Financial communication entails all of the strategies, tactics, and tools used to share financial data and recommendations with investors and other interested parties. Around the world, companies need strong, proactive financial communication competencies to successfully help shape the evolution of capital markets for themselves and their industries. In return, companies likely will see the benefits in stock price and operating performance.
Thompson (2002a, 1) defines investor relations (IR) as “a strategic management responsibility that integrates finance, communication, marketing and securities laws compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.” The field is described here on the basis of its development in the US and with examples of the US economy.
Financial communication evolved during the 1960s and 1970s with, as Mahoney (1991) wrote, a promotional flare. Annual reports became costly showpieces. “Dog and pony shows,” the euphemism for multimedia presentations to security analyst and stockholder meetings, became the trademark of full-service public relations (PR) departments. Financial communicators were technicians, leveraging their communication skills to create the necessary tools, such as reports, speeches, and multimedia presentations, to inform the investment community.
The “Age of Impressionism,” as Mahoney (1991, 3) described it, came to a sudden and unnerving end in the early 1980s with the emergence of a most unlikely influencer – the corporate raider. Individuals such as T. Boone Pickens, Ivan Boesky, and Carl Icahn in the US created a battleground unlike any ever experienced in corporate America.
Traditional public relations practitioners, functioning as IR representatives, found themselves involved in financial discussions with corporate leaders. Those who understood the financial markets moved easily into the dialogue. In a matter of months, the IR/PR practitioner experienced a major reality jolt. Priorities went from producing bland press releases and glitzy annual reports to battling in the takeover trenches: giving daily reports from the field on how the battle was going, assessing the friends and foes, identifying and facilitating direct contact with shareholders who were hidden behind brokerage or bank accounts, doing quality research on the bidder, leading or conducting media contact or providing the information that went to reporters, determining the strategic content of information that would sway investors and analysts, and preparing and disseminating the actual communications materials.
By the 1990s, the takeover battlefield became considerably quieter as corporate managements had pretty well learned their lessons. Managements became more aware of enhancing shareholder value and incorporating it into strategic growth priorities. In the process, senior corporate executives recognized a very different role for IR, the more specific and strategic tools of monitoring investor attitudes and actions, and communicating corporate valuation programs and results.
Subsequently, IR moved from the PR or corporate communications departments to the chief financial officer’s group, or even as a direct report to the chief executive officer. The people who occupied the posts were highly credentialed and often consisted of former business journalists, PR executives who possessed strong communications skills but also thoroughly understood business and finance, and perhaps a research analyst, an accountant, or a line business manager. They were working in a field that had become well defined as focusing on the investor constituency to enhance valuation.
Enter The Bulls Of The 1990s
The next major life-changing event for IR was the bull market that led Wall Street virtually throughout the 1990s and into the twenty-first century. The boom led to two developments that dramatically altered the financial communication landscape. First, the competition for capital and for market visibility became intense. IR pros were charged with developing initiatives that would break through the clutter on Wall Street and other capital markets, improve their company’s market visibility, and open the door to low-cost capital to fuel growth. This prompted the marketing discipline to drive IR. Marcus and Wallace (1997, xvii) argued that IR always had been a marketing function: “It has always been a process of understanding the needs of the target audience, and of casting the information about a company in ways that persuade the investor that a dollar invested in my company will appreciate faster than a dollar invested in somebody else’s company.” Any process that relates a company’s products or services – or even cogent information about that company – to the needs of the buyer is marketing.
Second, the boom of the 1990s rudely forced aside the notion of investing for long-term value and replaced it with a very short-term focused approach that worried about satisfying capital markets quarter to quarter. With this shift came the “managed earnings syndrome,” where corporate managements, through the accounting process, attempted to meet or beat the previous quarterly earnings to satisfy analyst expectations. The culprit here, as Louis M. Thompson (2002a, 12) wrote, was the reality that a “penny missed” could have devastating results on a company’s stock price.
The combination of these two developments – vying for the attention of Wall Street and managed earnings – brought the investment community and IR to the brink of another dramatic sea change.
The Crash Of Corporate Credibility
Except for the 2000 passage of Regulation Full Disclosure, which restricted the selective disclosure of material information to analysts and investors prior to making it available to the general public, Congress and the SEC basically stood aside as corporate America maintained its managed earnings practice. Financial scandals at Enron, Global Crossing, WorldCom, Tyco International, Adelphia Communications, and other blue-chip companies argued for new standards of financial communication. Multiple issues were blamed: aggressive accounting practices to meet quarterly earnings “consensus” expectations, conflicts of interest between research and investment banking, weaknesses in board oversight, a compensation system ill designed to align managements’ interests with those of their shareholders, and conflicts of interest between auditing and consulting in major accounting firms.
Were the IR officers in these companies aware of the alleged fraudulent practices? If so, is it that they voiced their objections and no one listened? Whatever they did or did not do “obviously reflects on our profession,” remarked NIRI’s president and CEO Louis M. Thompson, Jr (2002a, 11). Enron’s collapse, exacerbated by the other scandals, triggered the most extensive congressional legislation and SEC regulations seen on Wall Street in 60 years (Thompson 2002b, 2). Heading the list was the Sarbanes-Oxley Act, passed in July 2002, which in its simplest definition requires public companies to validate the accuracy and integrity of their financial management.
Investor Relations Returns To Its Public Relations Roots
Fast forward to today and we see IR again evolving, this time seemingly back to its PR roots. Shane McLaughlin, senior writer at Best Practices in Corporate Communications, maintained that IR and PR are once again converging: “With renewed calls for information in the wake of corporate scandals and new financial reporting standards . . . there is more reason than ever to combine the functions of investor relations and corporate communications” (McLaughlin 2003, 9).
Also, McLaughlin (2003) argued that it is only natural that as companies open up more channels to send information, corporate communications will play a central role in preserving consistency and content. Even if a company has not integrated the two functions of IR and PR, the people on these two sides need to be joined at the hip: “That way communications is systematically involved way before a matter becomes a public issue” (McLaughlin 2003, 9).
Roger S. Pondel (2002) argued that the debate essentially is over. Those who do not understand that IR and PR are converging are seriously weakening their companies’ valuations. The two management disciplines of IR and PR are being brought together more closely, Pondel maintained, because of heightened disclosure regulations and exploding technology around the Internet and related telecommunications.
Jeffrey Greene, global vice chair of corporate finance at Ernst and Young, suggested a new view of IR before a symposium of IR professionals in 2003. He called it “investor relationship management,” whereby IR officers move beyond providing data to facilitating a dialogue with the investor community on how best to value their companies. Greene added that the IR officer’s job is to manage relationships – internally and with the investing community – communicating but also educating and coaching: “It’s a two-way dialogue, and it requires integrated communications” (Berstein 2003, 4).
Investor Relations Destined For New Respect
This turf battle among the disciplines promises to prevail for decades. Regardless of where IR lands, corporate managements appear in agreement that the role and responsibilities of the financial communication executive will continue to expand. Specifically, five developments are singled out for fueling the future growth of IR: (1) a greater need to satisfy more stringent disclosure requirements; (2) a broader communications role in the company; (3) a more proactive attitude by corporate managements toward IR; (4) more involvement in the strategic planning process (aside from all the disclosure requirements dictated by Sarbanes-Oxley, the recent rash of executive stock option postdating incidents strongly suggests that IR executives need to be “in the know” in order to effectively firefight these and other issues); and (5) greater information needs from institutions and portfolio managers.
Since Sarbane-Oxley’s inception, its onerous enforcement impact on the New York Stock Exchange has led many corporate executives, particularly those heading up-and-coming entrepreneurial companies at home and abroad, to consider the New York market as an obsolete place to do business. They are flocking to exchanges in Europe and Asia instead. Around the world, corporate managements have a great opportunity to elevate IR to a more strategic and valuable role in response to today’s turmoil in capital markets and corporate governance.
- Berstein, L. (2003). Strategic communication: Defining a concept. National Investor Relations Institute Investor Relations Update, January, 1– 6.
- Driscoll, E. (2006). Sarbanes-Oxley not NYSE for New York. At http://eddriscoll.com/archives/009133.php, accessed August 1, 2007.
- Mahoney, W. F. (1991). Investor relations: The professional’s guide to financial marketing and communications. New York: New York Institute of Finance.
- Mahoney, W. F. (2000). The evolution of IR practice. Investor Relations Quarterly, 4, 4 –10.
- Marcus, B. W., & Wallace, S. L. (1997). New dimensions in investor relations. New York: John Wiley.
- McLaughlin, S. (2003). A new era. The Strategist, winter, 9 –10.
- Pondel, R. S. (2002). Close quarters: The necessarily increasing coziness of IR and PR. Investor Relations Quarterly, 1, 4 –10.
- Thompson, L. M., Jr. (2002a). Major developments affecting IR in 2002. National Investor Relations Institute Executive Alert, December 20, 1–13.
- Thompson, L. M., Jr. (2002b). NIRI ten point program to help restore investor confidence. National Investor Relations Institute Executive Alert, April 9, 1–3.
- Thompson, L. M., Jr. (2003). NIRI releases 2002 trends and technology survey. National Investor Relations Institute Executive Alert, February 11, 1–5.