I first worked in investor relations in 1994 or 1995. I can’t actually remember when, but it must have been right after completely my undergraduate degree. I was in the mineral exploration industry at the time, so I mostly took care of administration work, such as formatting quaterly and annual results and editing the President’s Message in some sort of archaic page-maker software.
Investor relations has changed drastically osince then, and most notably in this last decade thanks to a few new laws that I will speak of shortly. The purpose of IR is to communicate information relating to a company’s financial and strategic performance: to the community, to shareholders/investors, potential investors, and analysts.
According to Richard R. Dolphin, in The Strategic Role of Investor Relations, the purpose of this corporate function is to:
continuous, planned, deliberate, sustained marketing activities that identify, establish, maintain and enhance both long and short term relationships between a company and not only its prospective and present investors, but also other financial analysts and stakeholders.
It can be seen as a strategic corporate marketing activity that involves combining the disciples of finance and communication.
If IR falls under your umbrella, I strong suggest you do 3 things:
- Befriend the CEO. Know who they are, what they do, and become known to him/her. Befriend other key individuals in finance who can help you navigate the unfamiliar waters of financial statements, notes, and governance.
- Brush up on your financial ratios and financial statement analysis. Hey, can you find marketing expenses on the income statement and do you know what it means?
- Immediately, read up on SOX legislation and learn how your company applies the legislation to establish accountability within it’s financial reporting practices.
If anyone out there things that finance and communications are two separate corporate functions that have nothing to do with one another, they are dead wrong. In today’s post Enron-climate, finance needs communications like never before.
Here’s a fourth task: brush up on the Arthur Andesen Enron scandal to learn why SOX came to be.
Managing Reputation through Investor Relations
With key stakeholders like analysts, media, investors, employees, managing a firm’s reputation through investor relations couldn’t be more important. The overall image a company presents through its IR activity could, after all, help attract quality emloyees, lower costs, increase prices, and create competitie barriers.
Ahh…tangible benefits, my favourite. You see, it’s not just about laying out the numbers and saying have a look, here’s how we did. It’s a bit of (honest) storytelling and reputation management at the same time.
But here’s where things went wrong in the past. Annual reporting, for example, was often viewed as an exercise in creating confusion. And, it was used to always present management in as favourable a light as possible, in particular during bad times.
Financial reporting lost credibility. It somehow became the same as advertising in that thepublic realized it wouldn’t trust what a company would say, but instead rely more on the analysts to interpret and relay the truth behind the numbers.
The authenticity of the communication therefore lost credibility. Language was used to blur attributions. For example:
- External and environmental causes were to blame for any negative aspects of corporate performance
- Internal factors were applauded for all favourable outcomes
- Often negative performance would be explained using accounting jargon
- Positive performance would be clearly laid out in “cause-effect” terminology
See how the manipulation takes place. See why finance could use a helping hand from communications (and a skeptical parent to oversee the messaging in reporting activities?).
Research has also been carried out on the visuals within financial reporting (eg. annual and quarterly reports). I will say, I’ve seen a strong (and most welcomed) trend over the past few years to “tone it down” and simplify and streamline reports. Budgets have been cut drastically, and the online medium allows for fewer and fewer printed copies for mailing.
But wake up communications! Ask yourself if the visuals are still trying to manipulate the audience’s impression:
- photographs reflecting how one thinks the company behaves, not how people actually behave.
- visuals used to persuade and distract readers from from important (negative) information or used to try and establish credibility with the audience
- distortion of financial graphs and charts to enhance perceptions of management performance
The lack of governance in this field of communications along with numerous now famous accounting and financial reporting scandals, prompted the creation and enactment of the Sarbanes-Oxley Act of 2002.
The bill was enacted as a firm reaction to Enron, World.com, and other major accounting scandals which cost investors billions and essentially eroded public confidence in the securities markets.
It’s worth reading some high-level summary information such as the Wikipedia page on SOX.
At the heart of this legislation lies the tumour that prompted immediate and firm action.
- inadequate oversight of accountants
- lack of auditor independence (see Arthur Andersen & Enron case)
- weak corporate governance procedures
- in adequate disclosure provisions (which now has a significant impact on communications professionals in this field)
- many also believe poor funding of the SEC is also to blame
The intention of SOX legislation was to:
- strengthen corporate accounting controls
- to create standards for external auditor independence (to limit conflicts of interest)
- establish individual responsibility for accuracy and completeness of corporate financial reports (eg. this essentially means that the CEO could n’t say, “Huh? I didn’t know about that? And get away with it. He or she is now held legally accountable for the financial activities within the entire organization).
- create additional corporate board responsibilities (eg. same as above. The Board would also be held liable and accountable with creating, “signing off” power assigned to them before making statements and reports public).
- apply criminal penalties. ‘Nuf said.