Rethinking the investor relations director

The title ‘investor relations director’ rather speaks for itself. It relates to developing, sustaining and deepening the company’s relationships with its investors. Some organisations refer to this as role as communications director, corporate communications director, or even marketing and communications director. This article suggests a radical rethink of the IR director’s role, to view it more as someone who is a share-price strategist and who outlines the business benefits.

It’s interesting to observe how the IR director’s reporting line suggests his or her positioning within the organisation.

Many IR directors report to the chief financial officer, although some report directly to the CEO. Even in this case, however, several IR directors do not consider themselves to be part of the inner sanctum. If the CEO calls a meeting of the top four, it’s unlikely the IR director will be involved – though he or she probably does make it into the top 12.

How IR directors are perceived
The IR director’s function is viewed primarily as one of external communication, which is why he or she may also become aligned with marketing. In the majority of cases, wherever he or she is positioned, his/her role is normally seen to be one of business support. How does the management team view IR directors? Most chief executives view them as a support function because the IR director doesn’t lead a business unit, manage a product line or have specific operational responsibilities.

Management teams tend to view IR directors as a communication, marketing or investor relations person and therefore don’t always expect their presence at the top table. And in a few cases the IR director’s role still remains a mystery to the executive team. Most CEOs and CFOs see the IR director as providing a channel between themselves and investors to handle investor inquiries and provide company information to the market. This aspect of the IR director’s role means he or she must understand the financials.

How do investors view IR directors? They see them as a key way to obtain information. This means not only must IR directors be financially proficient, but they also need to be exceptional communicators – and in many instances good on their feet, too. Building effective relationships with investors requires a high level of interpersonal skills, backed up with a proficiency in designing (and often delivering) motivating presentations. It really is a multi-skilled role.

Most IR directors in the world’s top 100 companies have a team working with them. This team’s job usually reflects the IR director’s role and this team also spends a significant percentage of its time talking to individual investors, organising events, and so on. Larger teams will probably have upwards of a thousand investor contacts through meetings and phone calls.

These teams organise regular presentations to different investor groups, which include the large annual and bi-annual presentations and one-off presentations for smaller groups. Today’s teams are usually exceptionally web-savvy in their channel mix, understanding the importance of video presentations online, for example.

Investor relations communication activity clearly focuses on investors, where much of the work involves explaining company strategy to them, providing regular company reporting and publishing company results. The brief for most IR directors and their teams, therefore, is to communicate and market the company’s messages to investors.

Why rethink the IR director role?
So far, so traditional – but there is a missing function that is much bigger than the current one. Landing it will require the next wave of vision surrounding IR functionality to create a new role: share price strategist.

One of the key factors in calculating share price is free cash flow, which equates with profit times a multiple. This is also understood in investor circles as the price earnings (P/E) ratio, where ‘earnings’ is used to describe the profit descriptor and ‘price’ the multiple descriptor.

If you ask your chairman or CEO how many people he or she employs trying to improve earnings and how many people are trying to improve the price, you are likely to get a common response. The vast majority of companies employ all their people in efforts to improve earnings because they assume the multiple is out of their control. But what if that primary assumption is false?

Fund managers know that every industry contains companies with a range of multiples. The best companies have the highest multiples, and these multiples decline on a sliding scale down to those considered to be the poorest companies (those with the lowest multiples). Because companies have different multiples, it is evident that there must be a specific method to calculate them.

Given that a mathematical formula for calculating the multiple exists – and that it gives varying results for each company – it must therefore be possible to influence it. This means it is possible to present to investors that your company deserves an increased multiple. This goes beyond simply presenting that your profit will go up and that your business therefore deserves a better multiple; most management teams assume their multiple will go up as long as they continue to prove their earnings will rise. But some factors, which are taken into account in terms of which multiple you are given, differ from those influencing your profit.

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