The Importance of Investor Relations

by Elaine Lim, Apr 24 2009 Tell it as it is, and keep talking in good and bad times, says Elaine Lim.

In the past 10 years, investors have been brought through their worst roller-coaster rides in the capital market - spurred by greed, fraud and callous disregard for upholding governance and strengthening fundamentals. This corruption of market attitudes and corporate responsibility led to the collapse of Corporate America.

Drastic governance reforms followed, culminating in the passage of the Sarbanes-Oxley Act, 'the most far-reaching reforms of American business practices'. This brought some much-needed discipline back to the boardrooms.

However, as long as greed exists in some quarters, attitudinal corruption will never be eradicated. The motivation to prosper overrides all other concerns, even if other parties are hurt along the way. This is probably one of the key motivating factors that gave rise to the sub-prime debacle, resulting from toxic assets, more popularly known as CDOs. The bursting of the CDO bubble brought Corporate America once again to its knees. Large, established financial institutions disappeared from the corporate radar screen.

Then came the re-emergence of the Ponzi scheme which wiped out the fortunes of many. NYSE-listed Satyam shocked the global financial community when its founder and CEO confessed to cooking the books with phantom assets.

The Singapore capital market has recently been deluged with a spate of S-chip scandals and corporate failings, ranging from bank sheet irregularities to cooking the books, change of effective control to key management going AWOL.

Integrity and Ethics
All these corporate debacles have happened despite the fact that governments and regulators all over the world have instituted new and more stringent laws and statutes governing the financial and securities industry, introduced more refinements to regulatory policies and guidelines and are continuously enhancing corporate governance practices.

Sadly, no amount of regulations, policies and rules in the world will stem or curb corporate scandals if the corporate captains do not embrace corporate integrity and uphold a set of corporate ethics and value system that permeate across the entire corporation.

While laws, rules, codes and even penalties can be prescribed to regulate and guide market players, integrity, values, ethics and principles cannot be taught in the market place. It is upbringing and educational background that come into play. In these recessionary times when some companies are struggling to stay afloat, investor relations do not rank very high in a cost-cutting operating environment. After all, sentiments are so overwhelmingly bearish that good news often gets lost. Should companies go into hibernation during this winter of capital markets and come out again when spring arrives afresh?

Communication is Key
Given the current economic climate, it is even more important for companies to communicate, explain and gain confidence. This is the time to explain why the company is not significantly affected by negative macro-economic factors or how it is navigating its course through the economic storm. This is the time to stay the course. Maintaining confidence or winning back and retaining investor trust must surely be a top priority. Keeping silent would be construed negatively and no news is bad news.

Under these volatile market conditions, investors are nervous and easily spooked by market rumours. They are more likely to sell first and ask questions later. In this instance, consistency is key. Be transparent in good times and in bad times. Tell it as it is - based on facts and rational supposition.

In fact, this is also the time for companies to review its policy on rumours. Especially under the current market environment when investors sell on rumours and buy on facts, a blanket refusal to comment on rumours can be disastrous. Some rumours can be so damaging that if companies do not comment immediately to refute them and set the record straight, it may be too late as the damage would have been done. Better news needs to be better managed.

Cost-effective IR
How do companies manage effective investor relations on a budget? Like most programmes, it is both a matter of prioritising and reviewing the method of execution.

First, differentiate between the must-haves and nice-to-haves. The former include the regulatory communication platforms such as annual reports and AGMs as well as basic shareholder communication tools such as websites and roadshows for results and major corporate developments.

Companies' key investor relations objectives do not change, regardless of market conditions. Ironically, during weak and challenging market conditions, these objectives are heightened as investors want more answers and demand assurances when the capital values of their investments diminish and dividends are reduced or eradicated.

Many of the must-haves can, in fact, be just as effectively achieved on lower budgets. Annual reports are just as useful if they are not printed on expensive fancy paper, write-ups are more concise and printed in black-and-white instead of full colour. Investor briefings and shareholder meetings need not be held at five-star hotels with lavish buffet spreads. Funds and institutions would prefer to be wooed with corporate transparency rather than fancy gourmet dinners. Companies can be more selective in which non-deal road shows to invest time and resources.

Be Transparent
It is during challenging times like these that investors want to engage the companies more. No longer are they satisfied with understanding the business, its entry barriers, quality of management, return on capital employed and strategic growth directions. They want to know more - how companies have been impacted and how they are responding/managing the issues and challenges. They also want to have a better understanding of the underlying drivers of the companies' financial statements, whether companies are exploiting opportunities that distressed markets present and how companies are sharpening their fundamentals in preparation for the upturn.

With the current credit crunch, investors want to see improved transparency on companies' balance sheets. In particular, they want to know and understand better companies' debts and covenants and whether or how they could support or hinder the companies' road-map going forward.

Companies who capitalise on the current market weaknesses to continue communicating their fundamentals, particularly their strong balance sheets, are well-positioned to get good ratings and attract quality investors on a longer term than before.

The writer is managing director of Citigate Dewe Rogerson iMAGE and one of the judges of the Best Investor Relations award.