Is investor relations responsible for the share price?
There are simply too many factors involved in the determination of a company’s share price – from macroeconomics to which sectors are in fashion – for responsibility to fall solely on any one department.
While investor relations might not be responsible for pushing up the share price, there are elements of a company’s valuation that are of course impacted by IR.
‘If you’re doing best practice investor relations, you really need to understand the company’s investment proposition and what its future prospects are. And you need to be able to communicate that really well to the widest possible pool of potential investors,’ says Sue Scholes, chair of the UK’s IR Society. ‘And if you do that, you can make sure your company is appropriately valued – which is not necessarily quite the same as trying to maximize the share price.’
If you get things right in terms of trust, reliability and transparency, you will develop the right reputation – ‘and that can help your comparative valuation,’ she says.
This was a subject raised at the IR Society’s annual conference this week, in fact, highlighting the value IR can add – during good and bad times. ‘Even if you need to make a profit warning for example, a company that’s worked well at its IR and is trusted and has a good reputation is going to be hit less badly than a company where these things haven’t been in place before bad news,’ adds Scholes.
Sofia El Boury, head of IR at First Gulf Bank and Middle East Investor Relations Society board member, agrees. ‘It would not be fair to assume that IR is fully responsible for a company’s share price which is influenced by a myriad of exogenous and endogenous factors,’ she says.
‘What IR is responsible for is consistently analyzing and identifying which factors prevent the shares from reaching fair value. Based on this, IR efforts are fine-tuned accordingly in order to remove selected discounts and close valuation gaps whenever possible.’
This is something senior management also acknowledges. When IR Magazine’s recent Senior management and investor relations report looked at different factors and their relevant importance in measuring IR from the senior management point of view, the price/earnings ratio in relation to peers was seen as the least important. Composition of the shareholder base came out on top, followed by accuracy of sell-side models and forecasts in second place and analyst coverage in third.
Not all companies take this approach though. When it comes to measuring the success of the IR program, Ignacio Cuenca, head of IR at Iberdrola, does rely on looking at the company’s share price performance versus various reference indexes – the EurostoxxUtil index of European utilities, for instance, as well as the IBEX35 and the Eurostoxx 50.
That’s not the norm however, and Bjorn Scheib, head of IR and reporting at Daimler, is more typical in his methods. The car manufacturer doesn’t conduct perception studies as such but does seek feedback after meetings with investors on roadshows. ‘And we do case-by-case interviews with key institutions about the granularity and effectiveness of our program,’ he says.
‘We don’t take the share price as a tool for evaluating the effectiveness of our IR,’ he continues. ‘Daimler is often a proxy for the market so there are parameters beyond our influence.’ Is this difficult to stick to? ‘Well, if the share price is down 3 percent in one day and the market is flat, it definitely triggers a lot of questions. You have to have a quick explanation for management if they ask you!’
Regardless of whether you agree with the consensus or see share price as falling under the responsibility of the IR department, the quality of your investor relations can have a tangible effect on the share price.
Research by Rivel – most recently published in August 2014 but tracked annually – found that among the three quarters of buy-side respondents that believe good IR impacts the share price, they estimate that ‘superb’ IR can boost a company’s share price by a median 10 percent while ‘poor’ IR has the opposite effect – with a median share price discount of 20 percent.