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Jun 19, 2019

Mifid II and the changing IR role

How Mifid II is changing the IRO job description

‘Mifid II seeks to improve transparency, reduce potential conflicts of interest and promote competition by unbundling brokers’ activities,’ said Andrew Bailey, CEO of the UK’s Financial Conduct Authority, in a speech delivered earlier this year. The European legislation has brought in ‘a number of fundamental changes,’ he added.

Alexander Free, senior analyst at Nasdaq IR Intelligence, explains that these fundamental changes, since Mifid II went live in January 2018, are placing extra pressure on IR professionals. Specifically, the way in which the buy side and the sell side interact has been significantly affected.

‘The itemization of costs for research and corporate access has, in turn, affected how IR professionals operate,’ he points out. More pressure and demands are falling on investor relations teams as a number of large buy-side firms are increasingly taking corporate access in-house, he adds.

So how do IR professionals win in a Mifid II world? They have to change their mindset and be willing to use the disruption to their advantage, suggests Oskar Yasar, managing partner at Broome Yasar Partnership, a senior executive recruitment company in corporate communications and investor relations.

‘Senior management is under so much pressure now,’ he explains. ‘And not just from investors but also from other stakeholders, including the government. Because of this, senior managers need people within IR to step up to the plate and oversee the relationship with investors.

‘Ten or 15 years ago a lot of our clients didn’t need to have dedicated IR professionals and now 50 percent of our mandate is looking for a brand-new IR director for an organization that didn’t have one before. This change has been heightened and strengthened by Mifid II.’

Sophisticated IR professionals

Yasar uses the phrase ‘sophisticated investor relations professional’ to describe the type of candidates he is being asked to identify and place. He believes financial and analytical skills make IROs attractive in this new world.

‘IROs need not only to understand regulation but also to react to it in line with the company narrative,’ Yasar says. ‘IROs need to understand how the capital markets work, what makes them move – and they must have an awareness of what makes investors tick. That is what makes a credible and sophisticated investor relations professional.’

He also confirms that Mifid II has changed IR job descriptions, particularly concerning how corporates and investors interact. ‘We have noticed that 50 percent of our clients want people who have come from investment banking or the sell side. Corporates need to bring in people who have a relationship with investors at a sophisticated level,’ he explains.

Yasar cites another reason why corporates may be turning to analysts: ‘Gone are the days when IR was a back-office process function. Investor relations sits at the top table within the C-suite. CEOs and chief financial officers now believe and conclude that their careers are dependent on how they communicate with their financial stakeholders. Because of this shift, people who come into IR need to have the credibility and gravitas to work at that senior table.’

A NIRI/Korn Ferry study of the profession shows that the number of IROs with investment banking backgrounds has increased 400 percent and IROs with securities analyst experience has risen 366 percent over the last 14 years. The report also notes that the MBA qualification remains the most common route to career and salary advancement.

Information quality and accuracy 

Andrew Carlsen joined Denmark-based Genmab, an international biotechnology firm, in March. He came in as a senior director of IR from the sell side and emphasizes that one of the reasons for his crossover into IR is the changes Mifid II has brought about.

‘Mifid II had a significant impact on the sell-side business,’ he confirms. ‘Given the pressure the sell side is under because of Mifid II, you could argue that there will be more analysts seeking other opportunities in the future. We are only in the second year of Mifid II so we have yet to see the full consequences of the regulation.’

David Lloyd-Seed, a highly experienced investor relations professional and chair of the UK’s IR Society, agrees. He says that because of the disruption the sell side faces, the quality of research could be threatened – so corporates need an IRO who is making sure the quality of information in the public domain is accurate.

‘Mifid II is accelerating the conveyor belt of people from the City [of London] coming into IR,’ Lloyd-Seed says. ‘I think the competition for capital is much tougher among corporates. They have a greater responsibility to communicate their message if they want to get full value for their listing.

‘IROs need to be out networking and marketing their organization’s story. The old days of free facilitators of that interaction have gone. Management teams are realizing that they need to have a fully informed investor relations function.’

Expanding responsibilities & teams

For example, Carlsen recently appointed Marisol Peron as corporate vice president of communications and investor relations. Although Peron was primarily hired as a replacement, Carlsen acknowledges that because of Mifid II, heads of departments will need extra support. The regulation is forcing IROs to rethink their roles, he says, confirming that purely communicating is not enough any more and there is more to be done to accommodate investor demands.

‘You have an increasing demand from your investors as they are circumventing the brokers while, on the other hand, there are ESG and CSR policies to follow,’ Carlsen explains. ‘Suddenly, you have to bridge a significant amount of information not purely pertaining to the financials of the business but also to the governance of the company.’

Because of the changing level of relationships with investors, IR heads need to have second and third-in-command IROs, Yasar highlights. He explains that Mifid II will actually increase the number of entry positions because corporates will need to build their IR functions. He believes more executives and IR managers will be employed.

‘IR teams will grow in stature and size, so budgets will have to increase to cover man hours,’ Yasar predicts. ‘Because of the increasing budgets and the increasing credibility, the IR teams will undoubtedly become much stronger internally. Their reputation will also change internally.’ He forecasts that all these changes will be more compounded and much stronger in the next two to three years.

For companies that want to keep ahead of the ‘fundamental changes’ of Mifid II over the coming years, Lloyd-Seed recommends that they ‘upgrade’ their investor relations offering now: if you’re a small cap firm, hire a head of IR; if you’re a large cap, look to expand your team.

‘By default, the extra roles within the IR function create a clear career path for everyone,’ Lloyd-Seed continues. Bumped-up investor relations teams ‘in a Mifid II world will improve the way IR professionals set out their corporate store to the market, whether via online, interactions with the market, capital markets days or presentations.’

This article originally appeared in the Summer 2019 issues of IR Magazine.