out in the capital markets.

That’s a lot of ground to cover – really, the whole job of IR. I’ll share one thought of many that struck me, from Hancock’s comments on a slide headlined “How IROs Add Value to Investors.” Note that she focused on adding value to investors. On her list: representing the company honestly, being prepared with answers for questions, informed and responsive, conveying understanding of the numbers.

The Hasbro IRO  listed one value-add that especially stood out to me:

Put the story together for investors. I think this is super-important…. What are the big takeaways from all this information? Put that together for them, put that story together.

Providing perspective, thinking like someone on the investor side and meeting the needs of an asset manager or analyst trying to make an investment decision, is probably the greatest value we can add in IR.

© 2014 Johnson Strategic Communications Inc.


Buy side: “IR makes a difference”

December 12, 2009

Some CEOs and CFOs don’t believe, in their heart of hearts, that investor relations makes a difference. The numbers speak for themselves, they say – it doesn’t matter if you commit time and resources to doing a good job of IR vs. complying with the minimum requirements for disclosure. So why do IR?

A neat little video on the value of IR surfaced yesterday on Bradley Smith’s IR/PR Product Blog – published by and NASDAQ OMX. The clip is Brian Rivel, president of Rivel Research Group, sharing a result from a recent survey in institutional investors. What Rivel says about IR:

  • 74% of buy siders surveyed say good IR does has a real effect on valuation.
  • How much does good IR help a company’s valuation? Median answer is +10%.
  • How much of a discount does bad IR impose? Median answer -25%.

Rivel sums up:

So the difference between good IR and bad IR in this environment is 35% of a company’s valuation. So the answer to the question, Does IR make a difference? Absolutely. IR makes a difference.

This is a perception study, not scientific proof of causation. But it’s interesting, considering that buy side investors aren’t overly inclined to dispense praise, to see that they perceive the quality of investor relations as a real factor in valuation.

If for no other reason than the feel-good experience of having someone say your job is worth doing, you should take a look at the Rivel video – and while you’re there, browse Smith’s blog for interesting comments on other topics.

PR does matter

July 8, 2009

Media-and-manI know, I know. “It’s all about the numbers.” Investor relations people (and some CEOs and CFOs), steeped in accounting fundamentals and valuation formulas, are skeptical of public relations. We scoff at press interviews, photo ops … the “spin” stuff PR people do. Of course, no respectable fund manager or analyst would admit to being swayed by a press release, or getting an idea from a newspaper. “It’s all about the numbers,” they say.

Trouble is, influencing the market is not all about the numbers. It’s all about the numbers – plus getting the right people to pay attention.

Two recent studies from respected business schools analyze extensive data on the relationship between press coverage and the market for individual stocks – and conclude that broader dissemination of news has benefits in the capital markets.

The more comprehensive study, a doctoral paper by Eugene Soltes at University of Chicago’s Booth School of Business, looks at all US nonfinancial companies traded on NYSE, NASDAQ or AMEX, excluding the 100 largest by market cap. Soltes and his computer programs count and analyze all articles on these firms, 9.3 million bits of news in total, from the Factiva database for 2001 through January 2007. Then he crosses that information with annual trading data on the stocks, looking for long-term effects rather than a daily “pop” in market activity. Soltes concludes:

The press provides an important and highly visible system of communication between firms and investors. … Specifically, greater dissemination of firm news is found to lower bid-ask spreads, increase trading volume, and lower idiosyncratic volatility. …

By increasing the visibility of firms, greater dissemination may also reduce a firm’s cost of capital.

In this paper, “dissemination” has to do with putting news out and getting it covered in the business press. Soltes says the average firm sent out 21 press releases a year, one every 12 trading days, covering deals, earnings and other news. (His tables give a median of 14 releases a year, just over one a month, a figure I like better as the midpoint in a range of small to large companies). For each release, business publications wrote an average of 1.5 articles – obviously, many releases get no coverage, while some get a lot. Soltes did not investigate why some releases get more coverage – being newsworthy probably is the key, although making connections with reporters also helps.

Soltes’ point is that more is better – more frequent issuance of news and broader coverage of it. Consider the impact of news dissemination on bid-ask spreads:

Based on an average sized trade, a 20% increase in press coverage reduces the average cost of a trade by $1.07. With the average firm having nearly 25,000 trades a month, this translates into a significant reduction in trading costs.

Soltes also finds more dissemination of news increases monthly trading volumes and decreases the volatility of individual stocks. Most companies – and institutional investors – value reduced trading costs, increased liquidity and lower volatility.

The other recent study, by Brian Bushee and three accounting colleagues at the University of Pennsylvania’s Wharton School, focuses on quarterly earnings news. This one looks at the three-day window around earnings (earnings release date, plus or minus one trading day) and yields more detail on immediate trading effects.

The Wharton study looks at quarterly announcements by 1,182 medium-sized NASDAQ firms from 1993 to 2004, excluding large cap companies based on an assumption that differences in coverage are more marked among lesser-known names. The authors analyze 608,296 articles on those quarterly results:

Our results indicate that, ceteris paribus, press coverage has a significant effect on firms’ information environments around earnings announcements. We find that greater press coverage during the earnings announcement window is associated with reductions in bid-ask spreads and improvements in depth.

The impact of media attention extends to retail and institutional investors:

We find that greater press coverage is associated with a larger increase in the number of both small and large trades. … For small trades, these results are consistent with the press providing information to a broader set of investors and triggering more trades. For large trades, these results are consistent with press coverage reducing spreads and increasing depth enough to reduce adverse selection costs and encourage more block traders to execute trades.

Both papers take a mechanistic view of corporate processes for disseminating news and how the media respond. These are data mining studies by accounting scholars – focusing on numbers of releases and press stories, word counts and similar measures of dissemination.

No attention is given to the qualitative nature of the news – positive, negative or nuanced. The authors also do not explore why reporters decide to write more, less or not at all. (The Soltes study does analyze “busy news days,” when a flood of business or nonbusiness news overwhelms XYX Company’s little press release, and confirms that issuing news on busy days has little benefit – although companies obviously can’t control when Michael Jackson dies or GM goes bankrupt.)

Neither of these studies venture outside of traditional “news” databases to analyze the impact of using social media, blogs and so on, to disseminate news. My guess is future studies will prove that the impact on markets comes from getting the word out, by any means, as long as you are reaching the investing audience.

Bottom line: Issuing news has a measurable benefit for public companies in the capital markets – increasing volume, reducing trading costs and reducing volatility. More frequent news is better. Getting more reporters or news outlets to write about the company amplifies the benefit. That’s what the quantitative evidence says.

So when PR people speak of “creating visibility,” it does matter in the market.

Benchmarking the best: II on IR

April 29, 2009

When the going gets tough, the best companies get going – to communicate more than ever with shareholders and analysts – according to Institutional Investor‘s ranking of “America’s Best Investor Relations.”

The article in the magazine’s April 2009 issue is worth reading, but IR folks who want to benchmark against the “best” should go online and explore II‘s interactive rankings page. It’s a clunky interface, but you can find your industry among the 54 sectors covered.

The magazine polled more than 650 portfolio managers and buy side analysts, along with 400 sell side analysts, to compile its review of winning IR. Some examples of championship efforts cited by II:

  • With volatile currency exchange rates hitting many companies’ earnings, MasterCard and McDonald’s won kudos for providing extra data on the impacts, such as income and expense sensitivity to the dollar-euro rate.
  • In a scary time for airlines, Continental “soared above its competitors by being open and giving detailed information not provided by others in the sector” – e.g., monthly projections of revenue growth and jet fuel costs. The IRO also says investors appreciate predictability – like being able to count on seeing Continental’s traffic report on the first business day of each month.
  • When Coca-Cola Co. and its largest bottler had a run-in over pricing, KO launched a two-stage outreach – contacting top shareholders and influencers to answer rumors and concerns, then following up with a broad communication effort on how the two companies work together.
  • With the recession pinching casinos, slot machine maker WMS Industries emphasizes “being much more visible” by meeting personally with investors and analysts. WMS’ IRO says he’s on the road twice as much now as at the start of 2008.

Bottom line, professional investors are working harder than ever to eke out returns. To cultivate long-term relationships, IR people and the companies we serve must go the extra mile to help investors analyze and understand this challenging time.

Who’s most shareholder-friendly?

March 24, 2009

The March 2009 Institutional Investor is a must-read for IROs.

The names of top-ranked firms in 57 industries are reason enough to take a look at “America’s Most Shareholder Friendly Companies,” an II ranking based on relationship evaluations by 675 buy side analysts and portfolio managers. Yes, the list includes some of the market’s longtime “blue chips,” but also a few you might not have considered.

You can check rankings in your industry here for a mini-benchmarking.

But the common themes among top-ranked companies are even more compelling. Beyond working hard on delivering fundamentals amid a tough economy, managements are focusing more than ever on relationships with their investors. Here’s a sampler.

Southwest Airlines:

“Any time that circumstances are difficult, it puts that much more stress on providing the right information,” [CEO Gary Kelly] says. “We work hard to establish a baseline understanding of Southwest Airlines’ vision and who we are, and we do the best we can to set reasonable expectations.”

Baxter International:

“The thirst for information from investors has grown significantly over the past 12 months,” says Mary Kay Ladone, vice president of investor relations. The challenge, she explains, is trying to find the right balance between “delivering a simple message that allows shareholders to make investment decisions, but not simplifying the message to the extent that we mask some of the uncertainty. This has always been the case, but the current environment has heightened it.”

… she adheres to five basic principles when communicating with shareholders and potential investors: “simple, transparent, responsive, timely and accurate.”


[CEO Thomas] Falk and his investor relations team keep shareholders informed of developments – even when the news is not good – by scheduling regular meetings in the offices of buy-side analysts in major markets and by making themselves available to answer questions. “Good investors are always probing for the soft spots in your strategy and your deliveries,” he says. “They have done their homework.”

Procter & Gamble:

“At the heart of our investor relations approach is the clear understanding that our shareholders are the owners of the company and that we need to be pro-actively responsive to them,” [CFO Jon Moeller] says, adding that P&G hosts investor meetings eight times a year at its headquarters and also attends most major investor conferences. “We make sure they understand our strategy, how we’re competitively advantaged and how we’re building on that.”

You might say it comes down to basics. Companies that execute well on the fundamentals of investor relations – clear communication of strategy, timely disclosure of changes and generous access for shareholders – earn favor and loyalty from the buy side.

And those relationships pay off in an uncertain era.

A surprise in the cereal box

March 23, 2009

surprise-in-cereal-boxImagine my delight when I opened up a box of Cheerios and found a surprise inside: a snap-together plastic sports car. Cool! … Yes, I know. They say men are just 8-year-old boys in grown-up bodies, and this explains my glee upon running across a cheap little toy.

Call it quirky, but the surprise in the cereal box made me think of investors and their reactions to a pleasant surprise. We’ve all seen the pop in a company’s stock price when it beats earnings estimates.

But there are other surprises a company can give its shareholders.

Investor presentations offer an opportunity. How about surprising an audience with a speech offering deep insights into your industry and markets, rather than the usual data-dump-in-a-Powerpoint-file? How about announcing a news item at a meeting, approximately simultaneous with a broad release? Or brightening up an analyst day with a bit of entertainment? In a small way, just running on time is a nice surprise (beating a 10- or 20-minute limit demands two disciplines: saying only what matters, and practicing to nail the time).

A little psychology on the substantive side also can help relationships. Sure, there aren’t many positive surprises – earnings or otherwise – in today’s brutal economy. And you can’t hold back material information.

But IROs can help management look for opportunities to highlight an unexpected benefit or unpromised outcome. An acquiring company can deliver synergies faster than projected. A new CEO can implement changes he hasn’t been ballyhooing publicly. A cost-cutting program can exceed its targets. In each case, management can influence both what it promises up-front and how well the company executes. Never over-promising should be a core principle of IR.

For investors, a surprise is like finding a toy in the cereal box. Cool!

(I’m going to go play with my car now.)

© Copyright 2009 Johnson Strategic Communications Inc.

McKinsey: Good time to open up

March 19, 2009

Transparency is “in” again, big-time. But what transparency should look like in ongoing conversations with investors isn’t always clear.

McKinsey & Co. consultants Robert Palter and Werner Rehm outline a sensible strategy in “Opening Up to Investors” in the January ’09 McKinsey Quarterly. It begins with not hiding in tough times:

As the credit crisis sorts itself out, one outcome investors and regulators will almost certainly demand is more transparency into the strategy and the underlying operating and financial performance of companies—not only the financial ones at the storm’s center but all companies. Managers should enthusiastically embrace such reforms.

The consultants urge companies to take action by thinking through and bolstering disclosure in three areas:

  • Give additional detail on how you create value, such as more granular P&L and balance sheet data to help investors value business segments.
  • Provide a candid assessment of performance, including initiatives that don’t work out and discussion of trade-offs such as pricing and margin.
  • Offer long-term guidance on your value drivers – estimated ranges on a handful of key operating metrics that drive value (not quarterly EPS).

The McKinsey piece suggests quite a few examples of disclosures to implement these three broad actions in specific industries. It’s available on the McKinsey website, with free registration. (Thanks to financial communicator Nick Iammartino for passing along the McKinsey article.)

Communicate – don’t hunker

January 16, 2009

Sage words from Fortune magazine in “How to Manage Your Business in a Recession” (January 19 issue):

The instinct of most executives is to hunker down in uncertain times, keeping quiet until they believe they have some answers. That’s the opposite of what’s needed. In a recession all of a company’s constituencies are nervous: Employees are worried that they’ll be fired, suppliers that they won’t be paid, customers that quality will decline or prices rise, investors that the stock will tank, communities that operations will close down. Your silence just makes them worry more.

Good managers respond by communicating even more than usual. They find that they needn’t have all the answers, but they do need to say what they’re thinking and be honest about conditions.

It may be preaching to the choir to say “get out and communicate” to investor relations folks, but it’s good advice for reticent CEOs and CFOs. To see the other nine tips for tough times, view the story.

IR & your company’s market cap

July 28, 2008

In an article on perception studies in IR magazine, Brian Rivel, president of Rivel Research Group, drawing on years of talking to institutional investors about companies and stocks, noted a conclusion on the value of investor relations itself:

We can point to cases that clearly show the impact good IR has on valuation. In our experience, 10 percent of company valuation is tied to truly superb IR. A downside valuation of 15 percent accounts for bad IR. That’s a 25 percent swing, so companies that communicate well attract a much higher valuation.

– Brian Rivel, quoted in Adrian Holliday, “Feedback at a Cost,”
IR magazine, June 2008, p.41

Words matter – to IROs as well as politicians

July 8, 2008

For any who doubt that our mission in investor relations overlaps with news-media coverage of companies, an article in the June issue of the Journal of Finance reports a study that parsed 350,000 news stories (100 million-plus words) on firms in the S&P 500 from 1980 to 2004.

What is intriguing in “More Than Words: Quantifying Language” is the attempt by two finance profs and a tech expert to translate language into numbers and capture their impact on stock prices. The findings offer some insights for IR as well as PR professionals:

  • Words do matter. Drawing on Dow Jones and Wall Street Journal coverage, the study found that negative words, especially, are predictive of lower earnings and shareholder returns in the future – and stock prices adjust, partially at least, with only a slight delay from publication.
  • Quantitatively, “the numbers” (that is, publicly disclosed results that many finance folks believe are all-important) account for only part of the change in stock price after an event. Analysts’ reactions also figure in. And the words have their own impact, statistically speaking.
  • Words can be classified as negative or positive. The authors use a linquistic database called the Harvard-IV-4 dictionary to analyze those 100 million words. Thinking in those terms, the point is decidedly not that a company should try to “spin” bad news into positive. But surely the IR team, in communicating results, should consider whether the words it uses appropriately convey the company’s intended tone.
  • The words in Dow Jones and WSJ stories, of course, are written by reporters – although stories often pick up words from press releases or statements. To me, the point is that news reporters are intensely relevant to the process (which some CEOs and CFOs don’t understand).
  • News coverage of companies spikes dramatically around quarterly earnings announcements – one day before, the day of earnings, and one day after. Seems obvious, but this strongly suggests the importance of seizing the quarterly “news peg” to reinforce key messages.
The authors explain the incremental impact of words on stock prices: “Linguistic communication is a potentially important source of information about firms’ fundamental values. Because very few stock market investors directly observe firms’ production activities, they get most of their information secondhand.”
Of course, traders do watch news stories – seeking to capitalize on the market’s short-term underreaction. The authors note: “Even if economists have neglected the possibility of quantifying language to measure firms’ fundamentals, stock market investors have not.” And neither should we.