The new investor relations game.

More and more, financial executives are finding the investor relations function on their slate of responsibilities. Even those executives who have always managed their firms' IR function are devoting significantly, more time to it today. How can these high-level corporate players gain control of this task - and maybe even influence the company's standing?

Financial Executives Institute's Santa Clara Valley Chapter put together a panel on the subject. The following is an adaptation of that discussion.

The Meaning Is

Not the Message

Investor relations has gone through massive change since that October crash in 1987. Instead of being driven by the need to merely provide information and disclosure, investor relations today is strategy-driven, with managements recognizing the need to manage stockholder mix, to manage supply and demand, and to target carefully. This has been accompanied by a dominant new investor relations philosophy - asset management.

Ever since the crash, IR executives around the country have risen in status, and significantly expanded their budget and staffing. Indeed, today IR is an asset management function rather than simply a communications function. A company's market capitalization is now managed daily with the same intensity as is the cash balance or any other critical asset. Further, in the past two years, the IR philosophy has moved to protecting the company against unfriendly actions, such as those by large institutional investors that lobby for a key voice in management.

So how do you measure the effectiveness of your investor relations program? The key is to state your objectives in measurable terms. You want the stock price to go up, or you want it to be in the top 10 percent in your peer group, or you want it to be in line with the S&P 500. In each case, you've got a benchmark to measure against, and you can do the same regarding your investor relations objectives for volume, volatility, stockholder mix, and other stock behavioral characteristics.

Who your IR audience is depends on your objectives. I've divided the IR world into 21 different types of investors. The traditional four that you hear about are stockbrokers, institutions, international, and individuals. But, of those, only stockbrokers are a homogeneous group. The rest have to be divided into subgroups before you can predict behavior with any accuracy.

For example, banks are different from pension funds, insurance companies, and mutual funds in terms of how they treat stocks. That's why they're in separate investor categories. Other categories in my list of 21 are market makers, customers, suppliers, and corporations.

To decide which audiences are right for you, first look at your objectives. Then analyze the 21 types to determine which ones will help you meet your objectives. In most cases, only four or five of the 21 will actively contribute to those IR objectives, and those are the ones you target.

It's critical, by the way, not to forget your internal audiences. Marketing people, for example, benefit greatly when investor relations is effective. Coordination with corporate communications and public relations is also important. And the asset management approach calls for a tie directly to the CFO. In fact, even the CEO can often benefit from IR intelligence gained from the outside by the IR executive.

HOW MUCH VOLATILITY

IS RIGHT FOR YOU?

What about volatility? You need to start by asking yourself some questions: First, do you wish to reduce volatility on the downside alone, or also on the upside? Second, do any other IR objectives work against your volatility objective? Third, does the company have a strong message to offer or a weak one?

Let's say we want to decrease volatility on the downside but keep it vibrant on the upside. Let's say we'll have a mix of good news and bad news in the next four quarters. The first move should be to diversify the stockholder base. Volatility often occurs because a large part of your stockholder base decides to do the same thing at the same time. The stock market crash taught us that lesson in spades.

Maintaining direct, one-on,one relationships with investors also reduces volatility. Be sure you know what they're thinking, what they're worried about. The only way to do that is to be on the phone with them regularly and to even see them occassionally. It's not something you can let the sell-side analyst take care of for you.

What all of this says is that your IR message is not as important as it was in the days before the crash, not if you're following the new asset management strategy to protect and enhance the value of your stock. In fact, there's been a lot of research on this in recent years. One study is from a survey of Fortune 500 companies that were managing supply and demand, were building demand for their shares, were targeting, were diversifying their stockholder base, and so on. The study says that the actual content of the company's message accounts for only 15 percent of the stock's valuation. All of the other activities are the real valuation boosters.

This is the new message for investor relations.

IR BECOMES PROACTIVE

From the investor relations side of the fence, we have two objectives at Quantum Corporation. One is short term, to maintain a P/E ratio higher than the average for the disk drive industry. The other is longer term: We want to achieve a P/E ratio that matches the S&P 500.

Given the need to build a demand for the company stock, we've developed some aggressive strategies. We want to increase the average holding period by attracting long-term investors. We want to diversify the reasons institutions purchase our stock, and we think small - and medium-sized institutions will help us achieve this. And we want to conduct an open dialogue with investors.

But at the same time that we try to be open, we also believe in being consistent. As a result, we spend a lot of time developing position statements and preparing answers to potential questions. So if the president or 1, or anyone else, receives a call, we'll have material that highlights the areas we're focusing on.

Over the years, we've attended many financial conferences. We've narrowed this down, because you can be overexposed. We attend the AEA conference and those by brokerage firms where the analysts actively follow us. We make a trip east every six months to meet institutional investors and security analysts in New York and Boston. We also target institutions in those areas that are long-term investors. In the future, we plan to sponsor semi-annual analyst and investor meetings. This will improve our control over the time we have with these people and give broader exposure to the depth of our management.

Also, because I grew tired of explaining to visitors when we incorporated, when we went public, and so forth, I compiled a background book that's updated three or four times a year. This is the basic document I now send everyone.

With help from Carol Abrahamson, my co-panelist, Quantum has established an investor data base of potential contacts, their location, their investment patterns, and their willingness to participate in things like conference calls. This has become a vital tool in improving communications.

The conference call, by the way, has both its pluses and its minuses. On the downside, it homogenizes the process of releasing financial information, and it releases everything at one time. On the positive side, you don't have to take 40 or 50 phone calls to update people on the same information, and you're assured of a consistent message.

The target audiences for whom we've developed programs include sell-side analysts, U.S. institutions, buy-side analysts, and portfolio managers. We've also targeted brokers, market makers, individual investors and clubs, and international institutions. With each group, we develop a budget for the cost of reaching that audience.

MEASURING PROGRESS

How do we measure our achievements? We've done very well in terms of market makers, for example; we currently have 51, with a goal of 55. When our trading volume was about 30,000 shares a day, we really wanted to bump that up. Now, our average volume is 640,000 shares a day. Many institutions want to be able to make a major decision on a particular stock without moving its price up or down significantly when they buy or sell. Also we've reacquired 30 percent of our shares through stock repurchase programs over the past four years. We've also split the stock on three occasions, and today have about 40 million shares outstanding.

Concerning shareholder mix, about 50 percent of our shares are owned by institutions, and we want to keep it in the range of 50 to 60 percent. The balance of shareholders are predominantly individuals. We do want to change the mix of our institutional group so Quantum will be more focused on long-term investment.

As CFO, I find I'm spending 40 to 50 percent of my time on investor relations, when taking into account the time devoted to conferences, trips to the East Coast, position statements, questions and answers, and meeting with individual institutions and analysts. I am the primary contact with both buy-side and sellside analysts.

The P/E objective that I referred to at the beginning is 9, which is consistent with the industry average. We're currently averaging 8.7. It may be tough, but I think we'll make it.