VICTORIA GEDDES, ECECUTIVE DIRECTOR
Nov 3, 2016
The starting point in the development of a company’s IR strategy is to understand the Corporate Strategy. Closely allied to this is an audit, for wont of a better word, of how this strategy is talked about within the company and communicated to external stakeholders. It is surprisingly common to find that overtime, a bit like Chinese whispers, the understanding and interpretation of the strategy at board and management level shifts, so there maybe multiple versions in use at any one point in time.
So, elementary as it might sound, there needs to be both a corporate strategy in place and the consistent articulation of that strategy throughout the business before you can begin developing the IR strategy.
Linking Strategy with the Investment Thesis
At the most fundamental level shareholder communication relates to the messaging around the company’s plans for growth and how it intends to achieve its objectives. Most companies do this well and understand the importance of linking corporate strategy into their communications with investors and the market. A common mistake, however, is to assume that this is where it ends, to treat it simply as an exercise in PR, an extra page in the slide deck to reassure investors that you do indeed have a strategy.
The focus of IR professionals is to ensure that shareholder communication delivers a consistent articulation of both the company’s business strategy and its investment thesis. While most investors would start with the premise that companies will, over time, be employing strategies that target sustainable growth in earnings per share, the level of risk attached to achieving such growth will vary enormously.
Each investor, whether retail or institutional, will approach an investment proposition within the context of their own appetite for risk. A core function of IR therefore is to provide sufficient information via the company’s communications to enable investors to make an informed judgement about the amount of risk they consider is attached to the company’s strategy and its business profile. Many institutions will request a formal meeting with company management in order to confirm their understanding of strategy and risk before they decide to buy into the stock or sell an existing position. Those who buy in, will also monitor company statements over time to assess whether what has been communicated reflects the reality of the corporate strategy being executed.
The corollary of risk is return which is closely linked to valuation. Again the flow of information regarding the company’s business strategy and how this will generate long term returns for shareholders, sits at the heart of the valuation process. The more confidence investors have in the strategy, the greater likelihood that the market will ascribe a valuation that reflects its future capacity to generate earnings.
An Aligned Shareholder Base
An equally critical function of the IR strategy is to plan for shifts in the composition of the shareholder base as the company grows and changes over time. The objective is to ensure that the company’s register comprises a supportive, stable shareholder base with an appropriate mix of institutional and retail investors, both domestic and offshore. This facilitates access to capital and reduces volatility in the share price.
There are two strategies associated with shareholder alignment. In the short term the objective is to ensure there is sufficient demand for stock so that those shareholders who need to lighten their portfolio exposure can do so without impacting the price. Peer analysis and building a strong contact list of potential investors with the right investment style, who are well informed about the business, is what underpins the day to day business of IR.
Longer term there needs to be a plan in place that enables the composition of the share register to adjust to the changing profile of the company as it moves from being a small cap to a large cap, from not being included in an index to one that sits in the S&P/ASX 200. In each of these scenarios the company will be competing for capital in a different market requiring new relationships to be formed and whose investors will have varying levels of demand for information and contact. It is better to be well-prepared for this change before it happens.
When Corporate Strategy Changes
A change in strategy represents an opportunity to set out clearly what the new direction is and to develop a coherent story in relation to how this is communicated both within the company and externally. All communications to the financial markets must be consistent in the way in which the new strategy is articulated and it should be referenced regularly as the company moves through upcoming reporting cycles.
Of course, the challenge with a change in strategy is that the shareholders who bought into the previous strategy may not like the new one or feel it no longer satisfies their portfolio requirements for risk or income. If they bought into a company because they wanted a utility style exposure to the energy industry, regular dividends and a high level of visibility regarding future earnings, the new strategy may not deliver that. For a number of retail and institutional shareholders alike, the shift from an income to a growth oriented strategy will have ramifications for their portfolio which can only be resolved by selling their shares.
On the other hand there will be many investors who felt the previous strategy was not appropriate but will now take a fresh look at the company as an investment proposition. Those growth or GARP style institutional investors whose mandate is to seek out exactly this type of opportunity, have the potential to take the place of those yield and value oriented investors seeking to exit. The risk of not taking an active approach to the management of this transition is that the existing shareholders who need to exit, do so without having a willing group of buyers to take their place. The result is sustained pressure on the share price, particularly when large institutional holders are seeking to move big positions.
Your IR strategy is a constant work in progress, recalibrating as the company grows or makes changes to its corporate strategy in response to the competitive landscape in which it operates. It is not to be confused with the IR program which outlines the activities associated with communicating to investors over the course of the year. An IR strategy is all about ensuring that the messaging is consistent with the company’s corporate strategy; that the investment thesis is clearly articulated; and that relationships are established with a targeted network of investors who have the capacity to become shareholders now and also well into the future.