The New Paradigm of Investor Relations

If you’re like me, you think of investor relations as a fairly staid field. As far as I can tell from the outside, IR is usually responsible for getting the annual reports and SEC filings written (with a healthy dose of accounting and legal input), managing earnings conference calls, and perhaps helping deal with the occasional company crisis. But of course it doesn’t have to be that way. In theory, investor relations should be educating investors on their company and industry, protecting the company’s access to capital. The communication channel should also flow the other way, keeping management apprised of potential risks to the company.

The wrong way

Probably 95% of investor relations departments don’t have this kind of mandate. To pick on a recent example, let’s consider Strabag, one of Europe’s leading construction companies. The firm recently shut down its communications Twitter account because no one was tweeting them. Of course, the company didn’t use the account for anything except for relaying analyst ratings and the status of its order backlog – not exactly captivating.

Strabag Twitter account

Strabag made a variety of mistakes. All marketing, but especially social marketing, is a content-driven activity. If you don’t have interesting things to say, no one will listen. You don’t have to be in a sexy business to come up with meaningful content (look at Zappo’s in shoe retailing), but you do have to think about what your audience wants to hear. Strabag could have engaged in a dialog with analysts, better understanding their information needs and perceptions of the company. A primer for investors unfamiliar with the construction market would have been even better. I won’t belabor all the usual social media points beyond that.

Tactically, Twitter is an awful channel for arbitrary data points (output is up 6%!) lacking context. Even order backlog is probably interesting to investors and equity analysts, but it should at least link back to a chart and spreadsheet showing the trend over time, comparisons with competitors, and implications. There’s no reason for online communications to mimic the dry facts of a stock ticker. Help people draw conclusions!

The right way

In contrast, I was blown away by the exchange between Reed Hastings from Netflix and a hedge fund short seller on Seeking Alpha (brilliant site, by the way). The hedge fund manager lays out his concerns about Netflix’s valuation, new competition, the costs and quality of licensed streaming content, and a few other reasons for his short position. Hastings addresses them all openly and dismantles most of them. Finally, the short seller posts again to say that he’s covered his position and why. For a business geek like me, their dueling analyses are such fun to read, and they do an excellent job of illuminating the company’s strategy, the industry landscape, and possible risks and upsides. I probably could have read Netflix’s entire 10-K filing and come away with much less understanding of their business than after reading those posts. It’s also brilliant investor relations, and Hastings and his team eliminated a potential stock performance issue, thus allowing them to stay focused on the core business. Now, this kind of response requires that your company actually have a very well thought-out strategy and evidence to back it up. Most firms probably couldn’t hack it, but it is something to aspire to.

Expand your mandate

Various corporate functions have been transformed from rote work to strategic assets over the last few decades. Human resources used to be about job postings and benefits management. Now, ideally, it’s about selecting, recruiting, and retaining the best possible talent. Traditionally, purchasing was probably one of the dullest jobs imaginable (no offense). However, in the context of strategic sourcing, the job is more about partnering with suppliers, understanding their impact on product quality and strategy, and forecasting the evolution of your industry value chain than just about issuing purchase orders.

The same thing needs to happen with investor relations. Investors are critical stakeholders in public companies, and we’ve seen various examples of firms crippled by short sellers over the last few years. Investor relations should be a strategic communication channel to cultivate a supportive investor base and to funnel market information back to management. It’s time to go beyond conference calls and financial filings.

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  • alexa

    Wow, very interesting read. I wonder how long it will take for companies to fully embrace this new style of Investor Relations? Doesn’t surprise me that a new, and what I consider cool, company like Zappos does it so brilliantly!

  • Greg4

    Thanks for the comment. Sadly enough, I doubt most companies will ever be that proactive about IR, or most things. Just like in marketing and PR, it’s usually easier just to blast out the standard message. But the plus side is that those companies that do pay attention have a good chance to stand out.

  • Geert

    Nice post, IR firms can really learn something from you :-) Calling Seeking Alpha a brilliant site is probably overstating, there’s a lot of bullshit on Seeking Alpha by pumpers and dumpers that advocate their stocks up- or downward only for own benefits

  • Geert Roete

    Nice post, IR firms can really learn something from you :-) Calling Seeking Alpha a brilliant site is probably overstating, there’s a lot of bullshit on Seeking Alpha by pumpers and dumpers that advocate their stocks up- or downward only for own benefits

  • Greg4

    True. It’s almost like two or three sites in one. I tend to be pretty selective in what I read, so I barely notice the bad stuff. It’s like banner blindness.

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