CHAPTER 10 Traditional IR: What It Is, and Why It’s Not Enough

All public companies must adhere to numerous requirements in terms of

communicating with investors. These include filings that the Securities

and Exchange Commission requires to level the playing field for all investors.

SEC filings are the raw materials of IR, and what one does with

them can determine the success of financial communications.

Of course, on the one hand, a company that did nothing more than file

10-Ks and 10-Qs would be utterly uninteresting to institutions and probably

never develop a strong public company multiple. On the other hand, if a

company goes out of its way to explain these rather dry documents and

makes the effort to target and court the right investors at the right time, the

success can raise the visibility of the organization and increase the company’s

overall value.

Let’s start at the beginning, however, and review the basics.

THE ESSENTIALS: PUBLIC FILINGS AND MEETINGS

The following list shows the absolutes that every public company must file

with the Securities and Exchange Commission and the procedural notices

and meetings that are a part of all public company interaction with investors.

The schedules of these reports and notices are based on a fiscal, as

opposed to a calendar, year.

Annual reports

Proxies

10-Ks

10-Qs

SEC Disclosures

Annual meeting

Annual report: An end-of-the-fiscal-year report to investors that includes

communication from the CEO and a basic summary of business,

including text on operations, tables of audited GAAP (Generally Accepted

Accounting Principles) financials (income statement, cash flows, balance

sheets), and the notes explaining the assumptions behind those numbers.

This is an easier-to-digest, graphically designed, variation on the 10-K.

The bigger, more extensive annual reports with pages of products and

strategy are becoming less relevant in today’s world. They are usually the

domain of larger companies that use their annual report to market their

business. We tend to recommend the 10-K Wrap, a two- or three-page

fold-out that wraps around the 10-K. This approach makes sense for costconscious

firms because the difference between a 10-K Wrap and a fullblown,

designed, and distributed annual report can be tens of thousands

of dollars.

Proxy: The proxy is a document that contains vital information on current

company issues to be discussed at the annual meeting. These usually include

elections for the board of directors, ratification of independent accountants,

company plans, and shareholder proposals. Shareholders who

cannot attend the open meeting cast their votes by proxy by signing and

sending in the proxy’s voting card. The proxy document also lists up-to-date

information on beneficial and insider stock and options ownership.

10-K: An end-of-the-fiscal year report to the SEC that summarizes that

year’s business and financial activities, the 10-K is more extensive than the

annual report.

10-Q: A summary filed with the SEC each quarter of the fiscal year, reporting

the last three months and year-to-date operations.

MD&A: The Management’s Discussion and Analysis is a key, required

section of the 10-K and 10-Q filings.

SEC Disclosures: Required documents filed with the SEC any time a

significant event has occurred. These include 8-Ks, to report unscheduled,

time-sensitive, material events, such as a merger or a change in board of directors.

For private companies or spin-offs of divisions, SEC disclosures include

S-1s, which are registration statements/filings that announce an initial

public offering.

Annual meeting: The company’s once-a-year meeting to which all

shareholders are invited. Some companies have more than one to accommodate

the geographical distribution and number of their shareholders. Management

and the directors present and discuss recent issues and decisions, answer shareholders’ questions, and put company plans and shareholder

proposals, pre-announced by proxy, up to vote.

THE ESSENTIALS: DELIVERY VEHICLES

The absolutes are delivered, or can be made accessible, to investors in many

ways, including:

The SEC

Direct mail

The media

The Internet

Conference calls

The SEC: By filing with the SEC, companies automatically make their

disclosures accessible and available to the public. Created in 1984 to ease

paper flow and to hurdle microfiche hassles, the government’s Electronic

Data Gathering Analysis and Retrieval System, EDGAR, collects, validates,

and stores SEC-required public disclosures. Since 1996 all public companies

have been required to file disclosures electronically, and these forms are

made available to the public on the SEC Web site. Increasingly, SEC Web

links are found directly on the IR portion of most company Web sites, creating

even easier access to both institutional and retail investors.

Direct mail: Public companies are required to mail the annual report

and proxy to all of their investors. This expense can be substantial for even

the smallest of companies. More and more companies make annual reports

and proxies, current and past, available on their Web sites. With the permission

of their investors, many companies are transferring the delivery of disclosures

and news from traditional mail to the more immediate and costefficient

email and electronic distribution. As stated earlier, the savings can

be material, anywhere from $20,000 to $50,000 for smaller companies. All

that said, many companies still mail press releases and other materials to investors,

a practice that is becoming less and less common.

The media: In order to stay in compliance with Reg FD, companies

must share material information with all investors promptly and simultaneously.

To do this, companies should issue quarterly earnings releases and

press releases describing SEC disclosure highlights and other significant

company events. Common sense, however, dictates that these disclosures

should be disseminated to a wider audience that includes media, trade publications,

buy-side organizations, and sell-side firms. IR should develop a

Traditional IR: What It Is, and Why It’s Not Enough 63

standard press release format in combination with investor targeting mechanisms

to garner optimal reach and frequency. IR should also make sure

that the message and investment highlights are clear and focus on key capital

markets triggers.

The Internet: Company Web sites, as well as the Web sites of agencies

that provide investors with public company information, are good platforms

for the communication of essential disclosures. User-friendly investor relations

pages can provide current and potential investors with current and historical

annual reports, proxies, press releases, 10-Ks, 10-Qs, and other SEC

disclosures. Email alerts are also an efficient way to reach investors in an

even and timely manner. Beefing up these capabilities not only saves money

on dissemination, but it’s also legally required.

Conference calls: An effective and the most common way to draw investor

and analyst attention to recent company disclosures, the conference

call allows capital markets players to listen to senior management summarize

recent disclosures, highlights, and significant activities, as well as ask

questions. We believe that a script for these calls is essential and should

never be sacrificed for bullet points or off-the-cuff explanations of relevant

facts. This is due to Reg FD as well as the quest to control the information

that the buy- and sell-side are digesting. Because these calls are highly scrutinized,

the script functions as a template for disclosure for the upcoming

quarter, by providing a framework for materiality, and mitigating the possibility

of an intra-quarter Reg FD slipup. For example, if management receives

a call from a 10 percent investor during the quarter, they can always

reference prepared remarks from the latest script, rather than inadvertently

disseminate new information.

The conference call is also management’s opportunity to define its company

rather than wait for the analyst to do so in writing. Accordingly, the

best way to create that definition is a well-thought-out script that leaves

nothing to analyst interpretation. This tack gives buy-siders a welcome

check and balance to sell-side research as they can go directly to the source,

the transcribed conference call transcript, and get a solid understanding of

management’s vision. Knowing this, management should never be unprepared

for this critical touch point with the institutional community.

ADDITIONAL IR TOOLS AND VEHICLES

Investors expect public companies to go beyond the SEC requirements of annual

reports, 10-Ks, 10-Qs, proxies, and SEC disclosures and provide as much information as possible to fully relay the company story. Additionally,

strategic partners and employees sometimes expect to receive, or have access

to, a steady flow of information. Supplementary information could include

the following:

Newsletters

Conferences

Road shows

One-on-Ones

Analyst days

Ads/Publicity

Web sites

Newsletters: Periodic newsletters to employees, partners, and investors

are a good way to keep stakeholders informed and capture the attention of

key constituencies. Interviews with executives and key management, insights

into operations, announcements of product or service initiatives, technology

or research advancements, consumer trends, industry updates, marketing

concepts, and any other information that helps investors and strategic partners

stay informed should be included.

Other forms of interim communication include fact sheets, sent out

quarterly, that summarize the most recent company developments and financial

performance. Large companies sometimes provide the sell- and buyside

with fact books, or supplemental disclosure forms, which literally have

reams of data on the finer details of complex operations.

Although helpful to investors, these supplemental materials are most effective

when disseminated consistently, no matter how the company performed.

Companies that only do so when times are good and suspend information

sharing when times are bad risk their reputation and company

credibility, both drivers of equity valuation over time.

Conferences: Companies can sponsor, or participate in, conferences for

companies and customers in their industry. It creates an opportunity for senior

management to present a viewpoint through speeches, panels, or discussion

groups and a platform for product sampling or exposure of services. It

is best for Reg FD purposes to have such presentations Web cast to avoid unintentional

selective disclosure.

Road shows: This is an effective way for management to tell its story directly

to investors. Sometimes called Non-Deal Road Shows, because companies

aren’t raising capital at the time, these are presentations where management

travels to the offices of buy-side and sometimes sell-side analysts to

Traditional IR: What It Is, and Why It’s Not Enough 65

discuss the financial and strategic prospects for the company. The hope is to

generate interest so the buy-side will buy and the sell-side will publish. These

meetings also serve to establish and build personal relationships. Having the

sell-side involved in coordinating these events is a good move, as it is a

source of their compensation and can provide for active sales and trading

support in conjunction with the meeting. The IR team should coordinate the

process and potentially augment the schedule of meetings so it’s done as efficiently

as possible with maximum impact. However, it should be ultimately

executed by the sell-side, not the investor relations agency.

One-on-Ones: Although Reg FD keeps everyone on their toes, one-onone

meetings between management and analysts or fund managers, either at

conferences or on road shows, are still a productive way for investors to find

the answers they need while giving management a chance to share their story

directly.

Analyst days: Many companies find it helpful to bring analysts to company

headquarters to hear the story, see the product, and most importantly,

meet some of the other management outside of the CEO and CFO, with

whom they typically interact.

Advertising and publicity: Broadcast and cable television, radio, magazines,

newspapers, and trade publications are good resources for reaching a

wide segment of potential investors and stakeholders. Relaying the corporate

mission to a wide audience can help build awareness and name recognition

that will bolster investor interest. Through publicity, companies can

draw attention in media articles and news stories, and present management

as interview candidates for business and news programs. In advertising,

companies can showcase their corporate message, products, services, customer

satisfaction, trade awards, or financial performance.

Web sites: The Internet is as pervasive as the media, but much more immediate

and flexible, making a corporate and/or brand Web site an excellent

way to communicate with all stakeholders. Most corporate sites have specific

pages where the employees, suppliers, vendors, customers, consumers,

and investors can connect and collect pertinent information. The pages for

investors, a specific investor relations area, should include

Daily stock quotes

Dividend announcements

Earnings releases

Stock performance graphs

Current and historical financial performance

Company history and background

Web casts of presentations and conference calls

Archives of annual reports, SEC disclosures, and media releases

Answers to frequently asked questions

New product demos or factory tours interactive chats

Language access for global investors

Also on the investor relations pages should be information about administrative

functions, such as

Stock transfer agents

Dividend reinvestment programs

Employee stock services

Shareholder stock purchase programs

Subscriber services

Company investment plans

IR contact information

The following items are optional and should be included on the investor

relations pages if appropriate:

Fact sheets and books

Newsletters

Information on governance issues, such as lists of board of directors,

committees, charters, policies, guidelines, by-laws, and accountability

initiatives

Companies should also consider creating links to their Web site from related

sites and third-party Web sites that provide data to potential investors.

OTHER BASIC IR PRACTICES

Obviously, basic IR has a lot of administrative tasks that need to be conquered,

such as overseeing the preparation and distribution of disclosures

and organizing conferences, presentations, and meetings. But, of course,

even with these basic IR functions, simply sending out information and providing

access to facts and figures does not compose a world-class IR program.

Most IR professionals will tell you that that is just the beginning. In

addition to the above tools and vehicles, IR professionals must engage in the

following activities:

Traditional IR: What It Is, and Why It’s Not Enough 67

Stock Market Reconnaissance

IR’s job is to keep an eye on the stock market and understand valuation. IR

must follow general economic indicators, industry-specific indicators, and

stock-specific issues. Stock price and stock volume, as well as specific ratios

such as P/E or EV/EBITDA relative to industry competitors, help management

understand market perception of the industry, the competition, and

their own company’s performance.

Shareholder Analysis

The makeup of institutional ownership and percentage of institutional ownership

relative to the whole is an indicator of a company’s image in the eyes

of the capital markets. Large holdings by institutions, involvement by shortsellers,

or a high degree of retail or mom-and-pop ownership indicate the

kind of holders or nonholders a stock might have. Tracking investors, the

amount of ownership, and movement can keep a company ahead of the

market currents and help the company target the investors it wants in a costeffective

manner. Knowing who your investors are, how much money they

manage, what their investment style is, and what comparable stocks they

own is essential information.

Approaching Analysts

Equity research coverage is still one of the best ways to create exposure and

gain credibility. Analysts are quoted by the media, referenced by investors,

and queried by their own brokers and traders. The potential endorsement of

coverage, and the realistic setting of earnings estimates, can lead to wider

distribution of equity, greater liquidity, less volatility, and a better multiple

for the stock.

Feedback

IR should constantly survey the capital markets to understand the attitudes

of the sell-side and the buy-side toward the company. Not understanding

perception before approaching a release or conference call is like distributing

product on gut instinct. Much like a consumer products company would

understand the market or customer before introducing an extension, IR

should understand market issues before communicating with investors. At

the end of the day, publicly traded companies are “product” to the buy- and

sell-sides, and the exercise of shareholder communication should be approached

as a marketing function to a degree.

RESOURCES FOR TRADITIONAL IR

Many good books on investor relations explain the requirements and resources

for providing the traditional IR function to investors. These books

include Investor Relations for the Emerging Company, by Ralph A. Rieves

and John Lefebvre; New Dimensions in Investor Relations, by Bruce W.

Marcus and Sherwood Lee Wallace; and Best Practices in Global Investor

Relations, by Richard B. Higgins.

These texts provide clear explanations of the IR necessities. Additionally,

many Web sites and associations provide IR information. Other critical

resources include the National Investor Relations Institute’s Web site,

NIRI.Org, and IR Magazine’s IRontheNet.Com.

REVAMPED, RAMPED UP, AND REDEFINED

Traditional IR is not enough, however. We believe it is not only about delivering

the basics, but also wrapping them in the context of valuation at any

given time. For people who sit on the sell-side and buy-side, it often seems

that companies don’t understand what they need. Rather, companies tend to

present a one-dimensional portrait.

Senior management knows the story inside and out. After all, they run

the companies. However, a large number of management teams don’t really

know how to package their story for institutional buyers or sell-side analysts.

It’s unfortunate because, if a company is packaged properly, analysts

just might take a chance on publishing or portfolio managers might begin to

accumulate a long position. In sum, the channels and methods by which

management communicates to Wall Street and Wall Street communicates to

the companies should not be underestimated. Done right, the process is simply

not as easy as many companies think.

Being on the inside with companies teaches that it takes more than traditional

IR to build or preserve value. Though going beyond the required

and voluntary disclosure of information, traditional IR can sometimes still

fall short. Unless IR operates from a capital markets perspective, understanding

the thoughts and processes of the sell-side and the buy-side, there

will always be room for improvement.

Consider these cases in point:

Missteps in Stock Market Reconnaissance

The stock market is a funny thing, and like a pot to boil, it’s best not to

watch it too closely. Companies that cross the fine line between noncha-

Traditional IR: What It Is, and Why It’s Not Enough 69

lance and obsessing over short-term stock movements can make rash decisions

to try and purge their short-sellers or have careless delays when dealing

with sizable institutional investors. Achieving that balance takes capital

markets know-how. For example, it’s best for management to not talk valuation

with analysts and portfolio managers. After all, they are the professionals.

Rather, management should get counsel from IR that understands

all of the implications and consequences of any market moves.

Missteps in Shareholder Analysis

IR that monitors share price to gauge market perception is somewhat behind

the curve. Although important, stock price movement is the tail wagging

the dog to a degree, and IR must know the likely impact of a company

decision before the shareholders render their judgment in the form of buying

or selling.

Missteps in Approaching Analysts

Having a handle on analysts’ estimates and the consensus estimate helps a

company stay in control of its story and engage The Street as an active, participatory

voice. But analysts are not just smart, calculating evaluators, they

are human beings who rely heavily on trust to devise those estimates and

recommendations. Not just any approach will do. Management must control

this process, as it can be a significant part of building valuation and raising

capital.

The public establishment of estimates by a company to The Street,

guidance, is perhaps one of the most essential practices of IR that this book

covers. One of the biggest missteps we’ve seen in the relationships that

companies have with the investment community is when they decide not to

give guidance. This inaction stems from a management view that if they

don’t give guidance, they won’t be measured against the numbers. The reality

is that analysts must make projections with or without guidance from

the companies, so companies are losing control of a number that will exist

anyway. Effective IR should always counsel management to take control of

that process.

Missteps in Obtaining Feedback

Though management might think they are getting clear feedback from analyst

conversations, they may not recognize that the sell-side and buy-side

rarely say anything to jeopardize access to management. That’s because access leads to information, which is the currency of Wall Street. It enables

both analysts and portfolio managers to either generate commissions, invest

safely, or avoid an investment altogether. Therefore, because someone’s living

is at stake, Wall Street pros are wary of giving honest (negative) feedback,

particularly to an emotional CEO or CFO.

This is the classic “Emperor Has No Clothes” scenario, where market

feedback is filtered to the company, even though it’s no-holds-barred between

analysts and investors. CEOs unwilling to take constructive criticism

because they think it’s personal are ultimately not conducting themselves in

the best interest of shareholders.

A BETTER APPROACH

IR with a capital markets background guards against many of these missteps.

Companies that engage in more strategic IR know how to communicate

better with the buy-side and the sell-side and materially improve

chances of coverage and institutional ownership. Done right, this method

and knowledge can lead to more optimal media coverage, better company

morale, and many other benefits that all increase the value of the company.

All public companies must adhere to numerous requirements in terms of

communicating with investors. These include filings that the Securities

and Exchange Commission requires to level the playing field for all investors.

SEC filings are the raw materials of IR, and what one does with

them can determine the success of financial communications.

Of course, on the one hand, a company that did nothing more than file

10-Ks and 10-Qs would be utterly uninteresting to institutions and probably

never develop a strong public company multiple. On the other hand, if a

company goes out of its way to explain these rather dry documents and

makes the effort to target and court the right investors at the right time, the

success can raise the visibility of the organization and increase the company’s

overall value.

Let’s start at the beginning, however, and review the basics.

THE ESSENTIALS: PUBLIC FILINGS AND MEETINGS

The following list shows the absolutes that every public company must file

with the Securities and Exchange Commission and the procedural notices

and meetings that are a part of all public company interaction with investors.

The schedules of these reports and notices are based on a fiscal, as

opposed to a calendar, year.

Annual reports

Proxies

10-Ks

10-Qs

SEC Disclosures

Annual meeting

Annual report: An end-of-the-fiscal-year report to investors that includes

communication from the CEO and a basic summary of business,

including text on operations, tables of audited GAAP (Generally Accepted

Accounting Principles) financials (income statement, cash flows, balance

sheets), and the notes explaining the assumptions behind those numbers.

This is an easier-to-digest, graphically designed, variation on the 10-K.

The bigger, more extensive annual reports with pages of products and

strategy are becoming less relevant in today’s world. They are usually the

domain of larger companies that use their annual report to market their

business. We tend to recommend the 10-K Wrap, a two- or three-page

fold-out that wraps around the 10-K. This approach makes sense for costconscious

firms because the difference between a 10-K Wrap and a fullblown,

designed, and distributed annual report can be tens of thousands

of dollars.

Proxy: The proxy is a document that contains vital information on current

company issues to be discussed at the annual meeting. These usually include

elections for the board of directors, ratification of independent accountants,

company plans, and shareholder proposals. Shareholders who

cannot attend the open meeting cast their votes by proxy by signing and

sending in the proxy’s voting card. The proxy document also lists up-to-date

information on beneficial and insider stock and options ownership.

10-K: An end-of-the-fiscal year report to the SEC that summarizes that

year’s business and financial activities, the 10-K is more extensive than the

annual report.

10-Q: A summary filed with the SEC each quarter of the fiscal year, reporting

the last three months and year-to-date operations.

MD&A: The Management’s Discussion and Analysis is a key, required

section of the 10-K and 10-Q filings.

SEC Disclosures: Required documents filed with the SEC any time a

significant event has occurred. These include 8-Ks, to report unscheduled,

time-sensitive, material events, such as a merger or a change in board of directors.

For private companies or spin-offs of divisions, SEC disclosures include

S-1s, which are registration statements/filings that announce an initial

public offering.

Annual meeting: The company’s once-a-year meeting to which all

shareholders are invited. Some companies have more than one to accommodate

the geographical distribution and number of their shareholders. Management

and the directors present and discuss recent issues and decisions, answer shareholders’ questions, and put company plans and shareholder

proposals, pre-announced by proxy, up to vote.

THE ESSENTIALS: DELIVERY VEHICLES

The absolutes are delivered, or can be made accessible, to investors in many

ways, including:

The SEC

Direct mail

The media

The Internet

Conference calls

The SEC: By filing with the SEC, companies automatically make their

disclosures accessible and available to the public. Created in 1984 to ease

paper flow and to hurdle microfiche hassles, the government’s Electronic

Data Gathering Analysis and Retrieval System, EDGAR, collects, validates,

and stores SEC-required public disclosures. Since 1996 all public companies

have been required to file disclosures electronically, and these forms are

made available to the public on the SEC Web site. Increasingly, SEC Web

links are found directly on the IR portion of most company Web sites, creating

even easier access to both institutional and retail investors.

Direct mail: Public companies are required to mail the annual report

and proxy to all of their investors. This expense can be substantial for even

the smallest of companies. More and more companies make annual reports

and proxies, current and past, available on their Web sites. With the permission

of their investors, many companies are transferring the delivery of disclosures

and news from traditional mail to the more immediate and costefficient

email and electronic distribution. As stated earlier, the savings can

be material, anywhere from $20,000 to $50,000 for smaller companies. All

that said, many companies still mail press releases and other materials to investors,

a practice that is becoming less and less common.

The media: In order to stay in compliance with Reg FD, companies

must share material information with all investors promptly and simultaneously.

To do this, companies should issue quarterly earnings releases and

press releases describing SEC disclosure highlights and other significant

company events. Common sense, however, dictates that these disclosures

should be disseminated to a wider audience that includes media, trade publications,

buy-side organizations, and sell-side firms. IR should develop a

Traditional IR: What It Is, and Why It’s Not Enough 63

standard press release format in combination with investor targeting mechanisms

to garner optimal reach and frequency. IR should also make sure

that the message and investment highlights are clear and focus on key capital

markets triggers.

The Internet: Company Web sites, as well as the Web sites of agencies

that provide investors with public company information, are good platforms

for the communication of essential disclosures. User-friendly investor relations

pages can provide current and potential investors with current and historical

annual reports, proxies, press releases, 10-Ks, 10-Qs, and other SEC

disclosures. Email alerts are also an efficient way to reach investors in an

even and timely manner. Beefing up these capabilities not only saves money

on dissemination, but it’s also legally required.

Conference calls: An effective and the most common way to draw investor

and analyst attention to recent company disclosures, the conference

call allows capital markets players to listen to senior management summarize

recent disclosures, highlights, and significant activities, as well as ask

questions. We believe that a script for these calls is essential and should

never be sacrificed for bullet points or off-the-cuff explanations of relevant

facts. This is due to Reg FD as well as the quest to control the information

that the buy- and sell-side are digesting. Because these calls are highly scrutinized,

the script functions as a template for disclosure for the upcoming

quarter, by providing a framework for materiality, and mitigating the possibility

of an intra-quarter Reg FD slipup. For example, if management receives

a call from a 10 percent investor during the quarter, they can always

reference prepared remarks from the latest script, rather than inadvertently

disseminate new information.

The conference call is also management’s opportunity to define its company

rather than wait for the analyst to do so in writing. Accordingly, the

best way to create that definition is a well-thought-out script that leaves

nothing to analyst interpretation. This tack gives buy-siders a welcome

check and balance to sell-side research as they can go directly to the source,

the transcribed conference call transcript, and get a solid understanding of

management’s vision. Knowing this, management should never be unprepared

for this critical touch point with the institutional community.

ADDITIONAL IR TOOLS AND VEHICLES

Investors expect public companies to go beyond the SEC requirements of annual

reports, 10-Ks, 10-Qs, proxies, and SEC disclosures and provide as much information as possible to fully relay the company story. Additionally,

strategic partners and employees sometimes expect to receive, or have access

to, a steady flow of information. Supplementary information could include

the following:

Newsletters

Conferences

Road shows

One-on-Ones

Analyst days

Ads/Publicity

Web sites

Newsletters: Periodic newsletters to employees, partners, and investors

are a good way to keep stakeholders informed and capture the attention of

key constituencies. Interviews with executives and key management, insights

into operations, announcements of product or service initiatives, technology

or research advancements, consumer trends, industry updates, marketing

concepts, and any other information that helps investors and strategic partners

stay informed should be included.

Other forms of interim communication include fact sheets, sent out

quarterly, that summarize the most recent company developments and financial

performance. Large companies sometimes provide the sell- and buyside

with fact books, or supplemental disclosure forms, which literally have

reams of data on the finer details of complex operations.

Although helpful to investors, these supplemental materials are most effective

when disseminated consistently, no matter how the company performed.

Companies that only do so when times are good and suspend information

sharing when times are bad risk their reputation and company

credibility, both drivers of equity valuation over time.

Conferences: Companies can sponsor, or participate in, conferences for

companies and customers in their industry. It creates an opportunity for senior

management to present a viewpoint through speeches, panels, or discussion

groups and a platform for product sampling or exposure of services. It

is best for Reg FD purposes to have such presentations Web cast to avoid unintentional

selective disclosure.

Road shows: This is an effective way for management to tell its story directly

to investors. Sometimes called Non-Deal Road Shows, because companies

aren’t raising capital at the time, these are presentations where management

travels to the offices of buy-side and sometimes sell-side analysts to

Traditional IR: What It Is, and Why It’s Not Enough 65

discuss the financial and strategic prospects for the company. The hope is to

generate interest so the buy-side will buy and the sell-side will publish. These

meetings also serve to establish and build personal relationships. Having the

sell-side involved in coordinating these events is a good move, as it is a

source of their compensation and can provide for active sales and trading

support in conjunction with the meeting. The IR team should coordinate the

process and potentially augment the schedule of meetings so it’s done as efficiently

as possible with maximum impact. However, it should be ultimately

executed by the sell-side, not the investor relations agency.

One-on-Ones: Although Reg FD keeps everyone on their toes, one-onone

meetings between management and analysts or fund managers, either at

conferences or on road shows, are still a productive way for investors to find

the answers they need while giving management a chance to share their story

directly.

Analyst days: Many companies find it helpful to bring analysts to company

headquarters to hear the story, see the product, and most importantly,

meet some of the other management outside of the CEO and CFO, with

whom they typically interact.

Advertising and publicity: Broadcast and cable television, radio, magazines,

newspapers, and trade publications are good resources for reaching a

wide segment of potential investors and stakeholders. Relaying the corporate

mission to a wide audience can help build awareness and name recognition

that will bolster investor interest. Through publicity, companies can

draw attention in media articles and news stories, and present management

as interview candidates for business and news programs. In advertising,

companies can showcase their corporate message, products, services, customer

satisfaction, trade awards, or financial performance.

Web sites: The Internet is as pervasive as the media, but much more immediate

and flexible, making a corporate and/or brand Web site an excellent

way to communicate with all stakeholders. Most corporate sites have specific

pages where the employees, suppliers, vendors, customers, consumers,

and investors can connect and collect pertinent information. The pages for

investors, a specific investor relations area, should include

Daily stock quotes

Dividend announcements

Earnings releases

Stock performance graphs

Current and historical financial performance

Company history and background

Web casts of presentations and conference calls

Archives of annual reports, SEC disclosures, and media releases

Answers to frequently asked questions

New product demos or factory tours interactive chats

Language access for global investors

Also on the investor relations pages should be information about administrative

functions, such as

Stock transfer agents

Dividend reinvestment programs

Employee stock services

Shareholder stock purchase programs

Subscriber services

Company investment plans

IR contact information

The following items are optional and should be included on the investor

relations pages if appropriate:

Fact sheets and books

Newsletters

Information on governance issues, such as lists of board of directors,

committees, charters, policies, guidelines, by-laws, and accountability

initiatives

Companies should also consider creating links to their Web site from related

sites and third-party Web sites that provide data to potential investors.

OTHER BASIC IR PRACTICES

Obviously, basic IR has a lot of administrative tasks that need to be conquered,

such as overseeing the preparation and distribution of disclosures

and organizing conferences, presentations, and meetings. But, of course,

even with these basic IR functions, simply sending out information and providing

access to facts and figures does not compose a world-class IR program.

Most IR professionals will tell you that that is just the beginning. In

addition to the above tools and vehicles, IR professionals must engage in the

following activities:

Traditional IR: What It Is, and Why It’s Not Enough 67

Stock Market Reconnaissance

IR’s job is to keep an eye on the stock market and understand valuation. IR

must follow general economic indicators, industry-specific indicators, and

stock-specific issues. Stock price and stock volume, as well as specific ratios

such as P/E or EV/EBITDA relative to industry competitors, help management

understand market perception of the industry, the competition, and

their own company’s performance.

Shareholder Analysis

The makeup of institutional ownership and percentage of institutional ownership

relative to the whole is an indicator of a company’s image in the eyes

of the capital markets. Large holdings by institutions, involvement by shortsellers,

or a high degree of retail or mom-and-pop ownership indicate the

kind of holders or nonholders a stock might have. Tracking investors, the

amount of ownership, and movement can keep a company ahead of the

market currents and help the company target the investors it wants in a costeffective

manner. Knowing who your investors are, how much money they

manage, what their investment style is, and what comparable stocks they

own is essential information.

Approaching Analysts

Equity research coverage is still one of the best ways to create exposure and

gain credibility. Analysts are quoted by the media, referenced by investors,

and queried by their own brokers and traders. The potential endorsement of

coverage, and the realistic setting of earnings estimates, can lead to wider

distribution of equity, greater liquidity, less volatility, and a better multiple

for the stock.

Feedback

IR should constantly survey the capital markets to understand the attitudes

of the sell-side and the buy-side toward the company. Not understanding

perception before approaching a release or conference call is like distributing

product on gut instinct. Much like a consumer products company would

understand the market or customer before introducing an extension, IR

should understand market issues before communicating with investors. At

the end of the day, publicly traded companies are “product” to the buy- and

sell-sides, and the exercise of shareholder communication should be approached

as a marketing function to a degree.

RESOURCES FOR TRADITIONAL IR

Many good books on investor relations explain the requirements and resources

for providing the traditional IR function to investors. These books

include Investor Relations for the Emerging Company, by Ralph A. Rieves

and John Lefebvre; New Dimensions in Investor Relations, by Bruce W.

Marcus and Sherwood Lee Wallace; and Best Practices in Global Investor

Relations, by Richard B. Higgins.

These texts provide clear explanations of the IR necessities. Additionally,

many Web sites and associations provide IR information. Other critical

resources include the National Investor Relations Institute’s Web site,

NIRI.Org, and IR Magazine’s IRontheNet.Com.

REVAMPED, RAMPED UP, AND REDEFINED

Traditional IR is not enough, however. We believe it is not only about delivering

the basics, but also wrapping them in the context of valuation at any

given time. For people who sit on the sell-side and buy-side, it often seems

that companies don’t understand what they need. Rather, companies tend to

present a one-dimensional portrait.

Senior management knows the story inside and out. After all, they run

the companies. However, a large number of management teams don’t really

know how to package their story for institutional buyers or sell-side analysts.

It’s unfortunate because, if a company is packaged properly, analysts

just might take a chance on publishing or portfolio managers might begin to

accumulate a long position. In sum, the channels and methods by which

management communicates to Wall Street and Wall Street communicates to

the companies should not be underestimated. Done right, the process is simply

not as easy as many companies think.

Being on the inside with companies teaches that it takes more than traditional

IR to build or preserve value. Though going beyond the required

and voluntary disclosure of information, traditional IR can sometimes still

fall short. Unless IR operates from a capital markets perspective, understanding

the thoughts and processes of the sell-side and the buy-side, there

will always be room for improvement.

Consider these cases in point:

Missteps in Stock Market Reconnaissance

The stock market is a funny thing, and like a pot to boil, it’s best not to

watch it too closely. Companies that cross the fine line between noncha-

Traditional IR: What It Is, and Why It’s Not Enough 69

lance and obsessing over short-term stock movements can make rash decisions

to try and purge their short-sellers or have careless delays when dealing

with sizable institutional investors. Achieving that balance takes capital

markets know-how. For example, it’s best for management to not talk valuation

with analysts and portfolio managers. After all, they are the professionals.

Rather, management should get counsel from IR that understands

all of the implications and consequences of any market moves.

Missteps in Shareholder Analysis

IR that monitors share price to gauge market perception is somewhat behind

the curve. Although important, stock price movement is the tail wagging

the dog to a degree, and IR must know the likely impact of a company

decision before the shareholders render their judgment in the form of buying

or selling.

Missteps in Approaching Analysts

Having a handle on analysts’ estimates and the consensus estimate helps a

company stay in control of its story and engage The Street as an active, participatory

voice. But analysts are not just smart, calculating evaluators, they

are human beings who rely heavily on trust to devise those estimates and

recommendations. Not just any approach will do. Management must control

this process, as it can be a significant part of building valuation and raising

capital.

The public establishment of estimates by a company to The Street,

guidance, is perhaps one of the most essential practices of IR that this book

covers. One of the biggest missteps we’ve seen in the relationships that

companies have with the investment community is when they decide not to

give guidance. This inaction stems from a management view that if they

don’t give guidance, they won’t be measured against the numbers. The reality

is that analysts must make projections with or without guidance from

the companies, so companies are losing control of a number that will exist

anyway. Effective IR should always counsel management to take control of

that process.

Missteps in Obtaining Feedback

Though management might think they are getting clear feedback from analyst

conversations, they may not recognize that the sell-side and buy-side

rarely say anything to jeopardize access to management. That’s because access leads to information, which is the currency of Wall Street. It enables

both analysts and portfolio managers to either generate commissions, invest

safely, or avoid an investment altogether. Therefore, because someone’s living

is at stake, Wall Street pros are wary of giving honest (negative) feedback,

particularly to an emotional CEO or CFO.

This is the classic “Emperor Has No Clothes” scenario, where market

feedback is filtered to the company, even though it’s no-holds-barred between

analysts and investors. CEOs unwilling to take constructive criticism

because they think it’s personal are ultimately not conducting themselves in

the best interest of shareholders.

A BETTER APPROACH

IR with a capital markets background guards against many of these missteps.

Companies that engage in more strategic IR know how to communicate

better with the buy-side and the sell-side and materially improve

chances of coverage and institutional ownership. Done right, this method

and knowledge can lead to more optimal media coverage, better company

morale, and many other benefits that all increase the value of the company.