Earlier this year, I wrote a blog post that recounted a discussion that ensued on #irchat regarding one of Rivel’s research findings in late 2009 regarding IR’s role in a company’s valuation.

An interesting discussion developed when Dan Dykens, CEO of Meet the Street and host of #irchat asked “What do you think about Rivel Research’s buy-side survey which suggests that the valuation differential between good and bad IR is 35%?”

This question stirred up quite a debate, especially since no one had access to the methodology or a definition of what constitutes “good” vs “bad” IR.  So the responses were based on the information we had.

Shortly thereafter, Brian Rivel, president of Rivel Research Group, the firm specializing in perception research for public companies posted the following comment:

Glad to see that this data sparked such a debate! One of our most popular findings, as you might imagine. Just as an FYI, the study goes on to define what IS superb IR, according to the buy-side. That result can’t be looked at in a vacuum. I would be happy to provide more flavor to anyone who is interested.

With that, I jumped at the chance and contacted him for an interview:

SJ: Let me begin by addressing something that has been getting a great deal of discussion lately. One of Rivel’s research findings last year dealt with IR’s role in a company’s valuation. There have been conflicting accounts or interpretations of the research; can you clear this up for us?

BR: Definitely. As you can imagine, this is one of our most popular findings as it really comes as close as you can to putting a tangible number on the value of IR. And that always sparks such a fervent debate. Last year we surveyed over 250 buy-side investors from various industries on, among other things, whether or not good IR has a meaningful impact on a firm’s valuation — nearly three out of four said they believe that good IR does have an impact.

We then asked for them to quantify that impact and what we found was quite compelling. IR can account for a total variance of 35% in a company’s valuation – ranging from a premium of 10% for “superb” IR to a discount of fully 25% for “poor” IR. This is notable because just three years ago when we asked the same question, buy-side investors estimated a discount of 15%, so the risk associated with poor IR is increasing, given the level of uncertainty out there.

SJ: Now that begs the question, what constitutes “superb” IR?

BR: Thankfully, we asked the buy-side this follow-up question as well, and what we discovered was while “superb” IR rests on the usual tenets of good disclosure and responsiveness and ample access to senior management, the one standout was transparency.

SJ: But wait, you mentioned disclosure and transparency. Aren’t they essentially the same thing or is there a difference?

BR: Actually there is a big difference in the eyes of the investor. Investment professionals define transparency as clear, unambiguous information through which companies articulate definitive strategic goals, why they are important and the drivers by which they will be achieved. In essence, it’s the clarity of message that brings forward key challenges, how they are being addressed and frank, forthright discussions of the company’s prospects … in good times and bad. That last part is quite important as we’ve seen in many of our custom projects. Being transparent when times are rough goes a long way and is genuinely appreciated by the investment community.

On the other hand, disclosure is simply providing data, metrics, operating figures, what have you, on the many facets of the company, typically in the financial realm, but market share, product development, etc. come into play as well. Normally, disclosure in itself does not provide any color or interpretation on management’s part.

So a company can provide mountains of data on their operations, but they fail to provide any discussion or insight into what it means now or in terms of future performance…for example, how they are connecting the dots between A and B (A being where we are now and B being where the company expects to be in the future). And I can’t stress enough the key to having transparent communications is openness, honesty and frankness.

SJ: I can already hear IROs buckling at the prospect of giving away more information since managements loathe giving away too much disclosure in the interest of their competitive edge. Have you found in your research what the perfect balance is between too much information and not enough, especially as it relates to earnings guidance?

BR: Interestingly, our research shows that the recent implosion of the markets has altered expectations about guidance. First of all, when asked to name the most important aspects of superb investor relations, guidance rarely makes the list. Secondly, guidance is not all about earnings. Relative to a set of five types of corporate insight, earnings guidance ranks fourth. What the investment community is looking for is qualitative insight on the strategy.  How are you going to execute your strategy to achieve the goals you have outlined?  They are saying “connect the dots for us.”

But to answer your question, we haven’t done a definitive study on such a balance since it really varies between types of companies, their sectors, etc. Anecdotally, I can tell you from many of our custom research studies that investors do understand the competitive nature of their business and are aware there’s a fine line between too much and not enough. So they get that. But what they prefer is a sufficient level of disclosure surrounded by a discussion on what management thinks about it. They don’t want volumes upon volumes of data they can’t use. They want management’s take on the data and how that translates into future financial performance. After all, managements theoretically have the best view of what’s going on in their company and their industry.

SJ: So, in a sense, you are saying management has to do more to appease the investment community, even if they think what they are giving is adequate?

BR: In a manner of speaking, yes that’s the case. But it gets back to the original question about IR and valuation. Since the IR program is almost always viewed as an extension of management, if a company wants that premium of 10%, then becoming a superb IR department means having to provide transparency in their communications. It’s not necessarily MORE information, rather, the right information and the right level of transparency…“this is our strategy, these are the key elements, this is some detail around those key elements and this is how we think this will produce future financial performance.”   Without it, you risk being judged on the poor side, and with the continued market malaise, why run that risk when detailed and transparent investor communications are entirely possible with the right amount of work on the company’s part?

SJ: Sounds like a prudent move, but I wonder if management balks at giving such insight in what is a heavily controlled Reg. FD world we’re living in nowadays.

BR: I’m sure there are many internal discussions (or debates, I should say) between the IRO and their management about this subject. But in the end, our research shows that transparency helps set the stage for management credibility, which is at the core of investment decisions today. Having credible senior leadership always tops the list of factors investors take into account when making decisions about a company.

Transparency is also an IR code word for education since now more than ever, educating the investment community is an imperative for IROs as preconceptions about a company’s investment attractiveness are challenged by new economic realities.

SJ: Thank you, Brian for enlightening us on this ever-fascinating topic of IR’s role in valuation. If you have an update to your research, please let us know.

BR: Thank you, Sheryl. I will be sure to that.

Related posts:

1. New Rivel Research: Buy-side Perspectives on Best Practice IR Websites
2. Best Practices for conducting one-on-one meetings with the buy-side
3. IR Best Practice: Get to know the Buy-Side
4. IR Community Weighs in on Valuation placed on Good vs. Bad IR programs
5. Transparency and next-generation reporting

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