Running an Effective Investor Relations Department E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 454

Veröffentlichungsjahr: 2010

Beschreibung

The ultimate guide to investor relations Your one-stop resource for everything pertaining to your company's dealings with the investment community, Running an Effective Investor Relations Department provides investor relations professionals with essential day-to-day information. From creating and properly communicating a company's investment story, to dealing with both the sell side and buy side of the investment community, to providing guidance, and the form and frequency of that guidance, this authoritative resource covers it all. * Addresses every possible area of the investor relations profession * Includes chapters covering disclosure, forward-looking statements, guidance, event management, and twenty other topics * Other titles by Bragg: The Vest Pocket Controller, Accounting Best Practices, Sixth Edition, and Just-in-Time Accounting, Third Edition Practical and thorough, this book offers the world-class guidance you need to effectively manage your investor relations department.

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

About the Author

CHAPTER 1 - Managing Investor Relations

WHY HAVE AN INVESTOR RELATIONS DEPARTMENT?

INVESTOR RELATIONS OBJECTIVES AND GOALS

INVESTOR RELATIONS TOOLS

INVESTOR RELATIONS BUDGET

FLOAT MANAGEMENT

MANAGING BAD NEWS

RESPONDING TO RUMORS

SUMMARY

CHAPTER 2 - Investor Relations Officer Position

KEY ASPECTS OF THE IRO POSITION

IRO JOB DESCRIPTION

INVESTOR RELATIONS TEAM

IRO AS MANAGEMENT REPRESENTATIVE

SUMMARY

CHAPTER 3 - Creating the Company Story

CREATING THE STORY

PACKAGING THE STORY

STRATEGIC CREDIBILITY

CLARIFYING AND MITIGATING RISK

COMPANY REPUTATION

MATCHING THE COMPANY TO THE STORY

DURATION OF THE STORY

COORDINATION WITH PUBLIC RELATIONS

SUMMARY

CHAPTER 4 - Event Management

CONFERENCE CALL

ROAD SHOW

NON-DEAL ROAD SHOW

ANNUAL MEETING

PLANT TOUR

ANNUAL ANALYST MEETING

ANALYST AND INDUSTRY CONFERENCES

PODCAST DISSEMINATION

VIDEO DISSEMINATION

BLOG DISSEMINATION

EVENT DISCLOSURE ISSUES

PRACTICING FOR EVENTS

SUMMARY

CHAPTER 5 - Public Communications

CONSTRUCTING A PRESS RELEASE

DEALING WITH THE MEDIA

DEALING WITH ELECTRONIC MESSAGE BOARDS

INVESTOR RELATIONS ADVERTISING

SUMMARY

CHAPTER 6 - Publications

FACT SHEET

ANNUAL REPORT

PRODUCT PIPELINE REPORT

COMPANY-PAID RESEARCH REPORTS

INDEPENDENT RESEARCH REPORTS

WELCOME KIT

VIDEOS

OTHER PUBLICATIONS

INFORMATION TRACKING SYSTEMS FOR PUBLICATIONS

LEGAL LIABILITY

SUMMARY

CHAPTER 7 - Investor Relations Web Site

BASIC INVESTOR RELATIONS WEB SITE

INTERMEDIATE INVESTOR RELATIONS WEB SITE

ADVANCED INVESTOR RELATIONS WEB SITE

WEB SITE LAYOUT

HYPERLINK LIABILITY

SAMPLE WEB SITES

SUMMARY

CHAPTER 8 - Management Discussion and Analysis Section

MD&A REPORTING REQUIREMENTS

SEC GUIDANCE

EXAMPLES OF ENHANCED MD&A DISCLOSURE

A CASE FOR FULL DISCLOSURE

SUMMARY

CHAPTER 9 - Disclosure

FORM 8-K

DISCLOSURE OF NON-GAAP INFORMATION

REGULATION FD

DISCLOSURE POLICY

DISCLOSURE PROCEDURE

ENSURING COMPLIANCE WITH DISCLOSURE RULES

DISCLOSURE DURING AN INITIAL PUBLIC OFFERING

SUMMARY

CHAPTER 10 - Forward-Looking Statements

BASIS FOR CLASS ACTION LAWSUITS

PRIVATE SECURITIES LITIGATION REFORM ACT

FORWARD-LOOKING STATEMENTS

LEGAL LIABILITY FOR PAST STATEMENTS

SUMMARY

CHAPTER 11 - Providing Guidance

WHETHER TO PROVIDE GUIDANCE

FORM OF GUIDANCE ISSUED

FREQUENCY AND TIMING OF GUIDANCE

AGGRESSIVENESS OF GUIDANCE

GUIDANCE POLICY

SUMMARY

CHAPTER 12 - Dealing with the Sell Side

ANALYST’S PERSPECTIVE

FINDING THE RIGHT ANALYST

DEALING WITH ANALYSTS

NEGATIVE ANALYST REPORT

DEALING WITH BROKERS

PUMP AND DUMP

DEALING WITH INVESTMENT BANKERS

DEALING WITH SELL-SIDE SPECIALISTS

SUMMARY

CHAPTER 13 - Dealing with the Buy Side

TYPES OF INVESTORS

DEALING WITH INSTITUTIONAL INVESTORS

TRAVEL REQUIREMENTS FOR MEETINGS WITH INSTITUTIONAL INVESTORS

DEALING WITH INDIVIDUAL INVESTORS

DEALING WITH INVESTMENT CLUBS

DEALING WITH FOREIGN INVESTORS

INVESTOR PRESENTATION

MANAGING A PRIVATE INVESTMENT IN PUBLIC EQUITY

ACCREDITED INVESTOR

DIVIDEND REINVESTMENT

DIRECT STOCK PURCHASE PLANS

SUMMARY

CHAPTER 14 - Dealing with Credit Rating Agencies

CREDIT RATING AGENCY RELATIONSHIP

SUMMARY

CHAPTER 15 - Dealing with Short Sellers and Activist Investors

HOW SHORT SELLERS OPERATE

HOW TO HANDLE SHORT SELLERS

MONITORING SHORT SELLERS

DEALING WITH ACTIVIST INVESTORS

SUMMARY

CHAPTER 16 - Dealing with the Board of Directors

IRO AND THE BOARD OF DIRECTORS

INVESTOR RELATIONS BOARD PACKET

SUMMARY

CHAPTER 17 - Major Stock Exchanges

LISTING PROCESS

AMERICAN STOCK EXCHANGE

OVERVIEW OF THE NASDAQ

NASDAQ CAPITAL MARKET

NASDAQ GLOBAL MARKET

NEW YORK STOCK EXCHANGE

COMPARING THE STOCK EXCHANGES

SUMMARY

CHAPTER 18 - Monitoring the Market

MONITORING THROUGH INTERNET SERVICES

MONITORING THROUGH INDIVIDUALS

SURVEYING INVESTORS

LOCATING INVESTORS

MONITORING THROUGH A STOCK SURVEILLANCE SERVICE

MONITORING THROUGH A STOCK TRANSFER AGENT

BLOOMBERG TERMINALS

ELECTRONIC MESSAGE BOARDS

ACTIVITY CAUSED BY TRADING STRATEGIES

SUMMARY

CHAPTER 19 - Blue Sky Laws

BLUE SKY LAW REQUIREMENTS AND IMPLICATIONS

BLUE SKY ADVICE FOR THE IRO

CHAPTER 20 - Proxy Solicitations

PROXY SOLICITATION CONCEPTS

ONLINE PROXY VOTING

PROXY DISTRIBUTION PROCESS

NYSE RULE 452

SUMMARY

CHAPTER 21 - Dividends and Stock Buy-Backs

TRANSITION TO A DIVIDEND

DIVIDEND POLICY

STOCK BUY-BACK ALTERNATIVE

SEC CONDITIONS ON STOCK BUY-BACKS

DISCLOSURE OF A STOCK BUY-BACK PROGRAM

ODD-LOT SHAREHOLDINGS

SUMMARY

CHAPTER 22 - Outsourcing Investor Relations

SKILL SET OF AN INVESTOR RELATIONS CONSULTANT

MANAGING THE CONSULTANT RELATIONSHIP

NATIONAL INVESTOR RELATIONS INSTITUTE

SUMMARY

CHAPTER 23 - Investor Relations Metrics

INTERNAL AND FINANCIAL METRICS

PEER METRICS

COMPANY-SPECIFIC METRICS

METRICS CONSISTENCY

EXPLAINING RESULTS

SUMMARY

Index

Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bragg, Steven M.

Running an effective investor relations department: a comprehensive guide/ Steven M. Bragg. p. cm.

Includes index.

ISBN 978-0-470-63030-3 (cloth); 978-0-470-64253-5 (ebk); 978-0-470-64254-2 (ebk); 978-0-470-64255-9 (ebk)

1. Corporations—Investor relations. 2. Corporations—Public relations. I. Title. HD2 744.B .2—dc22 2010004699

Preface

INVESTOR RELATIONS IS AN extremely complicated activity, because it requires an intensive level of communications with an unusually broad range of constituencies—analysts, brokers, investors, investment bankers, credit rating agencies, and the board of directors. The type of communication used is broad, requiring considerable skill in producing a multitude of written documents, Web site pages, press releases, conference calls, road shows, and other meetings. However, these communications are tightly controlled by government disclosure requirements that could land a company in a great deal of trouble if it violates them.

Running an Effective Investor Relations Department: A Comprehensive Guide was designed to assist the investor relations professional in creating a message for the investment community, navigating through the various constituencies, handling many forms of communication, and knowing how to operate within government disclosure guidelines. The first two chapters address the management needs of the investor relations function, covering the goals and objectives of investor relations, how to budget for it, several specific management issues, and how to build an investor relations officer (IRO) job description.

Chapters 3 through 7 address every aspect of communications with the investment community. They cover how to create a viable company story, as well as how to conduct a road show, conference call, and annual meeting. There is also a lengthy discussion of the proper formatting of a press release, and how to write a fact sheet, annual report, and many other reports. Chapter 7 specifically addresses the various elements of an investor relations Web site and refers the reader to a number of company sites that have taken the presentation of investor relations information to a high level.

Chapters 8 through 11 cover multiple aspects of disclosure rules. Chapter 8 reveals the requirements for management discussion and analysis (MD&A) reporting, while Chapter 9 covers Form 8-K event reporting, Regulation Fair Disclosure, and disclosure compliance policies. Chapter 10 addresses the origins of class action lawsuits, as well as the proper way to handle forward-looking statements. Chapter 11 discusses the reasons why guidance is used, as well as its format and timing, and the proper level of aggressiveness to be communicated.

Chapters 12 through 18 cover the various investor relations constituencies—the buy side, sell side, credit rating agencies, board of directors, and short sellers. These chapters primarily describe the nature and needs of each constituency and how to deal with them. Special topics are also addressed, such as the requirements for being an accredited investor, how to handle short sellers, the fee structures and requirements of the various stock exchanges, and how to monitor the markets.

Chapters 19 through 23 cover a broad range of miscellaneous topics. Chapter 19 addresses blue sky laws, while Chapter 20 shows how to conduct both traditional and electronic proxy solicitations. Chapter 21 discusses the intricacies of dividends and stock buy-backs, while Chapter 22 covers how to outsource a variety of investor relations activities. Finally, Chapter 23 reveals a broad range of metrics that can be used to measure a company’s investor relations activities, as well as its performance for presentation to outside investors.

Taken as a whole, Running an Effective Investor Relations Department is intended to be the daily reference source for the investor relations professional.

About the Author

Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in Economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books:

Accounting and Finance for Your Small Business

Accounting Best Practices

Accounting Control Best Practices

Accounting Policies and Procedures Manual

Advanced Accounting Systems

Billing and Collections Best Practices

Business Ratios and Formulas

Controller’s Guide to Costing

Controller’s Guide to Planning and Controlling Operations

Controller’s Guide: Roles and Responsibilities for the New Controller

Controllership

Cost Accounting

Cost Reduction Analysis

Essentials of Payroll

Fast Close

Financial Analysis

GAAP Guide

GAAP Policies and Procedures Manual

GAAS Guide

Inventory Accounting

Inventory Best Practices

Investor Relations

Just-in-Time Accounting

Management Accounting Best Practices

Managing Explosive Corporate Growth

Mergers & Acquisitions

Outsourcing

Payroll Accounting

Payroll Best Practices

Revenue Recognition

Run the Rockies

Running a Public Company

Sales and Operations for Your Small Business

The Controller’s Function

The New CFO Financial Leadership Manual

The Ultimate Accountants’ Reference

The Vest Pocket Controller’s Guide

Throughput Accounting

FREE ONLINE RESOURCES BY STEVE BRAGG

Steve Bragg issues the Accounting Best Practices podcast, which is available on iTunes and at www.accountingtools.com.

CHAPTER 1

Managing Investor Relations

THE WORK OF THE investor relations officer (IRO) centers on communicating the company’s current and potential market value to investors. IROs achieve this by targeting a specific set of goals and using a broad range of tools to attain them. They must also be conversant with the methods for constructing a viable investor relations budget. Furthermore, proper management of bad news defines the character of the IRO, and is a key driver of investor faith in a company. All of these topics, and more, are addressed in this chapter.

WHY HAVE AN INVESTOR RELATIONS DEPARTMENT?

A public company is not required to have a public relations department at all. There is no legal requirement to engage in any communications with the investment community, outside of the required SEC filings. However, when there is no investor relations function, investors must rely solely on media, Internet, and SEC reports, which are all based on historical information or sometimes on conjecture. With this limited pool of information, investors are less inclined to acquire a company’s stock, and will certainly not bid it up above the average market valuation of the peer group against which the company is usually compared.

Given this lower stock price, a company’s cost of capital tends to be higher, since it will obtain fewer funds per share sold. Also, without strong demand for a stock, its price will tend to be more volatile, with many upward and downward transactions over short periods of time. Further, without a consistent investment message being promulgated by a company, short sellers will be more inclined to feed erroneous information into the marketplace in order to trigger short-term price slides from which they can earn profits.

A low stock price will also attract hostile takeover bids. A case can be made that management’s primary objective is to obtain the highest possible stock price for investors, so it should welcome even a hostile tender offer. The problem is that the potential acquirer will undoubtedly offer a price below what the company could have obtained if it had actively worked to achieve a higher stock price!

Thus, the key reason for building an investor relations department is to maximize the company’s market value. The IRO does this by continually communicating a company’s unique value proposition to the investment community, and specifically through the goals noted in the next section.

INVESTOR RELATIONS OBJECTIVES AND GOALS

The first step for the IRO in creating an investor relations department is to determine its objectives and supporting goals. The IRO should be very clear about these issues in order to avoid wasting resources in the pursuit of other activities.

Ultimately, the only objective of the investor relations function is to maximize a company’s market value. By doing so, the company can obtain the maximum amount of cash in exchange for the fewest number of shares. Also, a strong stock price will keep away hostile takeovers, because the company is too expensive to buy.

IROs should therefore direct considerable attention to the goals that support higher market value:

• Alter perception of the company. If a company has historically been compared to a peer group whose valuation multiples are low, then the IRO will have a difficult time increasing the stock price to a level above that of the peer group. One solution is to reposition the company story to align it with a different peer group whose multiples are higher.

• Increase analyst coverage. The opinions of analysts carry considerable weight with investors, so obtaining coverage from a moderate number of analysts is a key objective for the IRO. Favorable analyst reports will very likely increase average sales volume, which, in turn, tends to drive up the stock price.

• Increase geographic coverage. If a company’s stockholders are limited to a few geographic areas, then it does not take long before everyone who wants to hold the stock is already doing so. This results in reduced stock trading and minimal upward pressure on the stock price. The IRO can avoid this by scheduling road shows in new regions to meet with an entirely new group of analysts, brokers, institutional investors, and retail investors.

• Reduce stock price volatility. If there are institutional investors who constantly buy and sell large blocks of company stock, then the stock price may swing considerably. Volatility is not a desirable condition, since it drives away some investors and attracts short sellers. To reduce volatility, the IRO can work on attracting retail investors, who hold smaller blocks of stock and tend to retain their holdings longer.

• Manage existing investors. If current investors sell their holdings, then the increased supply of stock will likely cause a price reduction, as well as increased price volatility. The IRO can reduce this risk by generating a high level of communication with them, using one-on-one meetings and newsletters. The result should be longer-term retention of investors.

Clearly, the IRO must delve into a broad array of activities to achieve a high market value. The tools available to reach this objective are described in the next section.

INVESTOR RELATIONS TOOLS

We have established that the primary investor relations objective is to maximize a company’s market value. Before attempting to enhance the price, we must first determine what factors influence it. Two key factors are the condition of the general economy and the condition of the industry in which a company competes. Neither one can be altered by specific company actions, which means that a stock’s price will, to some extent, fluctuate irrespective of any investor relations activities. In addition, a stock’s price will be governed by a company’s operating and financial results, its strategic direction, and the quality of its management team. The IRO can do a great deal to favorably present these later items to the investment community using the tools described in this section.

IROs have a broad array of tools at their disposal, which can be categorized as basic, intermediate, and advanced tools. A basic tool is one needed to accomplish the basic investor relations goals, while more advanced ones are layered on top of the basic tools to achieve the highest possible level of communications with the investment community. The basic tools are as follows:

• Annual report. The IRO is expected to manage the creation of an annual report that shows a company’s results for the past year and explains its goals and future prospects. A more basic variation on this report is the wrap report, which is the annual SEC Form 10-K, accompanied by a letter from the chief executive officer. The wrap report is increasingly common, but conveys no investment message to stockholders.

• Annual meeting. The IRO is responsible for organizing the stockholder annual meeting, at which stockholders vote for a board of directors. The IRO can greatly expand on this minimal agenda by including manager presentations, additional decisions to be voted upon, and question and answer sessions.

• Proxy solicitation. The IRO is responsible for issuing the annual proxy solicitation, in which the company asks investors to vote for a slate of candidates for board of director positions, and possibly a variety of other motions involving corporate governance.

These basic tools achieve only the most modest level of communication with the investment community. The proxy solicitation and annual meeting are designed to fulfill legal requirements, rather than to enhance communications, while the annual report tends to be a dry recitation of historical facts. Thus, the IRO should use an additional set of intermediate tools to engage in a more active level of stockholder communications:

• Press release. A key IRO tool is the press release. This is a brief summary of information about a key company event, such as an acquisition or a major contract award. It is issued through a press release distribution service. The IRO may choose to also issue the same information through a Form 8-K filed with the SEC.

• Web site. The investor relations section of a company’s Web site is capable of imparting an enormous amount of quality information to investors. If properly constructed and maintained, it can be the primary source of investor information.

• Fact sheet. This is a two- to four-page document that lists the essential facts about a company, including its key customers, managers, recent press releases, and mission. The fact sheet can be posted on the company Web site and is also a useful document to bring to external meetings of all kinds as a handout.

• Reports. The company Web site can include an offer for any site visitor to sign up for a variety of reports, such as new product notices, product pipeline reports, management newsletters, and earnings releases.

• Speech transcripts. If a company officer makes a major speech or presentation, then the investor relations staff can record it, have it transcribed, and post it on the company Web site.

• Advertising. An advertising campaign can introduce a company to an entirely new group of potential investors, though it can be expensive in relation to the number of new stockholders obtained. It is not an effective tool for smaller firms with limited investor relations budgets.

These intermediate-level tools are primarily designed to create new information and present it passively for consumption by the investment community. However, an additional level of activity is needed to bring the company face to face with investors and analysts. This requires much more personal involvement by the senior management team, since management must be involved in the presentations. Also, the company is (in some cases) paying for meeting rooms and meals for all participants, which can involve a considerable expense. The advanced tools are as follows:

• Road show. The most effective of the advanced investor relations tools is the road show. This is usually a series of meetings in which the CEO, CFO, and IRO present the company to a variety of audiences. The expense of an ongoing series of road shows can be considerable, but it results in the best possible face-to-face contact with the investment community.

• Conference calls. It is standard practice to schedule a conference call immediately following the release of a company’s quarterly 10-Q report. During this call, company officers discuss the earnings release, and usually allow some time to field questions from attendees.

• Investor day. The company invites investors and analysts to a formal series of presentations by company managers. This may be located near the investment community, or at a major company location (in which case a facility tour is expected).

All of the tools noted in the preceding bullet points are described in more detail in Chapters 5, 6, and 7 on public communications, publications, and Web sites.

Once an IRO has set up the most appropriate mix of tools to achieve the objective, the IRO should also create a measurement system to evaluate the effectiveness of those tools. Examples of appropriate metrics are changes in the stock price, the number of requests for financial information, changes in the mix of investors, the number of analysts following the company, trading volume, and the price/earnings ratio in comparison to the market or a peer group. Investor relations metrics are addressed in Chapter 23.

INVESTOR RELATIONS BUDGET

When constructing a potential budget for investor relations, the best approach is to build it in layers that are based on the need for a variety of activities. The bottom-most layer of the budget should always address entitlements. These are the bare-minimum activities required of any public company. The key item is SEC compliance, where a company must pay for adequate attorney, auditor, and valuation services to file the required number of SEC reports within the designated timelines. The cost of this item may be located within the budget of the accounting department, rather than the investor relations budget—but it has to be addressed somewhere.

The minimum-level investor relations budget should also include a salary sufficient to retain the services of a qualified IRO. A company may try to reduce costs by hiring a clearly unqualified person or by promoting a low-level manager into the job. Since the IRO is the primary interface between the company and the investment community, the company is clearly stating how poorly it values investors! If the IRO is of exceptionally low quality, investors will either sell off their holdings or find alternative means of communicating with the company through other managers.

A minor item that is generally included in the bottom layer of the budget is the cost of buying back stock from excessively small stockholders. There are significant proxy costs associated with each share held, including the printing and mailing of a proxy statement and the tallying of annual votes for directors. Depending on the proxy cost per share and the market price per share, it may be cost-effective for a company to offer to buy back its stock from smaller stockholders. For example, if the total proxy cost for a single stockholder is $20 per year, and the market price of the stock is currently $4, then the IRO can reasonably conclude that buying back the holdings of all stockholders owning five shares or less will result in full payback within one year.

The next layer of the budget is for the minimum amount of investor communications required to keep the investment community aware of the company. This usually includes the cost of responding to investor inquiries, a stockholder hotline, an annual report, a Web site, periodic press releases describing major events, conference calls, and occasional media contacts. Many companies budget only to this level and stop.

At the top layer of the budget is active communications, such as road shows, investor days, and a plethora of reports that are pushed out to a mailing list of investors, analysts, and media contacts. This level of budgeting can be expensive, but also can propel a company into the upper ranks of public companies in terms of investor perception.

An additional defense for a fully funded investor relations department is that the investment community may extrapolate the performance of this department to how well the entire company is run. If the company handles its customers as well as its treats its investors, then it would appear reasonable to an investor that the company’s customer base must be satisfied and loyal. When the investment community’s sole point of contact is the investor relations staff, it is not unreasonable for them to make this assumption. Thus, a small but well-funded investor relations department can have an inordinate impact on investors.

The layering approach to the investor relations budget is the most logical and easily defended budgeting technique, since it directly ties expenditures to the performance of a specific set of activities. There are other methods for setting the budget, such as a percentage of the total company market capitalization, or a cost per stockholder. However, these methods are far too general, and cannot be tied to specific performance. Also, they fluctuate too much—for example, a company’s market capitalization can change so much from year to year that the IRO could see her budget, to which it is tied, slashed or doubled from year to year.

There is a defensible high-level justification for an investor relations budget, which is to compare it to the cost of a line of credit or an investment banking relationship. Both activities are also used to acquire funds, so one could make the case that the investor relations budget should be calculated as a percentage of the incremental funds obtained through stock sales, and then compared to the same calculation for these other funding activities. However, a company does not go to the capital markets every year to obtain funds, so there will be years when this comparison will not be functional.

When initially budgeting for investor relations, the IRO should set expectations by pointing out that the program will have little impact in the short term. Investor relations activities require a cumulative long-term effort, with multiple “touches” of the investment community, before a discernible increase in investor interest becomes evident. In the short term, other effects—such as economic downturns, political disturbances, and currency valuation changes—will have such a large impact that they overwhelm the initial effects of a nascent investor relations program. Instead, there must be a long-term, consistently applied budget. Also, there is very little long-term residual value to investor relations activities if they are halted. Even if such a program has been in existence for years, its cumulative effect will vanish once it is stopped. Thus, a public company must permanently commit to a consistently applied and well-funded investor relations department.

FLOAT MANAGEMENT

The primary objective of the IRO is to maximize a company’s market valuation. A key driver of this valuation is the number of shares available for trading by the investment community (commonly known as the float). If there is a large float, then investors can easily move in and out of stock positions with a minimal impact on the stock price. As noted in this section, there are a number of actions the IRO can take to properly manage the float.

When a company is in need of cash and has a choice of obtaining it through either debt or equity, the IRO should point out to the chief financial officer that increasing the amount of stock outstanding will increase the float (once it is registered). This is especially important if there is currently a small float, since the proportional impact on the float would be significant. When the IRO takes this position, she will likely be arguing against the advice of the CFO, who will note that debt is less expensive than equity, and that issuing more stock will drive up the cost of capital. The CFO is correct in this reasoning, but it is more important for a public company with minimal float to increase that float than it is to maintain a low cost of capital.

The IRO should also be active in having stock registered. If a public company privately issues stock, such as through a Private Investment in Public Equity (PIPE), then those shares cannot be publicly traded until the company files a stock registration document, which must be approved by the SEC. This can be a torturous process, since the SEC may issue multiple iterations of comment letters prior to approval, requiring a company to modify its application and quite possibly other public documents that it had previously filed. The registration process is very expensive and may require well over three months to complete. Despite these obstacles, the IRO should make continual efforts to register stock that cannot currently be publicly traded, in order to increase the float.

If the number of unregistered shares is relatively small, then the registration cost will be prohibitive. In this case, the IRO should wait for additional private stock placements to increase the total number, until such time as the registration process will no longer be cost-prohibitive on a per-share basis. Some private stock placement agreements will require best efforts for a stock registration within a certain period of time, which may force the IRO to file registration documents for a small amount of stock.

If the IRO is successful in having a large amount of privately placed stock registered, she will now be at risk of having the holders of these newly registered shares dump their holdings on the market. If they do so, the sudden overwhelming supply of stock will put significant downward pressure on the stock price. The best way to avoid this problem is to require the stockholders to sign a lockup agreement, under which they cannot sell their shares for a certain period of time, or can only sell a certain number of shares within predetermined time blocks (e.g., 50,000 shares per month). A lesser alternative is to recommend to investors that they have their holdings liquidated in an orderly manner through a single brokerage firm, which can attempt to sell stock over a longer period of time. Of the two methods, the first is mandatory, and so tends to function better, especially if the lockup agreement allows the gradual sale of stock, rather than suddenly allowing all shares to be sold at the end of a predetermined holding period.

An overly complex capital structure can also effectively reduce the amount of float. For example, if a company has multiple types of stocks, bonds, warrants, and other equity instruments, then it is diffusing the amount of tradable equity among all of the various equity instruments. A better approach is to simplify the equity structure by trading common stock for all of the other types of stock. This centralizes all equity into a single large pool of tradable stock.

A related issue is that investors tend to avoid owning multiclass stocks, on the grounds that they only have access to nonvoting stocks or stocks with minority voting rights. Investors prefer to have all voting rights centered on the common stock that is available for sale, so that they can vote out a board of directors in the event of inadequate company performance. Thus, having a single class of common stock with full voting rights can increase the pool of stockholders, thereby indirectly increasing the stock price.

Another difficulty is when a company has achieved a large float, but holdings are centralized in the hands of a small number of institutional investors. If these investors are not actively trading stock, then the effective float of the company may be far smaller than the standard float calculation may indicate. The IRO can meet with the larger stockholders to persuade them to sell some portion of their holdings, though an investor who is optimistic about the future performance of his holdings will be unlikely to do this. A better long-range approach is to initiate an ongoing series of road shows to present the company either to brokers or directly to retail investors in order to encourage stock placements with the types of investors who are more likely to create an active trading market.

The IRO should offer advice to the board of directors if it is considering the repurchase of stock. A stock repurchasing program sends a signal to the market that the company considers its stock to be undervalued. It also tends to prop up the stock price, if the company makes it clear that it will buy back stock if the price drops below a predetermined level. Further, it increases earnings per share, since there are fewer shares to divide into earnings. However, it also reduces the volume of stock outstanding, which reduces the float. In most cases, the number of shares authorized for repurchase is so small that the float reduction will be minimal. Thus, the IRO should advise against a stock purchase only if the contemplated repurchase is so large that the float will be seriously reduced.

It is also useful to monitor the public filings of competitors to see how they are managing their floats. If they use an innovative approach that appears to work well, then copy it. Conversely, if they have difficulty with float management, learn from their experience and try an alternative method.

In short, there is no such thing as an excessively large or widely distributed float. The IRO should always strive to simplify a complex capital structure, register stock, and persuade retail investors to buy stock, thereby improving the float.

MANAGING BAD NEWS

Bad news will arise from time to time, and the IRO must be prepared to deal with it. The exact nature of bad news is extremely difficult to predict, since it can come in many forms and may involve a new scenario that has never arisen in the past. Examples of bad news include a hostile takeover attempt, many types of lawsuits, the failure of a key patent application, conflicts with a labor union, and so on. The investment community will adjust a company’s stock price not only in reaction to the actual news, but also in accordance with how the company handles the news.

If a particular type of bad news has happened in the past, and there is a reasonable possibility of its recurrence, then the IRO should develop a contingency plan for dealing with that specific item. This plan should encompass a contact list that itemizes which managers and investors will be contacted, where to contact them, who to contact if they are not available, a list of actions to take, and a media contact list. This can include a boilerplate set of press releases. The IRO should include in her schedule of activities an annual review of all contingency plans, to ensure that all responses are still reasonable, and that contact information is still up-to-date. Also, an attorney should periodically review the plans to determine the need for any SEC filings if certain actions are taken.

An excellent way to prepare for bad news is to constantly monitor the affairs of other companies in the same industry. If they fall prey to a particular problem, the IRO should monitor how they deal with it. If a competitor creates an unusually effective response to a situation, then the IRO should copy it directly into her contingency plan for the same scenario.

The IRO should also develop an early-warning system in order to learn about bad news as soon as possible. This means cultivating contacts in the business media and investment community, who will forward any rumors they hear. Also, the IRO should immediately examine company financial statements as soon as they are available for internal distribution, to see if they contain any issues that might prompt queries from investors or analysts. In addition, the IRO should be on the distribution list of any auditor letters outlining potential concerns about company controls. If there is even a slight chance of a strike, then the IRO should be in constant contact with the company’s labor negotiator. If there is upcoming legislation that may negatively impact the business (such as pollution controls or import restrictions), then the IRO should be receiving regular updates about the prospective law from a lobbyist or attorney. Even an insider stock sale can be considered bad news. If a manager sells off a massive stock position, the stock price is likely to dive as a result. Consequently, the IRO should be aware of upcoming stock sales and be prepared to discuss the reasons for the sales. Thus, an early warning system should include input from a broad array of information sources.

The early warning system should also monitor the appearance of the contagion effect, which sweeps through industries from time to time. In essence, if one company in an industry suffers from a problem, investors will suspect that its competitors may suffer from the same problem, and drive down the stock prices of the entire cluster of firms. Thus, an IRO may find the company caught up in the contagion effect, even though it has done nothing wrong. In these cases, a company’s stock price will likely fall, irrespective of any investor relations actions taken. However, it may be possible to quickly drive the price back up by using the early warning system to spot the contagion starting with another company and immediately take steps to tell investors that the company does not suffer from the same problems. For example, if one company suffers a massive loss from not using hedging to cover its foreign currency investments, the IRO should immediately sponsor a press release detailing the extent of hedging activities used by her company, and how this has kept the company from incurring similar losses.

The contagion effect may begin at the IRO’s company. If so, the IRO could deliberately unleash the contagion effect on competitors by being the first one to issue bad news to the investment community. By being first, the IRO has the time to craft the best possible message for how the company is dealing with the bad news. Competitors will hopefully be caught off guard by the announcement, and will therefore appear less prepared than the initiating company.

Whenever an early warning system uncovers a potential issue, the IRO should immediately draft a plan to deal with it, along with associated press releases. The plan may never be needed, but it is important to create the plan before any inquiry ever arrives from the public, so that the management team can spend more time considering the appropriate response and level of disclosure, and less time ruminating over the basic plan.

The IRO can also take an extremely proactive approach to bad news by recommending mitigation plans to the CEO, and publicizing the implementation of those plans. For example, if there is no obvious successor to the CEO, the IRO can recommend the enactment of a succession plan, and set up media interviews with division presidents to show the depth of management. As another example, if an oil company is at risk of having an oil tanker cause a pollution incident on the high seas, then enact a plan to convert to double-hulled ships, and create a media campaign to advertise this action.

If the bad news involves allegations that an employee or the company itself has done something illegal, then the IRO (after suitable discussion with counsel) should immediately announce the situation, point out that a mitigation plan is being developed to reduce the risk of the event reoccurring, actively cooperate with the justice enforcement authorities, and promptly pay any fines imposed. The worst thing a company can do in this situation is to appear defensive; the media love to report on conflict and so will keep the story in front of the investment community for far longer than would have been the case if the company had simply revealed the situation at once and taken mitigation steps.

If bad news occurs and there is no contingency plan for it, then the IRO should first assess the extent of the damage caused by the news. In many cases, the “damage” will disappear within a few days or weeks, as the stock price returns to historic levels. However, if the damage appears to be impacting key stockholder beliefs about the company, such as its brand name or product quality, then further action will be necessary. The IRO should focus on mitigating the lingering effects of the bad news that threaten to permanently impair the stock price. For example, if a company product causes the death of a consumer, then the company should immediately announce the hiring of a quality assurance consultant to independently investigate the cause of the problem. Without this sort of prompt action, it would be reasonable to expect investors to put downward pressure on the stock price.

If there is a solid block of bad news that the IRO must reveal to the marketplace, then the best approach is to issue all of it at once, rather than dribbling it out over a period of time in the hope that the company can mitigate some of the damage before needing to publicize it. By addressing the problem in its entirety at one time, the stock price will suffer a one-time drop, but the IRO can then focus on informing the market about remedial actions, which will gradually bring the stock price back up. If the alternative method of spreading out the bad news were to be used, then investors would gradually form the opinion that the management team is not credible, ultimately resulting in a longer and more profound price dip.

Also, when releasing bad news, present it prominently and clear of any other items that may distract readers from the underlying issue. By doing so, investors gain the impression that the company is maintaining a high level of candor in revealing its problems. The worst way to release bad news is to bury it in the financial statement footnotes, in the hope that no one will see it. A diligent investor or analyst always reads the footnotes, and will not appreciate having to dig so deep to uncover potentially critical information. Also, a company’s propensity to mask bad news will trickle through the investment community, eventually resulting in the departure of some investors and downward pressure on the stock price.

The IRO should periodically keep investors updated on the company’s progress in resolving its issues. This does not require continual communications if there is no change in the underlying situation - only a notification when there is a material change.

In many bad-news situations, the IRO should plan to contact a select group of the largest stockholders to discuss the situation and the company’s planned response to it (within the bounds of the SEC’s disclosure rules). This is particularly important in the event of a proxy battle or hostile takeover attempt, when the concurrence of key stockholders will be vital. For these events, the IRO should prepare in advance a rough draft of a message to be sent to the key stockholders, preferably by e-mail, with a follow-up by express mail. This means that the IRO must collect e-mail address information in advance from the major investors, and continually update this list.

If a company has suffered through a string of bad news over a protracted period of time, then it is possible that investors are fleeing the stock, whose price is therefore dropping. Under this scenario, there is no easy way to win back the existing shareholder base. Instead, consider repositioning the company story and selling it to an entirely new audience. This may require a corporate name change, the sale of whichever divisions were causing the bulk of the problems, and a series of road shows into entirely new geographic regions in order to attract a new base of investors.

In short, the primary goal when dealing with bad news is to handle it in such a manner that a company’s long-term market capitalization is preserved, or even enhanced. Short-term pricing dips are not especially important, as long as the long-term value is not damaged.

RESPONDING TO RUMORS

A rumor may arise that circulates through the investment community and noticeably impacts the stock price. If a company waits long enough, the rumor will likely die out and the stock price will return to its normal level. If asked about the rumor, the IRO can simply state that the company does not respond to rumors and speculation. This lack of action may harm shareholder value in the short term, but is unlikely to do so over the long term.

However, there may be cases where the rumor is so egregious that it impacts customers’ view of the company and may cause a sales decline. In this case, the IRO may be tempted to refute the rumor, either through a press release or some other public means. While this may seem like a judicious response, it can create a precedent where investors now expect the company to refute rumors. If it does not do so, then investors will think that the rumor is correct, which may prolong its impact. Thus, it is generally best not to respond to rumors except under extraordinary circumstances.

SUMMARY

Ultimately, the IRO is responsible for maximizing a company’s market valuation over the long term. This requires the use of a multitude of tools to communicate a company’s unique value proposition to the investment community. It also calls for the proper handling of bad news in order to avoid an artificially low stock price, which many IROs would consider the most difficult part of their jobs. The net result of a consistently applied communications campaign and adroit handling of bad news should yield a higher stock price than would be the case without an investor relations department, as well as prices that vary within a relatively narrow price range. These results justify the investor relations budget.

CHAPTER 2

Investor Relations Officer Position

A WELL-RUN INVESTOR RELATIONS function can add a massive amount to a company’s market valuation, and so should be viewed as a strongly value-added area. Accordingly, a company should hire into the IRO position a very highly qualified individual. This chapter discusses the key aspects of the IRO position, expands upon those criteria with a formal job description, and then addresses the uses to which additional investor relations staff can be put.

KEY ASPECTS OF THE IRO POSITION

Several of the most important aspects of the IRO position are noted in this section, touching on the IRO’s experience level, knowledge base, and reporting relationships.

Experience with the company is a key consideration for an IRO candidate, since this person should have a detailed understanding of how the company operates and should know the managers who run the various divisions. Otherwise, the IRO will be dangerously dependent on other people for information to pass along to the investment community, and will be unable to discern which information might be misleading. There are two ways for an IRO to obtain a sufficient level of experience. One is to promote an internal person to the position who has been in a series of responsible positions with the company for many years. The alternative is to bring in an outsider with strong IRO skills, and to then force this person through a detailed company review process that includes multiple meetings with all key company personnel.

Even if an IRO already has a strong operational background with a company, this does not mean that the IRO can afford to stop keeping close contact with all aspects of the company. On the contrary, the IRO should regularly attend a broad range of operational, executive, and board meetings. By doing so, the IRO will stay in close touch with both upcoming and ongoing issues that may impact the message being given to investors.

The IRO is in the unique position of having a valid demand on the time of both the CEO and CFO. These individuals are responsible for making presentations to the investor community through road shows, conference calls, and the annual investor meeting. Since IROs are responsible for the management of all these activities, they must work closely with company CEOs and CFOs to schedule their time, as well as to assist in crafting their presentations.

The IRO must set herself up as an internal critic on behalf of investors. In this role, she keeps track of the investor messages that have been used in the past and the responses received from investors about the company’s strategic positioning. By doing so, she can critique changes to that message and give the CEO and CFO feedback regarding the positioning of the company in a manner that will yield the highest possible stock valuation. This can be an extremely difficult role, requiring a considerable amount of backbone to point out a flaw in a company’s strategic direction that no one else wishes to discuss.

Given the need for an IRO person with considerable experience, contacts throughout the company, a close relationship with senior management, and independent standing as a critic, it is apparent that the IRO position can only be given to someone with the experience and expertise of a senior-level employee.

An IRO must have a solid grounding in finance and accounting principles. Investors expect and deserve to have someone in the IRO role who knows what financial information they need, why it is useful, and how to obtain it. This does not mean that IROs must have a college degree in accounting or finance, but such a background should certainly be considered a plus for the position. There are also several master’s degree programs specifically targeted at investor relations that provide an excellent grounding in the financial and accounting concepts needed for this position.

At a minimum, IROs should have a demonstrated knowledge of not only accounting and finance principles, but also of the unique aspects of accounting terminology and rules for the company’s industry. For example, there are unique accounting terms used in the oil and gas exploration business that are used nowhere else, as well as industry-specific accounting standards. Investors will expect the IRO to know the “lingo,” and to have a firm grasp of how the company interprets industry-specific accounting standards.

IROs should have a detailed knowledge of a company’s short-term and long-term financing needs, so that she knows approximately when the company plans to offer new debt or equity instruments to the public, and can be prepared with the appropriate message to the investment community.

IROs must also have an excellent knowledge of the capital markets and how they operate, which should include experience in dealing with representatives of both the sell side and buy side of the investment community. This requirement is usually a weak point for anyone promoted into the IRO position from an accounting position, and is the main reason why so many IROs have Wall Street backgrounds.

The ability to write is a key requirement of the IRO position. There is a continual need for press releases, investor reports, and speeches by top-level management, and the IRO is expected to provide this information. If there is no other staff, then the IRO will be expected to either do the writing herself, or outsource the task to a press release or speechwriter. However, even if all writing chores are outsourced or handed off to someone else within the company, IROs are still responsible for the final product, and so must be capable of editing any written materials to be issued to the investing public.

IROs need some communication skills, though they do not need to be as highly honed as was the case for writing skills. IROs are mostly involved in introducing the CEO or CFO during road shows or formal presentations, and in coordinating conference calls where (again) the CEO and CFO are doing the talking. IROs are not really expected to make lengthy, solo presentations or speeches on behalf of the company.

Also, IROs should be available on extremely short notice to answer questions from the investment community. The company always has a core set of investors with whom a strong and ongoing dialog is essential, and it cannot afford to have protracted delays in responding to their queries. Accordingly, an IRO should be a frequent user of voicemail and e-mail, even when on the road. Also, the IRO should have an administrative assistant who can efficiently respond to minor queries while proactively tracking down the IRO to handle more critical responses.

IROs must also have considerable planning expertise. This includes the ability to audit the existing investor relations function, determine its strengths and weaknesses, and to then craft an investor relations plan that will optimize both the company’s message to the investor community and its mix of investors. A key part of this planning requirement is the ability to manage several staff, and quite possibly the services of one or more investor relations consulting firms.