In short:

  • As investor demographics and expectations change, the practice of investor relations needs to evolve as well
  • As CFO, look for IR pros who know your vertical, can craft effective communications, understand new ‘conscience investing’ norms and stay cool under pressure
  • Technology enables richer and more frequent connection points with investors – but also invites higher levels of scrutiny and increases the risk of very public missteps

Wanted: Extrovert with strong interpersonal skills, excellent financial analysis and writing ability, an understanding of general and industry-specific corporate governance practices, a rolodex of finance contacts, technical skills including databases and social platforms, a PR mindset and a tolerance for rollercoaster IPO market fluctuations.

Sound like a unicorn? Welcome to the world of investor relations.

These professionals also need to be flexible, as a 2019 survey conducted by the National Investor Relations Institute shows. Fully 97% of respondents said they believe the investor relations practice will transform over the next 10 years, fueled by rapid-fire changes in technology, communications, investor engagement, activism and more.

CFOs need to care because the IR function is increasingly falling into their portfolios. In a McKinsey Global survey, the number of CFOs saying they are responsible for investor relations rose by 13% between 2016 and 2018, to 46%.

Perhaps at this point you’re wondering why this is. And that wouldn’t be an outlandish question, because the function didn’t roll up to finance initially. However, numerous events and transformations in the market have solidified IR’s importance — and altered the role completely.

As an established function, IR is still relatively young. The first corporate IR department was established as a communications practice by GE in 1953. At the time, IR was considered a form of public relations and was classified accordingly. But in the early 21st century, the corporate world was rocked by a series of finance scandals, most notably Enron. Through fabricated financial statements and false information, Enron garnered favorable recommendations, credibility and investors from around the world, including a large number of their own employees. In the four years leading up to Enron’s bankruptcy, those shareholders lost $74 billion.

Similar scandals in companies like WorldCom, Adelphia Communications and Tyco, which were found to have manipulated their financial statements, drove investor confidence in financial disclosures and corporate governance to an all-time low. In 2002, the SEC introduced the Sarbanes-Oxley (SOX) Act to institute more oversight and regulation, particularly in regard to the IR practice. This instigated a change on the investor side as well, as buyers vocalized their need for information, transparency and two-way communications.

This increased emphasis on audit accuracy, reporting, disclosures and compliance shifted IR into a specialized realm that required a financial background, not simply PR.

Today, the CFO must embrace IR’s original emphasis on transparent communication while capitalizing on new technology and data to meet shareholders’ needs.

Directive 1: Know your Audience

One size does not fit all when it comes to IR. What resonates with one shareholder may not register with another. An integral component of success is to know your company’s potential investors, or investment targets, and customize accordingly.

The target audience for IR tends to be split into two segments: the buy-side and the sell-side. Looking first at the buy-side, these entities purchase and invest large amounts of securities for money management purposes. Their goal is to provide returns and manage risk for their clients’ investments. Due to the nature of their work, the buy-side entity will typically understand a company on a more comprehensive and intensive level since they are either considering or have committed capital to it.

If your company is more focused on who currently owns your stock or imminent investors, the buy side is the place to target your IR efforts. According to Eric Pillmore, senior adviser to Deloitte’s Center for Corporate Governance, CFOs will likely spend at least 20% of their time in IR, with an 80/20 or 70/30 split favoring buy side; Pillmore offers more tips for CFOs here.

While the buy side tends to be afforded more attention, CFOs need to be aware of the sell-side entities in their orbits, because sell-side intermediaries are the influencers in this equation. They may not have 7 million Twitter followers or a seat on Shark Tank. But investors do heed their research, which delves into company performance, management details, projected future financials and other criteria.

Sell-side entities take all that intel and assign a price target. They issue recommendations, which are called ratings, usually in the form of “buy,” “sell” or “hold.” These investment analyses are circulated to the firm’s clients; they’re also available in the public domain and are used by institutional investors to gauge prevailing sentiment. The sell-side tends to be focused on factors that will influence their financial modelling and research reports, such as quarterly update calls. For CFOs of companies hoping to be acquired, these are important voices.

Who's Buying?

While this audience categorization is useful when crafting communications, a strong IR pro needs a thorough understanding of the shareholder perspective: What questions do investors want answered? What are they worried about? What excites them and what bores them? How can I craft my company’s equity story, goals and updates to resonate?

IR professionals may capture this data by informally talking with investors, building relationships and keeping an eye on recommendations. Westwicke, a strategic communications and capital markets advisory firm, suggests a more formal approach as well, in the form of a perception study. This annual audit, often conducted by a third party, allows analysts and investors to anonymously give their thoughts. That frank feedback on your company’s communications, strategy, leadership, performance and more can be used to construct a more effective and customized IR strategy.

Communication is Key

As one of the main figures involved in IR, CFOs are under pressure. They must be trustworthy, confident, reliable, financially savvy, transparent, knowledgeable and likeable. Potential and current investors will be looking for someone who is capable of leading, building relationships and handling the unexpected. An integral component of building that reputation lies in the communications practices a company establishes with its stakeholders.

Of the many communications skills required today, three reign supreme in IR:

  • Frequency: In Deloitte’s Q3 2019 North American CFO Signals survey, 97% of CFOs surveyed reported talking with key buy-side analysts on a quarterly or more frequent basis; 96% speak with sell-side analysts at the same cadence. Some frequency in communication is mandated, such as around conveying financial and operating results. However, many companies choose to disclose more than what’s required to establish relationships, value, understanding and transparency. When investors have more information, they tend to assign lower risk to a company, ultimately resulting in a higher market valuation and more long-term value. The CFO must work alongside the CEO to implement regular communications — one-on-one in-person meetings, conference calls, group get-togethers, written reports and email updates — to foster connections and confidence.
  • Proactivity and transparency: At some point, the unexpected is going to happen. It could be lackluster financials, a key executive leaving the company or a breach where attackers name your company publicly. This is not the time for spin, cover-ups or avoidance. Instead, IR leaders must inform investors as quickly as possible of the situation and any potential fallout. Pro tip: Use phone, video or in-person channels whenever possible. Emails can be misinterpreted and not well-received. Additionally, for public companies, notify all investors at once to avoid any issues with selective disclosure. And, in cases where personal information may have been stolen, all 50 states have notification requirements. Investors will want assurance that you’re on top of communications.
  • Clarity: Investors want to understand your company’s performance, milestones and strategy. They also want to see how it all ties back into the financial model. Realistic business plans with an actionable execution roadmap are invaluable. IR best practice is to get buy- and sell-side experts the information they need to see the long-term value of your company, minus any marketing fluff.

Your Investors are Using Technology. So Should You

Technical innovations like stock scanners, investment apps, robo-advisers and online investment education resources have made investors more financially savvy, communicative and well-informed than ever before. However, the benefits of technology do not accrue solely to investors. Technology offers an unprecedented amount of opportunity for companies looking to enhance and evolve their IR practices.

Who's Selling?

Perhaps one of the biggest innovations in store for IR pros is the integration of predictive analytics, machine learning and even AI. These technologies are allowing firms to codify previously qualitative IR efforts. For instance, companies like Sentieo, FactSet and Amenity Analytics have begun offering earnings sentiment research. These firms take earnings call transcripts, SEC filings and conference presentations and employ algorithms to identify insights, like audience composition and targeting, language that can positively or negatively affect sentiment, what influenced conversions and other successes, and what is the “right” information to include when talking to investors.

Using these new capabilities will allow CFOs to revise their messages, strategy and scope based on concrete information.

Additionally, technology provides opportunity in the form of communication outlets. Companies have more access to shareholders than ever before. Investors want — and expect — IR teams to use all available platforms to ensure transparency and dialogue. According to Brunswick’s 2019 Digital Investor Survey, 98% of investors use digital resources, including websites, blogs, online articles and podcasts, to research a company, and 88% make investment decisions based on that information. These statistics reinforce how important it is to have digital distribution channels to disseminate and collect important details about your company.

However, perhaps more surprising was Brunswick’s findings around social media: 63% of investors use LinkedIn as a platform for research, 55% use Twitter, 43% use YouTube and 23% use Facebook. Moreover, 26% made investment decisions based on LinkedIn, 35% based on Twitter, 18% based on YouTube and 16% based on Facebook. Additionally, half of investors use digital media — social platforms, videos, blogs, podcasts — to learn more about what C-suite executives are saying, a 21-point increase over the previous year.

Investor depends of social

Evidence shows that neglecting these less-typical tools is a missed opportunity when it comes to reaching investors.

Proceed with caution, though. The past few years have seen plenty of cases of comms gone very wrong through perhaps too much access to digital outlets. Who can forget Elon Musk’s consequential Twitter storm and ensuing SEC charges. Or the #BoycottUber campaign that peaked after Uber CEO Dara Khosrowshahi called the murder of Washington Post journalist Jamal Khashoggi a “mistake.” We could go on. The point is, with frictionless communications comes increased scrutiny and risk of execs going rogue.

To lessen the chance of a negative or controversial outcome, executives should participate in media training. Whether in a scripted or unscripted capacity, leaders should be able to clearly and confidently articulate the company story.

Anticipate Social Initiatives

In the great alphabet soup that is finance acronyms, two that you’ll see bubbling up more frequently are “ESG Investing” and “SRI.” These refer to “Environmental, Social and Governance Investing” and “Socially Responsible Investing,” respectively. Often, these phrases are used interchangeably with terms like “sustainable,” “social,” “impact,” “responsible” and “principle” investing.

They all refer to the same thing: the rise of conscience-based investments.

A survey by the Morgan Stanley Institute for Sustainable Investing shows 85% of individual investors — and 95% of millennial investors — have expressed interest in socially responsible investing. Furthermore, the 2019 proxy season was the third consecutive year that environmental, social and governance issues have made up the majority of shareholder proposals. According to the Global Sustainable Investment Alliance, ESG investing grew to more than $30 trillion in 2018, and some estimates say it could reach $50 trillion over the next two decades.

“Responsible investment is central to our investment philosophy,” Claudia Kruse, managing director global responsible investment & governance at APG Asset Management, recently told HBR. “Portfolio managers are accountable for assessing every investment in the context of risk, return, costs and ESG. This has been an internal cultural evolution.”

Perhaps the most newsworthy examples of ESG occurred at the end of last year. Sisters of Mercy, an investment fund representing 9,000 nuns, filed a joint motion ahead of BlackRock’s annual meeting with more than 10 other shareholders. In the resolution, the group stated: “We believe it is BlackRock’s fiduciary responsibility to review how climate change quantitatively impacts…portfolio companies, evaluate how specific shareholder resolutions on climate may impact shareholder value, and vote accordingly.”

Coincidence that last week BlackRock CEO Laurence Fink announced that the world’s largest asset manager would put “climate change at the center of its investment strategy,” including divesting thermal coal producers?

As investors increasingly expect ESG commitments, it is imperative for CFOs and IR teams to communicate that story along with more traditional metrics, such as capital allocation and cash flow. Unlike those metrics, though, ESG does not yet have mandated reporting standards, despite being financially material. Thus, it becomes the duty of the investor relations expert to determine how best to satisfy investors while not overpromising.

Hiring Plan: Investor Relations Specialist

Which brings us to one last point: Many companies now see the benefit of utilizing a standard form of disclosure. As markets evolved, investors demanded transparency into intangibles behind companies’ financial filings that could affect long-term value. Companies in turn vocalized a need for a way to identify and manage sustainability issues — and communicate them to shareholders.

In response, the Sustainability Accounting Standards Board launched the first set of industry-specific accounting standards to measure, manage and report on the sustainability factors that drive value and matter most to investors. Standardizing this information allows investors to better understand a company’s performance and how it compares with others within the same industry.

It is this demand for reliable, comparable, consistent and financially material metrics pushing ESG reporting into the purview of the CFO and, by extension, the IR team. Investors are not simply looking for a list of ESG activities. They are looking for investor-grade information that analyzes material ESG issues, identifies their connections to financial performance and uses that information to chart a course toward long-term value creation.

Investors today are more informed than ever. The IR function has developed immensely over the past 50 years, and it will continue to evolve. CFOs who build a comprehensive IR strategy to account for changes in technology, communications and priorities will equip their companies for success when it comes time to seek investment.

Megan O’Brien is Brainyard’s finance & business editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Reach Megan here.