I think she raises some interesting points in answering the question. So much so that I’d like to reinforce and provide my two cents from an IRO perspective on those points here.  I’ll also provide some suggested tactics IROs can use to foster relationships and gain credibility with investors, and ways to help them make informed investment decisions about your company.

Recommendations are typically issued after quarterly earnings.  This fact makes it difficult to determine how much the share price would have moved on the basis of the recommendation alone.

• While there are many factors that trigger investors to buy or sell, one would hope that quarterly financials would be seen in the context of the company as a whole – not just viewed as the only metric to base the company’s performance.
• IROs can help to ensure that financials are not the only factor in an investor’s decision to buy or sell shares of their company.  For example, companies need to effectively convey their investment proposition and the market opportunity of their business.  Having a comprehensive IR web site will help fill in the holes and should be current and up-to-date.  In addition, now more than ever, investors want to know the long-term strategy as well as the roadmap to achieve their business goals.  Lastly, communicating in good and bad times and consistently speaking with investors will help the company gain credibility.  When taken all together, all of the previously mentioned tactics will help ensure that investors are exposed to all relevant aspects of a company’s story so they can get the complete picture and make an informed investment decision.

How much do Fund Managers rely on analyst recommendations? This is tough to prove and Clare rightly states that “no fund manager with any sense would admit to relying solely on the recommendations of analysts to do his or her job satisfactorily”

• While this would be an interesting conversation, having this information in my opinion is a moot point.
• Companies have buy and sell recommendations issued on them all of the time. The key is to be in tune with how investors are making their investment decisions.  One way to do this is by establishing a rapport which means proactively reaching out to them.  The more often you speak with them, the better chance you have to establish a rapport.  Also, as the liaison between management and the investment community, regularly communicating with your investors will help you as the IRO become a credible source of information.  Being well versed in the company and the ability to answer tough questions as well as providing appropriate access to management when deemed necessary will help you foster a relationship with them.  Don’t forget, while it is important to be able to adequately answer questions, these conversations don’t have to be one-sided, and understanding how they make investment decisions is crucial to IR messaging and objectives. So go ahead and ask specific questions.

Good investment ideas come from equity salespeople – Clare cites a recent study conducted by hedge fund GLG Partners that argues that information gleaned from sales teams helps fund managers achieve better performance than recommendations directly from research departments.

• Clare makes an interesting point when saying this information is useful as it helps make the case for the company to cultivate a closer relationship with the sales team.  One opportunity to do this is, is during a roadshow when issuers can end up spending a lot of time with analysts.
• Referring back to my point in #2 where I recommend proactively reaching out to your analysts on a regular basis, will help pave the way as a relationship would already be in the works through regular contact with them.

Non-consensus recommendations – She also notes that certain issues should trigger a re-evaluation of how time is spent with analysts.  For example, she says “When there is disagreement between analysts about a stock, the recommendations of certain analysts are more likely to influence your stock price.  It should be no surprise that the GLG study found recommendations from large, global brokerage firms have more of an impact on stock prices than smaller brokerage firms.

• There is bound to be some differing opinions among analysts regarding your company.  And yes it is logical for analyst recommendations coming from larger brokerage houses to have more clout.
• However no matter what the recommendation is and whether it is coming from a large or small brokerage house, IROs should still regularly speak to analysts.  You have a right to ask your analyst to review the report.  You could even try asking them how they came up with their recommendation – but be prepared to be shut out as analysts oftentimes have complicated financial models that have taken many years to put together, so they aren’t likely to tell you their trade secrets.  That said, I adhere to the old adage “do not ask, do not get”, so in the very least I would ask for a sneak preview of their report before it is issued.  There are a few benefits to doing this i) it gives you a reason to contact them; ii) it gives you the opportunity to clarify anything misleading or blatantly erroneous in the report; and iii) it gives them a “fact” checker right from the source.

Analysts who don’t engage with investors – Another dilemma Clare highlights are “rogue” analysts who don’t engage with issuers -  IR people occasionally complain that investors ring up citing an analyst report the issuer isn’t on the distribution list for.

• I have not had a lot of experience with this issue – but it doesn’t mean it isn’t happening.
• If you get blindsided by this, get them to send you the report. Then let them know that you would like some time to review and you’ll get back to them.  This will give you some time to investigate the report and the author.  In any case, whether they have given a buy or sell recommendation you should reach out and introduce yourself.

With the many places that investors can access to get information about your company, it is difficult to determine whether investors put a lot of stock (no pun intended) on analyst recommendations.  That said, IROs should make it a point of knowing what is being said by this important audience.  Whether there is a buy, sell or hold recommendation on the company, the IRO should take it upon themselves to proactively reach out and foster a working relationship with them.  The tactics I have previously outlined can help IROs foster relationships and gain credibility with investors and help them make informed investment decisions about your company.

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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.

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The session only runs an hour so Dan asks one question every 15 minutes which gives us time for usually about three to four questions.  He does a fantastic job of stimulating the conversation by asking thought provoking questions which creates a lot of debate among the experienced IR professionals who participate each week.

In conjunction with findings released in December 2009 from Rivel Research Group on the premium the buy-side in the U.S. place on “superb” versus “poor” investor relations (IR), Dan started this particular #irchat session by asking “What do you think about Rivel Research’s buy-side survey which suggests that the valuation differential between good IR and bad IR is 35%?”

RIVEL’S FINDINGS

• Surveyed 250 members of the US buy-side on how they make investment decisions were initially asked “Does good IR impact a company’s valuation?”  Of the respondents, 74% stated that yes, good IR makes a difference. 
• The respondents were then asked how much as a percentage of a company’s valuation does superb IR contribute?  The median response was 10% for good with a 25% discount attributed to poor IR with Superb IR impacting a company’s valuation by a total of 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.  What follows is an overview of how the chat unfolded around the question:

• The high number of people surveyed (250) gives this finding some credibility and can be considered statistically relevant: 
  - Although a few refuted the study as it was only based on what the buy-side constitutes as good vs. bad (again not sure how these parameters were defined) so the findings were viewed as more conversational/anecdotal as opposed to scientific.
  - However, one thought that it is okay to gather anecdotal comments about how IR is measured, but when speaking about ROI, specific inputs should be defined.
  - Another wanted to know what the breakout of the 35% impact on a company’s valuation among buy-side based on investment style i.e. value, growth, momentum, hedge fund and rapid traders.

• In spite of whether it was felt the study was credible or not, some had mixed feelings about the findings and how IR should use this information:
  - One stated that ascribing more of a discount to bad IR makes senses as it is similar to how word of mouth can impact a reputation (think of bad experience regarding service related issues i.e. Rogers, Bell) and in this case if a portfolio manager has a negative experience with IR (even if it is only once), that may taint their view of the company for good.
  - If research is correct/accurate, it is a powerful statement being conveyed and should be presented to uncooperative executive teams, as the larger 25% underlines the need for stronger communication with the buy-side.

The chat then turned to a conversation about “What constitutes good IR?”

• A company builds credibility by educating and communicating in good times and in bad. 
• Tailored targeting: contacts approached and the number of successful connections – with good IR targeting improves over time.
• Standard metrics such as liquidity, number of meetings, changes in shareholder positions and perception reports to name a few.
• Providing more detail and transparency around investment story as well as more access to senior management (not just CEO, CFO but other key players i.e. product, engineering etc.)

Coincidentally, another article in the Economic Times entitled “Companies with Good IR can command premium” was issued within a few days of the Rivel findings.  The survey covered 24 fund managers based in India and found:

• 29% of investors would pay a premium of anywhere between 10- 15%, and about 16% of institutional investors would pay a premium of 5-10% on share prices of those companies with a good IR program in place.
• Drilling down, the study found that institutional investors believed the most important quality of a firm’s IR is credibility of management and the IRO.

In spite of the differing sample sizes from both studies, the findings indicate that good IR practices are being recognized by investors.  While these studies are not considered scientific, in my opinion, anecdotal commentary is still useful information to have from an IR point of view.  If nothing else, it may make IR professionals stop and think about their interactions with shareholders and to either keep on doing what they are doing or make the necessary changes to enhance their relationship with the investment community.

Related posts:

1. Rivel Research: Transparency Key Factor in Buy-side Definition of Superb IR Earlier this year, I wrote a blog post that recounted...
2. IR Best Practice: Get to know the Buy-Side Recently, I responded to a discussion on LinkedIN entitled “Required...
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Dealing with the buy-side has been pushed to the top of the priority list for IROs – especially since there has been a slow decline in the number of sell-side analysts over the past few years. This coupled with the spotlight it has been given at this year’s NIRI conference with a panel discussion entitled “How the Buy and Sell Side Trade your Stocks Today” (and the fact that there was standing room only) along with the discussion I outlined above has prompted me to share some ideas for IROs to consider when dealing with the buy-side.

THE IMPORTANCE OF IR

The IRO is the liaison between management and the investment community so it is essential a rapport is established early on. One way to do this is to become a credible source of information which means being well versed in the company and having the ability to answer their questions. Being a  source of valuable information is very important as a recent study of the buy-side by Rivel Research suggested, IR plays a role in their investment decisions, as they “uncovered that portfolio managers and buy-side analysts attribute a premium of 10% of a company’s valuation to good investor communications and a discount of 15% to bad investor communications”.

The research previously cited proves that  how well the company conveys itself to the investment community is taken into consideration and if an IRO can prove early on that they are capable of answering questions, they will potentially be the first person that the portfolio manager calls for information.

Keep in mind that, while it is important to be able to adequately answer questions, these conversations don’t have to be one-sided, and understanding how they make decisions to buy or sell is crucial to IR messaging and objectives. So go ahead and ask specific questions.

BUYING

Idea generation:
• What’s the most successful way to get you to look at a company?
• How reliant are you on sell-side research and sell-side ideas? Do sell-side analysts or equity sales play a large role in idea generation?
• How do you decide which analysts you think have the most credibility? (external ratings, internal research team evaluations, track record, etc)

Criteria (fundamentals, metrics, model, sector, management)
• What is your investment process?
• What is the first thing you look at? Fundamentals, management?
• Are there key metrics that you follow? What are they and why?
• What is the proportion of your holdings in large-cap, mid-cap and small-cap?
• Do you meet management of every company in your portfolio? How high do you rank access to management in your investing process? When you meet with management, do you strongly prefer one-on-one to group meetings? Does it depend whether the stock is one of your core holdings?

SELLING
Triggers
• What are the key triggers that lead you to a decision to sell?
• What is your process internally for selling? Is it the same as the buy process, does it need to go to a committee?

GENERAL
• What is the average time you hold a stock?
• Does the quality of IR play a role in your investment decisions?
• What are you expectations from investor relations and what have you found to be world-class IR practices?
• Do you go to dealer-hosted conferences and take meetings there?
• Do you prefer to be contacted by the company directly to offer a meeting, or are you just as happy to have a dealer set it up and host?
• Do you find investor days valuable, and what do you expect from them?
• Do you encourage or want issuers to provide earnings guidance? If not, any other type of guidance, given the current environment for extreme volatility if targets are missed, even by small amounts?
• Has the current economic environment changed your approach to investing; are you analyzing different fundamentals e.g. are you paying more attention to the balance sheet now then you did before?

Traditional Media and Social Media
• Do you talk to reporters or go on financial shows to talk about your thoughts on a company or investment ideas? Do you see any value in that?
• Do you ever check out chat rooms about companies?
• Does social media like blogs or Twitter in any way affect how you get or share information professionally?
• Do any of the companies you follow use Twitter?
• Do you read financial blogs like SeekingAlpha.com or follow investors on social networks?

I would like to thank some people (who asked not to be named) from the Ontario Chapter of CIRI who helped me compile these ideas.  We recognize that there may be some additional areas to be included, but wanted to keep it to buying and selling.

As the number of sell-side analysts continues to decrease, interacting more with the buy-side has been pushed to the top of the priority list for IROs. Successfully communicating a company’s story is highly valued in their eyes. Becoming a credible source of information and establishing a rapport will foster two-way communication that will benefit both parties – PM’s will be more apt to call if they know they will get valuable information by calling the company directly and IR professionals will be given the opportunity to gain an understanding of how and why decisions are made to buy or sell which is crucial to IR messaging and objectives.

Related posts:

1. Rivel Research: Transparency Key Factor in Buy-side Definition of Superb IR Earlier this year, I wrote a blog post that recounted...
2. Buy-Side seminar points to the web and social media as prime channels of communication I attended an interesting CIRI (Canadian Investor Relations Institute) round-table...
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