A company will typically, and hopefully, have good and frequent contact with the equity analysts who cover it. This positively indicates an interest in the company from both the analyst and investors. But equity analysts are reluctant to spend time on a company unless there is money associated with it [via] investors having a potential interest in trading shares in that company.
Therefore, the company’s contact with the analyst will typically be telephone-based, where the analyst regularly calls the IR function to get in-depth comment on, for example:
- A stock exchange announcement issued by the company
- A stock exchange announcement or press release issued by a peer company
- Other matters of relevance to the company, such as the development of the company’s share price.
Only rarely – such as in connection with the preparation of a major research report on the firm – will the equity analyst wish to meet the company, either the IRO or management, for a more thorough update regarding the company’s situation and conditions.
The dialogue between the company and the equity analyst must not violate the relevant stock exchange rules regarding the disclosure obligations of listed companies.
This balance can be difficult to find, especially for newly listed companies. The result is, sensibly enough, that these companies operate with a certain wide margin in respect of the stock exchange’s rules on disclosure obligations of listed companies. One may naturally say ‘better safe than sorry’ but, for the equity analyst, this can be a bit cumbersome as it can make the company seem not very co-operative.
But if the company is to avoid an unintentional offense, it must naturally be careful and get used to its new role as a listed company. This initial period of getting used to being listed is typically well understood by equity analysts.
What’s the (business) story?
There is no doubt that equity analysts, like skilled business journalists, go after a good story and seek to uncover matters no one else has touched before.
The company must never expect that a piece of given privileged information will be kept confidential between the company and the analyst. It is simply illegal in the case of price-sensitive information and it can be fateful for all parties involved if this information comes out in the market. This applies to the company, the equity analysts and any investor that may trade the company’s shares based on the information in question.
If ever an unintended mistake should happen, it is recommended to quickly involve both relevant legal counsel and compliance to seek advice, prior to communicating anything further to third parties. Then matters will be sorted out and appropriate action may be taken.
To ensure some consistent routines, the IRO must clarify to the equity analyst that the company’s IR function is the analyst’s primary entrance to the company. If the equity analyst has a close relationship with the company’s management, and management does not mind, it is in order for the equity analyst to contact management directly. It is just a question of the company’s policies and wishes in this area.
Separately, the company must take great efforts to dissuade the analyst – and journalists – from contacting company employees for further information. Unless the employees are specially trained to deal with equity analysts, [there is a chance] the analyst will succeed in getting them to disclose potential price-sensitive information. Hence, agreements must be made with equity analysts and the company must create and enforce relevant internal communications policies.
Similarly, as a rule, journalists should contact the company’s communications department or communications manager. Relevant agreements and communications policies should also be in place for this.
‘CEO for a day’
The company can benefit greatly from equity analysts. This is related to, for example, competitor intelligence and improving the company’s IR function. Good relationships with analysts can be maintained by having a constructive one-on-one relationship and inviting analysts who follow the company to an annual lunch for an informal meeting. Such initiatives can be distributed throughout the year, outside the company’s blackout or frozen zone periods, which are the periods up to the company’s quarterly results announcements.
Under this arrangement, the management and the IRO may benefit from encouraging the equity analyst to prepare some thoughts and ideas regarding:
- How the company can improve its IR activities
- How the equity analyst sees the competitive situation, including future trends in the industry
- What initiatives the analyst would take if he/she were ‘CEO for a day’.
Of course, the analyst does not have to decide anything, and he/she is certainly not always right, either. But the best equity analysts have considerable industry and competitor knowledge, and they closely follow the company. Furthermore, they are typically very passionate about their task and naturally want to impress the company’s management with some creative thoughts.
The management of some companies will be grateful to hear what equity analysts have to say about the company. Our opinion is that most companies can benefit positively from such brainstorming.
This is an extract from the new book Investor relations and ESG reporting in a regulatory perspective: A practical guide for financial market participants by Poul Lykkesfeldt and Laurits Louis Kjaergaard