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Passive Aggression 

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.

To put the above in a personal context, I’ll make a confession.  Having attended a thousand or so one on ones by the time index funds and ETFs became available to retail investors in the 90s, I put my personal portfolio into passive, low cost vehicles as quickly as they became available.  Well before the current phase of virtually instantaneous global news and information and technological overstimulation, it was clear to me a significant minority of portfolio managers were not processing information and making decisions to a level that justified their remuneration. On the other hand, I also observed first hand many great investing minds at work -- but I’ve also been around long enough to see their performance take a dramatic turn for the worse.  Meeting with hundreds of value investors as the 90s progressed through the internet boom to its inevitable bust shaped a good deal of this thinking.

There is not one IRO or senior executive reading this that isn’t nodding in agreement based on countless investor meetings with uninformed questions, borderline rude inattention, mixed groups of investors with inquiries from different levels of knowledge and sometimes conflicting motivations regarding using management’s time. The better the IR program, the lower the number of these meetings, but they are unavoidable despite the IRO’s best efforts. Sadly, the IRO is often put in the position of apologizing for situations that they have done their best to avoid, and a straightforward discussion about the realities of management/investor communications can result in a “so why am I wasting my time with this” from the CEO or CFO and/or the IRO promising it can be avoided when disappointing institutional interactions are increasingly baked into the system.

I recently met for dinner with a close friend and ex-client and we recounted the most off kilter IR meetings we had attended together through the years.  From several beers worth of stories, I’ll highlight the “bad science” winner: a portfolio manager – at a major buy side firm – who insisted that electricity could be sent over the internet, and not the other way around. The fact that my client was an electrical engineer representing one of the world’s leading utilities did not seem to matter as he patiently tried to explain to the PM that existing electric wiring had the potential to be used for a data transfer, but the data transfer that constitutes the internet could not conduct electricity.

Passive investing, algorithmic trading and the basis for hedge fund strategies are all based on a common approach, exploiting inefficiencies and seizing market opportunities. So as passive investing grows and potentially creates market disturbances and inefficiencies, the IRO needs to be better prepared than ever to build a capital market that best supports their corporate strategy and ambitions.

The buy-side is under more relative stress than at any time in my 35 year career. For well over a decade there’s been an expectation that traditional sell-side and media channels would get blown away in a storm of change, demanding a new approach and ultimately more appropriate levels of corporate resources for IR.  In the last few years, fund allocation data and market sentiment have begun predicting major buy-side storms -- impacting plain vanilla mutual funds, high flying hedge funds and retail brokerage services alike.  The old saying “the time to repair your roof is when the sun is shining” doesn’t apply when the storm is in sight.  So let’s change another old saying slightly to “never miss the opportunity presented by a fear of a good crisis.”  A great number of key players and your competitors (in the corporate competition for capital) are in a state of systemic denial, so take advantage of this opportunity.

Owning your institutional marketplace, and actively managing it – as opposed to allowing corporate access providers and existing interests to dictate programming priorities – will keep the IRO competing effectively for capital regardless of the labels attached in the hopes of simplifying the continuum that is the capital markets.  Investment in meaningful resources for IR can be driven by presenting goal-oriented strategic capital markets and IR program analysis to your senior management team when they are struggling to interpret increasingly alarmist headlines and “accepted wisdom” that is clearly dumb. The investing community should be analyzed and defined for management in relation to the ways institutions should understand and appreciate the corporation’s value building strategy and ability to deliver, not by headlines and sell-side interests.

Citing only one of many examples, just as there is no clear line between “activist” and “active” investors, nor is a label indicative of their intentions, the public dialogue is already missing the extent to which “passive” investing is active with regards to corporate governance. And “corporate governance” as it relates to corporate social responsibility is as different for example as the politics of the states that sponsor their massive pension funds.  Having been around since investors defined as “hedge funds” went from relative institutional obscurity to the caricatures favored by the news and entertainment industry, from the IR perspective I can confirm dramatic change is inevitable, but it is rarely what is expected or reported in the media.  The rise of “passive” investing means IROs can spot new institutional innovators and leaders as they emerge at the same time that market disruptions present opportunities to goal-oriented IR programs to build corporate capital markets well ahead of other companies relying on headlines and biased interlocutors to chart their course with an eye to the past, and to their own bottom lines.

If you look, it’s not difficult to spot great opportunity in investor relations, and there are increasing numbers of IR professionals leading the way.  And on that note, I would like to thank the UK’s Investor Relations Society for theming their 2017 annual conference “The New World Order: The Ascent of IR.” Leadership requires an element of audacity. Noting the irony of the “Old World” IR society charging ahead of asleep at the wheel “New World” NIRI, the words of an 18th century military theorist speaks to the IR profession and the IRO: 

“If the leader is filled with high ambition and if he pursues his aims with audacity and strength of will, he will reach them in spite of all obstacles.” Carl von Clausewitz

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