The New Age of Investor Relations

So far in 2020, we learned with abject certainty that “business as usual” is an axiom of the past. COVID-19 continues to wreak havoc on the world, leaving in its wake total carnage of economies, businesses, communities, schools and health care systems. As world leaders and health experts attempt to define a semblance of the “new” normal, we’re all reminded that the future can only be forecast, not foretold. This means it’s time to adapt.

Established crisis management plans, from a global perspective, did not anticipate this crisis. Determining the full scale of impact will take decades, though the effect on America’s businesses, however, is closer at hand. As the pandemic peaks and plateaus, we will see which public companies successfully adopted a new-age strategy to retain, attract and communicate with the lifeblood of their existence: the investor community.

The game plan for many CEOs thus far has been to reduce overhead and adjust operations to minimize impact on the bottom-line and ensure continuity with customers. In the midst of these changes, temporary disregard of the financial community to focus on corporate survival is expected, though admissible for only so long and to a small degree. If broader market performance is any indication, existing and perspective stakeholders are watching to gain clear understanding of what measures are taken to manage liquidity. Qualitative information – the company’s new business model and strategic direction – may be more important to convey in the near-term than quantitative financial documents. In order to stabilize stock prices, shareholder performance-expectation must align with the actual decisions made by management.

Of extreme, immediate importance is timely communication that answers the most common questions of the investment community.

For instance: Are there pressures on demand for your goods and services? Are you able to meet this demand? What is the impact from supply chain disruptions? Are projects being delayed or cancelled? How are you managing your human capital? Are you eligible for government assistance?

There are many more questions, with relevancy based upon industry sectors, some of which are impossible to answer during this changing environment. Even so, investors are observing management’s ability to handle the current crisis and evaluating the longer-term merits of making or holding investments. In the absence of concise answers, it is critical that public companies communicate to shareholders how they are monitoring economic indicators and steps they are taking to manage relationships with suppliers and customers.

Is Face-to-Face Gone Forever?

Nothing beats face-to-face communication. The tactility of an in-person meeting can never be replaced, but with the current environment, roadshows, investor luncheons and equity conferences are no longer on near-term calendars. Businesses are forced to find new ways to communicate in both business and social settings. In many cases, the results are better-than-expected and more cost-effective than in-person arrangements. Innovative companies are redirecting their travel dollars to improve their digital presence and create virtual offices. Websites are being overhauled; benign investor relations (IR) sections are coming to life; and webinars and virtual meetings have exploded in both number and the richness of content.

When face-to-face contact is deemed safe, executives will be back on airplanes and checking into hotels. This new digital awareness, however, will not be lost. When the cost-to-benefit analysis is complete, it will gain a permanent place in the IR toolbox.

Planning for Better Times

While trust is a prerequisite for effective IR, it is now more important than ever. “I don’t know what or who to believe,” has replaced “How are you?” as the opening catchphrase. Skepticism is at least on par with optimism.

Fortunately for corporate executives, world governments and mass media have usurped and preserved the lead as those least trustworthy. Mistrust for corporate America, however, still provides a sizable hurdle for those given the task of telling the company story.

When the storytellers are the inside players, the hurdles become taller. Only the most skilled CEOs and CFOs can effectively maneuver through this unprecedented territory. Pure transparency of message – passion without promotion – has always been the bedrock of effective IR and it will be critical in the planning of post-crisis strategies.

Specialized and accredited IR firms – together with third-party, institutional-quality equity research – can help deliver, verify and validate internal messaging.

Think of this in terms of a restaurant. Who best to provide a recommendation: the cook or the customer? Investing in an uncertain future is immensely difficult. But it is the companies with emergent strategies, in the midst of crisis, that captivate the attention of investors. Even Apple was once on the brink of bankruptcy.

Picking the Best Players

Developing an effective IR program is not easy. CEOs and CFOs cannot just hire the solution; they must take an active role in its development. Many companies churn through IR firms, particularly when expectations are not met. Where consistency and clarity of messaging is imperative, churn is not good. Picking the “right” players the first time is imperative in developing a sustainable IR program.

So, what should be looked for in the selection of IR professionals? Specialization is a good start, particularly for companies in complex sectors. It’s akin to choosing a heart surgeon who has performed thousands of surgeries; specific experience will aid in the management of unforeseen circumstances.

Longevity is paramount, both as a firm and in the retention of clients. Longer-term case studies will provide insight into the IR firm’s methodology and how it establishes a rapport with the investment community.

Personnel is also key. Consider the employees of the firm. CEOs and CFOs will need to spend considerable time with the person or team assigned to their account. The chemistry of these relationships will often determine the success of the program. A mutual respect promotes an honest exchange of ideas and information, and a candid discussion of expectations is the kind of relationship that will result in a more cohesive execution of the plan.

Over the last 15 years, attracting the attention of sell-side analysts has become increasingly difficult for small and microcap companies. Independent research provides the foundation for IR initiatives. Through a combination of decimalization, regulation and radical changes in the trading paradigm, small, more illiquid companies struggle to get coverage. Sell-side providers have an equal struggle getting paid by Wall Street for microcap research, so many have moved to higher market cap securities. The evolution of company-sponsored, or “paid” research has provided hope for these companies. With reputable firms, however, the decision to initiate coverage remains with the research department. A rule of thumb: if you can simply “pick them and pay them,” you probably should not.

Company-sponsored equity research (CSR) was stripped of the promotional / propaganda stigma when regulated, licensed equity analysts started writing it. Regulators have clear rules by which this level of analyst must abide by or incur hefty fines, or even ejection from the industry. The broker / dealer that sponsors the publishing analyst is also held responsible for ethical breaches. The relatively small cost to issuers of between $4,000 and $6,000 per month provides little incentive to cheat. Except for the payment method, the CSR process of selection, initiation and coverage through a licensed broker / dealer has not changed. Initially, there were conflict of interest concerns with CSR. Ironically, CSR can reduce conflicts arising from pay-to-play schemes, wherein research is offered in exchange for investment banking arrangements. For a company that has little or no coverage, if CSR is offered, it should be considered using similar standards of specialization and accreditation used in the selection of an IR firm.

Delivering the Message

A balanced and comprehensive IR strategy can only be measured by how it is accessed and by whom. On the research side, CSR or otherwise, institutional investors prefer access through aggregators such as Bloomberg, FactSet, Refinitiv (formerly known as Thomson Reuters) and Capital IQ. Retail distribution is more complex and is usually managed through direct communication with investors or their representatives. A new service, Channelchek.com, offers institutional-quality research on small and microcap companies to anyone who registers on the site. This free service also provides advanced market data, webinars and webcasts, podcasts and news. There are more than 6,000 companies listed on ChannelChek.com, opening a new channel of distribution to individuals and groups who did not have access though the aggregators, which charge hefty fees to users. Family offices, investment advisors, independent brokers, private equity, high-net-worth individuals and the huge and growing group of self-directed investors now have a fighting chance to making more informed decisions like the institutions; plus, at no cost.

Stay Optimistic

Management of even the largest companies are suspending guidance through what should be called the “Uncertainty Pandemic.” The uncertainty, however, doesn’t alleviate the responsibility to execute effective IR with the investment community. Tomorrow’s survival is arguably contingent on today’s strategies. Business leaders must establish flexible, yet defined, crisis management standards – such as the selection of a quality, modern IR firm – and demonstrate their ability to adapt as needed.

While the stock market has seen plenty of volatility this year, the numbers prove that investors are rallying behind American business. At all levels of adversity – and yes, this is probably the highest level we have seen – opportunity exists for those who successfully adapt. One sure strategy is to reevaluate and reenergize IR practices and communication strategies. Investors need companies as much as companies need them. Get on their radar screens. Carpe diem. Seize the day.

About the Author

Stuart Smith is the CEO and Founder of SmallCapVoice.com, which is a recognized corporate investor relations firm, with clients nationwide, known for its ability to help emerging growth companies build a following among retail and institutional investors via c-suite corporate profiles.

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