Who’s Got the Power?

The most powerful person in the world is the storyteller.  The storyteller sets the vision, values and agenda of an entire generation that is to come.
                                                            – Steve Jobs

Are you a storyteller?  Can you create a compelling narrative about your company, its strategies and results?  If you’re in investor relations (IR), do you think it even matters?

I know some will say NO – investors are rationale beings and only (expected) results matter.  Others will point to the rise of passive and quant investing strategies or increasing use of big data, analytics and artificial intelligence (AI) to guide investment decisions as evidence a company’s story doesn’t matter.

But, the idea of being data-driven cuts both ways as investors don’t just look at financial results.  For example, some are using nascent AI applications to mine linguistics and behavioral analytics to explain, describe and potentially predict future outcomes or evaluate a speaker’s level of cognitive dissonance or truthfulness.

Then there’s the increased investor scrutiny of environmental, social and governance (ESG) factors.  In my view, this ESG focus is really about investors wanting to know the “how” of a company:  How does the company manage risk (environmental, social or other) … how does the company source/produce/operate and the impacts thereof … how does the company interact with key stakeholders (employees, customers, communities, etc.)?  In short, how does the company conduct itself?

It’s in answering the how that a company’s story is told. When it comes to financial performance, the story puts context around how results are achieved:  Was it great strategy … fabulous marketing or customer relationships … disciplined execution or operating efficiency?

So, in every earnings release and call, investor presentation or roadshow meeting, a story is being told.  With that in mind, here’s some tips:

  • Be clear and concise: Establish context and convey results via effective headlines with supporting bullet points – this is something IR practitioners are well-versed in doing.
  • Master the narrative structure: Most stories have a story arc consisting of a main character who faces a journey or challenge which leads to an outcome. In business, the story arc goes something like a company with a business opportunity/problem executing strategies to address that opportunity/problem which creates operating and financial results.
  • Engage the eyes: A picture is worth a thousand words, or rather graphs, charts and infographics can get your point across with few words.
  • Make connections: Use examples to make your business narrative resonate. Highlight customer benefits of your products, innovations that create new market opportunities or employee initiatives that enhance productivity and efficiency.
  • Build on outcomes: Offer some direction on how the company expects to build on, extend or sustain performance long term in a given environment.

A memorable and credible business story can build confidence in a company, its management and strategies, thereby breaking through the clutter, attracting investor interest and potentially enhancing valuation.  Indeed, storytellers have the power.

Tell me a fact and I’ll learn. Tell me a truth and I’ll believe.
But tell me a story and it will live in my heart forever.
                                                         – Native American Proverb


Lisa Ciota
Lead-IR Advisors, Inc.

Laser Focus

You know that uneasy feeling that gnaws in the back of your head?  Well, I’ve got it bad right now.  I talk with a lot of people and what I’ve been hearing over the last several months has contributed to a growing sense of unease about the future of the investor relations profession.  Of course, the National Investor Relations Institute’s (NIRI) Think Tank survey on the future of investor relations did nothing to allay those worries.

Change is nothing new.  IR has weathered changes and evolved over the years and I believe has come out stronger and more influential as a result.  However, from the rise of private equity, the dearth of IPOs and decline in number of public companies … to the pressures of short-termism and growth of algorithmic/robotic trading … to the impact of MiFid and the secular decline of the sell side … it somehow feels like we are on the cusp of a paradigm change.

Will these changes further elevate IR as a strategic function or will IR become more tactically focused? Anecdotally, I’m hearing companies are upping their focus on financial disclosure, analyst projection models/estimates and capital allocation.  The notion is to focus on the same things analysts and investors do and use the quarterly earnings process as the milepost for driving valuation.

What I’m not hearing is a focus on communicating about company purpose, market opportunities, strategy, operations or reputation – factors that create value – with analysts and investors.  Nor does there appear to be any priority being placed on developing relationships or having a dialogue with analysts and investors.  Maybe this is because this is the easy part and it’s all been done.  Maybe it’s because “soft” subjects are hard.  Maybe it’s because investors aren’t interested.  Maybe its all of this, or none of this.

What worries me is the laser-like focus on the financials may narrow IR’s sphere of influence.  When there’s a matter related to strategy, operations or reputation, will the C-Suite seek counsel from IR?  Will IR have a seat at the table or simply serve as the messenger?  Will this laser-like focus limit IR’s ability to sense a shift in investor perceptions or develop the supportive long-term investor relationships important during challenging times?

I have no crystal ball to answer these questions. IR as a profession has proven resilient in the past and may continue to prove such long into the future.  But as we look ahead, I want to paraphrase something I recently heard: “Facts (i.e., financials) are like bones, but there’s a lot more to life.”

Lisa Ciota
Lead-IR Advisors, Inc.

Supporting Role

Let’s start with the obvious: strong board dynamics and processes appear to go hand-in-hand with financial outperformance, according to a recent McKinsey & Company board study.  What piqued my interest was McKinsey’s efforts to dissect board performance across three dimensions: board processes, internal board dynamics and strength of the board’s relationship with the C-Suite.

It’s the latter I want to focus on.  In particular, how stronger interactions between CFOs and Boards can contribute to better board dynamics and how investor relations can play a pivotal supporting role.

The study indicated the board activities that most support corporate outperformance includes:

  • Assessing management’s understanding of the drivers of value creation;
  • Overseeing the development of a comprehensive strategic framework;
  • Assessing the adaption and evolution of strategy in view of the business environment, and
  • Debating strategic alternatives internally within the board itself as well as with the CEO.

CFOs add critical perspectives and insights to these processes, McKinsey contends in a supplement to the board study.  Through their interactions with the board, CFOs can provide:

  • An objective view of business results and future outlook as a whole and by business unit;
  • Context on overall and business unit performance in view of the market and industry environment;
  • Perspective on investor perceptions and their view on key value creation drivers.

By going beyond pure financial reporting to providing qualitative information about the company, its industry and markets, CFOs help inform board dialogue and increase its effectiveness.  In a way, CFOs should think of their role as helping improve board/C-Suite collaboration by identifying, surfacing and answering questions (often well in before the board meeting).

Investor Relations is primed to support the CFO in this regard.  With its finger on the pulse of investors, Investor Relations can:

  • Provide context around investor perceptions of the company, its strategies, management team and the market drivers of valuation;
  • Advance awareness of the company’s performance and strategies relative to peers and the corresponding implication for valuation multiples;
  • Offer perspectives on investor behaviors that may signal a risk for sector rotation, activism or proxy voting.

With insights such as these, Investor Relations is poised to win in the best supporting role category.

Lisa Ciota
Lead-IR Advisors, Inc.

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And The Nominees Are . . .

If you’ve ever been involved in an activism campaign, you know activists are smart . . . they’re well-advised . . . and they are likely go after seats on your board.  With the director-nominating season in full swing, more than a few companies will be dealing with activists seeking board seats.

Sophisticated activists know the mechanics of your by-laws, understand the director-nomination process and are prepared to request and complete your D&O questionnaire.  So, it’s unlikely they’ll make a technical mistake when nominating directors.  They also understand the importance of passive investors and the role of ISS and Glass Lewis in the proxy process.  So, to garner support for their director nominees, activists are beginning to consider issues of diversity, overboarding and independence when making director nominations or creating a dissident slate. 

To de-escalate an activism campaign or avoid a proxy fight, many boards are engaging and granting activists board seats.  Engagement can give boards certain advantages including the potential ability to: 

  • Better control the agenda;
  • Negotiate director-nominee qualifications and background;
  • Set expectations for activist-director roles and behaviors; and,
  • Enter into a stand-still agreement to mitigate the disruptive effect of an activism campaign.

Of course, once an activist is on the board the challenges don’t end. It’s important for directors to remember the human element:  treat each other with respect; be candid and engaged, and put your fiduciary responsibilities to shareholders first.

Now what’s the role of investor relations in all this? I believe this is where investor relations’ role as a steward of corporate value comes to the fore.  As a steward, investor relations champions corporate value on behalf of the company’s owners under the direction of the owners’ appointed representatives – the board and management. Investor relations hears the voice of the company’s owners and has a responsibility to regularly communicate investors’ viewpoints internally.  This includes providing context around investor perceptions of valuation, management credibility, peer and industry performance as well as the overall competitive environment.  

It’s also important for investor relations to share perspectives on investor behavior – not only about activists and their followers, but how the existing investor base is or may change.  Such knowledge can help inform decisions as the interplay of who enters or exits a stock can affect valuation, signal confidence in the company’s strategies and be indicative of potential proxy fight outcomes. 

In the end, activism brings change on many levels. Investor relations needs to deal with that as the corporate narrative evolves. The notion of being a steward of corporate value can help center investor relations’ focus and approach to navigating that change.

Lisa Ciota
Lead-IR Advisors, Inc.

Passive Resistance

Much has been made about the growth of passive investing.  Today, passive investments (index and exchange traded funds) represent approximately 37% of all assets under management in the U.S. up from 19% in 2009.

Pundits have raised several broad economic and social concerns about this growth, including:

  • Its effect on stock prices and corporate valuation;
  • The implications of the significant cross-ownership levels of passive investors on economic competitiveness, income equality, innovation and corporate investment in research & development;
  • Demand for the IPO of small companies that may not automatically become part of an index.

These are big questions that I’ll let market analysts, economists and philosophers tackle.  Instead, I want to address the implications of the growth in passive investing for investor relations professionals.

First, there is the potential impact on trading and valuation.  On any given day, its estimated index funds, quant funds and ETFs represent about a third of a typical stock’s daily trading volume. It’s also estimated another third of daily volume is generated by automated or high frequency trading.  So, combined, 65% – 70% of a typical stock’s daily volume is driven by programs, bots and algos – not company fundamentals – thereby increasing the correlation between and among individual stocks in a sector as well as with the overall market.

It also means fewer active or fundamental investors are setting price.  As a result, their investment decisions are potentially more impactful given so much of trading can be driven by non-company-specific factors.  Communicating your investment thesis, understanding active investors’ underlying styles and building relationships becomes more important.

Questions to ask:  What does your investor base look like?  What is the mix of growth, GARP, value or momentum investors, etc. and their investment horizons?  If existing investors exited your stock, who is poised to move in? What’s important to attracting these investors? Would a sector rotation change your outreach strategies?

Second, consider the implications of passive investors being your permanent owners.  They focus on both the quality of board and governance practices as well as how the company conducts its business (encompassing operating, environmental and social matters). This reflects their view that strong board oversight is the best way to protect and enhance their investment. Passive investors want communications that articulate and put context around a business’s long-term strategic framework and seek evidence the board is engaged and performing its fiduciary responsibilities.

While passive investors rarely initiate, they do hold boards accountable by actively evaluating issues raised by other investors and their internal and external proxy advisors. Their vote is critical as they often own between 25% – 35% of a typical public company’s outstanding shares.

So be familiar with the strengths and weaknesses of your company’s governance principles and practices.  Understand the governance priorities of your passive investors and the nuances of their views and voting record.  Consider conducting periodic outreach to stay abreast of their perspectives and build relationships before you need them.  Share your learnings with your board.

Wrapping up, don’t be passive about passive investors.  They will continue to play an important function in the markets for the foreseeable future.

  • Understand the behaviors of both your active and passive investors.
  • Develop a comprehensive approach to investor outreach.
  • Be cognizant of the implications for trading and valuation.
  • Think about the strategic importance of passive investors during an activist campaign as well as on matters related to environmental and social issues.
  • Balance your communications to address near-term expectations and results with your long-term strategic framework and corporate purpose as you reach out to all investor audiences.

 Lisa Ciota
Lead-IR Advisors, Inc.

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