VALUATION

Is the Investor Relations function about finance? As the current leadership reaches retirement age, will we see not only a change in personnel but in the practice of IR?

Investor Relations is a relatively new business function. The founders are still in leadership positions at corporations and consulting firms throughout the US; however that is changing. Many are starting to move aside leaving their demanding jobs and finding new roles. As leadership positions are assumed by the next generation of professionals, it will create opportunities for outstanding performers most likely with 20-30 years of experience. Not only is this a personnel shift, it is a paradigm shift in how the IR role is defined.

When IR was a new corporate function, the primary role was to communicate the value proposition of the organization. That was defined in financial terms and metrics. The focus was effectively making the best case scenario out of performance results to a robust community of buy and sell side analysts and key stakeholders. Discussions in the industry centered on which financial models were most effective, e.g. “quantitative” vs. “soft side” (looking at non-numeric t qualitative strengths such as the leadership team) to establish value.

Reporting to the CFO made sense. In some companies, when financial issues were key priorities (e.g. major acquisitions, seeking new financing, restructurings) the function reported to the CEO or had dotted line to the CEO. In the early years, IR professionals kept their distance from the Corporate Communications teams if they could, feeling that Communications was less rigorous, less relevant and less vital to the mission of the company.

The Evolving View of Valuation--Metrics

Examining the issue of how corporations are valued today, I believe we are in the midst of a shift in the metrics used to establish the worth of an organization. These criteria have become more complex and require input from multiple disciplines within the company to effectively communicate the company “story.” Combined, these factors determine the value of the stock price and investor interest.

Corporate Communications has traditionally taken on responsibility for media relations and influencing how the company is perceived by key constituencies. Supporting the brand (and all that implies about reputation, community, internal communications, etc.) and marketing initiatives are examples of what falls under the Corporate Communications umbrella. CorpCom does not “own” all the functions that deal with Corporate Reputation and Valuation. For example, CorpCom generally does not have responsibility for Government Relations, Public Affairs and Customer relations.

Evolving metrics, now being recognized as legitimate, center around Corporate Governance (being accountable, fair and transparent with all stakeholders) and Sustainability (evolved from establishing formal codes of ethical practices and CSR to incorporating business practices built around social and environmental considerations). Additional metrics are Public Affairs (aligning the organization with values in communities through foundation, community affairs activities, etc.) and government relations/regulatory affairs (to make the case to elected officials in support of the organization’s goals –in the context of sustainable, socially responsible growth).

The Complexity of the Concept—A Need for Structural Realignment

(See below for a discussion of the BP Disaster which explains my point)

Determining what constitutes the company’s “Valuation” story becomes a multi-layered messaging challenge. Addressing that fundamental shift (away from strict financial metrics) has rarely been defined as a strategic goal requiring a realignment of functions and responsibilities. Instead, companies have dealt piecemeal with adjusting to market changes. There are implications for the CorpCom function in this complex mix. I see the greater impact on the Investor Relations function.

IR leaders, whose ideas about their role were shaped during the formative years of IR as a profession, should be questioning their assumptions about the scope of the function. Initially, it was to tell the company’s valuation story based on financial performance, as I explained above. Today, I do not believe any one functional area “owns” the valuation story. Then what is the legitimate role of IR? Is it the financial “piece” and more? Should the IR team own the process of assembling and integrating the messaging—around several functions—such as Governance and Sustainability? Is there a need for CorpCom to broaden its role?

The key to responding effectively to these shifts, in my opinion, is flexibility, cooperation, willingness to change and team decision-making. Oversight and accountability would be to the office of the CEO. In my discussions with IR Directors (in #2 IR positions) they report that a cooperative attitude prevails in the relationship with their Corporate Communications colleagues—and see that as a norm. This is an encouraging development and far more the usual practice than not. However, there are many organizations that continue to operate in silos.

As these talented Directors become Vice Presidents, there are greater opportunities for them to competently assume responsibility for a combined IR/CorpCom function. That role is relatively uncommon but creating broader jobs may be a developing trend as the economy improves. (Combined IR/CorpCom functions today are seen in the life sciences and relatively young small-cap companies.)

The BP Disaster and Valuation - the clearest example of what not to do

My point is that it is critical to “look under the tent” to understand what the hiring organization may not wish to publicly acknowledge are complex issues that they hope a new leader can address. Or, and this is frequently the case, they are unaware of how their own culture and current practices derail the goals they have set. They are presenting their story but lack the objectivity and knowledge to give you the full picture. It is only when you have made your own assessment of the risk and challenges that you can determine if you should consider an offer and proceed as a finalist in the search.

The BP disaster is one of the clearest examples of the complex factors that determine the value of an organization and how quickly a company can be affected. Financial losses can total billions of dollars. This tragedy makes the point that no organization can afford to be unprepared for a crisis.

While creating a Crisis Communications Plan for the Corporate Communications group is common practice, I rarely see that thinking in IR. Yet, as we observe in the situation with BP, that is a critical component and it appears the company was not prepared for the precipitous decline in the stock price. It should have had the mechanisms in place to quickly release key messages about the viability of the company and why it is in everyone’s best interests to keep BP in business. At the same time BP must not appear to be self-serving.

In a crisis of this scope every major functional area of the company should have input into the messaging strategy while maintaining consistency both internally and externally. Once that alignment is established, constant communication and updates are shared. This is the most critical time for the company to speak with one voice and to support, to the extent possible, the valuation of the company.

When viewed from this perspective, it is the office of the CEO that is responsible for the messaging strategy along with authorizing and delegating clear responsibility for having a comprehensive plan. (The role of the Board and communication with Board must also be taken into consideration.)

Here are the functions I can immediately identify (and there are others) that “own” a piece of the valuation story:

Corporate Communications (including employee communications)
Customer Communications
Governance and Sustainability
Government Relations
Human Resources
International Relations (global market implications)
Investor Relations
Legal
Marketing/Branding
Public Affairs, Community Affairs (Foundation).

How will companies, once a crisis is behind them, tackle the longer term challenge of restructuring to present their “story” synergistically? Will corporations take to heart the lesson that every organization must be prepared for the worst case scenario.