The Effective Communication For Investor Relations Commerce Essay

Corporations worldwide work daily to increase the value of their stock for the investing public. In order to exploit this value, businesses must constantly make every effort to extensively communicate to their investors and potential investors. In view of this, investor relations are a vital part of business strategy, principally in the area of communication. Argenti (2009) says, “While explaining financial results and giving guidance on future earnings are critical investor relations activities, companies today need to go ‘beyond the numbers'” (p. 203). Corporate departments involved with investor directions must make a necessary connection between efficient communication and company goals. Since communication is starting to play such an important role in investor relations, corporate communication programs are being created not only to participate in financial areas, but also to take part in media relations and other public communication. Ultimately, the best way for corporations to understand communications for investor relations is to look at an overview of the investor relations function, know how to organize investor relations, learn about investor relations programs and be informed on investor relations advancements.

Investor Relations Synopsis

In the United States, the Boston Manufacturing Company, established in 1814, is foretold to be the first public company. As business increased and growth was desired, the owner chose to sale shares of the company stock to other businessmen (Laskin, 2009). Laskin (2009) states, “The separation of management and ownership became the key pre-determining factor in the development of investor relations” (p. 1). However, as long as the stock market and the Securities Exchange Commission (SEC) have been a part of the business world, investor relations and communication have not been in effect. Argenti (2009) explains how communications to and from investors in the 1930s and 1940s were barely existent and unnecessary. Corporations were mainly concerned with disclosures required by the SEC, which left little reason for a corporate investor relations representative or department (Argenti, 2009). Midway through the 1900s modern-day investor relations began to surface in the corporate world. Potential investors and stockholders became more of a priority to businesses around 1960, which brought forth the creation of the National Investor Relations Institute (NIRI) (Hockerts and Moir, 2004). Hockert and Moir (2004) go on to say, “The National Investor Relations Institute {NIRI), founded in the U.S. in 1969, was the first recognized professional [investor relations] body” (p. 1).

With the creation of the NIRI to communicate with management, investors and potential investors, corporations began to utilize modern technology and bring the investor relations function to the forefront of corporate communications. By the 1990s and the turn of the century, investor relations took-on a highly technological-based approach to investor communications. According to Jameson (2000), visual discourse became a major element in investor interactions. Visual discourse was effective for stimulating the response to good news for investors, and reducing the brunt of bad news. Jameson (2000) says, “The most powerful forces that do this are the use of symbolism, the photographic depiction of the narrators, and the highlighting of key pieces of information” (p. 1). Visual discourse through the use of the internet brought investor relations to an even greater height after the turn of the century; investor relations can now be found on a variety of platforms, locally and globally. Pressure from investors will always continue to mold the investor relations function. Many companies have already put into place a shareholder relations department. These departments will become even more common in the future as financial advisors and other professionals will influence and have high expectations for firms (Martson, 2008).

Organizing Investor Relations Communications

The significance of a business structure that effectively implements investor relations communication is vital, especially when handling worldwide operations. Goodman (1999) says that communication, especially external communication with investors, is imperative for corporate growth in an economy that is evidently based on information, instead of industrialization. “Investors expect a high level of communication and candor from the companies that operate in their community” (Goodman, 1999, p. 1). In order to fully employ the investor relations function through communications, entities must strive to adequately establish and organize interactions within an effective corporate communications department.

Objectives

Argenti (2009) emphasizes that the most important goal for a business seeking to implement successful communication should be to place the entity in a position to efficiently work for investor’s capital. According to Almazan, Banajeri and Motta (2008), management may be hesitant to fully reveal information, especially in situations where management decisions could be to blame for inadequate performance. However, businesses must seek to communicate information fully and honestly. Initially, companies should relay as much information as possible to investors and potential investors. Conger (2004) says

The more you tell, the more you sell. The more a company makes investors aware of its existence, business and strategies, the more likely it is to increase sales of its stock. Making investors aware doesn’t mean a spin campaign, but a program to communicate and educate investors about the company’s market, its strengths and potential as an investment (p. 1).

Next, Argenti (2009) stresses the need for publicly held companies to understand the appropriate expectations for the company’s stock in the scope of earnings, trade and the market. These companies must also strive to lessen stock price instability (Argenti, 2009). The objective is for the investor relations department to fulfill the need for communications guidance in management’s decision-making methods. To understand appropriate expectations for company stock and to decrease stock unpredictability, “integration [of departments] is a more respected approach, with public relations leading the mix. Public relations drive strategy and execution” (Capozzi, 2005, p. 1).

In general, communication within investor affairs should seek to honestly maintain the publics’ view of an organization. Prasad and Mir (2002) underline four general objectives of shareholder relations: accurately present a corporation’s attitude, mold the identity of the corporation, justifying the established identity of the entity and keep safe the legitimacy of the company. These objectives should seek to provide transparent facts for investors. Kedem (2006) emphasizes the importance of presenting facts in context, instead of in a segregated manner. Kedem (2006) further clarifies that communication must fulfill the investor’s “immediate need to become informed and take action” (p. 1), as well as answer “interpretation and ‘what if?’ suppositions [that] may follow” (p. 1). Investor relations officers should also be able to answer questions of “‘What’s next?’ or ‘What does this mean for me?'” (Kedem, 2006, p. 1).

Communication with Investor Types

In such a broad business world, corporations are required to communicate with investors on every level. A wide range of investors need to be taken into consideration by firms so that the proper information is communicated to the correct investor or group of investors (Dolphin, 2003). The role of the investor relations function is to communicate effectively to both institutions shareholders and individual shareholders. A firm that is not dynamic in this aspect will unsuccessfully communicate with some current and potential investors. Marston (2008) explains how shareholder interactions from an institutional standpoint require more “boundary spanning” (p. 1) interactions by allowing “greater efficiencies in message delivery and market impact” (Argenti, 2009, p. 208). Conversely, individual investors ranked one-on-one meetings with investees and professionals as the most crucial way of communicating (Marston, 2008). In order to accomplish a well-rounded investor relations department, sufficient communications to both individual and institutional investors will “create closer links with investors, and can help a company in developing strategies that will be welcomed by shareholders; it is that strategic element of the role [of communication] that is at the core of [investor relations]” (Dolphin, 2003, p. 1).

Institutional investors.

Communication with institutional investors is a critical part of any investor relations program. Institutions, such as insurance companies, are available to contribute much larger amounts of capital than a single person. Dolphin (2003) says there is great ease in moving large quantities of capital from market to market. Due to this ease of moving capital, and institutional investors holding more than 60% of Unites States equities in the 21st Century, firms have realized and acted on the significance of communicating with institutional investors. Also, institutional investors are often candidates for mergers and acquisitions. Investees must maintain investor relations departments in order to identify and target potential openings for big investors, mergers or acquisitions. Sirower and Lipin (2003) stress the necessity of excellent communication with institutional investors because of the potential risk of losing a major shareholder. Sirower and Lipin (2003) said

Slick press releases and conference calls cannot save a bad deal, but a poorly conceived communications strategy can-and usually will-kill one that may make good strategic sense. Many of the biggest unsuccessful deals, as measured by post-announcement return to shareholders, have performed poorly in large part because the acquirers did not tell their story adequately (p. 1).

Furthermore, interaction with institutional investors can be handled best by researching, then organizing institutions into groups or target audiences based on the characteristics of the entity (Argenti, 2009). Argenti (2009) notes: “This kind of research will prevent the company from spending too much time communicating with uninterested investors” (p. 209). An entity that spends time wisely on interested institutional investors is more likely to obtain more committed, corporate patrons. The responsibility of management is to bring in a qualified investor relations officer who can market shares of the company to these types of organizational investors (“ADX Urges Listed Companies”, 2009).

Individual investors.

Individual investors require a different type of communication than an institution typically requires. Many individual investors will be employees of the investee. These employees are investors through 401(k) plans or other company stock. Individual investors are many times directly communicated to through personal messages or one-on-one meetings (Tate, 2000). Tate (2000) explains that this personal communication is executed through one of two types of situations: prepared and interactive. Hanley (2008) says, “Long gone are the days when [companies] should take an ad hoc approach to [investor relations], setting their chief financial officer in front of a microphone to read aloud from a quarterly earnings report” (p. 1). Entities must carefully analyze whether communications will only be prepared and delivered, or if investors or the public will be given the chance to respond. Written statements or oral speeches are usually considered prepared situations where individuals are presented with information through memos, online forums or speeches (Tate, 2000). Tate (2000) also describes interactive situations: unique situations where problems or questions can be addressed live to a speaker. Interactive situations must be handled by a well-qualified and experienced executive or investor relations officer.

Next, investor relations communications with individuals must be more of a “hand-holding” experience for the investor. Corporate backers invest on a different capital playing field than individuals, and therefore do call for identical treatment. Individuals identify a firm as legitimate if the investee to investor communication meets the entity’s social responsibility of providing information (Cowden and Sellnow, 2002). Research has shown that individual investors look for similar or familiar communication functions seen of other renowned organizations. Before personally establishing an entity as legitimate, an individual shareholder also seeks justifiable management actions and necessary social standards of professional communication (Cowden and Sellnow, 2002). Ultimately, corporate relations with individual investors require adequate, available and honest information.

Intermediaries

Communication directly to institutional and individuals shareholders is only one method by which businesses pass information, updates and news. Argenti (2009) says that corporations also communicate indirectly through intermediaries such as sell-side agents and rating agencies. Sell-side agents “cover stocks with certain industries and generate detailed research reports that offer recommendations” (Argenti, 2009, p. 212). Rating agencies play a similar role to sell-side agents, but rating agencies place special emphasize on whether an investee is creditworthy (Argenti, 2009). Rating agencies will rate an entity on their ability to obtain, maintain and use debt. “Virtually all firms depend on a constant flow of credit to carry them smoothly through the ups and downs of business fluctuations. It is entirely typical for lenders to get more cautious in a downturn, but freezing of credit is [a problem]” (Colvin, Gray, Tkaczyk and Yi-Wyn, 2009, p. 1). Investors will look to intermediaries such as rating agencies to indirectly determine if an investee and investment is beneficial or detrimental.

The media is also a commonly used intermediary by investees and investors. Investor relations departments may utilize the media especially when going through a crisis. One of the most important actions taken by a company going through a crisis is to use the media as an intermediary to satisfactorily relay information to a curious, concerned or affected public. Hasenfuss (2009) explains the frustration that occurs for investors or potential investors when information is delayed or never presented. Investor relations departments must use the media to communicate detailed explanations during important situations. A failure to do this will bring no closure to a company’s current business-life. Denying the use of a media intermediary during an important situation may very well bring an organization to its final days (Hasenfuss, 2009).

Communication through Investor Relations Programs

Communication within investor affairs is most effective when implemented through investor relations programs. Depending on the size and the activities of the corporation, the investor relations program may be in-house and consist of only a few officers, or it may be entirely outsourced to public or financial relations firms (Argenti, 2009). Communication programs are necessary for the majority of businesses; they help to place market status of corporate stock in the hands of investors, as well as limit control of stock price by management (Coyle, n.d.). Furthermore, Coyle (n.d.) states that “CEOs and their individual corporate investor relations programs must recognize that the market followings themselves are tiered; thus corporate advertising, direct mail and even telemarketing strategies can be beneficial” (p. 1). These investor relations responsibilities are carried out through the establishment of investor relations programs. These programs help to connect the entity to society, as well as build a line of proactive and reactive relationships with investors.

Proactive Communication

Proactive communication is necessary for companies seeking to add value to their stock. Proactively pursuing investors, especially valuable investors, is a key role of the investor relations program. A hands-on attitude is positive for increasing productivity of a firm, as well as constructively driving the decision-making process for management and investors (Hughes and Demetrious, 2006). Conger, 2004 explains

If a company isn’t proactive at all with its [investor relations] efforts, some investors are still bound to find it. But [many] investors…have a limited amount of time at their disposal. They will, therefore, invest in those companies they have heard of, are familiar with and can trust. When a company is willing to communicate, it decreases investors’ uncertainty and risk (p. 1).

Argenti (2009) also adds that communication strategies should be intact for both expected and unexpected situation, such as mergers and crisis situations. A company that takes on a proactive communication role with investor relations is likely heading towards investee success.

Reactive Communication

Another important aspect of investor relations programs is reactive communication, which focuses on making use of investor responses, concerns, suggestions and preferences. One large petroleum company, Voyager Petroleum (2010), made a special effort to acquire Marmel Communications LLC, a well-equipped communications corporation. This business decision supported Voyager’s desire to reach out for investor input. Voyager Petroleum (2010) announced, “Our team is inviting all shareholders to [an] exclusive investor controlled forum. Our staff and members have requested that all Voyager Petroleum shareholders join our community and share their thoughts on the company, its development and future outlook” (p. 1). The main benefit of a company choosing to practice this type of reactive communication is to understand the mindset of their investors in order to know where the company can change and improve. The corporate forum method used by Voyager for reactive communication is beneficial by providing an area for a wide variety of feedback on all aspects of the entity. Ettredge and Gerdes (2005) also support reactive communication through venues like website forums because investor and investee information is able to be presented in numerous forms, such as video, audio, pictures and text. Website forums also support multiple languages (Ettredge and Gerdes, 2005). Corporations that require their investor relations programs to use reactive communication will more quickly know the key to success.

Investor Relations Advancement

As technology advances, all aspects of the business world advance; this includes investor relations and communications. As manufacturing, information storage and many other areas of the corporate world advance, communications to investors also advance. Some companies seek to only become more efficient with familiar methods. Vahouny (2004) describes how companies can use modern-day automation to develop more effective communication through typical actions: “using advertising, employee letters, collateral, client letters and press releases” (p. 1). Also, Boyd and Boyd (2008) explain how advancements can be made by effectively carrying out other general practice such as shareholder votes, calls and letters. Some firms still advance in the area of presenting, recording and reposting speeches to investors (Boyd and Boyd, 2008).

However, many modern-day businesses are advancing in investor communications directly by way of technology and the internet. Boyd and Boyd (2008) admit that communication such as speeches is becoming outdated, and that most similar methods of communication provide information or form, but rarely both. In general, the internet is taking over the investor relations function by offering convenient form and necessary information. Companies such as Chevron are combining investor relations, communications and marketing through the use of emails, blogs and social networking websites. Thompson (2009) says

Chevron is among the many companies that not only hosts an official [investor relations] Twitter feed, but promotes it on the company’s “Media Resources” page online. Chief Twitterer is Chevron media adviser Justin Higgs. Cisco is another company that hosts an [investor relations] presence on Twitter; the company has multiple Twitter sites, including ones such as “CiscoGeeks” and “CiscoEvents” (p. 1).

Twitter is a social networking website where information is quickly and easily released live to the internet for millions to see on mobile phones, computers and other electronic devices. These companies also communicate to the public through Facebook, a social networking website available to anyone with an active email address (Thompson, 2009). Firms that are jumping on the technological bandwagon are advancing investor relations communications exponentially. For a corporate department that thrives on providing timely and accurate information, the internet has revolutionized, and will continue to revolutionize, the investor relations function.

Conclusion

In conclusion, publicly traded businesses make a great effort to add value to their entities in order to maximize the benefits received by the investing community. By taking every possible step to have the best communication with investors, corporations are increasing the value of their business and stock. In consideration of this, investor relations are understandably a major function of doing business, and a major function of corporate communication. Argenti (2009) states: “As companies strive to maximize shareholder value, they must continually communicate their progress toward that goal to the investing public” (p. 203). As companies strive in this direction, the relationship between meeting corporate objectives and communication must be comprehended. This understanding by some corporations has brought communications for investor relations to a stage where programs are being established to take-on the role of entire departments, such as public relations. In the end, businesses will best identify with communications in the context of investor relations by: looking at an overview of the investor relations function, knowing how to organize investor relations, learning about investor relations programs and being informed on investor relations advancements. Above all, “Companies need to follow a communication strategy that includes a clear understanding of the company’s objectives and a thorough analysis of all its constituencies so that appropriate messages can be crafted and delivered” (Argenti, 2009, p. 222).