With analysts’ first-hand knowledge of the public markets, their contacts on the buy side and their experience of corporate access events, they can appear to be the perfect fit for a senior IR job. Recent research from three academics in North America suggests as much, finding that former-analyst IROs improve a company’s financial disclosures, analyst coverage, institutional investor holdings and stock liquidity.
The greatest incidence of ex-analysts being hired as IR professionals was in the immediate aftermath of the financial crisis, according to the research, when there were plenty of unemployed analysts looking for work. And with Mifid II likely causing sell-side firms to cut jobs, there could be a rapid acceleration of analysts looking to enter investor relations roles.
The numbers are already surprisingly big – in the US there was a 333 percent increase in the number of IROs with analyst experience between 2000 and 2016, according to research from NIRI. So what distinguishes a former analyst from other IR professionals? And is it really the case that former analysts outperform IR professionals with other backgrounds?
The academic research – Economic consequences of hiring Wall Street analysts as investor relations officers – compares the performance of former-analyst IROs with that of IROs from a more traditional background at S&P 500 companies between 2004 and 2016. The researchers explore the quality of companies’ financial disclosures after hiring former analysts, using the SEC’s Plain English Disclosure Rules 421 (b) and 421 (d) as a benchmark. They find that 8Ks became shorter, used fewer long words and used a smaller percentage of uncertain financial terms.
‘An analyst has expertise in processing corporate disclosure and understands good-versus-bad disclosure practices from the perspective of investors,’ the report authors write. ‘If a firm capitalizes on such expertise and deep understanding... the investment community would likely incur lower costs to process corporate disclosure. Thus, we expect firms to attract more interest from analysts and institutional investors after hiring a former financial analyst as an IRO.’
Ring of confidence
The authors draw a correlation between improved disclosures and other, harder-to-measure benefits, such as improved analyst coverage, institutional investor holdings and stock liquidity. Former analysts are also more likely to participate in investor conferences. ‘When we look at the stock market consequences [of hiring former analysts], we still find significant results,’ says Rucsandra Moldovan, assistant professor in the department of accountancy at John Molson School of Business, Concordia University, and research co-author.
‘Analyst IROs bring something more than just improved disclosures. It’s probably more confidence in the way they address the investment community.’
This confidence, in turn, breeds confidence from the Street. Brian Tanner, former head of IR at Hawaiian Telcom, worked as a senior equity analyst at Bank of America and Merrill Lynch before moving into investor relations. ‘I had credibility and could cut through a lot of bullshit,’ he tells IR Magazine. ‘I had more in-depth experience of how things worked within an investment bank and how to sell a story appropriately to the investment community.’
This confidence is clearly valuable for companies, and the research authors suggest that former analysts could be particularly valuable at firms with a complicated story to tell, such as technology companies with unusual business models. But if so many of the benefits come from past experience, personal relationships and confidence, they could potentially be lessened as time goes on – especially given the forthcoming reporting changes brought about by FASB’s revenue recognition and leasing standards.
Managing internal relationships
Peter McDermott, principal of the corporate affairs practice at Korn Ferry, says there has definitely been an increase in sell-side analysts interested in making the move into an investor relations role. But he hasn’t seen an increase in the placements of former analysts because candidates may not always fit as well in practice as they do on paper.
‘Analysts definitely understand the tactical and strategic aspect of what IR is in-house,’ McDermott explains. ‘But what they won’t understand until they get in-house is what it’s like to manage a very complicated internal and external stakeholder base. The IR officer has to build a productive relationship with everyone from the CEO and CFO to public affairs, the general counsel, HR and the operations heads.’
Candidates from the sell side may be used to working fairly independently and having the autonomy to run their own businesses, which Tanner says can lead to culture shock when entering an IR role. ‘You go from being concerned with just your business to all of a sudden sitting in a meeting that doesn’t seem very related to IR but matters somehow,’ he points out.
While most IR teams work very closely with the sell side throughout the year, McDermott says there is often a misconception that IR teams have more resources than they do in reality (see Average IR team size (people), below). This can cause a cultural mismatch that will often be flagged during the candidate screening and interview process.
‘If you’re a senior sell-side analyst and you’re used to having a lot of resources, you aren’t going to get that in IR,’ McDermott says. ‘Often you’re a one-person team, or part of a very small team. You really do need to roll up your sleeves and get into the weeds yourself. Not every sell-side analyst is able to do that.’
The work/life balance myth
The lazy assumption is that IR teams are busy only four times a year, around the earnings schedule. But this misinterprets what the day-to-day requirements of an IR team really are. ‘You can come into work with a to-do list and all of a sudden there’s a management change or a competitive issue or something else that throws your day completely,’ says Tanner. ‘It’s a role that requires long hours and, even if the market cap increases, the resources don’t necessarily increase accordingly.’
McDermott says IROs should be flattered, rather than threatened, by more sell-siders wanting jobs in investor relations. ‘The function has evolved to become more senior and with a broader range of responsibilities,’ he notes. ‘It’s a more legitimate function and that makes it a more attractive career path.’
For anyone who still feels insecure about how he or she compares with a sell-sider, McDermott recommends further financial education. Several IR associations around the world – including NIRI, the UK’s IR Society and France’s Cliff – have launched professional accreditations, which McDermott says will improve IR professionals’ resumés, their ability to communicate with the
Street and their confidence.
This article first appeared in the spring 2018 issue of IR Magazine