A Communication Guide for Investor Relations in an Age of Activism

Marcia W. DiStaso, David Michaelson, John Gilfeather

• Publisher: Business Expert Press
• Year: 2017
• ISBN:
  9781947098985
• Topic: Business
• Subtopic: Public Relations
• Index: Business

Today's competitive corporate environment and the increased expectations of speed in communication make it critical for companies to develop strategic programs for communicating with investors. This book provides an executive overview of the field of investor relations with a focus on what investor relations officers need to know to be successful. Readers will learn the essentials of communicating with investors, the stock market, governance, reputation, and more. With the rise of activist investors, investor relations officers serve as guardians of one of a company's most important assets-its reputation. This book serves as a guide to understanding the history of investor relations and how it has evolved in the age of activist investors. Included are discussions about managing an investor relations program, assessing reputations and how to measure the impact of investor relations efforts. By the end of the book, you will understand the strategic role of investor relations and how activism impacts corporate storytelling, risk, crisis, events, and analyst relations.

CHAPTER 1

Investor Relations Background and History

Over the past several years, the investment landscape has seen much change, and with that, the operating environment for investment relations officers (IROs) has been transformed. This chapter addresses what investor relations (IR) is, explains its history, and provides details about the stock markets and key financial acts.

The Stock Market Explained

Stocks are equity investments that represent ownership in a company. Owning stock entitles the investor to part of that company’s earnings and assets. There are two types of stocks: Common stock and preferred stock. Stockholders have voting rights with common stocks, but no guarantee of dividend payments. However, preferred stocks provide no voting rights but typically guarantee a dividend payment. Stock ownership is recorded electronically and shares are held in street name¹ by brokerage firms and traded on a stock exchange.

The stock market is split into two main sections: The primary market and the secondary market. The primary market is when new issues are first sold through initial public offering (IPO). Institutional investors typically purchase most of these shares from investment banks. All subsequent trading goes on in the secondary market, where participants include both institutional and individual investors.

The two biggest stock exchanges in the United States are the New York Stock Exchange (founded in 1792) and the Nasdaq (founded in 1971). While each began as a U.S.-based exchange, both currently serve as international exchanges. Stock indexes serve as an indication of how the market is performing. There are four major indexes: The Dow Jones Industrial Average (the “Dow”), the Nasdaq Composite index, the Russell 2000, and the Standard & Poor’s 500 (“S&P 500”). The Dow is an index that measures the trading of 30 “blue chip companies” such as Apple, Johnson & Johnson, and GE. Created in 1896, it is the most watched stock index in the United States. The Nasdaq Composite primarily contains technology companies. The S&P 500 index was created in 1923 with a total of 500 large companies in it.

History of Investor Relations

The role of investor relations within an organization has evolved rapidly. The first reported U.S. public company was Boston Manufacturing Company, founded in 1814 in Waltham, Massachusetts. In order to fund expansion of this textile maker, the founder sold stock to 10 associates. These individuals received substantial returns on their investments, so it led to a new business model—the public company. Now public companies include many multibillion dollar entities that deliver goods and services around the world.

What Is Investor Relations?

Investor relations is a “strategic management responsibility that integrates finance, communication, marketing, and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation” (About NIRI n.d.). Typically, the work of an IRO is to communicate with a company’s current and potential investors. This is accomplished through direct and mediated communication. Investor relations is often considered the child of a marriage between public relations and finance (Mahoney 1990).

Another widely accepted IR definition is as a:

strategic corporate marketing activity, combining the disciplines of finance and communication, which provides present and potential investors with an accurate portrayal of a company’s performance and prospects. Conducted effectively, investor relations can have a positive effect on a company’s total value relative to that of the overall market and a company’s cost of capital. (Brown 1994)

Ultimately, IROs incorporate many elements of finance and communication that work in concert to market the company and its stock while increasing value in the long term. IR accomplishes this while operating within the prescribed framework set by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and other state and federal agencies. Given the strong potential IROs have to support a company and enhance a company’s stock price-to-earnings ratio, investor relations departments are found in most publicly traded companies.

According to the Financial Accounting Standards Board (FASB) (Golden and Kroeker 2013), a public company, also known as a public business entity, needs to meet any one of the following criteria:

(a) It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers) with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

(b) It is required by the Securities Exchange Act of 1934, as amended, requires rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

(c) It is required to file or furnish financial statements with a regulatory agency (foreign or domestic) in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

(d) It has (or is a conduit bond obligor for) securities that are traded, listed, or quoted on a financial or an over-the-counter market exchange.

(e) Its securities are not subject to contractual restrictions on transfer, and it is required to prepare U.S. generally accepted accounting practices (GAAP) financial statements (including footnotes) and make them publicly available on a periodic basis (e.g., interim or annual periods), pursuant to a legal, contractual, or regulatory requirement. An entity must meet all those conditions to meet criterion.

Ultimately, the act of becoming a public company allows the market to determine the value of the company through daily trading. Once a company goes public, it has to answer to its shareholders; there are specific rules and regulations that must be followed. Each of these will be explained later in this chapter, but for now, it is important to identify how investor relations has evolved.

Whether the company is publicly held or privately owned, shareholders require information to evaluate the efficacy of their investments. While a company must comply with what is mandated or required, there remains wide latitude as to what else to share, how much detail to volunteer, and when information should be disseminated. Ultimately, the communication style that a company chooses to adopt will have a huge impact on its reputation and its ability to attract and hold investors.

Investor Relations Departments

There are four main focuses for investor relations departments: valuation, disclosure, shareholder relations, and capital formation (Brown 1994).

With respect to valuation, IROs work to have the stock price reflect realistic prospects for the company and reasonable assessments by the marketplace. To accomplish this, IROs need to understand factors that can influence stock price and what drives value for investors. In addition, they should be able to articulate these factors to management and use the insight in strategic planning. In this role, they are responsible for managing expectations and perceptions while identifying and correcting misperceptions.

Disclosure refers to disseminating material as part of the investment process. This includes mandatory (those required by federal and state law, the SEC, and the various exchanges) and voluntary communications. IROs are responsible for accuracy, timeliness, and compliance. Both good and bad news needs to be communicated along with company developments that could have a material effect on investment decisions. There are two types of disclosures: structured and unstructured.

Structured disclosure refers to explicit information about a company’s operating results. This must be reported in a specific manner such as required by the SEC in Form 10-K (annual report), Form 10-Q (quarterly report), and Form 8-K (event reporting). The requirement of these specific forms from the SEC ensures a degree of consistency through the standardization of disclosure.

On the other hand, unstructured disclosure is not standardized and pertains to information that a company discloses at will. This disclosure is defined under the antifraud provisions of the 1933 Securities Act and includes materials such as press releases, letters to shareholders, advertisements, presentations, and conference calls. This type of disclosure can be concerning since the rules are less clear and are determined on an individual company level. Careful attention needs to be paid to ensure the proper treatment of material information and communication with insiders.

Material information pertains to knowledge that could influence an ordinary person to make a decision about stock. That means information that might influence an opinion to buy, sell, or hold a company’s stock. Determining what is material can be simplified using what Louis Thompson, past National Investor Relations Institute (NIRI) president called the “Five Minute Rule.” This takes into consideration that if something takes more than five minutes to discuss whether it is material or not, it probably should be disclosed (Cole 2004).

An insider is someone who is deemed to have material information prior to public disclosure of that information. An insider is legally mandated not to pass this information along to anyone with the purpose of influencing their trading the stock. Over the years, there have been several famous cases involving insider trading. One of the most famous was when ImClone’s founder instructed his friends and family to sell their stock when the company failed to receive U.S. Food and Drug Administration (FDA) approval for their drug (Overfelt 2010). This led to his arrest along with others, including television celebrity Martha Stewart, who acted on the inside information by selling about a quarter million dollars of the stock a day before the FDA decision was publicly announced.

The best approach is for investor relations departments to have a policy for what will be disclosed and how. The goal should be consistent, clear, and timely disclosure. More specifics about specific investor relations disclosures is included in Chapter 7.

Shareholder relations includes the care, attention, and efforts investor relations officers place on communicating with or nurturing relationships with investors. Relationship building is an important aspect of investor relations, so that is why it is common to see IROs with a background in public relations.

Capital formation pertains to the IROs role in ensuring that there is a market for the company’s securities and that capital is available at reasonable, competitive costs. Fair pricing of security shares is important to the company and the market. The process by which companies identify the percentage of shares available to investors is a frequent responsibility. Assisting in a company moving from private to public is another component IROs are heavily involved with (see Chapter 9).

The Early Days

From the 1800s to early 1900s, the novel idea of owning stock was alluring. Owing to the lack of oversight and other concerns in the Roaring Twenties, the Crash of 1929, which led to the Great Depression, rocked investor confidence. The Federal government’s response was to pass into law the Securities Acts of 1933 and 1934, which established the SEC. This government agency regulates and supervises the stock market to this day.

Next came the difficult years during World War II, followed by the flourishing economy in the post-World War II era of the 1950s when the recession ended and there was strong economic expansion. Veterans returned, entered the workforce, and the baby boom began. Companies rebuilt, expanded, and new technologies came into play. There were low interest rates on bonds and no inflation leading to the stock market seen as a good investment. In addition, there was an increase in mutual funds, pension funds, and insurance companies, along with higher numbers of individual investors trading on various stock markets.

This influx of individual investors led to a difficult paradox for companies. In years past, they did not need to pay attention to individual shareholders, especially those who held low numbers of shares, because most stockholders until then were the wealthy customers of investment banking and brokerage partnerships, of banks, trust departments, and investment counselors.

In fact, little effort was paid to individual shareholders who typically held their stock long-term without attending annual meetings. Now, with many shareholders owning fewer than 100 shares each, needs were changing. One big change was the sheer number of company shareholders who were also potential purchasers of company products.

In 1956, when Ford Motor Company went public, they asked underwriters to focus their sales efforts on buyers of 200 shares or fewer. The goal was to create a new pool of customers for Ford cars and trucks. The Ford initial public offering (IPO) was the largest in history at that time and the small shareowner strategy was a huge success. “People stood in lines outside brokerage houses to buy Ford stock, thus owning a piece of the company that still had an almost magical quality for the average American” (Hayes 1990, p. 36).

The Birth of Activism

All this interest in investing helped to push stock prices up and fuel the economy. However, these new shareholders saw themselves as entitled to a voice and wanted to be heard. This led to quite interesting annual meetings where these “owners” showed up and asked questions.

Activist investors were not new, but they were growing in numbers. In the United States, investor activism traces back to the 1932 annual meeting of New York City’s Consolidated Gas Company. Investor Lewis Gilbert was unhappy about the chairman’s refusal to recognize shareholder questions from the floor; so, along with his brother John Gilbert, he began buying stock, attending annual meetings, and asking questions of corporate management. This earned Lewis Gilbert the nicknames “The Talking Stockholder” and “the Corporate Gadfly” (Emerson and Lachman 1952).

Shareholders in the 1950s were determined to keep a close eye on the companies they invested in and the stock market as a whole. The Depression had shaken trust in both. Many new shareholders were activists for what they believed in (DiStaso 2015b). Their large numbers made them a force to be acknowledged. In 1952, there were 4.5 million family units owning common stock. They held 6.49 million total shares and included 4.2 percent of the total population (Origins of NIRI n.d.).

This new force was challenging management’s authority and their expectations of traditional shareholder behavior. This was an especially difficult time because management was typically unsure if they needed to take individual shareholders seriously. While management knew they needed them, they felt it was unlikely that individual investors would ever organize into a serious pressure group and w...

Table of contents

• Cover
• Half-title Page
• Title Page
• Copyright
• Dedication
• Contents
• Foreword
• Chapter 1 Investor Relations Background and History
• Chapter 2 Audiences for Investor Relations
• Chapter 3 Investor Relations and Corporate Reputation
• Chapter 4 Investor Relations Ethics
• Chapter 5 Emerging Issues in Investor Relations
• Chapter 6 Writing for Investor Relations
• Chapter 7 Corporate Governance and Investor Relations
• Chapter 8 Proxy Voting and the Investor Relations Officer
• Chapter 9 Investor Relations Events
• Chapter 10 Global Investor Relations
• Chapter 11 Risks, Corporate Crises, and Investor Relations
• Chapter 12 Measuring Investor Relations
• About the Authors
• Bibliography
• Index
• Backcover