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
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.