Micro-cap companies beware
As Darwin suggested well over 100 years ago, all of life relates to and descends from a common ancestor and, over time, creatures evolve to survive. While I am not prepared to affix a comparable commonality among non-living organisms, I firmly believe the rules of evolution also apply to companies and professions: evolve or perish.
Prime examples of companies that should have dominated over the long term but fell short of expectations due to their inability to evolve include Sony (producer of the walkman), Yahoo (developer of the first significant online marketplace) and Motorola (the once dominant producer of mobile phones). In terms of professions, when was the last time you saw a bowling alley pinsetter?
Applying this theory to my chosen profession, I am pleased to report that investor relations has definitively evolved throughout the 20-plus years I have been involved in the industry. When I first got into the industry, when compared with public relations, investor relations was considered the lesser of the two communications competencies. Not only was IR less established than PR, but it was also less defined in the eyes of the C-suite in terms of perceived value.
In its infancy, IR was considered nice to have but certainly not a must-have. By the early 2000s, however, aided by the maturing of the industry, and given a tremendous boost by the introduction of Sarbanes-Oxley, investor relations had reached the promised land: gaining a seat at the proverbial table with senior management.
Whether providing key insight and advice to the CEO on various topics such as strategic messaging and crisis communications or providing an informed opinion on the merits of guidance, IROs and IR consultants have evolved into the go-to authority for all aspects of shareholder communications – and deservedly so.
But as the investor relations industry has matured, I have become concerned that IR has lost some of its scrappiness and evolutionary momentum – especially as it pertains to the micro-cap segment of the industry, where companies are having an increasingly difficult time realizing the benefits or determining the merits of remaining (or becoming) a publicly traded company.
On a weekly basis, I encounter management teams of sub-$100 mn market cap companies that can’t understand why their stocks don’t trade or why the price of their shares is depressed and the buy side and sell side act as if they don’t exist. This common scenario undermines the core rationale to be public – to gain access to growth capital, provide liquidity for founders and use stock as a currency to make acquisitions and attract and retain key employees.
Sadly, I have come to the conclusion, with increased frequency, that micro-cap companies and their respective IR advisers are failing themselves and their shareholders as a result of IR fatigue, IR churn and IR tunnel vision. From overbearing boards of directors and shareholders to unpredictable capital market conditions, let’s face it: running a public company isn’t easy, and it isn’t always fun. This is especially true for micro-cap companies.
The result of this challenge is what I refer to as IR fatigue, which occurs when management executives lose faith in the capital markets – they believe they’re doing everything right, delivering strong results and favorable news, and know all of the right investors, but still, the market isn’t properly valuing their shares. Over time, this condition results in a defeatist attitude that causes executives to call it in – to simply go through the motions in terms of IR – issuing two to three obligatory press releases, hosting uninspired earnings conference calls and conducting a couple of days of lackluster non-deal roadshows, and repeating this quarter after quarter.
My advice for micro-cap companies is simple: present yourself and your company as the company you aspire to be. If you communicate like a small company, you’ll likely be treated like a small company. If you communicate as if you’re a small company on the rise – with a solid plan to be a much larger company in the future – you’re likely to be taken seriously and be rewarded over the long haul for your current and future successes.
I am equally concerned that the micro-cap IR profession has lost some of the credibility it has worked so hard to attain. With increasing frequency, micro-cap companies are committing IR churn – going from one IR firm to another every few months, hoping to achieve what they have been unable to achieve with their precious consultants. While some of this can be chalked up to management’s lack of hiring prowess or having unreasonable expectations, much of the blame rests squarely on the shoulders of the ‘bad actors’ who have nudged their way into the industry, promising the world but failing to deliver tangible results.
The fallout from this is two-fold: (1) a lack of continuity in terms of a company’s investor relations program is not only a tremendous distraction for management, but is also viewed negatively by investors, and (2) substandard IR counsel gives the entire investor relations profession a black eye.
Taken to the extreme, IR has become a dirty word, synonymous with stock promotion. The good news is that people’s reputation typically precedes them, so the vast majority of my fellow IR brethren have nothing to worry about. In addition, trade organizations such as NIRI have done an exceptional job helping to define the IR industry and establish rules for best practices.
IR tunnel vision
Finally, I contend that many micro-cap companies employ IR tunnel vision and have been conditioned to view non-deal roadshows as the panacea for what ails them – underappreciated, underperforming publicly traded shares.
While I agree it’s important to press the flesh and tell your story to a range of current and prospective investors, roadshows are only one tool in a toolbox chock-full of complementary communications services. From strategic messaging, well-articulated press releases and conference call scripts to the effective use of traditional public relations and, increasingly, social media, successful IR is grounded in a multi-pronged, holistic approach that empowers companies to communicate directly with key stakeholders: shareholders, employees and business partners.
In practice, publicly traded companies can greatly raise their profiles through earned media – print, television and online – providing opportunities for management executives to demonstrate their expertise through thought-leadership, positioning the company as a leading participant in its industry. As many micro-cap companies often lack the ability to generate of-value, consistent news flow, earned media fills the void and provides an opportunity for public companies to consistently communicate with investors. What is achieved through earned media can also be repurposed through corporate websites and social media channels.
The good genes
The good news, as my mother likes to say, is that the investor relations industry has good genes. Not only is it a respected industry, but I would also go so far as to say its effect on the overall health of the capital markets has been tremendous. Can I put a dollar amount against what strong IR has meant to the combined market capitalization of publicly traded companies? Clearly not, but my guess is that it has been extremely positive.
My advice for our beloved IR industry is very simple: do not rest on our laurels but speak out and make change when necessary – and, by all means, continue to evolve.
Jeffrey Goldberger is managing partner at consultancy KCSA Strategic Communications