In the always-connected social media environment, it’s often difficult for CFOs to say with confidence who their most important investors are listening to, what events will affect them, and sometimes, who they are.
The volume of data available to investors today — via traditional sources such as financial statements and analyst reports, and untraditional ones (read social media) — and the speed with which it’s distributed, have combined to produce an enormous change in how investors react to news about the companies in their portfolios. When Carl Icahn takes to Twitter in his efforts to prevent Michael Dell from taking his company private (“all would be swell at Dell if Michael and the board bid farewell”), we know the world has changed.
There is, however, one person whose job it is to know all that: the Investor Relations Officer.
Knowing the investors — who they are, what they’re thinking about, and figuring out what affects them, and thereby a company’s stock — is the IRO’s job, as is managing communications with the capital markets.
Unfortunately, at many companies the IRO can’t do that job effectively because he or she is viewed simply as a gatekeeper who sets up meetings for the chief executive officer and hosts conference calls. Consequently, IROs are frequently left out of decision-making. This denies companies the information IROs uniquely possess, and heightens the risk that company decisions will be made without knowing how they may affect investors.
And that’s dangerous.
This Is Your IRO Taking Care of Business
An IRO spoke with FTI and told us about her company, a developer of wireless technologies. As Wall Street saw it, the company kept missing quarters, regularly coming in below the analyst consensus earnings estimates. The company’s leaders thought the company was right where it should have been, and couldn’t understand why they were being slammed quarter after quarter.
Fortunately, the IRO was able to identify an analyst who, although not with a major firm, influenced other analysts. This analyst, the IRO knew, wasn’t interested in quarterly earnings; his projections were long-term.
The IRO spoke with the analyst, explained the situation to Thomson Reuters and NASDAQ, and convinced them to remove this analyst from their quarterly expectations reports while keeping him in for their 12-month consensus.
This was possible only because the IRO, in constant contact with the analysts, could spot the anomaly. And because she had developed a line of communication with the board, she was able to explain the situation to leadership.
The company stopped missing quarters.
Earning a Seat at the Table
IROs agree that the onus falls on them to earn C-Suite trust by partnering with and reporting to the CFO or the chief communications officer. Because CFOs and CEOs make decisions that move stock, these are the two positions to whom the IRO should report.
IROs who feel the company is not using its expertise in the best way possible can have a conversation with the CEO or, if the IRO reports to the CFO, with the CFO first, then the CEO. The conversation should go like this:
- “I have a lot of information from the investor perspective that would be valuable to the board, especially in this age of shareholder activism.”
- “Here’s a mock-up of a communication plan to report to the board.” The plan should be no more than 10 pages (with an executive summary) and include an analysis of share price and price/earnings performance versus peers, sell-side ratings, shareholder composition, and price targets, among other elements.
Once business leaders become more confident in the IRO’s expertise, the IRO’s access will increase. Ideally, IROs need to be aware of, and be a part of company events — M&A deals, major product kick-offs, IPOs — that can affect investors.
Also, IROs should be fully briefed on board and executive-level discussions concerning enterprise and regulatory risk. Surprises to the investment community can damage corporate reputations. Surprises to the IRO can increase risk in many areas.
Indeed, in the 2005 Flowserve Corp. case, the U.S. Securities and Exchange Commission (SEC) charged the IRO with being as responsible as the CEO or CFO for the sharing of corporate information, a tacit recognition of the importance of the position.
Of course, IROs can’t reshape the organizational chart by themselves. CEOs and CFOs need to send the message to the organization – both directly and by modeling the behavior – that the IRO is a critical conduit for managing the external reputation of the business.
What an Empowered IRO Can Do
When the Street realizes that the IRO has timely access to operational information, it begins to regard him or her as a window on what’s really going on inside a company.
That allows the IRO to help mold the way the company is perceived, and become the person upon whom investors and analysts rely. And that makes it critical that the information the IRO has is accurate. Investors are putting their faith in the IRO; CFOs must be open and honest with them.
Transparency and truth is in the eye of the beholder, but it is the IRO’s job to see every event from many sides. This is especially important when everyone is looking for an edge.
Bankers and traders, for example, have critical parts to play in M&A deals and IPOs, but their view will be skewed by their clients and their sales forces. That means there is an inherent bias in their data. The investors they point a company to may not be aligned with the company’s long-range goals. It takes an empowered IRO to understand those biases, and communicate them to the CFO and the board.
Blogs, and Tweets, and Likes, Oh, My!
What happens when an investor or analyst breaks news, leaks sensitive information or shares previously private discussions via social media? In August, activist investor Carl Icahn used Twitter to announce that he had amassed “a large position” in Apple stock and that he had conversations with the company’s CEO to share his opinion “that a larger buyback should be done now.”
After only two simple tweets totaling fewer than 50 words, Icahn moved billions in market value as his posts pushed Apple’s stock nearly 5 percent higher, adding nearly $10 billion to the company’s market capitalization.
Icahn’s high-profile use of Twitter to break news comes after the SEC said that postings on sites such as Facebook and Twitter can serve the same functions as press releases and company websites to bring news to audiences that prefer delivery via social media.
While the SEC’s new guidelines and shareholder use of social media as a form of communication have obvious effects on the IR function at many publicly traded companies, increased investor use of social media and its possible effects on corporate communications and marketing has gone largely ignored.
An empowered IRO must engage with the company’s social media experts to create safe and sustainable policies for communication. The IRO should also be deeply involved with the corporate website — the most powerful public-facing tool companies have to influence the way they are perceived, and the primary source of information for shareholders, analysts and the media — and have a leading voice in what data is displayed, and how.
Just the IRO You Want
When hiring an IRO to be part of the executive team, the hiring executive should look for someone with:
- A good grounding in finance; someone able to do financial analysis on par with a head of financial planning and analysis (FP&A).
- An ability to build strong relationships both inside and outside the company.
- A backbone. For the CFO to leverage the IRO’s knowledge, the IRO must feel free to present difficult news and alternate views.
This should be fundamental for all companies. CEOs and CFOs report to the board. The board reports to the investors. The person who knows (or should know) most about the investors is the IRO.
Companies that empower their IROs and offer them a seat at the executive table will profit by it; companies that don’t won’t get the value from the role they should.
As business and markets continue to grow more complex (and there’s no sign they won’t), companies should take a hard look at whether they have an IRO with sufficient skills, gravitas and a broad enough scope of responsibilities to serve their needs.
Elizabeth Saunders is a senior managing director and Americas chairman of the strategic communications segment at FTI Consulting, and is based in Chicago and New York. She also serves as head of the segment’s financial communications practice in the Americas.