The investor relations function is becoming increasingly global
You're on a rocket and its name is IR. Fasten your seat belt and brace for the ride of your life. Don't pause in the troposphere at 40,000 feet. Don't even look down until you have the paradigm-shattering world view of the first Sputnik to puncture the stratosphere. Now what do you see?
As IROs across the globe were gearing up for the International Investor Relations Federation conference in Toronto this month, Investor Relations magazine was busy collating the first snapshot of worldwide IR. A poll of some 150 IROs on five continents reveals a beautiful vista: the clouds are clearing; the light is dawning. The US and the UK may still lead the pack, but no longer are they clear front-runners; the rest are catching up.
The results of this global survey of investor relations departments are somewhat surprising - principally for their regularity. Across every data point, from size of the IR department and budget to salary levels and responsibilities, it is clear that continental Europe and Asia, traditionally looked down upon for their naivete by supposed British and American sophisticates, are reaching the age of investor relations maturity. Even tools such as teleconferencing and web sites have penetrated the furthest reaches, while Asia is actually the early leader in sending e-mail announcements to investors - an emerging trend elsewhere.
There were but four IR societies in the world when the IIRF was informally established in 1989: the US, the UK, France and Denmark. Within three years twelve more arrived on the scene, including Japan, Canada and much of the rest of western Europe. Today there are 17 member societies, while recent overtures to the IIRF have come from Poland, the Czech Republic, South Africa, Mexico and Argentina, among others.
'Since the IIRF was formed, it has become more and more obvious that no large company can ignore the demands from institutional investors for more information and more direct contact with top management,' says Neil Ryder, an IIRF board member and director of London-based Sage Partners.
One clear conclusion from this magazine's survey is that IR is spreading like wildfire in continental Europe: 34 percent of the European companies polled are planning IR staff increases this year compared to a global average of 19 percent. If the US and the UK constituted the first wave of IR, 'Continental Europe is the second wave, with parts of Asia and eastern Europe behind that,' Ryder says.
Indeed, continental Europe is now stricken with the same shareholder value epidemic that earlier hit the US and the UK. One of the first symptoms exhibits itself in share buy-backs (see Bouncing baby buy-backs). Next the focus turns to cost of capital. 'And that brings a much more mature look at what IR is all about,' Ryder comments. 'It starts being less of a PR function and more of a key strategic role to keep the cost of capital at an optimum level.'
Ryder says this shift in attitude and culture has occurred across Europe over the last two years. For example, one French company he works with has removed most of the obstacles foreign investors complained about, such as restricted voting rights, making management much more available - and vulnerable. 'They now realize they shouldn't need artificial defenses for their own jobs. It's up to them to show the market they're performing, and not leave room for a premium to be paid by an acquirer. And that brings with it the need for a much heightened IR program.'
The US, meanwhile, is bushwhacking the trail to yet more new IR terrain. States Lou Thompson, chief executive of the National Investor Relations Institute: 'IR is a more strategic role, providing input into strategic planning. In some instances IROs are involved in board decisions on acquisitions or other major moves, supplying a perspective on how the Street would view such an action.'
And in today's volatile market, adds Thompson, IROs play an increasingly important role by supplying continual guidance on earnings and prospects. First Call has observed an increase in the number of pre-earnings announcements by US companies - positive, negative and neutral - each year for three years. 'Even companies that are not in trouble over earnings are telling the market, We're okay. It's all part of managing expectations to a greater degree than ever,' says Niri's Thompson.
Worldwide, investor relations officers are playing leap-frog to catch up to the standards still set by the US. The Canadian Investor Relations Institute has grown by 20 percent each of the last five years, notes Joey Browne, executive director. 'This is indicative of the growing recognition of the function, driven by factors like the Dey Report on corporate governance, the Allen Committee on corporate disclosure, and growing shareholder activism in Canada. Corporations are recognizing that they need to understand the capital markets and to have a dedicated investor relations function.'
Or take Italy, where the pressure to meet European monetary union limitations were imposed later, harder and perhaps more effectively than elsewhere. The changes sweeping Europe occurred faster and more intensively in Italy because the market had further to go, and IR has had to develop at a similarly rapid pace. One large cap Italian respondent to the survey already has an IR staff of four with plans to add two more this year, and the company has an exemplary list of innovations planned: videoconferencing, investor field trips, web site and fact book.
Of course the Asian crisis shows dramatically how market vagaries can dash the best-laid plans. Take the pitiful before-the-crisis/after-the-crisis survey responses from an Indonesian IRO: before the crisis, market cap $1 bn and IR budget over $1 mn. After the crisis, make that $40 mn and less than $100,000. (Admonishes Lou Thompson sternly: 'We wouldn't have an Asian crisis of the magnitude we have today if there was transparency in the public reporting of companies and banks in the region. We would have seen the problem coming years ago.')
While there appears to be an IR mindset taking over continental Europe and other regions, there is still a dearth of experience. According to Paul Foster of London-based recruitment consultants Foster & Crouch, there are only two groups that understand 'IR in the true sense'. These are the Americans and British, 'and the Brits are catching up with the Americans.' As a result, Foster is busy staffing continental European IR departments with Brits and Yanks.
'A continental European company comes to me because they need a pure IR specialist who understands analysts and fund managers, the difference between buy and sell-side analysts, UK accounting, US Gaap and the continental European scene at the same time,' Foster reports. 'The most important thing is that anyone good must have high credibility. You can phone up a fund manager, mention a name, and they say, Who? That's not what I want. I want someone who is in bed with investors and analysts, and, conversely, can advise their employer precisely what they should be doing from a strategic, tactical and hands-on level.'
'More companies are recognizing the need for IROs with experience in the US or UK markets,' agrees Ryder. 'And because of limited supply, salaries have been pushed up markedly.' He recalls continental European salaries starting at £65-70,000 in the early 1990s compared to present-day packages of around £100-130,000. This summer one IRO was hired at £200,000: 'Now you're starting to talk about big money.'
Paul Foster recruited two IROs for European companies this summer who started at £150,000 plus performance-related bonuses, which he adds are de rigeur now. One reason for the rising compensation levels is the increasing size of IR departments, with Foster citing one company currently looking for an IRO to build a whole team around.
The rising importance of IR in the US has also seen salaries increase. Two thirds of Niri members report to the CFO, while one in four reports to the CEO, putting many IROs at the vice president level with corresponding compensation. In fact, Niri salaries are double or even triple those reported by the Public Relations Society of America. And several of our survey respondents reported total compensation exceeding $300,000. Unfortunately, the size of the IR department at most companies can still put a ceiling on salaries.
'IR is still a thinly-staffed function,' notes Niri's Thompson. 'One of the problems IROs encounter is it's a hybrid position, and in many companies it hasn't been established that long. They have a real struggle to achieve salaries that justify the importance of the job because human resources people look at span of control and how many people they supervise.' As one IRO heading a small department complained to Thompson recently, 'But I supervise 38 analysts.'
'Sad but true,' laments one survey respondent who makes less than $60,000. 'I can't wait to see the results of your survey. It would be helpful as a data point to show that investor relations needs to be viewed much more strategically in my company - something I've been beating the bushes on for years.'
'IROs have to learn how to leverage themselves in what they do, so management understands and appreciates what they contribute,' Thompson adds.
Interestingly, the survey shows that equity-related performance bonuses are widespread. But while many Niri members have stock options, the organization urges IROs not to tie performance compensation to stock price. 'Your job in IR is getting information out to the market - good, bad or ugly - and getting it out in a timely way,' says Thompson. 'You may enhance shareholder value by better disclosure, so the Street better understands and more fairly values the company. But that can also go the other way, for reasons beyond your control as an investor relations officer.'
This axiom was demonstrated at the first Investor Relations Magazine Canada Awards in February this year as Newbridge Networks won numerous awards. Hoots of derision came from some members of the audience because the stock had recently crashed. Nonetheless, the investment community still ranked Newbridge tops in investor relations.
Rush to continental Europe
One trend that comes through clearly in the survey is the move toward continental European institutions, at least in the UK and continental Europe where respondents listed a targeted push in the region as an innovation for the coming year. Obviously the coming introduction of the euro is partly behind this.
At the same time demographic trends are putting pressure on state pension provision, leading to private, defined contribution plans, and a rise in savings and equity investment pushed further by government privatization campaigns. And the barriers to cross-border investment in the 'euro-zone' are falling, while banks have started to disinvest from passive industrial holdings - reportedly a big factor behind Daimler-Benz's listing on the New York Stock Exchange.
'The US has been the biggest engine behind the shift to foreign equity investment for the last ten years, and to some degree the UK was before that,' says Ryder. 'But some time within the next five to ten years the US will begin to plateau and Europe will rise fast to become the major exporter of equity capital.'
Still, relatively few investor relations officers have caught on to this trend, particularly in the US, and Ryder says that US or UK IROs experienced in taking their investment stories to continental Europe are a rare species. No doubt there will be much buzz at the IIRF conference this month over Europe blossoming into an equity investing superpower.
But even that regional phenomenon should not overshadow the glaring reality echoed in the results of the survey: Sure the drums of globalization have been beaten for years. But now they truly are resonating through an investor relations culture that spans the earth.