Why invest in investor relations?

Posted on February 20, 2012 by Anthony Fensom

Is investor relations like nurturing a bonsai?

Companies considering committing time and effort in investor relations (IR) campaigns now have a powerful incentive to do so.

According to research conducted in both the United States and Australia, “superb” IR does have an impact on company valuations, with one survey showing it can affect market value by as much as 25 per cent.

Rivel Research Group surveyed 302 buy-side investors from the United States and Europe in spring 2011 to determine the impact of positive IR on market value.

The results showed that “IR can account for a total variance of 25 per cent in a company’s valuation – ranging from a premium of 10 per cent for ‘superb’ IR to a discount of fully 15 per cent for ‘poor’ IR”.

When asked what they considered to be “superb” IR, respondents cited disclosure, responsiveness to queries and access to senior management, but the key message was the need for transparency.

While companies may provide copious amounts of data on their operations as part of their disclosure obligations, Rivel said transparency in terms of connecting the dots between what the data meant for future performance was often lacking.

The key to transparency is following the same principles as any good communicator – being open, honest and frank.

But what does transparency in IR mean?

One buy-side analyst/portfolio manager explained to Rivel:

“Being candid. I think that is the number-one thing..and not dodging questions. These are tough issues these days, so there are tough questions to be answered. If they are very candid in their answers, for that they get respect. And getting back to me in a timely manner if they can’t answer questions on the spot.”

Rivel said getting the premium of 10 per cent did not mean providing more information, but rather, the right kind of information concerning strategy and how it related to future performance.

According to Ian Matheson of the Australasian Investor Relations Association (AIRA), IR is a two-way process which can ultimately lead to a reduced cost of capital for companies.

“Good IR is like pumping up a football – you have to keep pumping, and it takes time and effort before you see the results,” he says.

“You have to keep communicating during the good times and bad, and you shouldn’t link the share price to a successful IR campaign.”

In July 2011, AIRA released its own survey results which showed that “excellent” IR practices could contribute more than 5 per cent to the valuation premium of Australian listed companies.

An overwhelming 89 per cent of respondents, comprising fund managers and analysts, said IR had an influence on corporate valuations. Importantly, 30 per cent said the discount for poor IR could be greater than 15 per cent.

The effects may be even more pronounced at the smaller end of the market, where competition for attention from the investment community, media and public is greater.

Ultimately, positive IR is based on successful communication. It is about expressing your value proposition with a clear and simple message, and knowing your company and your investors.

By clearly and consistently stating objectives, communicating through the good times and bad and being reliable and consistent in your IR activities, it is possible to be rewarded with a higher market valuation than might otherwise have been achieved.

For more information on this subject, refer to the Rivel research at http://rivel.com/blog/?p=19 or the AIRA website at http://aira.org.au/

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