How a comprehensive IR program pays off: an investor relations veteran analyzes the advantages of taking a comprehensive and proactive approach to investor outreach.

Public companies have different philosophies and different approaches to investor relations, with some viewing it as largely reactive--having delegated people respond to inquiries from analysts or investors as they come in. But a more proactive approach can pay big dividends. Consider the benefits to be gained:

1. THE MORE YOU TELL, THE MORE YOU SELL. The more a company makes investors aware of its existence, business and strategies, the more likely it is to increase sales of its stock. "Making investors aware" doesn't mean a spin campaign, but a program to communicate and educate investors about the company's market, its strengths and potential as an investment.

The National Investor Relations Institute (NIRI) defines IR as "a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community and other constituencies, which ultimately contributes to a company's securities achieving fair valuation."

Says Marc Greene, vice president of capital markets intelligence for Thomson Financial, "If a company isn't proactive at all with its IR efforts, some investors are still bound to find it. But investors, like us all, have a limited amount of time at their disposal. They will, therefore, invest in those companies they have heard of, are familiar with and can trust. When a company is willing to communicate, it decreases investors' uncertainty and risk."

Greene adds: "A few years ago, I was covering the telecommunications sector for Thomson. I had five clients and called a powerful telecom analyst, who owned millions of shares of four of the five. I asked him why he did not own the fifth company. He said, 'They have never made the effort to get in touch with me, and they are not good about returning my phone calls. I have no desire to invest in a company that has no interest in its investors.'"

John Fox, co-manager of the FAM Value Fund for Fenimore Asset Management, a long-term, buy-side institution that does its own research, says outreach can make the difference. "I got a call this week from a company which we don't own but visited several months ago," he recalls. "The IRO [investor relations officer] called to follow up and see if I had any questions. I am now seriously considering buying stock in this company because of that phone call. They demonstrated that they are responsive to investors. When a company reaches out, that sends a positive message.

"IROs are useful because they facilitate communication between investors and the CEO and CFO by arranging meetings and attending industry trade shows and conferences where investors can talk with senior management. IROs can also respond a lot more quickly to investors than can the CEO or CFO," says Fox.

Can the CEO and CFO market the stock without an IRO? Absolutely, but the IRO can save them time by doing it for them. "When a company has a competent IRO on board and the right outside consultants in place, its CEO and CFO should be able to spend two to four days per month on IR to get the job done," says Greene of Thomson Financial.

After several years of trying to fulfill the IR responsibilities in addition to his "day job," the CFO of Reynolds and Reynolds Inc., a provider of software and services to auto dealers worldwide, appreciated the value of investor relations and the time it took to execute a strong program. A couple of years ago, he hired John Shave as the company's vice president of IR.

"When I first got to Reynolds and Reynolds, the Street did not know the company, so its stock didn't trade much. We launched a targeting program to educate buy- and sell-side analysts about the stock," Shave said. The result? "We increased the average daily volume from 147,000 to 320,000 shares, thus making the company more attractive to institutions. We also increased the sell-side analyst coverage from one to five analysts."

The ranks of sell-side analysts has been shrinking as they have been sharply criticized in recent years for being too closely tied to the investment banking side of the business. However, they still have the ear of many investors and can help market a company's stock.

A good targeting program will match a company with institutions and mutual funds that would be likely to buy its stock, based on their past holdings, trading patterns and capacity to purchase. Companies such as Thomson Financial can develop a targeting model, while Peter Imlay and Associates, an IR consulting firm, and Thomson can help broker meetings with the targets. Experience has shown that the most effective way to run a comprehensive IR program may be to have a seasoned IRO on staff to hire these specialized outside consultants and coordinate the effort internally.

"But," says Shave's boss, Lloyd "Buzz" Waterhouse, CEO of Reynolds and Reynolds, "the IRO must have a seat at the senior management table. That way, he or she is in the know; investors sense that, and feel comfortable talking with the IRO. Only then can the IRO save me and our CFO time."

The benefit of increased volume in a company's stock is three-fold:

* The company is less vulnerable to the whims of a small number of shareholders.

* Its stock is less volatile.

* Its stock is more attractive to potential investors.

2. LOWERING THE COST OF CAPITAL, AS A RESULT OF HIGHER VALUATION. Barnes Group Inc., a diversified international manufacturing and distribution company, had not invested serious time or money in IR. Then, in 1998, a new management team was brought in and soon focused its attention on IR, as the need to raise additional capital became more and more apparent.

William C. Denninger joined Barnes Group as CFO in March 2000, when the market capitalization of the stock was $300 million, with 18 million shares outstanding and a float of 9 million shares. Seventy-five percent of the rejections the company was getting from investors stemmed from the lack of liquidity in the stock. At this point, the stock price was trading at a low of $12 per share. Denninger and his CEO knew they needed to do something to lower their cost of capital.

They hired Phillip Penn, a seasoned IR professional, and gave him the budget to do the job. Over the following two years, they built a solid, multi-pronged IR program: they enhanced the IR portion of the Web site, which resulted in a dramatic increase in visitors from 400 a month to 1,200 per month; they worked with Thomson Financial to assemble a targeted list of investors and met with them individually; and they introduced themselves and the company to buy-side analysts and invited them to their headquarters. In short, they targeted, marketed and communicated.

Was Denninger squeamish at first about spending the money on an IR program? "No. I view it as one of the necessary costs of being public. When you are public, you are competing for capital, and you must have the proper resources to distinguish yourself in the market."

Barnes' follow-on equity offering sold at $19 per share this past May, a $7 premium compared to the March 2000 low. Denninger attributes this premium to improved company results and the IR program, an investment that paid for itself many times over. Average daily trading in the stock ballooned from $400,000 to $2.3 million. The company's sell-side coverage rose from zero to four analysts--at a time when the number of sell-side analysts is contracting. Barnes' market cap expanded from $300 million to $750 million, and the stock has traded recently as high as $33.

3. KNOWING ITS INVESTORS CAN HELP A COMPANY ADDRESS POTENTIAL PROBLEMS BEFORE THEY ARISE, SAVING TIME AND BOOSTING THE COMPANY'S VALUE. CACI International Inc., which provides IT and network solutions to the federal government, did a secondary offering of 4.9 million shares in March 2002. In April, CACI reported its fiscal third-quarter results and issued its guidance for future quarters. Confusion ensued as a result of the difference between the company's guidance and the consensus estimates.

While the company's guidance included the additional shares that had been issued, five of the 11 sell-side estimates used by First Call did not. This resulted in the company's guidance being below the consensus, producing a sell-off of CACI's stock--even though the company had reported a record third quarter and was guiding to a record fourth quarter.

After responding to the initial flood of phone calls from investors, Stephen L. Waechter, CFO and corporate treasurer, set to work with his internal IR team, CACI's outside IR counsel and its stock surveillance firm. They conducted feedback research with a cross-section of CACI's institutional holders to determine their perceptions as a result of the confusion that had arisen. They also reviewed the trading patterns that had occurred to determine who might have been selling. Armed with this research, the IR team embarked on a communications campaign to educate key shareholders about the problem--from before and after the secondary offering.

As a result, they did not lose a single major investor. By the end of June 2002, CACI's stock price had returned to within 5 percent of its closing price prior to the April earnings announcement. Waechter believes "the investor relations program has more than paid for itself."

When you know your shareholders, you can save your company time and effort. Says David W. Olson, senior vice president, corporate communications and investor relations at Health Net Inc., one of the nation's largest publicly traded managed healthcare companies, "If you know your investors well; you know which proxy proposals they will support and which they won't.

"Several years ago, Health Net hired an outside compensation consultant who recommended a compensation package that I knew would not win the votes of shareholders. As a result of this knowledge, I was able to save the company, time and embarrassment by tweaking the package to make it palatable to both our investors and our senior management. Without this knowledge, the company might have lost the vote."

In addition to knowing your shareholders, it is important that they know your company and its senior management, in good times and bad. Health Net went through a 12-18 month period of bad news: it had a $1 billion charge, heavy asset disposition and several revisions to earnings guidance. During this difficult time, it never had a shareholder lawsuit. "I attribute this to our decision to over-communicate with our shareholders. The result? We kept all of our largest shareholders except for one," says Olson.

Kevin Rollins, president and chief operating officer of Dell Inc., uses knowledge of his investor base as a way to help boost the company's value. In a recent speech to the NIRI annual conference, he said, "We've also charged our investor relations team with sharing and interpreting feedback from the investment community for us. Now, that feedback is invaluable as we decide where to lead the company because, ultimately, my job and Michael's [CEO Michael Dell] job is to lead Dell in a way that drives sustainable, dependable shareholder value over time.

"But we cannot do our jobs effectively unless we know which factors are truly driving our company's value and how the market assesses these factors. So we see the IR function as adding a lot of value to our strategic decision-making process."

Does this mean that Dell makes its strategic decisions based on what investors want? No. It means it understands how important it is to know how shareholders would react to its strategic moves so that it knows how to communicate these moves to its shareholders. Or, as Rollins put it, "As we look at new opportunities for our company ... we have to do so with an eye to how ... our investors will understand these moves, because if you do things that are correct strategically, you certainly want to be rewarded for those and have your shareholders rewarded."

4. INCREASED INVESTOR CONFIDENCE, AS A RESULT OF HELPING THE COMPANY COMMUNICATE CLEARLY AND BUILDING RELATIONSHIPS. "Right now, with the crisis in confidence, more than ever CEOs need to establish personal relationships with the financial community. CEOs and CFOs build credibility when they come out and face the music and present their plans for the future," says Peter J. Imlay, senior managing director at Peter Imlay Associates. The firm has been hooking up companies with investors for over 30 years and has amassed considerable expertise from going through several market cycles.

"Wall Street has so many information sources, but all of those numbers don't mean much if you don't trust those who are running the company," says Imlay. The only way to establish that trust: build relationships and consistently communicate clearly.

How does a company do that and still comply strictly with Regulation Fair Disclosure (Reg FD), Sarbanes-Oxley and Regulation G? Fearful of violating these rules, some companies have been leaving investor communications largely to their accountants and lawyers.

"Right now, companies are focused on compliance. The lawyers and accountants have the upper hand, leaving the IRO or corporate communications person out of the writing of public shareholder communications documents," says Louis M. Thompson Jr., president and CEO of NIRI. "This can result in a lack of transparency. The message becomes convoluted because, in order to avoid risk, companies are often overreacting by including too much legal jargon m their investor communications."

The Financial Accounting Standards Board is also bullish on transparency (clear communication). According to its mission statement, "Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information." In fact, Robert H. Herz, FASB chairman, believes that IROs should help write the investor communications materials, including the SEC-filed documents.

"IROs are very key to the whole communications process because they take what the company has done from an accounting standpoint and translate it into something that is understandable to all levels of investors, be they institutions or individuals," Herz says. "Often, the first cut of the company's results is written by the accountants and then sent to its general counsel, at which point it is made harder to understand. I agree with what Alan Beller, director of the Division of Corporate Finance at the SEC, had to say about this, which is, "Disclosure is too important to be left to the attorneys.'"

Herz adds, "When I was researching my recent book, The Value Reporting Revolution: Moving Beyond the Earnings Game, I interviewed not only CEOs, CFOs and IROs of public companies, but also institutional investors. They said that the more a company's communications was open and honest--without spin and selectivity--the more their confidence to invest in the company increased."

Confidence and awareness are key benefits. Asked what he thought had been the biggest benefit of IR to his company, Buzz Waterhouse, CEO of Reynolds and Reynolds, said, "The investment community knows us much, much better as a result of our IR efforts ... Without our strong IR department, this would not have happened. Of course, this means we are starting to get a more respectable multiple. Good for investors, good for employees (since 100 percent own stock). That's what it's all about."

IR Firm Pushes Retail investor 

Has the recent runup in the stock market brought the individual investor, battered by years of losses, back into the market in a big way? Experts may be divided, but one sign that it has comes from the Financial Relations Board (FRB), a major public relations and investor relations firm.

The Chicago-based firm has launched a program designed to help companies woo retail investors, arguing that they tend to take a longer-term approach to ownership, providing greater stability and loyalty within the shareholder base.

The program attempts to capitalize on a clear trend in recent years: the proliferation of hedge funds--which now outnumber mutual funds in the U.S.--and their focus on short-term, often intraday, trading. In sharp contrast, individual holders frequently keep shares for three to seven years and often hold on to downtrodden stocks in the hopes that they will eventually see their paper losses disappear.

Moira Conlon, executive vice president and general manager of FRB, said in an interview that the firm has been marketing the program mostly to existing clients, especially those with strong consumer brands.

In some cases, Conlon says, companies can benefit from having a "fact sheet" and showing up at brokerage events to build outreach. "You need to find brokers who are position builders," she adds. In addition, she says some FRB clients will mail the fact sheet to shareholders with a reply card, with the aim of getting a reply with the identity of their broker or money manager.

"Anyone who's not marketing to retail needs to look at the landscape and realize they are missing an opportunity," she says. "Whatever the size of the program, there's an upside to be had in terms of stabilizing the [shareholder] base and reducing volatility. Other benefits include branding with investors."

Conlon adds that "IR budgets haven't grown" in the recent down years, but that "companies that are serious need to empower IR to get the job done,"

--Jeffrey Marshall

Mary Conger is principal of Conger Quarterlies, an investor relations consulting firm She can be reached at marycon [e-mail].