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Aug 31, 1999

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Investor Relations surveys IROs on individual investors

Once upon a time, long, long ago (well, really just a couple of years ago), mutual fund monsters were taking over the world, gobbling up private savings and growing into giants. Then one day the magic internet bean was planted, and once it grew, it gave all the little people the same information as the mutual fund monsters, making them, all together, just as strong.

Indeed the stellar growth of mutual funds for a while looked like it was going to eclipse mom and pop investors. To some extent it did – dear old mom and pop are in mutual funds now. But there is a whole new generation of retail investors who were raised on computers, and who are now taking increasing responsibility for their retirement savings.

The internet isn't the whole story, but who can say what is? The 1987 crash showed Wall Street was fallible, and the 1990s recession made small investors cost-conscious. Cable and satellite TV gave them business news 24 hours-a-day, then the internet gave them the tools to gather investment information and trade on their own. Whatever the sequence of events, the reality is that the retail investor is on the rebound.

In the US, for example, the influence of 401k plans cannot be underestimated. These retirement plans have introduced millions of Americans to brokers, and those brokers have introduced them to stocks. Now there's talk of Social Security privatization, which would increase that stockholding population by many magnitudes; while the fall of Glass-Steagall banking regulations means Main Street banks can market stocks alongside checking accounts. All around the world it's the same, as state-funded pension plans give way to defined contribution plans. Meanwhile, a wave of privatization over the last two decades has spawned massive equity cultures, especially in Europe.

Next to that picture put the internet. One report shows the number of people using the web worldwide doubling to 300 mn by year end, with internet traffic increasing 1,000 percent a year. Online brokers like eSchwab or E*Trade, which are now making forays into Europe, are eclipsing traditional brokers like Merrill Lynch, while a recent survey by the Securities Industry Association reveals that three out of ten investors not currently trading on the internet are likely to do so in the next year.

What does this mean for the IRO? For one thing, The internet knows no borders. A private investor on the other side of the world – and before long they could number in the billions – can now surf your web site, go on to an investing bulletin board like the Motley Fool, and from there to their online broker to take a stake in your company.

Luckily, the same technology that is empowering individual investors and leading them to invest in your company, allows the IR department to respond. And while the web is also used by investment professionals, it is with the retail investor that you can leverage the technology the most. It used to be easy to gather a dozen of your analysts together, or 25 of your top shareholders. But today's individual investor demands almost the same level of attention. At the same time, IR departments are small, they're going to stay small, and they're going to be driven by technology.

The 1999 Investor Relations global survey evaluates the current level of importance of individual investors in the shareholder base of public companies and the IR response to this audience, especially the technology used to meet the retail investor's needs. In July some 289 IROs from five continents responded to the survey. Highlights of the results follow.

Retail rise

Employee share ownership is higher for small-caps everywhere, reflecting the importance of stock-based compensation and management ownership at start-ups. This is shown most dramatically in Europe, where emerging growth companies from the Neuer Markt and Easdaq junior exchanges show almost 50 percent average employee ownership. US and UK small-caps are 22 and 13.4 percent respectively.

A similar picture is painted of the level of individual stock ownership, with small-caps generally topping the charts. The developing economies of Asia and South America show the reverse, with large caps – often formerly state-owned giants – boasting over 40 percent individual ownership. In Britain, which similarly plays home to large enterprises like BT sold off to the public in earlier times, the level of individual ownership at different sizes of companies is pretty constant.

The results from US companies may reveal groundswell change. At an average 35 percent individual ownership, US large-caps defy the standard 30-70 split. Meanwhile, retail investors make up close to 50 percent of the average small-cap shareholder base.

IROs at most US companies are standing back and watching retail investors advance on the market. Some, however, state proactive plans: around 28 percent of US large-caps say they plan to increase the proportion of individual ownership. A surprising number comment that they want to expand both individual and institutional ownership. As Americans would say, 'Go figure,' unless they're all planning to issue new shares.

Several companies say they wish to broaden rather than increase their shareholder base, particularly on the institutional side and particularly mid-cap companies. This looks to be a reaction to the volatile market of 1997-1999, and the realization that a handful of institutions can have a dramatic impact on a stock if they trade as a pack.

Calling all investors

Periodic analyst conference calls are spreading around the world, seeded by their virtually universal acceptance in the US where 96 percent of mid-cap companies and 92 percent of large-cap companies have them. Still, small-caps everywhere are less likely to hold conference calls compared with their larger cousins. In Europe, for example, over 40 percent of small-caps don't hold conference calls, while almost all large-caps (96 percent) have initiated the practice.

There seems to be a far more media friendly attitude in the US, with 42-47 percent of companies letting the press onto conference calls. IROs beg to differ in Europe and elsewhere overseas, where No is usually the firmly expressed and sometimes even underlined answer. A number of US companies say they offer separate conference calls for media and sometimes individual investors.

Tech tools

In last year's global Investor Relations magazine survey, the top investor relations innovations for the coming year focused largely on tools for reaching the retail investor: web sites, direct stock purchase plans, fax-on-demand, webcasting and electronic proxy voting. According to this year's survey, companies have come through on their promises to innovate.

IR web sites are now well nigh ubiquitous, be they for companies based in Sydney, Singapore or San Jose. And IROs are keeping tight control over them: more than 80 percent of IR departments at UK large caps, for example, have direct feedback from their IR sites.And the story appears to be much the same elsewhere in the world.

Meanwhile, the majority of companies of all sizes are developing and managing their own web sites in-house. In general, only around one third farm out their web sites to agencies. Some small-cap US companies use third parties to manage their investor relations sites externally, using services from the likes of PR Newswire, Business Wire and CCBN. These firms combine news releases and SEC filings with stock quotes and other external sources in sites that are integrated seamlessly with their clients' home pages.

Most companies with webcast conference calls say recordings are kept on the web following the call. Even some companies that don't do webcasts put archived teleconferences on their web sites, although this is primarily a US phenomenon as are most online activities beyond web sites.

Indeed, US companies appear to enjoy a large lead over their overseas counterparts in tools for individual shareholders. For example, some 42 percent of US large caps offer proxy voting on the internet and 47 percent have telephone voting. IROs in Germany and Spain, on the other hand, respond indignantly that telephone and internet proxy voting is illegal in their countries.

Nonetheless, many companies in the survey sample are following the US lead. European companies shine in particular, with 23 percent of mid caps and large caps webcasting their annual meetings, and 33 percent of small caps distributing proxy materials electronically over the internet.

Webcasting conference calls has caught on fast in the US, with a high 39 percent of large caps taking part. While other regions are lagging, the practice is so new that the relatively small number of non-US companies doing webcasts does not evidence a lack of interest, but rather foreshadows a coming trend.

Remarking rumors

The practice of monitoring the web for investment chatter is taking firm root. Remarkably, 64-72 percent of US IROs say they keep an eye on web chat about their companies, while the practice is becoming more prevalent in the UK and Europe where it's been adopted by over a third of small-capss. Larger-cap companies around the globe seem less inclined to worry about internet gossip, perhaps viewing themselves as insulated from the impact. Still, around 17 percent of UK and European large caps monitor web chat for mention of their stocks.

Very few companies respond to web chat. In the US, especially, it is considered highly risky to comment on any rumor, especially in the limited disclosure environment of a web chat room or internet bulletin board. Answers were underlined, capitalized or an exclamation mark used, with one replying, 'No, absolutely not'. A handful did say they would intervene in cases where the discussion was blatantly untrue or damaging to their company's share price, however. European companies are more willing to take part in web discussions. Between 11 and 16.5 percent of investor relations officers there said they would respond to investor comments posted on the net, particularly in the case of false rumors.

Pace of change

The current rate of change in the practice of IR is surely at its peak. As a securities lawyer remarked at the last Niri conference, IROs will look back at 1999 as the year of demarcation – the year that individual investors demanded to be met with the same respect that has typically been accorded institutions.

And according to the 1999 Investor Relations global survey, IR departments are responding in kind, using the tools necessary to meet the needs of individual investors.








Research assistance by Oliver Lawson