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Deverill Insight

Transparency, Truthfulness and Trust – What makes the best Investor Relations Director?

Author: Alison Howard

Investor Relations may, on first appearances, appear a less creative professional path than one in brand communications or less fashionable than a career in social media, but an IR team can make or break a company’s share price. Good IR can allow a company to access capital, to grow rather than stagnate, to fight off a hostile takeover, or indeed to achieve the right valuation of an offer so that Boards can fulfil their regulatory requirements.

We asked a variety of FDs, Heads of Communications, IR Directors, and external IR advisers what they believed made a good IR director. We hope our findings will assist anyone hiring or managing an IR team.

Our respondents made it clear that a role of this importance requires a person with a wide variety of skills. An IR Director needs to know how to handle a conversation with investors and analysts, whether discussing financials, strategy, the competitive landscape or broader economic conditions. A purely media-focused or financial-focused background is not enough.

An IR Director needs to have excellent relationships with senior management and have the confidence of the Board and be empowered to communicate on their behalf. Likewise he or she needs to have the confidence to communicate investor feedback honestly and frankly, and from an investor’s point of view, won’t go into hiding in tough times.

Investor Relations isn’t just about ensuring that you have a team in place to meet a company’s regulatory requirements. The approach taken by an Investor Relations team will heavily influence the investors’ and analysts’ perception of the company, as well as that of the management. Transparent, truthful and trusted are the three “Ts” that senior management teams should want the market to associate with themselves, their company and their communications.

A skilled and knowledgeable IR team which can proactively perform as the company’s eyes and ears in the marketplace is essential for a good flow of information. Having the authority and credibility to be seen as the CEO’s mouthpiece is paramount.

They should have a holistic view of communications and work on a joined-up message with the wider communications effort, particularly the media relations team. They will have to build good relationships internally across the business as well as maintain relationships in the sell- and buy-side communities and target new shareholders for liquidity.

Beyond the traditional long-only markets, bondholder relations seems to be in the main handled by Treasury departments, however IR directors have, over the last ten years, had to learn to deal with hedge funds and sovereign wealth funds, which have become a crucial audience.

Hedge funds require a proactive approach to identify any likely agenda and address issues, ideally before they become public. Relationships with hedge funds are about working out the quality of the fund and the materiality of their holding. They are a vital part of the market and can provide valuable liquidity so need to be part of the communications strategy. Even if they don’t own your shares, they probably own an entity that has an interest in your shares.

On a tactical basis, once an IR team has understood a hedge fund’s strategy, it is essential to maintain an up-to-date share register list, to track movements, to know at what price they came in and to have a view at which point they will look to take profit. IR Directors highlighted how important it was to appreciate the pivotal role hedge funds can play in deciding takeover situations, e.g. the recent Kraft/Cadbury takeover.

So where is the best place to find this person? Finance Directors in waiting, IR consultants, industry players moving internally and sell-side analysts are the main sources. All could provide good candidates, however as with all hires, much will depend on the individual’s calibre and his/her chemistry with management.

Financial Directors in waiting will clearly understand the figures and the necessity for having good IR in order to obtain growth capital and to protect a business from a possible takeover, but it is unlikely he or she will want to stay in the position for any length of time. They may want to be promoted too quickly and they may be less focused on relationship building with the buy- and sell-side.

IR Communications Advisers from consultancies who make the move in-house to an IR role will understand the market well and how it reacts to events, will have a broad understanding of different communications issues but they are likely to need to get fully up to speed with the company detail and their financial literacy will need to be tested.

Industry players moving internally will understand the business and industry in general but may not be ideally suited to an outward-facing, relationship-focused role and they may be too involved in the business to be able to step back and approach IR management successfully.

It is relatively common to find IR Directors with investment banking backgrounds, especially former equity analysts. Their prior experience requires financial fluency, as well as an ability to write competently, and to verbally communicate effectively with the investment community. They understand what analysts and investors are looking for and so “speak the same language”. They will be close to the numbers and understand the sector well, be able to take hold of the issues quickly and understand how the market will react to news/events. They may however find the adjustment from being an independent ‘seeker of truth’ to being an advocate difficult. They may not understand the internal workings of the business well enough to understand what drives it and hence what they should be telling analysts/investors. The challenge for companies is to attract these individuals away from the investment banks, where bulge-bracket bonuses are still commonplace. An IPO is one situation that may tempt bankers to move into IR roles given the opportunity for wealth creation.

Once you have hired the candidate, where should he or she sit in the organisation? There is no consensus about which reporting structure works best to incorporate IR into the communication process. Communication Directors believe IR should be within their remit. Finance Directors believe it should be in their jurisdiction. Communication Advisers, who may find themselves the go-betweens straddling the Finance and Communications teams, often believe there should be joint reporting to those departments

The only consensus reached was that, regardless of the reporting lines, there should be a spirit of collaboration and communication. Both Public Relations and Investor Relations should be incentivised to work well together and penalised if they try to champion silos or fiefdoms that result in poor information flow and sub-optimal message delivery.

Regardless of the difference in opinion over reporting lines there has, over the last ten years, been a substantial increase in terms of professionalism, calibre and, above all, sheer numbers of IR professionals. Institutional shareholders are happier now to deal directly with IR Directors on a day-to-day basis. They realise CEOs and FDs have companies to run. However direct contact with senior management remains top of the list of what makes investors buy shares.

Looking to the future, there is no clear consensus of where IR is going. If the UK becomes more akin to the United States in terms of regulation, IR may become a more administrative role, and focus on distributing safe harbours, EPS statements and quarterly results. Realistically, IR is likely to require the same balance of skills – numeracy, communications and relationship management; however several respondents pointed towards the importance of contact via social media.

To conclude, an IR director needs to understand the company, the sector, have excellent networking skills both internally and externally, be financially literate, be brave in a crisis, be confident in a boardroom, as well as have an understanding of how to utilise social media for commercial benefit.

The IR Director has come of age. The days of simply being the Finance Director’s bag carrier are over.