Investor relations (IR) is a misunderstood topic, especially in SA. Investor Relations Institute of SA (Irisa) head Neville Huxham says most local IR firms are a hybrid of media relations (MR), financial public relations (PR) and only a modicum of IR.
Huxham estimates there are about 330 IR professionals in SA. Irisa itself only has about 25 active members, most of whom are also members of the Public Relations Institute of SA (Prisa). Huxham also says "most PR specialists are literate, not necessarily numerate, and the closer you get to the money, the more complex the task". It's becoming increasingly difficult to influence with facts, without stepping over the line into insider trading. "It's a minefield. As much as the nonexecutive director is in a minefield, so is the IR professional", says Huxham.
IR is a high-level corporate communications mechanism focusing on the financial aspects of listed companies. It can have a positive effect on a company's value, image and cost of capital. Many of the services provided by investment banks, financial PR and MR firms fall considerably short of what most companies require as far as IR is concerned. However, an effective IR firm and/or dedicated in-house professional investor relations officer (IRO) can fill that gap effectively.
Most MR/financial PR firms concentrate on getting their clients' messages into the financial media. Some will also attempt to send these messages to analysts and fund managers.
This behaviour is symptomatic of a number of factors that differentiate MR and IR.
Corporate Image director Tamra Valey says: "We have a variety of constituencies or stakeholders to satisfy in addition to the media and the financial markets. We cannot, therefore, concentrate on one aspect of the business."
At one time, when investment banks were still known as stockbrokers, they performed many IR and financial PR functions for their clients. These days, they are increasingly commission- and fee-driven, tending to court companies only when lucrative rewards are likely.
This is a reflection of the continued reduction in commission paid by financial institutions, which has led many investment banks to concentrate their research efforts on the top 40-listed shares and not much else. Research coverage, untainted by too close an association with an investment bank's corporate department, can be a useful IR tool. Often, a good IR professional can generate new research coverage, either by sourcing from emerging independent research houses or by persuading existing stockbroking firms of the benefits of publishing research on a company.
IR is a communications function but, unlike most corporate communications functions, it mustn't be purely a one-way process. Financial PR is largely a one-way process as companies use financial PR to communicate with the media and investors. This is where the story ends, as there is little - if any - feedback from investors to companies. Effective IR, on the other hand, is a symbiotic process. Both the company and investors benefit from high-level, effective IR.
Without the vital feedback from stakeholders, management has no way of knowing whether its communications are good, bad or indifferent; or whether they are too little, too much, or just enough. An effective IR professional will be able to identify how valuable the information is to stakeholders.
Perception studies are one of the standard tools used by IR professionals. Market participants are more honest with their feedback to independent entities such as IR professionals than they are to management. The reason is simple: stakeholders want to maintain good relationships with company management and thus veer away from confrontation. It's often difficult, therefore, for these participants to be totally honest with management. IR professionals act as "sounding boards" with market participants and prepare perception studies that provide management with all relevant information from the investor world concerning their company and industry.
Most MR and financial PR practitioners in SA have PR or financial journalism as their backgrounds. The result of their efforts is often to try to make things seem better than they are. The better financial PR people are often good at this, which is why many companies are seduced by the perception that these spin doctors can "make a silk purse out of a sow's ear". But MR and PR people are rarely involved in the IR strategies of companies. They tend to be the messengers, which is one of the reasons this approach doesn't work. Effective IR requires the confidence of the corporate decision-makers regarding the media and IR functions.
IR professionals, on the other hand, understand financial markets and what moves them. Being market specialists, often with a buy or sell background, they have access to the institutional investor community. They're also comfortable discussing company financials and market sentiment with investors. Whereas MR firms will maintain databases of journalists, IR professionals maintain comprehensive and dynamic databases of buy and sell participants. They have the ability to communicate effectively, listen and disseminate information from institutional investors.
The starting point in a structured IR programme is getting under the skin of the company's shareholders.
The first step in this approach is cracking the share register - spending time analysing who owns the company, whether it's institutions, private investors or international investors.
Once the shareholders have been identified, the next task is to analyse share trading patterns. Ideally , institutions would filter out the shares they wanted to buy and then hold them for long periods of time.
Institutional styles also change with time. Until a few years ago, growth was fashionable, until the telecom, media and technology bubble burst. Now, it's difficult to find a growth manager in the institutional market place because most of them have gone scurrying for cover in a so-called "flight to quality".
Managing shareholder expectations is another part of the IR professional's work. By identifying shareholders, establishing their motives for buying, cultivating relationships with them and then demonstrating trust, both parties will know what is expected of them.
