Investor Relations – Why We Need It

Maximizing a Smaller Company’s Potential as a Publicly Traded Company

By Donna Dolan, Principal, Jones, Dolan & Co., Inc.

Investor Relations (IR) is a broad-ranging topic.  In its simplest form IR means maintaining good relationships with one’s investors. In reality, the investor relations function encompasses several vital and interrelated components, including timely communication of earnings and other material events, coordination of marketing communication efforts, establishment of good relationships with investors, and strong corporate governance.

To the non-strategic business manager investor relations may not seem to be that important – after all, once you have an investor’s money, put it to good use, and are paying the agreed interest or dividend payments, who cares about the relationship? While this perception may drive common business practices with debt holders, it is definitely not the best way to get and hold equity investors!

In general, equity investors need more hand holding than debt holders; in particular, the Securities and Exchange Commission (SEC) requires companies to provide more assistance to these stakeholders. The primary vehicle to accomplish this is through the required disclosure of material events. While the company’s disclosure obligations associated with equity issuance are well defined, the mechanism of the disclosure process, if done by rote with an eagerness to just comply with regulations, may not provide the investor with enough information to fully understand the value of the investment.

A company’s value is made up of a combination of the company’s actual performance and the investor’s perception of future performance. Investors’ perceptions of the firm, particularly of its ability to contend with market changes, can have a profound effect on valuation. Importantly, the shareowner often perceives an information gap between a company’s management team, the people who really run the day-to-day operations of the business and themselves — some might characterize this gap as mistrust. The management team, with their vast knowledge of the company’s strengths, weaknesses, competitors and markets, has knowledge of the company’s business unknown to the shareowners. This knowledge, when revealed, either intentionally or otherwise, can cause significant volatility in the stock valuation, causing the shareowner’s position to fluctuate.

This perceived information gap can foster ill-will among shareowners as well as a lack of support for the firms’ shares.  A bit of bad news emanating from a cable news network and the equity investor may sell his position first and ask questions later! Clearly this is a scenario that the successful CEO wants to avoid.

A strong, well-executed investor relations program will help a public company close this information gap and it will ensure that the company meets its fiduciary responsibility to its shareholders. Moreover, a well-executed program will help the company attain optimal valuation for its stock while helping to minimize its cost of capital.