New market demands reward IR professionals: increased corporate disclosure and the declining influence of brokerage analysts are redefining the IR role. There's a need for more advanced financial skills--and greater influence and compensation.
An interesting undercurrent is that the new market dynamics have effectively raised the bar for investor relations (IR) officers. Investor relations is a profession that, while always viewed as important, often didn't merit a regular seat in the boardroom at most corporations. But change is underway. Today, companies are seeking a new breed of investor relations officer with acute financial acumen and strong experience to serve as a credible advisor to the executive team. Indeed, financial experience ranked highest among the skills required of IR officers, according to a recent survey of corporate CEOs conducted by Rivel Research Group.
Several factors have converged to elevate the role of IR officers within U.S. corporations. Following the Enron collapse, corporations seeking to promote greater transparency have significantly strengthened their disclosure of financial and operating metrics--particularly when reporting quarterly financial results--as demonstrated by my experience at Digital Insight. New regulatory changes governing investment banks have also led corporations to communicate directly with institutional investors far more frequently, a significant shift from the days when powerful brokerage analysts were a company's primary conduit to the "buy side."
Importantly, financial rewards for IR officers have increased commensurate with greater market demands, presenting an attractive career path for financial executives. In fact, IR officers with financial experience earn 20 percent more than their IR counterparts who came to the profession from a marketing/communications background, according to a survey published by the National Investor Relations Institute (NIRI). What's more, the NIRI analysis reports that average compensation for IR officers at large-cap companies has risen to nearly $225,000 (excluding grants of stock options and restricted stock), underscoring the attractive remuneration available for top talent.
For financial executives considering IR as a potential career path, it is important to review the evolution of investor relations in recent years and the inherent opportunities and challenges.
Increased Disclosure Adds Complexity
In 2000, earnings per share (EPS) was the primary benchmark used by most investors to measure corporate performance. During the technology bull market, highfliers such as Lucent Technologies and Nortel Networks would invariably report quarterly EPS ahead of analysts' expectations. Their stocks would move predictably higher after the announcements, without regard to the company's cash flow statement and other important metrics, which typically weren't disclosed until a few weeks after the earnings announcement.
Many of the top technology stocks, including Lucent and Nortel, later succumbed to large write-offs and other financial challenges when the market began to decline. Warning signs were readily apparent to the few investors who regularly analyzed changes in the companies' quarterly cash flow statements. While investors suffered billions of dollars in losses, these high-profile disappointments helped encourage greater corporate disclosure in earnings press releases.
With all the focus on EPS, communications with Wall Street concerning financial metrics weren't difficult for most IR officers--even those without a financial background. Keep in mind that since the market was trending steadily higher at the time, shockingly few investors read the fine print in company 10-Qs and other Securities and Exchange Commission (SEC) filings. Even institutional investors focused primarily on the EPS metric, ensuring that discussion of financial trends with Wall Street was a relatively straightforward proposition much of the time.
Today, it's a completely different story. Corporate malfeasance and the precipitous decline experienced by many companies that had reported seemingly strong EPS have ushered in significantly improved corporate disclosure practices. In sharp contrast to the pre-bubble era, today most mid- and large-cap companies include a complete cash flow statement and full balance sheet in their quarterly earnings announcement as a supplement to the income statement.
Companies also increasingly include a report of financial results by individual operating segment and geography. Not surprisingly, the length of earnings announcements issued by Fortune 500 companies has increased 72 percent since 2000, according to a recent analysis of Business Wire clients.
This broader and deeper disclosure--coupled with new valuation techniques employed by many institutional investors--encourages discussions at a quantitative level that truly require the IR officer to have a complete understanding of financial statements. In fact, a portfolio manager from Putnam Investments recently told me that he couldn't remember the last time he reviewed an income statement. His valuation models no longer include any reference to net income or EPS. As with many institutional investors, his focus has shifted in favor of a more complicated analysis based on multiples of free cash flow and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
Brokerage Analysts' Reduced Influence
Another factor arguing for IR officers to have a strong quantitative background is the declining influence (and numbers) of "sell-side" analysts. Early in my career, I spent a disproportionate amount of time communicating with brokerage analysts following my company's industry segment. These analysts were universally viewed by corporations as the most important opinion-makers for our stocks.
Most IR officers believed that if leading brokerage analysts were convinced of our companies' investment merits, the analysts would assume the primary task of communicating to institutional investors. And, for the most part, the strategy worked.
Things are different now. New York Attorney General Eliot Spitzer's successful campaign to separate brokerage analyst compensation from investment banking fees, while entirely appropriate, has decimated the talent pool for brokerage analysts. A discipline that once comprised an integral function within a profit center today generates minimal revenue from trading commissions and faces a questionable future.
Sharply reduced compensation has caused many of the most talented and respected analysts to move to hedge funds in search of a higher payday. Thousands more analysts were let go by brokerage firms that could no longer justify paying even reduced salaries.
The significance for investor relations officers is that institutional investors are no longer willing to rely on brokerage analysts as the primary storytellers for the company. Communicating directly with much larger numbers of institutional investors--each maintaining a unique investment style and analytical approach to valuation--significantly increases the complexity for IR officers.
On the other hand, the change has elevated recognition for investor relations within boardrooms at many companies. Executive teams realize, with increasing frequency, that strong IR executives can have a much greater influence on investment decisions than in years past because we are having many more direct communications with institutional investors.
Recruiting Financial Executives to IR
Recently, I had an experience that underscores how much the investor relations profession has evolved to include quantitative analysis. My company was engaged in dialogue with another corporation about a potential business combination. I participated in several due diligence sessions, including discussions on financial reporting, business models and related financial metrics.
Feeling that my role in due diligence was rather unique, I was initially surprised to learn that a participant from the other corporation was also an IR officer. As it turns out, he regularly participates in corporate development initiatives and, in fact, formerly served on the company's corporate development and financial analysis team before being recruited into the investor relations function.
The meeting reinforced my conviction that a strong financial background has become of paramount importance within investor relations. Public companies will increasingly recruit proven talent from within the corporation as they search for financially savvy executives capable of communicating with Wall Street.
If you are up to the challenge, the rewards have never been more compelling.
Erik Randerson, CFA, is Director of Investor Relations for Digital Insight, a Nasdaq-listed provider of online banking products for financial institutions that is based in Calabasas, Calif. He can be reached at email@example.com.
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|Title Annotation:||from where I sit|
|Date:||Jan 1, 2007|
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