© Springer-Verlag Berlin Heidelberg 2015Orestis Schinas, Carsten Grau and Max Johns (eds.)HSBA Handbook on Ship Finance10.1007/978-3-662-43410-9_19
19. Investor Relations and Their Role in Effective Corporate Communications
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Investor relations are a critical function for a publicly-traded company to convey the performance of the company in a clear and concise manner to its shareholders, stakeholders, and other constituents. For investor relations professionals, the most critical task is in being a conduit for information for the company, regarding its performance both operationally and financially. Their mission is to establish and manage a two way process. On the one hand, they have to ensure that the company provides a regular flow of meaningful information to the investment community and organize systematic forms of interaction with investors, analysts and the financial media; on the other hand, they have to monitor the stock market behavior of its peer group public companies in the same sector, and gather and analyze feedback from the investment community about the company itself, its sector and its peers.
19.1 What Are Investor Relations?
Investor relations are a combination of critical activities that are consistent and proactive in nature, all with the purpose of communicating the company’s investment thesis and for achieving the company’s proper valuation. With constant competition for capital among peer companies within a sector and industry, as well as the need for companies to have strong share trading liquidity that will help mitigate share price volatility, it is of critical importance for investor relations to be in constant communication with all key stakeholders of the company. Stakeholders will typically include the company’s current investors, analysts covering the company, investors in the peer group, or similar industry/sector, along with the appropriate financial media covering the industry. In addition, the investor relations professional can be considered the most direct access to the company’s management while allowing the management to continue running the company.
Investor relations combine finance, strategic communications, marketing and compliance with securities and law within one department. The investor relations practitioner distributes a variety of information, both voluntarily and as required under certain financial regulations. The purpose of this is to give specific information on how the company operates, its overall performance as well as any future plans and prospects. In essence, the rationale behind the investor relations communication is to give the audience as much information to make a thoughtful decision on whether to invest in a company or not. Investor relations professionals achieve this through many different kinds of mediums, but all have the same strategic purposes. These mediums include press releases, fact sheets, annual reports, road shows, regulatory filings, conference calls, investor newsletters, media interviews, investor relations sections in the company website, and the numerous social media websites catering to the general public. The investor relations staff will utilize these mediums in an effort to distribute information on the company to as wide an audience as possible in the investment community.
Among its core responsibilities, investor relations must ensure adherence to security regulations. In the US, the Securities and Exchange Commission was formed during the Great Depression in 1934 after the stock market crash of 1929. The purpose of the SEC was to regulate the stock market and to prevent corruption in public companies during the trading of securities and to establish corporate disclosures. The SEC was given the power to license and regulate stock exchanges, the companies whose securities traded in them and the brokers and dealers who conducted the trading. In essence, the SEC was formed to be the watchdog for the retail investor community.
In 2000, the SEC put into effect Regulation Full Disclosure, which mandated that all companies’ material information and announcements must be made public to all investors at the same time. Earlier, public companies would hold meetings with fund managers and make presentations at bank conferences, often disclosing non-public and material information that professional investors would use to their advantage to trade stocks. However, investors without the same access to the company would be on the other side of the trade, not privy to the same information that was disseminated. Many public companies would not make quarterly conferences open to the general public, who in turn had to rely on their stock broker for company information and analysis. In the 1990s, as retail investors became savvier in trading stocks, along with the new trend of trading stocks online, investors craved more company access and information. The SEC proposed Regulation Full Disclosure to level the playing field between the more traditional, professional investors and the retail investors.
The Sarbanes-Oxley Act of 2002 significantly increased the importance of investor relations in financial markets. The act established new requirements for corporate governance and regulatory compliance, with an increased emphasis on accuracy in auditing and public disclosure. Notable provisions of the act that apply to investor relations include enhanced financial disclosures and accuracy of financial reports, real-time disclosures, off-balance-sheet transaction disclosures, pro forma financial disclosures, management assessment of internal controls, and corporate responsibility for financial reports.
The investor relations function also includes the transmission of information relating to intangible values such as the company’s policy on corporate governance or corporate social responsibility. Additionally, investors have trended toward an increasingly popular movement for data that is clear, concise, and easy to compare and manipulate, leading to management of company filings through streaming-data solutions such as Extensible Business Reporting Language (XBRL) and other forms of electronic disclosure.
19.2 A Historical Perspective on Investor Relations
Investor relations originated out of necessity for public companies looking to attract necessary capital to grow their businesses. After the Second World War, America emerged as the world’s leading financial power, and with that, significant investment capital to employ. While investors in equities had suffered terribly during the years of Great Depression following the Wall Street Crash of 1929, investors domestically returned to the equities markets. This, after years of low risk and return investment in “War Bonds” or U.S. Savings bonds, saw the government raise over $180 billion to finance the war efforts in the US. While few in population, most investors at the time were largely wealthy individuals, who hired portfolio managers to invest their capital, often quietly.
Although issuers have always met investors to seek investment, the first actual investor relations department did not emerge until the 1950s as company’s share rolls began to expand and the idea that communicating effectively with sources of investment capital gained credence. Back in 1953, Ralph Cordiner, the then president (later chairman and CEO) of General Electric (NYSE: GE) made the first systematic effort to formalize a corporation’s relationship with its shareholders. Under his initiative, a new department was created and the term investor relations was coined. The first in-depth research was undertaken into who the shareholders were, what they perceived their needs to be and what was the best way to communicate with them and for them to communicate with the management.
As the financial world became more sophisticated and interconnected, investment trends and investor relations changed to meet the new investor land-scape. Institutional investors, armed with the backing of their investors’ capital, became more prevalent and active than individuals. With growing demand for institutional investors, the impetus shifted towards financial elements of investor relations such as greater financial disclosure, heightened regulatory requirements, investor meetings with management, and the communication of the company’s overall strategy. However, one drawback to this was the growing misconception of investor relations being the predominant means of making a company’s stock price to go up, as the costs of investor relations budgets needed justification as a worthwhile cost center.