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Across America in thousnds of publicly traded companies, investor relations (IR) professionals and top executives are struggling to communicate corporate news effectively in an on-edge, suspicious environment of 24/7 financial information. Billions in stock value can be gained or obliterated quickly. based in no small part on how well the IR pros make the company's case and manage expectations. Earnings announcements, analyst reports, insider stock transactions (even if legal), and more all have a magnified ...
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Across America in thousnds of publicly traded companies, investor relations (IR) professionals and top executives are struggling to communicate corporate news effectively in an on-edge, suspicious environment of 24/7 financial information. Billions in stock value can be gained or obliterated quickly. based in no small part on how well the IR pros make the company's case and manage expectations. Earnings announcements, analyst reports, insider stock transactions (even if legal), and more all have a magnified impact on stock movements in today's climate. With contributions from leading IR experts, Benjamin Mark Cole has put together an incisive and practical blueprint for success in investor relations today. Filled with ancedotes and case studies of good—and bad—IR, this book provides indispensable, hands-on guidance.
DONALD ALLEN The Allen Group
To most corporate executives, the term investor relations (IR) conjures up images of financial communications with a public company's shareholder base. The present-day practice of IR, however, encompasses far more than communicating with one's shareholders. Investor relations is a proactive and strategic executive function that combines elements of finance, communications, and marketing to provide the investment community with an accurate portrayal of both a company's current performance and its future prospects. IR incorporates multiple program elements that work in concert to market the company and its stock and to help increase shareholder value in the long term-while operating within the prescribed framework set by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and other agencies. Given that good investor relations can also help enhance a stock's price-earnings ratio, a solid IR program should be considered a fiduciary responsibility of management.
The basics of investor relations include the following practices:
* Developing and maintaining a corporate disclosure policy, including an internal"process" for timely disclosure of material information
* Managing required financial reporting to shareholders, regulatory agencies, stock exchanges, and other key audiences
* Creating targeted outreach programs designed to increase market awareness and understanding of a company
* Building and maintaining relationships with the investment community
An effective IR program emphasizes not only prospects, but also accountability, good corporate governance, and transparency. Such a program can help build credibility for your company and obtain better market valuations. It can help lower your cost of capital. And it can help your company achieve the capital growth that investors seek. Properly planned and executed, the IR function serves both the company and the investment community. It's a two-way conduit between the public markets and the corporation, providing information of value to both investors and management. For the investor, the information that's communicated helps drive investment decisions. For the company, investor feedback can help management adjust business strategies and facilitate creation of long-term shareholder value.
What's the Point?
It's axiomatic that when companies perform well, their stock prices go up. When companies don't meet expectations, share prices go down. This means that companies must provide a consistent flow of good, reliable, and transparent information so that investors can evaluate future performance with confidence. And since perception is often reality, it's important to manage expectations as well. Working in tandem with corporate communications, a good investor relations program will manage five vital steps in creating a strategic program and enhancing its tactical success:
1. Define the company image and then support that image with information that positions the company as a positive and identifiable investment opportunity. Although it may be troublesome, sometimes public companies discover that by thinking about their image and what they can offer to the Street they have to change their substance-perhaps spinning off divisions that blur the company's focus. In this sense, good IR can help shape a company. For example, it may be enough to be a good real estate investment trust-but to empower investors (and thus gain their favor) would it be better to be a REIT with a certain type of portfolio, such as apartments only? Or a REIT that emphasizes not only dividends but also dividend growth?
2. Conduct market research to identify investors who have invested in opportunities before and thus might do so again.
3. Determine the best vehicles to communicate the information to targeted investors and the financial media.
4. Implement the program that broadly defines your company image on Wall Street.
5. Measure results and adjust the program accordingly.
Background on Corporate Disclosure
The first public company in the United States, reportedly, was the Boston Manufacturing Company, which was founded in 1814 in Waltham, Massachusetts. The company was a textile maker, and in order to fund expansion of higher volume production, its founder sold stock to ten associates. Happily enough, the ten investors all received substantial returns on their investments during the next several years, and thus was born a new business model that has flourished for close to two centuries. The novel idea of stock ownership was enticing to investors, especially in the unfettered environment reflecting the near-absence of government or stock exchange oversight prior to and during the early decades of the twentieth century. Spasms of speculation-and it was rank speculation, given the lack of financial information available to investors-resulted in the Roaring Twenties and subsequent Crash of 1929.
The federal government's response to this market crisis and the resulting Great Depression of the 1930s was to create the Securities Acts of 1933 and 1934, which established the Securities and Exchange Commission (SEC), the government agency that regulates and supervises stock market activities in the United States. These acts, and subsequent case law during the past seventy years, have defined what information companies must disclose to investors and how they must disclose it.
Understanding Disclosure and Materiality
The 1933 and 1934 acts define two types of disclosure: structured and unstructured. Structured disclosure refers to explicit information about a company's operating results and must be provided in a precise manner, as stipulated in required SEC documents such as Form 10-K (annual financial report), Form 10-Q (quarterly financial report), Form 8-K (event reporting), and other documents such as registration statements, prospectuses, proxy statements, and the management discussion and analysis (MD&A) section of the annual report to shareholders. The intent of setting such reporting standards for all public companies was to provide a structure that allows investors to easily compare corporate reporting and, in theory, better evaluate a company's performance relative to its peers and to other industries.
Unstructured disclosure describes information that companies may disclose at will, within certain broad guidelines. These implicit disclosure obligations are defined under the general antifraud provisions of the 1933 Securities Act, Rule 10b5, and include media such as annual reports, letters to shareholders, press releases, advertisements, speeches, investor meeting presentations, conference calls, and telephone conversations with investors or analysts.
Because hard and fast rules are not specified under the act, unstructured disclosure can have untoward results, especially if some investors learn material facts that others don't, or some investors contend they were misled. Two major factors affect this type of unstructured disclosure: the definition of "material" information and what constitutes an "insider." In general, material information is knowledge that would cause an ordinary person to make a decision to buy, sell, or hold a stock. It's basically any information that might change someone's evaluation of your stock-either upward (to buy), downward (to sell), or reinforcing an opinion to hold the stock.
An insider is someone who is deemed to have material information prior to its public disclosure and who thus cannot trade based on that information-and cannot pass the information along to anyone else to trade on it. There are several famous cases of insider trading. For example, in a classic case involving IBM's acquisition of Lotus Development Corp. in 1995, more than thirty people in Westchester County, New York, were charged with insider trading because a secretary who was simply copying legal documents told her husband of the pending acquisition. The news spread like wildfire through the community. A more recent case is the alleged insider trading in ImClone stock in 2002, which snared famous names such as Martha Stewart. Routinely, however, insiders usually are corporate management and employees, outside IR consultants, attorneys, accountants, investment bankers, or even suppliers such as printers working on stock offering documents.
The issues of materiality and disclosure of quantitative information aren't unusually complex. When considering whether information is material, use the Five Minute Rule suggested by Louis Thompson, president and CEO of the National Investor Relations Institute (NIRI). According to Thompson: "If it takes more than five minutes to discuss whether something is material or not, it's material. Disclose it." Nobody has ever gone to jail for too much accurate disclosure of a company's financial or business matters to the broad investing public. And it is hard to fight the perception that nondisclosure may be in management's interests, but not that of shareholders.
Quite often, the question of materiality arises from qualitative data about a company's operations and anticipated results. This type of information, usually nonfinancial in nature, is protected by provisions of the Private Securities Litigation Reform Act of 1995. This law provides a so-called safe harbor for forward-looking statements and makes it somewhat more difficult for lawyers to file suits on behalf of shareholders claiming to have lost money because of something the company did or didn't say.
Creating and Maintaining a Disclosure Policy
Given the importance of ensuring consistent, nonselective disclosure of material information, it's important that companies have a disclosure policy that makes clear who is allowed to speak for the company, how they may do so, and what guidelines they must follow. NIRI lists the basic elements for a suggested corporate disclosure policy in its publication Standards of Practice Handbook for Investor Relations. Here are their suggestions:
Designate a disclosure policy committee, which should include legal counsel, the CFO or treasurer, the chief investor relations officer (IRO), and chief corporate communications officer.
Designate authorized spokespersons and make a corporate commitment to keep these spokespersons fully apprised of company developments. Both the financial media and professional investment community quickly size up IR or PR representatives as either knowledgeable spokespersons or mere company stooges.
Instruct all employees who are not authorized to speak for the company to forward any calls or inquiries to the authorized spokespersons.
Have a policy on reviewing analysts' reports on the company. If your policy is to review reports, restrict comments to correcting errors in fact and don't comment on forecasts. Provide corrections only in writing.
Implement a policy on commenting on analyst earnings estimates. Most companies don't officially comment on estimates, but try to provide a steady and consistent flow of information to help analysts arrive at their own good estimates.
Have a policy on responding to rumors. A simple "Our corporate policy, at this time, is that we don't comment on rumors" will sometimes suffice, so long as the company itself is not the source of the rumor, but it can backfire with the financial media and even the professional investing community. Obviously, some rumors are persistent, or they may appear grounded in fact due to particular circumstances. If a rumor is a rumor, say so forthrightly. If a rumor is partially accurate clarify the situation by truthful disclosure. If a rumor is affecting the price of a stock, then it has become a material event, certainly in investors' minds. It's a judgment call, but it's always smart to err on the side of good disclosure.
Have a policy on providing forward-looking information. Follow the provisions of the Safe Harbor Act in providing qualitative information while not inviting lawsuits.
Have a policy on providing fair distribution of and access to corporate information.
Have a policy on the conduct of analyst meetings, conference calls, and webcasts.
* Have a policy regarding media participation in analyst meetings and conference calls. Most companies prohibit media from participating, but the use of live webcasts of conference calls makes it easier to provide information to the media.
Regulation Fair Disclosure (Reg FD)
The SEC issued new disclosure requirements in October 2000, in the form of Regulation Fair Disclosure, or Reg FD, as it's popularly known. This regulation was aimed specifically at leveling the playing field between institutional investors (the professionals) and individual shareholders (the amateurs). In the past, companies all too often favored analysts or institutional investors by conveying information to professionals that wasn't officially available to the broader investing public until after the fact. In effect, the institutions were used as an information conduit to the retail market. This gave certain institutions an unfair advantage. Rightly so, it is now required to disclose material information to all investors simultaneously as much as technologically feasible so that no investor has an advantage over any other investor.
In practice, Reg FD applies only to a company's communications with market professionals and investors. It does not include the press, customers, or suppliers. Reg FD also covers only communications by senior management, investor relations staff, and others who regularly communicate with investors and market professionals.
The regulation specifically does not apply to communications with certain people:
* Any person who owes a duty of trust or confidence with the company, such as accountants or attorneys.
* Any person who expressly agrees to maintain the information in confidence (by signing a nondisclosure agreement, for example) such as investment bankers or potential merger partners.
* Any entity whose primary business is the issuance of credit ratings, such as Standard & Poor's or Dun & Bradstreet.
* Any person contacted in connection with a registered offering, such as during a "quiet period," since it's assumed that documents related to that registered offering will provide sufficiently broad disclosure.
How does a company accomplish broad, nonexclusive disclosure under Reg FD? There are three primary ways:
Excerpted from The New Investor Relations Copyright © 2004 by Benjamin Mark Cole. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
|About the Contributors|
|Pt. 1||Underpinnings of the New Order|
|1||Fundamentals of Investor Relations||3|
|2||IR for Blue-Chip Companies: The New Look||23|
|3||Litigation IR and the Duties of Corporate Disclosure and Governance||41|
|4||The IR-PR Nexus||59|
|Pt. 2||IR Implications for Selected Financing Scenarios|
|5||Sustained Stock Buybacks: An IR Tool for Mature Companies||77|
|6||Investor Relations in M&A Transactions||89|
|7||Investor Relations for Private Placements||105|
|8||Investor Relations for the IPO||119|
|Pt. 3||IR Tactics in Proxy Wars and Other Crisis Scenarios|
|9||Crisis Investor Relations||139|
|10||The Art of Winning Proxy Wars||149|
|11||The Hewlett-Packard Merger: A Case Study||169|
|Pt. 4||Special Case Perspectives|
|12||IR for Non-U.S. Issuers Accessing the U.S. Capital Markets||183|
|13||Investor Relations and Microcap Companies||195|
|14||IR and the Credit-Ratings Process||209|
|15||The Information Investment Managers Want From Public Companies||221|
Posted May 19, 2004
After the wave of corporate scandals and new regulations, a book like this needed to be written, particularly a book that covers the field of investor relations and includes advice from the leading professionals. This comes as close as anything you have been offered so far. Alas, its style and timeliness fall short (it offers clichés couched in academic prose and presents year 2000 regulations as new), but it offer abundant information. This is a helpful and useful run-down, particularly Chapter 10, which covers proxy wars. Non-U.S. companies will also find Chapter 13 very relevant. If you need an IR overview, we believe you can satisfactorily start here.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.