The Animal Spirits of Investor Relations: Behavioral IR

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. This usually results in a grateful smile from the management team who is tired of hearing too many highly paid opinions and dreading two straight weeks of investor meetings. Numbers are of course proof points, but the IR process is best built on a foundation of direct and intense human interaction, much of which is based on building trust, understanding styles of communications, judging capabilities, etc.  Having spanned the IR years from telexes and addressograph machines to webcasts and telepresence facilities, I see management teams spend more time on the road meeting investors now than they did in the days of 35mm slides and rotary phones.  To be fair to the sell-side advisory community, the phrase “investment narrative” has become reasonably common in deal roadshow planning meetings, but that’s because they have (semi-secretly) admitted they are in the IR business (but just don’t want the remuneration of IRO’s and IR consultants).

If you’ve never heard a senior manager say “We just need to produce results and the market will respond accordingly,” then you’re not in Investor Relations or you’ve only worked for companies with enlightened leadership.  While financial performance obviously sets the baseline for capital market valuation, there is overwhelming evidence that outside the range of current market value expectations, human behavior is the most powerful driver in relative market performance.  For me, it’s gotten to the point that “why do I need to market to investors my investment appeal” is a question whose answer is incredibly obvious.  For if numbers are all that matters, why do markets “crash,” why do investors “panic,” what was “tulip mania,” and why have the numbers-based financial values of public companies fluctuated by double digits from day-to-day over the last month or so?

The “numbers are all that matters” approach gives to certain CEOs and CFOs false comfort regarding the complex and unpredictable capital markets, and it’s also the result of generations of brainwashing by the investment banking/corporate broking community. It simply is not in the banking world’s economic interest to embrace the behavioral view of investor decision making. Why? Because an understanding of Behavioral Finance is not a skill set possessed by investment bankers and corporate brokers. And as public company management better understands and appreciates investor information processing and decision making, it highlights the lack of the need for highly paid middlemen.  If you know your investors better than they do, why should they remain in between? And if you are paying attention you will already know who has the best insight into both the financial and behavioral drivers of a company’s existing and potential investors: the IRO. This is why Taylor Rafferty has developed “Behavioral IR,” a concept applying the science and principles of Behavioral Economics and Behavioral Finance.

While Behavioral IR has the potential to be a game changer for the IR profession in the coming years, it is built largely on what the best IROs have known and practiced for many years.  Integrating advances in neuroscience and human cognition will fine tune messaging efficiency and effectiveness, and building upon principles highlighted in Behavioral Economics and Behavioral Finance will codify and inevitably alter structural approaches that were formed before the current seismic pressures shrunk the IR effectiveness of the sell-side and the media.

Next: The Emperor’s New Clothes