Recently I traveled to Montreal to attend a 2010 Academy of Management conference. What a spectacular event that was! But in addition to learning about the most recent advances in management research, I also presented my study on investor relations.
The study focused on the information that investor relations officers communicate to investors and financial analysts as well as what information IROs view as the most important for properly understanding and evaluating their companies. The study essentially grew out of research conducted by Baruch Lev who concluded that investors under-price securities because they do not understand and do not know how to properly evaluate non-financial and intangible aspects of businesses. Indeed, one often does not have set metrics or comparables to evaluate intangible assets. Lev also proposed that in our economy role of intangibles and non-financials is constantly growing, thus under-pricing may become worse and worse, and require immediate corrective action.
So, my initial question was who was to blame for that? Was it investors who do not know how to evaluate intangibles or was it investor relations officers who do not communicate such information? Indeed, if we believe that one of the main goals of investor relations officers is to help investors understand the company’s business and properly evaluate it, then should not investor relations officers walk investors through all the complexities of intangibles and non-financials?
So, I created a list of ten different categories of information about the company. I presented this list to the investor relations officers who agreed to participate in my study and asked them to evaluate the importance of each category and also the frequency with which they communicate each category. The categories were: financial disclosure, strategy, products and services, market share, organizational capital, quality of management, corporate communications, research and development, employees, and corporate social responsibility.
The end result: financial information dominates. No category of non-financial information was even remotely close to the importance assigned to the financial information and frequency of communication of financial information. That should not be a surprise as financial disclosure is the one dictated by laws and regulations. Thus, it is communicated often, fully and in regular intervals.
Among the different categories of non-financials, however, the leader was information about corporate strategy followed by the information about products and services. This makes sense. As a former IRO, I remember how often conversations with investors and analysts focused on the strategy of the company. Financial information tells you about the past performance, but strategy tells you about the future and this is what investors and analysts really want to understand – what is going to happen with the company next, rather than what happened with the company last quarter or last year. I can also understand products and services – any company loves to showcase what they actually produce. And, in the end, the actual product is essentially what the company exists for and what its financials depend on. I am surprised, however, that research and development was not among the leading categories or the quality of management. Both of these categories seem quite important for understanding corporate value and when I worked as an IRO I paid significant attention to both the management team of the company as well as its research and development efforts during our meetings with investors and analysts.
Now let’s mention the outsiders – information that ranked the lowest both in terms of frequency of communication and its importance. The study found two types of information ranked lower than any other categories: it was information about corporate social responsibility and information about employees and human resource policies. And that is after all that talk about how important CSR is and that employees are the main asset of corporate America… Interesting…
It is also quite interesting to compare these results with what information investors and financial analysts actually want and expect from investor relations professionals. Perhaps, IROs do not communicate information about CSR because investors do not need that information? But since this post got way too long already, I will talk about these comparisons in the next posting.