Structured approach to investor communication

Dhaka,  Fri,  21 July 2017
Published : 10 Mar 2017, 21:18:25
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Structured approach to investor communication

Communicate with the Investors
dilip.pal@grameenphone.com
Mr. Mridha, who owns 1462 shares of a mining company, one day comes across a piece of news on extension of mineral patent exemption up to 2033 securities. Questions pop up in his mind instantly" "Will it have any kind of impact on the export capability of my company? How much will my dividend be affected?" Mr. Mridha's confusion increased while the confidence in the company decreased.

Streamlining the process of catering these shareholder requirements solicits establishment of a single point of contact. Hence the Investor Relations (IR) function comes to the fore.

According to US National Investor Relations Institute (NIRI), IR is a strategic management responsibility that is capable of integrating finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation. The term describes the department of a company devoted to handling inquiries from shareholders and investors, as well as others who might be interested in a company's stock or financial stability. The objective is to manage various stakeholders' expectations relative to company performance and prospects as well as bridge the information gap between management and the investment community in order to achieve fair valuation of the company.

So what is IR? Is it a sales job? Or a form of financial public relations? Does it convince investors to buy shares? Or does it manage the share price? If you ask me. I say: Yes, it is a sales job and it sells its services as an information provider. Here information means material facts that influence the business performance of an entity.

Typically the structure of IR involves a dedicated department or person having some essential skills. Knowledge of company operations, understanding of financial terms and their implications, familiarity with local regulations, marketing skills, communications skills are some aspects worth mentioning. The most important requirement of an IR expert is to have a strong sense of curiosity. On the competency side communication and presentation skill, ability to build working relationship with senior management and interpersonal skill to build external relationships are also important.

Now the structured approach requires contents through which the relevant message can be passed on. Developing the appropriate story line of the company that is clear, consistent and transparent is a vital element of the total package. This helps the company build confidence of the stakeholders. The storyline should cover quality of management, company performance, financial results, strategic priorities, growth prospects, market outlook, competition, regulatory landscape, governance, risk management, ethics and compliance, social responsibilities etc. among many others. IR can be considered as the corporate story teller in the value chain.

Then comes the job of selecting the channel of communication that can yield higher effectiveness, which is also important. Most popular channels include one-to-one meeting, press conference, Annual General Meeting, website, road show, capital market day, field visit, investor conference, e-mail, social media etc. The selection of channels will be influenced by regulatory obligations as well as time, resource and budget commitment of any IR programme. Typically a moderate-size share register with analyst/media coverage requires utilising all of the above-mentioned channels.

By having a structured approach to investor communication which consists of a dedicated team with proper mandate of stakeholder engagement and relevant contents through a right channel will benefit shareholders of the company. A collaborative study by the Singapore Management University (SMU) and the Investor Relations Professionals Association Singapore (IRPAS) has reflected that IR has significant influence on the investment decisions with a score of 7 out of 10. Furthermore, 89 per cent of the investors are willing to pay a premium of 5.0 per cent or more and 24 per cent are willing to pay more than 15 per cent premium for their investment in a company with sound IR practices.

Now let's take a closer look at the best practices of Investor Relations. The first step towards the field of Investor Relations is to secure commitment from the Board of Directors for the company to enter into a long-term two-way dialogue with shareholders, potential investors, analysts and the media. An approved policy on information disclosure and communication is the guiding star of any IR programme. It can include basic communication principles, authorised spokesperson, publication procedures, events etc. In practice, the Chief Executive Officer and Chief Financial Officer along with support from the IR officer undertake all the activities for managing expectation of the investors in relation to company performance.

Positioning of an IR officer in the organisational structure is vital just like the role of a playmaker in a football ground. Typically, anyone in the company who is sufficiently senior and able to access and provide timely financial and strategic information should be considered for the role of an IR officer. Ideally that person should report to CFO, whereas there are companies in which it is under CEO's office, corporate communications or company secretary function.

Next comes the analysis of share register and subsequent decision on the intended mix of shareholders. Any company can identify investors, often institutions or professional fund managers, that have a special interest in the company and its investment merits. It involves matching the investment style of the investor with the company's characteristics. Perfect matching can bring the right investors and their loyalty to company and subsequently sharing the price volatility will be minimum.

Formulating an effective IR programme can help the company stay on the radar of target investors to get their long term support. Declaration of earnings and other important business developments are a vital part of any programme. Managing investors and their influencers through direct contact or targeted event is also vital for any IR programme's effectiveness.

A major part of an IR programme is the quarterly results sharing session for analysts, fund managers and media. It is a very powerful tool of communicating the financial performance, business highlights and outlook of the company. A well-drafted presentation, adequate time for Q&A (questions and answers) and a press release can be the simplest yet very powerful modality for this. Annual General Meeting can also be capitalised onto cater to the shareholders' needs to a greater extent. Other forms of engagement can be done through organising road shows, both local and foreign, face to face meetings, media interviews, market visits, organizing investor days, online communication via e-mail, messaging applications etc.

All the structures and practices of IR also have the delicate flip side of becoming  compensatory for any company. Strict adherence to standard procedures and guideline is required to avoid small pitfalls on the journey. Disclosure of obligatory material information termed 'price sensitive information' is done in a timely and accurate manner. Beyond the obligatory ones, the investment community expects timely and candid communications even when developments are not favourable. Selective disclosure meaning providing material information preferentially to any shareholder or any other party, is strictly prohibited. The general rule is that all material information should be provided at the same time to all parties. It is a rule which is applied to all IR activities. While dealing with an uncomfortable situation of information leaks, unwanted reports in circulation or even rumours spreading, a proactive approach to candid clarification is given. Instant circulation of clarifications or update on the issue is also given. A forward-looking statement is given to assist the existing and potential investors in evaluating the future prospects of a company. IR gives a realistic sense or direction in which the company is headed. However, in Bangladesh this statement is not issued as more clarity in regulations is required to cater to the adoption and consequences of it.

To conclude, embarking on the IR journey with clear mandate from the top and emphasising quality communication platforms are good enough to extract value for the company.

The writer is CFO of Grameenphone.

dilip.pal@grameenphone.com
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