Almost 50 years ago, a function called "investor relations" was created within the public relations division at General Electric for the purpose of communicating with
investors. In those days, individuals rather than institutions dominated the investor community.
The concept of investor relations (IR) evolved slowly over the next 30 years, largely within corporate communication divisions of major publicly held companies and as a
consulting function in public relations firms. The creation of the National Investor Relations Institute (NIRI) in 1970 was evidence of the need for a professional association to
establish a code of ethics and means for professional development for those charged with the job of communicating with the investment community.
IR had its roots in the Securities and Exchange Act of 1934 that contained the periodic filing requirements for annual and quarterly reports and the Securities Act of 1933 that
requires that information communicated to investors must be truthful and not misleading. Some would contend that the regulatory aspects of IR are what differentiate the function
from PR. A look at the NIRI Standards of Practice for Investor Relations would support that contention.
As mutual funds began to grow and dominate the market in the late 1980s, the focus on individual investors as a function of corporate communication began to shift to the
corporate finance division since analysts and portfolio managers preferred to get their information directly from the chief financial officer or someone reporting directly to him
or her. Today, two-thirds of NIRI's 3,900 corporate members report to a CFO. Twenty-six percent report to the CEO where most are responsible for the combined functions of IR and
corporate communication.
Coming Together
So, what is going on that would suggest that IR and corporate communication should converge? Put simply, all roads of corporate communication - IR, PR, employee communication,
strategic communication, corporate branding, etc. - support the enhancement of corporate value. Today, Professor Baruch Lev of the Stern School of Business in New York says about
80 percent of the average S&P 500 company's market value is due to non-financial factors or intangible assets - factors that cannot be found in companies' financial
statements. The most important of these is "quality of management" followed by such factors as innovation in new product development, intellectual capital, research and
development activities, use of technology, corporate brand and corporate governance.
The function of IR - generally considered a hybrid of finance and communication - is to accurately communicate relevant financial and non-financial information so the market
can determine the company's value relative to its peers.
Yet, there seems to be little consistency in how companies communicate non-financial information to the institutional analysts and investors. This calls for new valuation
models incorporating both financial and non-financial factors along with means for communicating that information to the investment community.
It also suggests, from the standpoint of message development, that the company speak with one voice - that there be consistency in corporate messaging. Today, in many of the
larger corporations, IR and PR operate in separate silos. For example, in some companies, the IR officer is not allowed to talk with the financial media, so a media relations
person in corporate communication takes a query, refers it to the IR person who provides a response back through the same channel. In this situation, there's no opportunity for a
dialog. Investor relations officers talk willingly with analysts and there's little difference between the role of analysts and reporters. Some IR pros are afraid of the media and
prefer not to deal with reporters, but this does not work in today's disclosure environment.
The concept of "convergence" of IR and the other corporate communication functions should be driven by the need for functional coordination, as opposed to being driven by the
organization chart. While the ideal situation may be to have all corporate communication functions managed by one person who reports to the CEO, the reality is that many CFOs may
be reluctant to give up the IR function. In either case, the days of operating in silos are over. Companies have too much at stake to allow this practice to continue.
Louis Thompson Jr. is president and CEO of the National Investor Relations Institute and is a PR NEWS Advisory Board member. He can be reached at [email protected].
Creating an Integrated Communications Pro
If more companies place IR and other communication functions under one umbrella, do we have an adequate pool of professionals who can effectively manage the combined functions?
Executive recruiters will say that the number of people with strong IR experience who can also execute a communication strategy and a corporate branding program are relatively
few. Yet, assuming convergence is the way of the future, there are clearly career opportunities for those who can manage all of these functions.
To that end, NIRI is developing a Center for Integrated Communication. The Center, which will operate as part of NIRI, will have four functions:
- Research on communicating corporate value,
- Professional development for those with finance backgrounds to learn about the communication functions and for those with communication backgrounds to learn about investor
relations, - A repository for the body of knowledge of the combined communication functions, and
- Advocacy for the importance of integrated corporate communication. CEOs will be the primary targets of the advocacy program.