The September 2011 issue of IR Magazine highlighted Swedbank’s IR programme, which was ranked number nine in this year’s Euro Top 100, a ranking of the firms in Europe with the best IR. Last year, Swedbank did not make it into the top 100 (they were ranked 116th).
How was this feat accomplished?
“Johannes Rudbeck, head of IR at Swedbank, attributes his successful IR program to top management’s attitude toward the importance of investor relations. This includes a willingness to be transparent and allow IR full real-time insight into all financial and business developments.” (emphasis in bold is mine)
I guess that most companies fall somewhere in between these polar opposites. Hopefully, you're closer to Swedbank’s part of the spectrum, because - as Rodney Alfvén has pointed out - IR is never better than the CEO.
It seems as if fewer and fewer analysts and investors actually read annual reports. A survey by CA Cheuvreux concluded that “most merely glance at them or look at just a few pages”:
People increasingly get the information they need from other sources, most of which are outside of companies’ direct control.
Annual reports are produced with many different objectives in mind, but their importance as a tool for educating a company’s financial stakeholders on various aspects of the business is definitely waning.
So how should you respond? In a recent post, Dave Hogan claimed that online video has the potential to be a real game changer in investor relations and corporate communications. Dave makes the point that “corporate executives and their IR handlers will need to learn more about video production techniques such as narration, B-roll and music.”
Maybe, but I believe that a lot can be accomplished by very simple means.
When I read Dave’s post, I thought about the Khan Academy, a fantastic educational resource that I didn’t know about until very recently:
“With a library of over 2,400 videos covering everything from arithmetic to physics, finance, and history and 125 practice exercises, we're on a mission to help you learn whatever you want, whenever you want, at your own pace.”
Salman Khan, the Khan Academy’s founder and lone faculty member, is a former hedge fund analyst who came up with the idea for the site while tutoring his cousins remotely. Seeing as IR has a significant educational aspect to it, I think this might be a good place to look for inspiration. Perhaps video-based “analyst boot camps” or primers on key concepts to keep in mind when analysing and assessing the company’s performance? Anyway, here’s one example from the Khan Academy (Salman Khan talking about credit default swaps):
I just noticed that NSU, an outfit promoting Sweden abroad, will arrange a seminar during Almedalsveckan, focusing on Sweden’s country brand and its value to companies (more information in Swedish here).One of NSU’s member organisations is Invest Sweden, the country’s official investment promotion agency. As exposed by Svenska Dagbladet(article in Swedish), they’ve been promoting themselves a bit too hard over at Invest Sweden. Statistics published by the agency grossly inflate the number of jobs created here in Sweden through Chinese investments.Invest Sweden also seems to be overstating its own role in attracting foreign investors. Earlier this week, the Director General of Invest Sweden was summoned to the office of the Minister for Foreign Affairs in order to explain himself. So as not to further dent his and his organisation’s credibility, let’s hope he can keep his numbers straight at Almedalen, where he will be on the panel at the NSU seminar about brand value in a few weeks.I don't know the reason behind Invest Sweden's errors but in general, I believe that many people tend to underestimate the magnitude of the reputational risk they are taking on by reporting data carelessly or by creating the impression that they are hiding something (whether consciously or inadvertently). I wrote about another example here, and another one here... And I recommend this recent post by John Hemptonon the same topic.By the way, Sweden’s country brand seems to be rather strong, ranking number ten in the world according to the study below (Canada is number one). Don't take the numbers at face value though :-)
How social media can be leveraged in investor relations has been a really hot topic in the last couple of years, particularly in North America. I find it really interesting to look at all this from an investor’s point of view, i.e. how can social media be used to an investor’s advantage? Investing has always been about information and idea generation. What’s happened in the last few years, however, is that the number of potential sources of information has exploded. Investors who are able to spot the possibilities this new landscape offers can definitely get an edge.It seems as if many are slow to catch on though. Patrick Kissconducted a study recently to investigate the use of social media by European investment professionals. Many are still reluctant to commit resources:
“The survey participants commented, that they don’t want to be pushed or forced to use social media. They fear the “noise” on social media most and they are afraid that they are currently not able to filter this noise.”
Perhaps watching this panel discussion might get some people to reconsider their position...
I have met investors who have told me that they like companies with low earnings volatility. One told me that he would even go so far as to encourage earnings management in some cases. I don’t believe that this person represents the majority view, but I was still a little astonished to hear this.
Many companies heed this investor’s advice though. It is well documented that the practice of earnings smoothing is widespread, although perhaps not always with the objective of increasing firm value. If these companies’ goal is indeed to achieve a higher market valuation, their efforts do not seem to be rewarded.
“If investors really preferred smooth earnings, you would expect companies that achieve them to generate higher total returns to shareholders (TRS) and to have higher valuation multiples, everything else being equal. Yet […] there is no meaningful relationship between earnings variability and TRS or valuation multiples.”
From “The myth of smooth earnings”, McKinsey & Company. You can read more about the research results here:
So, investors do not shun earnings volatility per se.As McKinsey points out, most people realise that the world is not smooth. But if the earnings variability is construed as uncertainty around the strength of the company’s business model and longer-term health, you have a problem.
I believe that companies whose business dynamics, market position and strategy are poorly understood run a greater risk of having to face this situation. Companies in this category may also be more tempted to smooth their earnings.In any case, I found a study demonstrating that companies that are characterised by a low information environment (using a low level of analyst following as a proxy for this) are more likely to realise a valuation premium as a result of earnings smoothing.
“Overall, across all alternative definitions of high analyst following, we find no significant relationship between earnings smoothing and firm value when a firm is followed by a high number of analysts. The coefficients range from -0.053 to 0.004 and all are statistically insignificant. In contrast, we find significantly negative coefficients for firms followed by a low number of analysts, regardless of the cutoff we use, indicating a valuation premium for earnings smoothing when analyst following is low.”
I just reread this study, and I thought it worth sharing even though it's a few years old. PwC and Schroders conducted an experiment several years ago in order to explore the value of non-financial information to financial market participants.
I believe the conclusions provide an interesting perspective on the benefit of opening up and giving investors and analysts more non-financial information:
"The findings were quite startling. The average revenue and earnings forecast prepared by those with the full set of accounts were actually lower than that prepared by those who only had the financially-based document. This might be a little discouraging for advocates of greater transparency were it not for the fact that despite the lower forecast, members of the group with the complete information set were overwhelmingly in favour of buying the stock. This stands in stark contrast to those with the less complete information set. Although the average estimate that they generated was higher, nearly 80 per cent of this group recommended selling."
A corporate access professional I talked to recently claimed that Swedish shareholders are generally less willing than investors from certain other countries, e.g. the UK, to offer feedback to companies they meet with.
This intrigued me. Like any form of communication, investor communication must be two-way to be effective. My sense, though, is that investors here in Sweden are more than willing to engage in dialogue with companies and to offer candid feedback.
But perhaps it is necessary to ask for comments a bit more actively here than in, for example, the UK? According to the corporate access specialist I spoke to, investors in Sweden are used to being granted access to management. She claimed that this can be considerably more difficult in other countries and that investors, therefore, may be more willing to proactively offer their feedback in order to ensure continued access to management.
I’m not sure how much truth there is in this interpretation. But it got me wondering about how to best go about capturing feedback from investors.
Some people argue that you increase your chances of getting honest feedback by having a third party approach investors. This is often done by sending out a fairly standardised questionnaire. There is nothing wrong with this approach, which can yield useful intelligence. But I believe that companies must also engage investors directly in discussions about specific issues. One such opportunity might be when thinking about how to improve the company’s reporting framework.
I have not been very active on this blog for a while, and I guess it has to do with the fact that I have just changed jobs. I am transitioning into the role as head of investor relations at Transcom WorldWide S.A., a global outsourced service provider.
I am really looking forward to new challenges as an IRO, but at the same time I will miss my old colleagues at Intellecta Corporate and my clients very much. These last five years have been fantastic with many interesting and challenging client projects in various sectors.
While it is true that this is a very busy period for me, I don't think that's the reason for my inactivity here (life as a consultant is also hectic…). I think part of the explanation is that it's a bit more complicated to blog about IR as an IRO than as a consultant. At least I think it is. While I have often commented on issues I have encountered in my daily work with clients or prospective clients, I have been careful not to disclose the companies’ identities. Well, now everybody knows what company I work for.
There are, relatively speaking, not that many out there who blog about IR. Consultants or vendors run most IR blogs, while very few IROs blog. I want to continue using this site in some way, but it might be a bit quiet for a while. I plan to keep discussing IR issues in other forums as well, perhaps even to a greater extent than before. I enjoy participating in #irchat on Twitter for example.
“He wants to put analysts out of a job”. This was the title of an article in e24 (in Swedish) a few days ago. Of course, I had to read on:
“All the exchanges and stocks in the world, analysed and objectively valued, accessible through a single application developed for small private investors – like a “Spotify” for the stock market.”
Sceptical to say the least but no less curious, I continued reading about a new analytical tool named “Nordic Navigator”, developed by CIMknows. I learned that the “objective valuation” is essentially based on an analysis of a stock’s historical total return to shareholders (share price appreciation plus dividends over a given period), compared to the current share price.
The key idea seems to be that if a stock currently trades below its “long-term value trend”, it is undervalued. If you have five minutes to spare, this video describes the approach (in Swedish):
I have several problems with this crude method. I’ll just give you a couple of my key concerns:
First, and most obviously, a company’s share price reflects expectations about future performance. Hence, basing your investment decisions solely on information about historical returns is just silly.
CIMknows makes a point of the fact that its approach is not based on uncertain analyst projections. Well, looking in the rear-view mirror is just as dangerous. There may be a very good reason why a stock’s TRS is falling relative to its long-term trend. For example, as pointed out in “Valuation”, improving TRS is a lot harder for a company that is already successful:
“The reason is that a company’s progress towards performance leadership in any market will attract investors expecting more of the same, pushing up the share price. Managers then have to pull off herculean feats of real performance improvement to satisfy those expectations and continue improving TRS. Clearly, managers’ capacity to influence TRS depends heavily on their business’s position in the cycle of shareholder expectations, from start-up to maturity.”
So, a long-term investor needs to understand the expectations that are built into the share price, and also have a perspective on the underlying drivers of value: return on invested capital (ROIC) and growth. While top performing companies often have a good chance of sustaining a high return over time, sustaining high growth is much more difficult.
I guess what disturbs me the most about “Nordic Navigator” is the complete disregard for the underlying drivers of economic value creation, certainly not a recipe for long-term investment success.
Karin Tyche, one of my colleagues, recently posed the question whether it makes any sense to spend time developing an iPad version of an annual report.
Karin doubts the value of an annual report app for the iPad (post in Swedish). She argues that a more comprehensive IR application would be more valuable, combining access to a complete and updated information set with analytical tools. Also, Karin envisions an “IR interface” which would allow you to follow and compare several companies from different perspectives (perhaps leveraging XBRL-based information?).
Bengt Wennerström, another colleague of mine, also shared his views about the iPad last week (again, in Swedish). He is a huge fan of the iPad (sometimes using two of them at the same time), but he strongly believes that you should make information easily accessible independent of the user’s choice of device or platform. Bengt prefers using open web standards, publishing material in one place while making it searchable and shareable by anyone who is interested.
Needless to say, Bengt also doubts the added value of an iPad annual report over a good online annual report. I am not convinced either.
