The Emperor's New Clothes
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!”
Below are the most obvious facts confronting the IR profession… the ones that are too often willfully ignored in corporate/capital markets communications. Below each I have proposed an approach to make the obvious, well… obvious, and to conduct best practice IR. And it has to do with the discipline of writing down your IR and capital markets goals to ‘confront the courtiers’ with precision and clarity:
In the past few years, sell-side firms have paid some $70 billion in fines in response to regulatory and criminal violations too numerous to name here. IR proceeds as if the ethical and economic conditions and conflicts of interest that fostered these actions somehow do not extend to representing the interests of corporates in executing IR programs.
Solution: If you are being pitched to provide CEO/CFO time for corporate access meetings, insist the provider write down for you the ways their client targeting specifically aligns with your company’s capital markets and IR strategy. According to Greenwich Associates, Corporate Access generates $1.4 billion in revenue for the sell-side, and your management’s time is what they are selling. The least they can do is show you why it is in your interest to entrust them with your team’s time.
Highly precise identification of potential institutional investors, to the level of direct confirmation of interest or lack thereof, is available to IRO’s. Yet an astonishing percentage farm out institutional prioritization and contact to sell-side firms despite glaringly obvious conflicts of interest in optimizing management’s face-to-face institutional contact.
Solution: Have a definitive list of real, confirmed buy-side interest to compare to the corporate access targets. Identifying potential interest is fairly simple and inexpensive with the wealth of data and the commodity pricing associated with “targeting.” To get a clear picture of real interest, you need to hit the phones and ask the “targets” (actual human beings who make investment decisions) if they are interested in learning more about your company. This is something Taylor Rafferty does for clients on a project basis and we never fail to turn up 30-40% more portfolio managers and buy-side analysts than comprise the existing IR databases of even the most assiduous IR teams. And these tend to be the low turnover, high quality medium-sized institutions singularly unattractive to Corporate Access.
The buy-side is paying more for face-to-face time with your management team than they are for sell-side research. You have many times heard PMs tell you in one-on-ones that “we don’t pay much attention to the sell-side.” (Then they ask you in the same meeting who’s in print and who knows the company well, which is the subject of a future blog). Since you are providing them with “product” (your management team’s time) that they in turn re-sell to their clients, shouldn’t you know the financial arrangements that drive the process? If you can’t get precise numbers, then how about a general outline of the economics of corporate access? Sadly, what is obvious is high turnover accounts will be given priority. You should ask for this just for the fun of the squirming and non-response that will ensue. Fortunately, the UK authorities may make this transparent in 2016, which will be even more fun for IROs.
Solution: See the solution to the second point, and add that you will have to make additional calls yourself or hire an IR firm to do so if you want to get the most out of management’s time. As a veteran IR consultant who remembers when institutional salespeople were exclusively professional service providers who worked hand in glove with PM’s to help them position their portfolio, I have to imagine that some are still in the business, but from our day-to-day work with client programming it is clear the process is dominated today by a revolving door of management schedules pushed through as quickly as possible to the top fee-generating institutional clients.
If you are nodding your head at this, or saying “Brian, tell me something I don’t know, we already do all the above on our IR team” that is very good news from my perspective. And I know of many companies and IROs that are indeed proceeding in the fashion recommended above. To them I would say, please help change our profession for the better, advocate for standards and practices that highlight the conflicts above. I meet with many younger IRO’s who have the instinct to yell “The Emperor has no clothes!” and I know there are many senior IROs whose voices can encourage them to do so. As long as they are accepting sponsorship money from sell-side corporate access providers, the professional organizations are unlikely to do anything but compliment The Emperor’s splendid attire. If you follow the approaches above, we need your help, the IR profession can be much more with your leadership.
“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it's the only thing that ever has.” - Margaret Mead