nvestor relation (IR) is defined as the building and maintaining good relationships between company management and its investors. Good relationship requires communication, transparency and delivery of superior performance. However, IR practices are challenging in today’s environment as companies must compete for attention of brokers, analysts, corporate finance executives, fund managers, business journalists, and other professionals who can influence the price and liquidity of their stock.

Objective

The objective of IR is simple: to add new shareholders and to retain existing ones. IR is like the sales and marketing any other product, except this product is “company stock or shares”. Brand name would help building a premium over its true value; supply and demand would dictate its price and volume; market trend and industry environment are uncontrollable influencing factors; post-sale service is a requirement; and good distribution network and sales force are the essential elements for a successful campaign.

Strategy

Unlike strategy for any other product, the marketing and sales of shares requires a complete plan including the understanding of the market, brand name premium, product position among competitors, pricing as an auctioned item, customer behavior and motivation, advertising, market segmentation, post-sale service and other elements such as promotion, public relation and crisis management.

Corporate governance

Corporate governance is the cornerstone of an IR program. Without good corporate governance practices by management, IR would become an advertising campaign with fraudulent intent. Corporate governance is a set of internal rules and regulations imposed on management to insure transparency, check-and-balance, full disclosures, market disciplines and rights of minority shareholders. With proper corporate governance, there will be less common abuses of power by management such as insider trading, family control of public assets, personal benefits, arbitrary decision-making, false news or accounting, share manipulation etc… Management has to focus on core business and financial fundamentals (return on investment, P/E ratio, internal growth rate, technology) instead of jumping into all kinds of business models for personal glorification or benefit.

Decision-making process of shareholder

Shareholders could be classified into individual and professional investors. Their behavior is basically motivated by same objective: make money from their buy or hold decision and avoid loss in their sell decision. However, they are very different from each other on the degree of knowledge, time and resources.

For professional investors working for a financial institution, the decision process goes through 7 phases: setting objectives, determining strategy, collecting information, analyzing data, understanding constraint and bias, controlling risks and making decisions. For individuals, the process goes through these phases too, but they are much simpler and quicker and more influenced by personal emotion or preference.

The objective of a fund in seeking “alpha” (absolute) return or “beta” (indexed) would require the traders to make decision according to this fundamental goal. Alpha is a rate of return independent of market indices whereas beta is mirrored after these indices. Hedge fund managers use up to 14 strategies to match their objective: From long/short to distressed, from market timing to value, from industry sectors to geographical selection. Helping them nowadays are vast database and technical charts available in the digital explosion of information. Analyzing these data to locate strategic and systematic advantages would also require enormous software programs and sophisticated individual mindset. Even after this long process, the buy-sell opportunities must be refined by corporate constraints, personal biases and risk control parameters set forth by the financial institution.

Finally, when the buy/sell decision is made, it can still be influenced by breaking news, current market conditions, and availability of shares at desired pricing.

Factors influencing decision-making process

The top 5 major factors that influence the investment decision by fund managers in emerging markets include:

1. Global trend: Despite denials by fund managers, the herd mentality is well and alive. Trendy news and analysis tend to attract capital flows.

2. Potential growth: Investors are easily dazzled by growth rate and projected earnings.

3. Size of company: Bigger companies always enjoy more coverage and analysis.

4. Trading volume (liquidity): Liquidity eases the process of entry and exit into a stock.

5. Market conditions: Hong Kong and Singapore attracts more investments than their bigger neighbors in China and Indonesia.

The next 5 considerations are also important in their decision-making process:

1. Market timing: Fund managers are obsessed with beating the markets, hence, the timing gamble.

2. Tax and accounting system: International standards are easier to follow and understand for evaluation.

3. Information and data flow: Investors are reassured when transparency and data availability are ready at any time for inspection.

4. Quality of management: Management team is the top tenet of Buffet’s investment philosophy. Many managers agree.

5. Institutional buying/selling: It is safer for a manager’s career and reputation to follow the crowd.

Communication tactics

1. Web site and company brochure: Professionally prepared and designed site or brochure creates the first and more lasting impression.

2. Press release and newsletters: News keeps the company in limelight and gives the perception that company management is proactive.

3. Corresponding: Replies to all emails, phones, or letters from shareholders and potential investors are a must for all IR executives.

4. Annual shareholders’ meeting: A well-organized meeting with satisfied attendees will spread the company goodwill far and long among shareholders.

5. Conference calls and analyst meetings: Discussion of annual or quarterly results allows management to put the best face in the numbers and explain forward plan.

6. Road shows and investors’ meetings: This is still the most effective route to enlist support of institutional investors and retain existing shareholders.

7. Trade shows and conferences: Attendance is part of the brand building process and creates favorable impression among potential investors.

8. Handling: It could turn into an opportunity for good publicity if the management team is honest and skillful.

Measure of IR value

Brian Rivel of Rivel Research Group completed a study on IR measure in 2003. He found out that on an average, IR adds about 9,2% on a company share price and 8.4% on its trading volume. If a company market cap is about $100 million, at $10 a share, the company share price should increase to $10.92, giving its new market cap an extra gain of $ 9.20 million. Meanwhile, the average cost of a good IR campaign is averaging about 0.08% of the market cap, or only $800,000 in this case.

Execution

To be successful, IR program must be formulated into an IR plan with specific details on process, personnel, action steps, schedule and budget. The most important element of this plan would be the strong commitment of management in carrying out the proposed plan. Longterm perspective must be maintained as market conditions can fluctuate due to external environment independent of company control or desire.

Conclusion

There are many metrics that one can look at beyond absolute stock price performance to grade the effectiveness of an IR program:

• Stock performance versus peers/competitors.

• Stock performance versus industry indexes.

• Long-term investment returns (5 years or more).

• Revenue multiples. Nhân đôi lợi nhuận

• Earnings multiples. Kiếm gấp đôi

• Short positions. Vị trí ngắn

• Beta factors (volatility).

• Market capitalization versus peers.

• Average daily trading volumes (share liquidity).

• Ownership profiles. Profiles chủ sở hữu

• Turnover among top shareholders. Doanh thu từ các cổ đông hàng đầu.

• Quantity and quality of analyst coverage.

• Analyst recommendation breakdown.

• Investor marketing activity.

• Size and quality of IR database.

However, a simpler way is to look at IR on this perspective:

If a company is performing well, has been meeting or exceeding expectations, and is in good financial position, then shareholders should be rewarded by a higher moving stock price. If not, then we need to look at the IR program to see what is going wrong.

If a company is not performing well then the stock will get hit (in some cases, quite badly) no matter how great the IR program is. However, in this scenario, if the reputation of the management team and the company remains in tact, and investors and analysts see optimism in the future of the company, then the IR program has also succeeded.