Measuring Investor Relations Success:
Good communication can help a company hit a home run with investors
by Kelsey Mullen
A great relationship with investors is key to a public company's long-term success and a public company's long-term success is key for investors. Increased investor interest can make it easier for a company to raise money, improve liquidity and achieve a share price that more accurately reflects a company's underlying value. Given the potential power of communication, it is crucial for companies and investors to understand how to measure the success of a company's investor relations initiatives.
"Research and market surveillance is a crucial component to an investor relations officer's ability to measure, monitor and modify a company's financial communication efforts," says Jane McNichol, Instructor, Investor Relations, at Mount Royal College in Calgary. "It helps you analyze trends and develop programs to respond effectively."
Competition for capital is not always won by the "better" company. It is won by the company that is better known, better understood, and most notably, has a better relationship with its investors.
An upsurge in investor faith and confidence is a byproduct of a steady and reliable flow of corporate communication. "Basically, to have an effective IR program you need a long-term focus on building and maintaining relationships within both the financial and investment community," says McNichol. "This is true regardless of the size or market capitalization of your company."
There's little question that steady and reliable communication will benefit a public company and its investors over the long term, but it's not enough simply to adopt a philosophy of openness. Communication practices must be continually monitored, evaluated and refined. To build a solid foundation for an investor relations program, a company needs to define a target audience, such as investors and analysts. Next, a company needs to define its story; what key messages do they want these audiences to know? This can be developed by identifying unique characteristics related to the management team, assets and performance that are likely to impact an investor's perception of a company. Once the target audience and key messages are developed, the best channels of communication need to be determined. The most common and effective communication tools used to reach investors include quarterly and annual reports, conference calls, road show presentations and news releases. Quality of disclosure and consistency in financial communication are key as investor perceptions are formed based on these representations. The final component is measuring effectiveness - arguably the most important part of the communication process. This is the step where the investor relations team evaluates and responds to feedback regarding its communication efforts. This allows the team to tailor a company's financial communications to successfully target the right audience with the right message.
Tools for measuring the success of financial communications efforts include looking for an increase or improvement in the following:
• Price/earnings ratio in comparison to peers
• Conference call attendance
• Quantity and quality of analyst coverage
• Share price relative to fair market value
• Requests for information
• Ability to raise equity capital
• Institutional ownership
• Trading volume
Because a company with an effective investor relations program can benefit from using these tools, the strongest public companies hire experienced and knowledgeable investor relations firms to help them ensure these tools are being used consistently and effectively.
Although these tools are good tactical measures of company's financial communications initiatives, McNichol says a key measure of success is whether these initiatives strengthen a company's reputation.
"Above all, it's about changing attitudes and perceptions and building long-term credibility with senior management, the financial and business community and your investors," McNichol says.
