(The following is an excerpt of a speech recently given by Louis M. Thompson Jr., president and CEO of the National Investor Relations Institute and a member of the PR News
Board of Contributors, at the NIRI Chicago chapter.)
My vision for where the market place will be five to 10 years from now and what life will be like as an investment relations officer (IRO) looks like this:
First, the sell-side will no longer exist as we know it today. The brokerage firms will still perform their investment banking role but research will come largely from
independent research firms and from issuer-paid research for the buy side that will be performed by third parties. Meanwhile, the buy side will continue to beef up its internal
research capability and will use hard dollars to buy sector research from independent firms as a check on their own internal research.
Hedge funds will continue to grow substantially but will become regulated and more open to investors who are below the current threshold for "high net worth" individuals.
I believe we will have two primary electronic stock exchanges in the U.S. - the New York Stock Exchange and NASDAQ.
The trading systems will be truly globalized with 24/7 trading. (IROs won't sleep.) And, overseas exchanges will flourish, though we may well see consolidation among the global
exchanges. Along with this, the number of non-U.S. companies traded as ADRs (American Depository Receipts) will diminish. Why? We're already seeing non-U.S. companies avoid
listing as ADRs on the NYSE and NASDAQ because of Sarbanes-Oxley (SOX) and the exchanges' listing requirements, but most importantly, because they no longer have to come to the
U.S. to access capital. There's plenty abroad. And, we may soon begin to see some US IPO's list on an overseas exchange like the London Stock Exchange to avoid SOX requirements.
Quarterly reporting will be replaced by real-time disclosure. SOX section 409 will be expanded beyond the current 8-K filing requirements and will require current reporting on
material changes in financial condition or operations. Actually, that is the language contained in section 409. This will be a welcomed change by all who want to see a
significant shift from the short-term emphasis on corporate performance toward the long-term interest of the company and its shareholders.
The Road Ahead
There is evidence that our definition of IR as a strategic function, unfortunately, has not been fully realized in some companies. The evidence comes from conversations with
our members, our surveys and more recently the 2005 Rivel Research survey on the challenges facing IR officers along with Rivel's soon to be completed bench-mark survey of
CEOs on their involvement in and perception of IR. All of those who head an IR department should strive to achieve a seat at management's table so they are in on the takeoff, not
just the landing.
I wish I had nickel for every time an IRO has talked about being told of a major decision and given just hours to prepare a news release and make the preparations for a news
conference or Web cast announcement. At no time was the IRO involved in the decision-making process nor was she or he asked how the decision would play on Wall Street.
So, how have those who have earned a seat at the table get there? Most got there by "seizing the moment" when they were able prove to their bosses that they had something
strategic to offer. And, their role went beyond being at management's table taking notes. They were proactive in providing valuable strategic input to the decision-making process.
The 2005 Rivel study shows that while over, 61% of the vice presidents for IR say they are involved in strategic planning, only 42% of those in S&P 500 companies said they
were involved in this process.
Also, 53% of VPs attend board meetings, but only 22% actually make presentations to the board more than once a year. And, only 30% of VPs meet with investors without
management being present. The percentages dropped precipitously for those with the titles of director or manager.
Perhaps, the most compelling evidence that many IROs are missing the strategic boat will come forth in Rivel's benchmarking survey of well over 100 CEOs. When asked, "...what
are the most important means or metrics by which you measure the effectiveness of the investor relations function in your company?" Virtually across the board, the CEOs said - the
ability to communicate the company's strategic message to investors.
The CEO And IR
These results also convey a significant disconnect between how CEOs evaluate the IR program and how IROs evaluate themselves. The latter measure their effectiveness in largely
quantitative terms while the CEOs make a qualitative evaluation. Rivel's 2005 survey shows that IROs tend to measure their effectiveness in terms of tracing/counting the number
of meetings, interactions or "touches" with investment professionals; how these interactions have prompted investment in the company's stock; expanding sell-side coverage;
measuring relative valuation and stock price compared with their peer group, and so on.
These are all quantitative measures. Only 23% measured their effectiveness in terms of whether the company's strategy is resonating. And, they did so largely by monitoring the
thoroughness and accuracy of sell-side analyst reports, not on whether the strategy is resonating with the buy-side.
Reading between the lines, since more than three-fourths of IROs report to CFOs, perhaps their bosses are measuring them using more quantitative means while the CEO is making a
more qualitative assessment.
The most compelling evidence that many IROs have not achieved a seat at the table is their frustration over the lack of senior management's appreciation of and support for IR.
According to the Rivel survey, "IROs are saddled with a dearth of financial and human resources." The typical IR program for an S&P 1500 company is staffed by one IR
professional and has an annual operating budget of around $600K, extending upward to $900K for S&P 500 companies.
Therefore, how does the IRO, who is not playing a strategic role at senior management's table, become the key who will be intimately involved in the strategic planning process?
This means providing valuable input based on a thorough knowledge of how the company runs its business, knowing the industry in which the company operates, and how the financial
and non-financial factors contribute to the achievement of the company's vision and goals that support that vision.
Contact: Louis M. Thompson Jr., 703.506.3570.