What's Next For IR? Closing The Insight Gap

16 June 2019  |  Admin
What's Next For IR? Closing The Insight Gap

Part 3

The past two editions of IR Brief have been inspired by the 50th anniversary report from The National Investor Relations Institute (NIRI), on the big issues facing investor relations. The profession has reached a “burning platform” moment, says NIRI, with a perfect storm of new technology, market disruption, and shareholder activists threatening to make Investor Relations at best a tactical and less relevant function, at worst an irrelevance.

Iridium agrees with NIRI’s alarm, but we believe the issue is deeper and more fundamental: Rather than simply pinning the blame on technology or markets, the entire capital markets landscape has profoundly changed, and those who attempt to apply yesterday’s solutions to today’s problems are doomed to failure. 

NIRI makes a point of highlighting the shrinking number of companies that are listed on public exchanges, from around 7,500 listed US entities in 1999 to just 3600 today. This is not the real issue: Strategic Investor relations matters to all business, whether public or private, and by restricting its focus to public companies, NIRI is in danger of missing the point. 

Being a public company is not easy 

As regulation, compliance and other mandatory infrastructure has grown around public markets, the weight of being a participant in those markets has also grown, and being a publicly traded company has carried the heaviest burden. Disclosures, quarterly reporting, the application of big data by institutional investors, the rise of the algorithmic trader, and the relentless tide of regulatory compliance have combined to make public listings a sometimes joyless task. Add to this the growing cost of compliance required, and the attraction of alternative sources of capital is understandable. 

Frequently, the IR function in listed companies has failed to keep up with this burden. IR teams are swamped by the day-to-day tasks they need to do: every quarter, most IR teams are in lockdown for four or five weeks, preparing presentations, finalising the financials and endlessly refining their information materials. So time-consuming has the preparation of results become, that many companies only update the previous quarter’s disclosures, which of course leaves investors feeling short changed. 

This is not the role of strategic IR. If the role was simply to produce up to date numbers, IR would be done by financial professionals and computer programmes. Instead, the function of investor relations should be precisely that: to build relationships with investors. Every IRO should be thinking the way investors think: What is really important? What is going to move the needle? What risks are we facing? Where do our peers differ from us? And then devise insights for the CEO accordingly. 

And yet many IROs rarely get to have these conversations with their CEO, because they are completely tied up in publishing slightly different numbers in the same format as last quarter. This is what the function has been reduced to in many companies. 

This is a failure by IR teams to understand the perspective of their investors. Earnings calls have become something to appease the regulators, rather than to offer insight to investors. And every IR professional who goes along with this is part of the problem. 

The Insight Gap

Numbers alone do not deliver any insight. Yet year-on-year or quarter-on-quarter movement descriptions are often 90% of an earnings statement, with any commentary restricted to a few platitudes from the Chairman or CEO – taking credit for achievements if results are positive and blaming market conditions if results are negative. 

From the investors’ angle, this is at best lazy, at worst it looks like deception. And this mismatch of expectation and delivery, what we might call the ‘Insight Gap’, has led directly to the rise of the activist investor: Investors are the owners of the company, and if they do not feel engaged and aligned with the thinking and plans of management, they have every right to try to make changes. 

By not offering those insights and plans, companies are at risk of losing the trust of their owners. Because, lets face it, most data-driven information material is dull. Often ugly, frequently hard to understand, and regularly used to mask inconvenient truths, financial results are also prone to human error and bias. But they must be delivered, and the best way to do so is to automate the task. 

With automated data, the IRO has time to take on the strategic role that investors demand. Freed from the rigours of compiling another complex earnings presentation, IROs can collaborate with the C-Suite to deliver real insight, using the inside knowledge of what is important to investors that they have gained from having more time to interact with those investors. Not only that, but a large margin for error will have been removed from the task of compiling the numbers.

The timetable of corporate strategy does not match the timetable of regulatory reporting. In any 12-month period, news flow, market gyrations and human emotions will all contribute to the performance of a stock price. But corporate strategy will take far longer to achieve, and if Investor Relations is to be of use to shareholders and to issuers, then we need to concentrate on the beneficial trends of decades not the specifics of the current preoccupations of the moment.

Freeing the IR team by automating data management and presentation is a start.