Alexander V. Laskin - Investor Relations and Financial Communication

Financial analysts, however, were not valued highly in the corporate world; in fact, they were often regarded as “pests or worse” (Morrill, 1995). Yet, educated and knowledgeable analysts demanded lots of information on the company’s finances, strategy, sales, research and development, and so on. Investor relations practitioners with no or little knowledge of finance were not capable of providing such information and often could not even speak the same language as the analysts did.

In addition, financial analysts themselves were not accustomed to dealing with investor relations people. In fact, analysts were around long before the 1970s. In 1945 the New York Analysts Society already had 700 members and the number was growing fast. IROs, however, did not communicate with the analysts before the 1970s as they were mostly occupied with the retail shareholders, the dominant market force at the time. The job of communicating with analysts often fell to the chief financial officer (CFO), or somebody in the treasury department. As a result, when the 1970s brought the shift from retail to institutional ownership, many of institutional analysts already had their pre-established contacts at the corporations – most often in the finance department. Many analysts were not even aware that they needed to communicate with the investor relations people. They tended to go to the same source they used to go to earlier – a person in the treasury or finance department. Retail investor and professional investor communications were completely separated. Even today, because of this history, at some US corporations there are two separate departments: the investor relations department , aimed at professional institutional shareholders; and the shareholder relations department , aimed at individual retail shareholders.

The role of mass-mediated communications in investor relations suddenly lost its importance. Public relations practitioners were losing their grip on investor relations, while the financial departments were engaging in talks with analysts and institutional investors more and more often. It was not a one-day switch, but a slow transition over the years that eventually brought investor relations from the public relations office to the office of the CFO.

Typical CEOs, however, were still actively trying to avoid the financial gurus of Wall Street in the same way as they had been trying to avoid private shareholders earlier. Executives were used to being the only ones running the show and they did not plan on sharing their powers with either undereducated private shareholders or overeducated financial analysts. However, private shareholders were easy to deal with and could be kept at bay by using mass media and giving them occasional hand-outs. Management succeeded in creating “a nice warm feeling” in shareholders and keeping them “happy and calm” by avoiding “telling them anything that wasn’t legally required” (Morrill, 1995). The financial analysts, however, were far more difficult to please.

Financial analysts were not satisfied by the small amount of substantial information the companies were disclosing. They asked questions, sometimes questions “that management had not asked itself, or for various reasons did not want to answer” (Morrill, 1995). Moreover, institutional investors had power over the companies they owned stock in and perhaps even more power over the companies they did not invest in. Large institutional players could sweep all the company’s shares off the market, pushing the price up, just to unload them several days later causing the stock value to plummet. Chatlos (1984, p. 88) recalls, “The new institutions had so much money to invest that there literally was not enough time to observe the prudent ground rules. The new method was to dump the shares when a sell decision was made and to buy as quickly as possible when that decision was made. This had a severe impact on market price volatility.” If earlier private shareholders at least smoothed out this volatility, in the 1970s with individuals off the market the price was in the hands of the financial analysts. A single word from the company might have changed the price of stock enormously. The management decided they would rather avoid meeting with analysts altogether for fear of saying something wrong.

As a result, the investor relations profession in the 1970s experienced a notable change. Investor relations moved away from the public relations of the 1950s and 1960s. First, there was no demand any more for mass-mediated communications to myriad private shareholders, who moved off the market. Second, institutional investors demanded other communication channels than mass media. In addition, earlier public relations-based investor relations practices had left a bad taste in the mouths of Wall Street professionals, and financial analysts rarely wanted to communicate with this breed of investor relations professionals. Institutional investors and analysts tried to talk with managers of the company directly. The management, however, avoided any direct contact, choosing instead to communicate through the corporate secretaries or forward the calls to the CFO’s office or the treasury department.

In response to these changing demands, a new type of investor relations professional was emerging. Management often saw former financial analysts as being ideal IROs because they were expected to easily find a common language with the company’s financial analysts and professional investors. Wall Street-based firms started offering investor relations services, too. These firms were often an outgrowth of investment banks and thus had strong connections with and deep understanding of the financial markets.

These changes in the investor relations landscape had a strong effect on the investor relations function itself. Powerful and knowledgeable institutional investors evaluated every action the company took and were not afraid to ask questions and provide criticism if they did not believe the action was in the best interests of shareholders. Higgins (2000) describes the new institutional investors:

They have successfully sought an activist role in corporate governance, focusing their institutional power on company’s performance, the proper role of the board of directors, and executive compensation… The overall impact of the institutionalization of U.S. equity markets has been to make the job of the investor relations executive infinitely more challenging and complex.

(pp. 24–25)

From provider of information investor relations professionals had to turn into defenders of managers’ decisions – if investors had criticisms of company actions, investor relations were expected to provide counter-arguments to explain and protect the company’s executives. IR meetings started to become argumentative and, at times, confrontational. Proactive investor relations practices called for anticipating shareholders’ reactions and preparing to respond to them in advance. Financial analysts-turned-IROs prepared their own analysis to counter-act anything that other financial analysts may throw at them. Shareholder research became a necessity. Some IROs simply did not allow negative questions to be asked at conferences and annual meetings, tightly controlling the communication channels. Top executives wanted to stay away from all of this as far as possible.

The focus of investor relations, in addition to protecting the top management, was often on persuasion and making the sell. Marcus and Wallace (1997) explain that investor relations became “the process by which we inform and persuade investors of the value inherent in the securities we offer as means to capitalize business” (p. xi). Ryan and Jacobs (2005), financial analysts turned investor relations consultants, suggest the investor relations contribution is helping the management to “to package their story for institutional buyers or sell-side analysts” (p. 69).