Article of Zoya Taranchenko, Consultant, EBS, was published in “Strategies” (¹5, 2007): “Preserving the uniqueness of value added”
Article of Zoya Taranchenko, Consultant, EBS, was published in “Strategies” (¹5, 2007): “Preserving the uniqueness of value added”There is growing business sentiment within the foreign milieu about the lack of attention paid to potential investors. This gap has created a new type of specialist, which is needed to nurture and maintain existing as well as attract new investors
The Reality
Specialists within the HR and business coaching fields state that in 20 years the majority of people on this planet will be engaged in some type of professional activity of which we are presently unaware as they simply don’t exist.
The specialist profession as it relates to management of investor relations has been in existence for some time. However in the former CIS, it is still not wide spread and there are in fact, very few top professionals. Abroad, investor relations management professionals have existed for over 60 years. In Russia and Ukraine, these specialists appeared only in the mid-1990s.
Today, one of the most topical business issues is attracting investment by means of an IPO (many companies not only consider this option, but are quite successful in its use) and as a result, the need for investor relations specialists grows rapidly.
In the West, the abbreviation IRO (investor relations officer) is synonymous with CEO (chief executive officer) and CFO (chief financial officer). It is thought that there is a real need for IR departments for every company with over 100 investors. The demand for an IR specialist (department) is variable with the lowest for non-public companies and the highest or most critical for those companies planning to launch their IPO in the nearest future.
Since the information handled by IR departments is presumed to be complex (all aspects of company activities – from finance up to marketing), the departmental specialists should work with professionals in various functional areas: legal and financial experts as well as management consultants. This important and collaborative work with potential investors and existing shareholders presumes the need to establish a distinct organizational structure within the company, which is conferred with the IR functions and responsibilities to deal cooperatively with investors on behalf of the entire company.
One of the most difficult tasks for IR department management is to differentiate the management relation functions for the company’s shareholders and potential investors. Though specialists state that the main issue in organizing a corporate IR service is staff recruitment (so as to establish an effectively functioning IR department), highly-qualified specialists are needed in different functional areas with a broad range of skills. Obstacles may appear related to methodological activities for the following tasks within the company: IR specialist job description; IR dept. regulations and documentation, formalizing the cooperation with shareholders and potential investors. HR specialists concur that highly-qualified IR specialists are a unique and rare breed. Moreover, during the preparation phase of an IPO, many companies don’t have an established vision for what should the IR department be responsible and what are the criteria to assess its performance.
ASSIGNMENT AND INTERNAL CULTURE OF PROFESSION
IR tasks can be divided into two stages: pre and post IPO launch. Ideally investors should be informed about the company long before the IPO. For this reason, the IR activities should begin in vigor 1.5 – 2 years prior to the IPO. During this period, it is presumed that a well thought out action plan for the IR specialists is developed for every single IPO stakeholder. These are institutional and private investors, analysts, banks, and business mass media outlets. After the IPO launch, the IR specialists’ activities essentially focus on updating all information made available to the stock market in the pre-launch phase. This way, the IR specialists are those individuals, who thoroughly know the peculiarities of the company’s business activities and are also informed on the relevant trends of its activities and position related to the stock market.
The responsibilities of the IR specialist, at first glance, include a mix of marketing, PR, finance, corporate management, presentation skills and many others. The mission of this profession after attracting investments does stop there. Those companies that want their shares not only in demand by the market, but also to exceed its net assets value ten-fold, should ensure that there are devoted professionals in the IR department.
The functions of providing and publishing the company’s results and objectives as performed by the IR specialists should also become the norm in every respectable company, which wishes to achieve a positive public image as to: suppliers, clients and even competitors) are potential investors, who could become true investors in future.
• Company’s suppliers may potentially invest their future profits
• Company’s clients may invest their additional expenses
• Company’s competitors may invest because they’re motivated by innovation and potentially acquire a future market share as shareholders
In all, this is the “deserved loyalty to the company”. This “deserved loyalty” is achieved through the professional and collaborative efforts of the PR and IR departments.
IR STRATEGY
A common trait of this department is the absence of one common company strategy: each firm selects an exceptional individual strategy for the development of this internal business direction. We can assume that uniqueness of the IR strategy is directly related to the uniqueness of the company itself – its differentiating ideas and long-term, global strategy; the key to the IR strategy lies in the successful deployment and presentation of the company’s strategy to investors.
If the company is focused on attracting Western funds, it should pay special attention to this IR area, as foreign investors are more active and very often more informed on the development of the company, the object of the investments.
Many specialists believe that the real value of an investor relations management specialist is their ability to create worth. The IR specialist should understand the needs of shareholders and investors, the market rules and also use this knowledge to create value for the company. From this stand point, the ideal IR specialist should have a financial background with broad understanding and knowledge (including broad experience) as to company’s commercial activities.
Moreover, an IR department is an information center, where all the latest data on all the company’s activities is gathered. IR dept. should effectively collaborate with marketing, PR, finance, sales and legal departments in the collection of information, the preparation of reports and presentation of results.
Development and conducting a range of activities, aimed at reducing the variance between the company’s appraised value (in the opinion of analysts) and broad understanding of its fair market value is one of the duties of the IR department in the process of establishing a share value. IR – is not only the performance of a simple number of functions, which should be performed in any ordinary public company, but is also a philosophy, which leads to a unique way of building a positive public image of the company in the business world. Amongst the corporate management parameters, which can positively influence its market value, the specialist normally call this-the availability and broad access to information on the company’s business activities and timely presentation of this information consistent with the stock market (where placement is made) rules and regulations.
Each of the IR above mentioned functions has it element of influence on the company’s value. The basis for these factors that influence comes from the operations side of the company, and not by the departments, which perform supportive and administrative functions. The process of managing these spheres of influence is the responsibility of the IR department and the entire company is dependent on their efforts.
The investor relation management specialist should possess the following skills and qualities:
• to have a full grasp of the financial tools and know how as to practical methods for company valuations;
• to understand the mechanisms at work in the financial markets and factors that influence share price fluctuations;
• to be knowledgeable in marketing and PR in order to understand the degree of influence brand commands (as a comprehensive indicator) in terms of the company’s worth;
• to understand the mechanisms in sales and have excellent negotiation skills, focused on sale of goods;
• to have a full grasp of international management tools, as publicly traded have potential “multicultural” investors, partners and management;
• to understand the elements of HR management, as the value of modern companies is influenced by highly qualified management;
• to understand (the most important issue) the business processes of a company. It is in these business processes that the “valuable uniqueness” of the company is hidden away (or to be found). Frankly, either the process itself is unique or the process elements. “We do something unique” or “We do something innovatively”;
• to properly deal with legal issues and have a acute awareness on doing business ethically;
• to combine personal communication skills – firm and precise in communicating ideas, patient, cool under pressure, ability to be persuasive, which speaks about highly developed written and speaking skills.
Fluent knowledge of foreign languages (at least English) should be added to the list of requirements for a Ukrainian IR specialist. It is worthy to note that the role of “saviour”, by virtue of many expert requirements, can only be performed by either the president or the top-managers in the company.
COMMUNICATION CHANNELS WITH INVESTORS
IR specialists in their daily routine can apply a variety of management skills which impact by using the communication channels with current and potential investors:
1. publications;
2. verbal communications;
3. Internet.
FUNCTIONAL RESPONSIBILITIES AND COMPETENCES OF AN IR SPECIALIST
Investor relation management specialists perform the following functions:
1. IR action plan:
- establish key objectives in IR area;
- develop a detailed IR action plan.
2. Ensuring proper preparation and achievement of IR action steps:
- monitor shareholder database;
- organize meetings between investors and company’s management;
- prepare notices and press releases, company profile, reference materials;
- send quarterly and annual reports to investors;
- participate in major conferences;
- plan and organize road-shows (wither in-house or in concert with external companies);
- lead conference calls;
- update information and place financial results on corporate web-site;
- work with business and financial mass media outlets.
3. Collaboration with other departments:
- collect and exchange information on the company’s activities;
- assist in training departmental managers on how to communicate with investors;
- advise the company’s staff on how to prepare reports for investors.
PROFESSIONAL DEVELOPMENT, PERFORMANCE OF VALUE MANAGEMENT FUNCTION
Specialists believe that in future the IR area will expand from a passive positioning on the stock market to a more active management of the company’s share value. There is an assumption that with the development of IR specialists, they can become advisors in resolving key company issues and defining the strategy for the development of the company. The head of the IR department is a respected participant at board of directors meetings. With the development of this profession in Ukraine, this will also become their role.
This respected and honourable profession demonstrates that the IR specialist – is a person, who directly influences the company’s worth, in fact it “sells” value. If you consider it in the category of a valued product, then the peculiarities and difficulties of dealing with this product become clearer.
Apparently, it is easier to sell a product, which can be “touched” – either a material product or service, which results can be material. An intellectual product is more complex, as its value is more difficult to assess as it is subjective. An even more complicated product is namely the value generator, which is a company able to generate cash flow, a “cash cow”. This product could be an issue only because it is a mixture of the following elements: material products (labour and material), services (work of individuals) and intellectual property (intellectual labour) and also financial resources. But the most intricate product is “intangible value” of a value generator. It is intangible because, in the modern world intangible assets dominate and therefore, the real value of any company is prone to debate.
In the contemporary world, the following intangible assets are prominent – patents, brands, people, knowledge, organization systems, client networks, reputation, but accounting staffs haven’t learned how to assess and book them. Some specialists say, that “financial reporting is becoming more and more of a useless numbers game, which doesn’t bear any real commercial value and business sense. Many companies may have only a few computers on their balance sheets, but the ability to generate cash flow, which defines the company’s market value, is substantial. Therefore, the company’s market value can exceed its asset value hundred-fold – and the more modern and prospective the field of endeavour, the wider is the range”.
To sell ambiguous expectations in terms of value added is definitely harder then to sell any other product. There’s a need for a unique blend of a valued “executor”, creative individual and preserver of value-building uniqueness.
In discussing the company’s worth and the specialist’s influence, it is imperative to touch on at least on two aspects for understanding value – its nature and methods for assessment.
An IR specialist should not only be knowledgeable about their company so that they can share its attractive features with the public, who might become investors; understand what’s unique about the company, what makes it special and why it’s worth overpaying for its shares.
In their collaborative efforts, PR and IR departments should define “value building” the uniqueness of the company –that segment, where the highest growth in worth is generated, where the capitalization is separated from accounting value. If value is generated by means of labour, then its unique value is created by unique labour.
ASSESSMENT INDICATORS OF IR EFFECTIVENESS
In the event, the IR specialists’ activities are driven by objectives, the effectiveness indicators can be split into three definite groups:
1. To perform direct functional responsibilities (performance of planned IR activities);
2. To increase the opportunities for the company to influence the price indicators of their shares (raising the level of awareness of investors to accentuate the positives and reduce the negatives of the company on share prices);
3. The price dynamics of the company shares (in absolute and relative terms).
Based on the above mentioned factors, the first two assess the performance of the IR specialist while the third – assesses the results of the specialist’s activities – partially professionalism or partially talent or even luck. The third indicator is the most important for the company. That is why one of the most significant KPI for the IR specialist can be found in a dynamic indicator, P/E (correlation between the company’s capitalization and its net assets).
It is worth mentioning that the top three world leaders in terms of P/E ratio, from whom Ukrainian IR professionals can learn (dated August, 2006):
1. Comcast CP A (57.9);
2. Google (53.8);
3. Genentech (52.0)
CONCLUSIONS
In summary, today there is a shortage of IR professionals in Ukraine. This scarcity in high profile specialists has been noted by those enterprises, which decide on placing new shares on various stock exchanges to attract investors. The issue can be resolved in two ways: either attract foreign specialists or develop this professionalism with the necessary qualifications within the company’s personnel. The former is much more costly while the latter will undoubtedly require more time and effort. In our view, establishing an IR department from internal company resources is the optimal solution factoring in the fact that staff personnel are most familiar with the company’s activities. Besides, there is a great need to develop new group of professionals in Ukraine.
For specialists, working in the functional areas of finance, marketing, PR and general management and striving to further develop professionally, it is worth highlighting that there is an emerging interest on their part towards becoming a professional in investor relations management. This shortage of specialists with above mentioned qualifications has driven up remunerations in the IR sphere. Moreover, this area of business is in a practical sense an innovation for the Ukrainian job market as it show promises of unparallel growth characterized by diversity and the ultimate challenges.
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