IR Meets the FUD Factor:
Opportunities for Creativity

by Deborah B. Demer

The global economy and the stock market are in a prolonged downturn, with no end in sight. Corporate governance is in crisis. Accounting fraud—or at least the scrutiny and exposure thereof—is rampant. Disclosure requirements are tightening. Investor relations is changing, getting tougher. Managing the function is coming down to managing the delivery of bad news.

Or is it? Are IR fundamentals really any different from what they were, say, during the raging bull market of a few years ago? Just how good are IR’s best practices in a climate of fear, uncertainty and doubt (FUD)?

IR practitioners themselves have a lot of opinions on this subject, and they share them with each other through the National Investor Relations Institute (NIRI) and other professional forums.

However, if you really want to take the temperature, go to the core constituency of IR, the institutional money managers and research analysts who move stocks—a.k.a. the buy side and the sell side. As the more savvy corporate managements know, the buy side is their IR end customer, and the sell side is a channel, ranging from highly influential to absolutely neutral.

REG FD COMES OF AGE

Although buy-side and sell-side perceptions vary somewhat, there appears to be a consensus about the lingering effects of the Securities and Exchange Commission’s Regulation Fair Disclosure (Reg FD), enacted in October 2001.

“One obvious factor still affecting the status of investor relations is Reg FD,” said Jon Hickman, vice president and portfolio manager of Jurika & Voyles, a growth and value investor in the San Francisco Bay area. “While some companies have become more skittish about what they would say to investors, other companies have become more vocal by putting out messages all the time—sometimes, too many messages.

“However, more disclosure is better than less, and earlier is better than later,” Hickman continued. “In the face of bad news, the stock is going to get hit anyway, and the credibility issue is handled much better by disclosing events early and often. Also, management teams seem to be more conservative with their guidance. Or, at least, they’re being more proactive to get the numbers right, which is good.”

“The downturn has gone through a number of phases and made it difficult for public companies and their management teams to respond,” said Walter Price, managing director of Dresdner RCM Global Investors, a buy-side firm focused on global growth stocks and based in San Francisco. “First, you had the beginning of a fall-off in business, where things looked bad, but it was difficult to tell how bad. Then, you had companies start to miss their numbers and revise expectations, and management began to wake up to the severity of the downturn. And, then, you had management teams begin really to assess their business and do layoffs and the like to respond to the environment. What has added to all of the visibility problems is restrictions like Reg FD, which make it harder for investors to get information about the business. It used to be that management would at least hint as to how their business was going, but that’s not the case any more, so you get a series of negative surprises.”

“Reg FD has been interpreted in different ways,” said Howard Smith, research analyst at First Analysis Securities Corporation, a sell-side firm in Chicago that focuses on long-term growth opportunities. “Some companies stopped saying anything. When you ask probing questions, management will say, ‘We can’t discuss that because of Reg FD.’ I had one executive who told me that giving a probable week for the quarterly earnings announcement would violate Reg FD! It was designed to give everyone equal access to information. I believe it was also designed to increase the quantity of information generally available. But, while information may be better distributed, I think it has materially decreased the amount of information available.” A research analyst with an investment banking and brokerage firm based in Pennsylvania advocates midquarter updates to improve continuity of communications from corporate managements to the investment community.

“The longer the periods between the dissemination of data, the worse things are. If you can do a mid-quarter update, it gives everyone a chance to ask questions in an open forum, it enables the company to get more information out to the Street, and it also reduces the importance that everyone places on what happens every quarter, since it gives them better ongoing information and guidance.”

THE CHANGING FACE OF IR

Some investment professionals believe that the IR job itself has become more challenging in the current environment—and the IR practitioner more challenged. Alex Motola, CFA, is managing director of Thornburg Investment Management, a mid- to-large-cap growth and value investor based in Santa Fe, New Mexico, where he manages the Thornburg Core Growth Fund.

“I think corporate IR staffs are in a difficult position,” Motola said. “They want to help investors understand their company and respond to their requests. Within their companies, they are usually viewed as spokespeople, with no say in strategy. There are huge conflicts inherent in the position. Which is worse, knowing something adverse to the stock price and being unable to tell investors, or being kept in the dark by the management team that you represent? Having a good IR person rarely helps a company’s stock price, but having a poor IR person can certainly hurt it.” Commented an analyst with a research-driven, smalland large-cap growth investor in Chicago, “I think IR’s functionality will remain the same going forward. Sure, the amount of red tape has gone up, but the need for that function is probably going to remain the same, if not become greater in importance. As far as the caliber of IR folks goes, the companies that have been around a long time are doing outstanding work. For the newer companies, I think there’s a learning curve, and they’re learning slowly.”

During the fin de siècle IPO boom, it was not uncommon for pre-IPO companies to staff the IR function internally around the time they began interviewing investment bankers. The prevailing logic was that the ensuing quiet period running up to and through the effective date would give the IR director/manager/specialist time to build the necessary infrastructure in order to hit the ground running 25 days later, as the company shifted into the aftermarket. Viewed from another angle, the IPO momentum would propel the company into the aftermarket, where institutional ownership would proliferate, research coverage would multiply, and periodic price and volume trajectories would know no limits. Of course, someone— a professional dedicated to the function—had to take the calls, send out the investor kits, manage the database, arrange the quarterly teleconferences, coordinate the wire services, project-manage the first annual report, etc., so that management could focus its constrained IR time on cultivating relationships with the very top shareholders and analysts. However, when the market turned south in April 2000 and kept right on going, many of these in-house IR practitioners found themselves with increasing amounts of time on their hands. The routine housekeeping chores were still there, but the demand for attention and information that had been so ravenous before seemed to have evaporated. Managements grew progressively more preoccupied with managing the business through the darkening worldwide recession than enhancing the quality of the company’s investment universe. Revenue growth slowed or declined, margins slipped, losses deepened, cash burned. And, with them, stock prices dipped below the $5 threshold; 13(f) reports thinned out; analysts changed jobs, were not replaced, and did not resume coverage elsewhere. Meanwhile, wounded individual investors and their hapless stockbrokers were demanding to know where their fortunes had gone. And, the IR job had become very small indeed, perhaps even a candidate for the next reduction in force.

A recognizable symptom of this inflation/contraction phenomenon is the progressive dilution of the corporate IR talent pool and its impact on best practices. Observed Jurika & Voyles’s Hickman, “What is particularly interesting, among small-cap stocks, is that there’s currently a higher percentage that does not have Wall Street coverage, so their internal IR efforts are even more important. These smaller companies that used to be Wall Street darlings are now somewhat at a loss as to how to position their IR strategies. Of those companies that have survived, some have real business models and are making money and generating cash, but nobody is paying any attention to them. Again, it’s tough for an internal IR group to position these companies. That’s the fallout of the bursting of the recent market bubble.

“Dealing with the IR departments of public companies is really hit and miss,” Hickman continued. “Regardless of size, some do a really good job, and some don’t. Some companies don’t even really have an IR program in place, even though it seems necessary in this environment. IR departments need to target the right money managers that can really do something with the stock. Right now is probably a great opportunity for IR practitioners, but it just doesn’t seem to be playing out that way. The things they should be doing, they’re not. They may round up a few meetings, but if you have a company that’s really made it through this bust, you need an IR program that will put you in front of the right money managers and sell-side analysts to create some chatter about the company.”

CLIMBING BACK ON THE RADAR SCREEN

Which leads us to the inevitable questions: What about all of those small companies that have lost their visibility in the investment community? How do they make it back to Wall Street’s proverbial “radar screen”? “Business performance,” said Motola of Thornburg Investment Management. “Management integrity. These are essential.”

Added a technology research analyst at a bulgebracket, sell-side firm, “The best way for a company to maintain investor interest is to run and manage the business to the fullest extent possible. If management is able to hit targets and exceed expectations, it won’t have a problem with investor interest, or lack thereof. Improving business fundamentals will consistently bring Wall Street’s attention back to stocks that have fallen off the radar screen.”

The sell-side analyst in Pennsylvania commented, “Companies that have fallen off Wall Street’s radar screen need to show consistent growth. It’s as if they’re start-ups again, so now they just have to run the business effectively, and if they’re able to do that, they will eventually be noticed. The ones that come back have good business plans or have been able to find good managements to lead them through their turnaround situations. If they’re fundamentally good companies, they’ll come back to the radar screen.”

“Stock price is not a function of falling off Wall Street’s radar screen,” said the Chicago-based buy-side analyst. “It’s just a function of the business model not being correct. Clearly, all companies are experiencing a major downdraft here—technology companies in particular. The faster a company sizes its business to the current situation and lets the future develop as it may, the better off it will be in highlighting its direction for investors. You need to be willing to do that and let your investors know that you’ve appropriately sized the business for the near term—say, 12 months—and that if you need to go back and hire some people, you will, but you’re focusing on profitability. That’s a good story.”

SAME GAME, NEW RULES

Recent measures to establish higher standards of corporate governance—such as SEC Order 4-460 and the Sarbanes-Oxley Act of 2002, which require chief executive officers and chief financial officers to file sworn certifications of the accuracy of their companies’ financial statements, and new accounting rules for the treatment of stock options—have met with mixed reviews in the investment community. By and large, investors and analysts are still sorting out their assessments based on unfolding experiences with companies that they follow.

According to the sell-side analyst in Pennsylvania, “If management signs off on something only because it is required to, yet decides to challenge the ramifications later, then these regulations have no positive net effect. Having said that, any way you can make investors feel more confident in the system is a plus.”

Amy Feng, senior analyst at Jolson Merchant Partners, an industry-focused merchant bank and brokerage firm, added, “For the professional investor, like the institutional fund managers, the corporate governance regulations probably won’t restore confidence. They know what’s going on. But, in terms of the small retail investor— ‘Joe on Main Street’—maybe they will.”

Feng added, “There are two things I would like to see: 1) stock-based compensation for senior management that is proportionate to the company’s performance; and 2) stock-based compensation for senior management that is more in line with that of non-management. I don’t mind seeing the option pool increase for non-managers, but I want to see the option grants for senior managers shrink, and in line with corporate performance.”

“Unfortunately, because of all the rule and regulation changes, it’s just going to become that much more difficult for investors to get the information they need, as companies become more and more constrained,” said Price of Dresdner RCM Global Investors. “And, eventually, everyone will get the information at the same time. I think we’re going to go through a period of uncertainty for quite a while, which will make things difficult. One thing is for sure: companies won’t be able to get away with the stuff they used to. They’re under far more scrutiny and will continue to be in the future.”

NOW, FOR THE OPPORTUNITIES . . .

Business uncertainty equals IR uncertainty—but also a time of opportunity for the more creative practitioner.

First, rather than a burden or encumbrance, Reg FD can provide a platform for broader, more frequent corporate communications with the investment community, assuming that the information communicated is meaningful in shaping investor perspectives on the business. A still-common misperception of Reg FD is that it somehow inhibits disclosure and guidance. In fact, all it does is stipulate that material business information, whether historical or forward-looking, be fully disseminated in a public forum (e.g., news release, SEC filing, preannounced teleconference webcast, etc.). Management visibility permitting, the mid-quarter update suggested by one of the buy-side professionals quoted here is a way to capitalize on the letter and spirit of fair disclosure.

Second, management can assess the performance of its in-house IR staff relative to business conditions and investment community demand, and make adjustments as appropriate. “That’s the way we’ve always done it” and other expressions of complacency are cause for suspicion and scrutiny. Key questions to ask: Is there a job here? Fulltime? Part-time? Is there another, more efficient, more cost-effective way to get it done? Selective outsourcing to an IR firm? Temporary IR staffing? Some combination of the above? What skill sets and experience levels are required to meet current needs, and where can they be sourced?

Third, as business visibility improves and a path toward improving results emerges, forgotten public companies can reintroduce themselves on buy-side and sell-side radar screens through a concerted outreach effort. A resourceful, open-minded approach to IR research and analysis can lead to the targeting of investors and analysts with a demonstrated interest in peers, competitors, and the industry segment overall. As likely as not in the current market, properly targeted investment professionals will take meetings with management to gain market intelligence on the companies they follow and discover new (or returning) ideas ahead of accelerating business momentum.

Finally, corporate governance itself can be a point of differentiation and even distinction. As windows on the investment community, IR practitioners should have a voice in advising managements and boards on CEO/CFO certification of financial statements, trends in executive compensation, corporate policy for material disclosure, and trading by company insiders, as well as likely investor reaction to these issues. Moreover, they should be proactively communicating their companies’ positions and actions on these matters to investors, beyond SEC disclosure requirements now under discussion. In a period of quiet corporate compliance, juxtaposed with shareholder outrage, the outspoken championship of fiduciary responsibility can significantly enhance an IR brand.