-Adam Smith, 1776, Scottish Philosopher and Economist, author of The Wealth of Nations
“Reality is that which, when you stop believing in it, doesn’t go away.”
-Philip K. Dick, 1978, member of the Science Fiction Hall of Fame
“Investing is the intersection of economics and psychology.”
-Seth Klarman, 2011, famed value investor and founder of the Baupost Group
The quotes above, from different ages and perspectives, each highlight some basic truths, and together, the reason capital markets remain as unpredictable and mysterious in the 21st century as they were when 13 American colonies were just declaring independence from England. As we await the next major capital markets crisis that no one can predict – while everyone tries – the market’s known unknowns (and permutations thereof) will persist for as long as human decision-making drives investing. IROs manage hundreds of high touch, high intensity human relationships, often thousands, portfolio managers, buy- and sell-side analysts, investment professionals whose collective decisions comprise the equity market that ultimately drives the IRO’s company’s value premium, or discount. Increasingly, the mood of this collective consciousness is critical to the job security of the IRO’s management team and can even affect perceptions of the company’s product or service brand in the commercial marketplace.
In the Ultimatum Game two people have to agree on the division of a sum of money in one try. One player proposes how to divide the amount. The other can accept or reject the offer, but both players get nothing unless the “receiving” player accepts the “proposer’s” first offer. Let’s say there is $100 involved. How would you determine the amount you would offer as proposer? More than likely you would - among other considerations - refer to your own concept of fairness in determining a sum. How much would you accept as the receiver, and how much would your own views on fairness factor into your decision tree? A “rational” receiver would in theory accept any sum, because they would be better off than they were before the interaction with little or no effort. But if as the receiver you thought of any amount above $1 that you would accept, you are demonstrating the fallacy of a totally rational/efficient capital market made up of individuals making nuanced decisions. But if you’re an IRO, you know that already of course.
The spaghetti western renowned for having launched Clint Eastwood into stardom has much to say about the current Mexican standoff between the sell-side, buy-side and public companies as the costs and merits of equity research and corporate access payments come under increasing scrutiny.
Passive Investing and Institutional Innovators Create Opportunities for Best Practice Investor Relations
As alarm grows regarding “passive” investing’s seemingly inexorable march to domination of equity investing, IROs are presented with yet another opportunity to contribute to the health of the capital markets. IROs have direct access to virtually all the moving parts of the public market investing process. IR’s medium to long term goal orientation and a position where doing the right thing creates economic value put IR at a critical juncture of forces to re-shape corporate finance. But besides the obstacles of a workload that keeps growing with each regulatory change and a lack of appropriate professional recognition and leadership advancing clear goals for the profession itself, it’s a challenging subject for IROs to highlight because it entails “insulting” IR’s “customers” – the active buy-side fund managers.
Many of us Baby Boomers read George Orwell’s “1984” when it seemed in the far away future. I most likely first read it in the early 1970s, when I was a young teen, and then, it seemed like a lifetime away. When 1984 actually came around I was on Wall Street, building a cross border Investor Relations firm before the term existed. It certainly didn’t seem like the future had arrived, but the US capital markets and cross border equity investment were starting to create “the future” we live in today.
If you’re an Investor Relations Officer (IRO) and you haven’t written or approved a news release or presentation content with the phrase “win-win,” you are either much more creative than I, or you haven’t been in the business very long. The only time I’ve used the triple “win-win-win” however, has been referring to Best Practice IR collaborations with the sell-side.
I took it as a high compliment when a new client recently introduced me to a colleague as a “real Investor Relations Geek.” In truth, I prefer IR Nerd. While I’ve never sported a plastic pocket protector, I do have broader “nerd” credentials. I played massive multiplayer online games (MMOGs) when they weren’t “massive.”
Presented a choice between a larger Investor Relations budget and the enthusiastic support of the CEO for a goal oriented IR/Capital Markets program, I would always choose the latter. Most importantly, because it means the IR program is more likely to achieve its capital markets goals with the CEO focused on their benefits; secondarily, because once the CEO fully engages in the effort and experiences the kind of economic and strategic success Best Practice IR can achieve, budget will not be a major challenge in the future.
"Flowers for Algernon" is the saddest book I can recall reading as a kid. Its main character, Charlie, has an IQ of 68 but a strong desire to learn and a kindness of spirit. An experimental treatment causes a tripling of his intelligence, but it turns out to be only temporary. Algernon is a lab mouse given the same treatment, he becomes Charlie’s pet, experiences the same intelligence gain, and then suffers the same decline in mental acuity. But Algernon’s decline happens well ahead of Charlie’s, so Charlie not only suffers the loss of his intelligence, but also the pain of knowing what is coming while he is still extraordinarily intelligent. Charlie tries to apply his declining genius to halt his slide, but fails. This was the darkest struggle of the book for me.
Having emphatically refused to take seriously either the Classical or Keynesian economics I was taught in college (years before the development of "Behavioral economics"), I hesitate to agree with any economist who doesn’t give priority to the irrationality of human behavior in their thinking. But in this case I agree with Dr. Friedman. Someone always has to pay for lunch, especially at lunchtime investor presentations.
How is it possible that the head of the world’s largest asset manager, Larry Fink, can write a high profile letter to the world’s leading CEOs, strongly advocating the principles of Best Practice Investor Relations, and not once mention investor relations? At first, reading the letter, I was thrilled to see the gospel of IR – in the same way I have been presenting it for decades – preached from the bully pulpit of BlackRock to the audience of the global C-Suite. Then it dawned on me that neither the role of the IRO nor the profession itself were mentioned by name in the over three-page letter. Ouch, that thorn hurt.
One of the few regrets I have about my career in investor relations is that I didn’t save the typewritten meeting and feedback notes I wrote for clients in the 1980s following one on one meetings with legendary investors including Peter Lynch, Mario Gabelli (going back when he was an auto analyst), and Julian Robertson. These memos were essential for my IRO clients for planning and analysis purposes, and also to educate their colleagues in senior management about the essence of IR itself. For most of the 1980s, money managers regularly included comments about how our clients could adjust their communications to better appeal to US investors. The meetings and the feedback started my IR education about what worked best for companies to achieve their capital markets and IR goals, and these lessons came from some of the greatest investors of our time.
Flagging potential negative developments in upcoming reporting periods can be one of the most difficult and perilous components of IR messaging. Anyone reading this blog is well aware of the downside of getting it wrong. On the upside, there are few better ways to build trust and bolster valuation than clearly telegraphing a potential negative and when it comes to pass to have the market calmly take note, remark that it was expected, and move on to the next key development. Lost in Space’s “Robot B-9” made sure Will Robinson was kept well apprised of potential issues with flashing lights, waving of robotic arms and declaiming the immortal (at least among American boomers) lines “Danger, Will Robinson! Danger!” – but this approach has yet to be accepted as Best Practice Investor Relations. This is unfortunate, because I would enthusiastically don a robot costume and do this on behalf of my clients instead of drafting PowerPoints and news release copy.
I once caused some consternation among a client’s senior management when I said in a presentation “All things being equal, when it comes to achieving IR goals, I would rather have a motivated IR team hit the road and the senior management stay in the office than the other way around.” Consternation wasn’t the response I intended; I was highlighting that an IR team meeting with potential investors is essential to achieving capital markets goals and that it’s very hard for the CEO/CFO to achieve the same without an IR team supporting their efforts. It may have dented a few egos, but it was the truth all the same. This seems like common sense to me, but I am surprised how often we speak to companies where this is not the practice and indeed IROs hardly head to the airport at all.
What does sell-side corporate access work with public companies have in common with the "Great and Powerful" Wizard of Oz? Think, "Pay no attention to that man behind the curtain!" and you are heading in the right direction. These days, the IR professional can easily pull aside the curtain (although I am happy to play the part of Toto) to see the rather less grand reality. But not enough do so and I suspect the IRO’s odds of getting the corporate access providers to admit they are "a Humbug" without pulling it aside are slim to none.
Decades ago, many analysts and journalists were superstar market movers… smart, powerful, experienced voices in a far quieter, more civilized financial information marketplace. All-star analysts were highly paid and fiercely competitive about leading market opinion and presenting new and thoughtful perspectives on valuing their stocks. Senior financial journalists were tough, wise, worldly, and worked with editors and fact checkers who also took the quality of their stories very seriously. Of course some "old school" analysts and journalists still wield great influence today, but they are a dying breed. The economic environment in which both evolved and thrived has dried up and is being picked over for the last morsels of sustenance, while new breeds of information marketers are competing in an emerging capital markets ecosystem.
Hans Christian Andersen’s “The Emperor’s New Clothes” highlights so many strains of human frailty that it is difficult to name them all. Insecurity is certainly one, the effectiveness of false flattery is another. In the 18th century, the English judicial system coined the term “willful blindness” citing the accused for “willfully shutting his eyes” to the fact that the goods he purchased were stolen. Investor relations suffers from these and more when it comes to working with investment banks and corporate access providers. This isn’t the IRO’s fault alone, as the C-suite generally gets caught in the same psychological traps set by the sell-side… but like the child in Andersen’s tale, IRO’s are ideally positioned to yell “but he isn’t wearing anything at all!”
At a certain point in one’s career, you can amuse yourself at an IPO roadshow planning session as a banker opines how “all the investors are really interested in is the numbers” by then suggesting the two-week, two-team roadshow should be cancelled.
The definition of investor relations as seeking “fair value” for a company’s shares is disappointing at best, pathetic if analyzed in the context of the value building potential of professional investor relations. Best practice IR is competing for capital with the goal of establishing a security’s maximum sustainable valuation. To me “fair value” is a cop out because it implies an unfocused and passive effort. Winning the competition for capital is IR’s responsibility to the public company and shareholder alike, and is how the most outstanding professionals I’ve worked with over the decades led their programs. Sadly, setting clear goals and committing to win over the long term frightens the distressingly large number of IR bureaucrats as well as the proponents of the popularity contest approach to judging IR success.