文書No.
961202e
Handbook of Investor Relations Theodere H. Pincus The Financial Relations Board
Lest anybody kid anybody,investor relations is by no means a science but an art.
An immature one at that. Indeed,over its past 40 years of recoded history,it has grown to be an expensive-and some say indispensable-part of 20th century corporate life.According to our annual survey,the 10,000 actively traded publicly held American companies will spend a record $5.4 billion on investor relations in 1988,as compared with an estimated $4 billion in 1986 and $2.9 billion in 1983. But during much of that four-decade period of infancy and adolescence, the field's growth has been sorely retarded by ambiguity bred of its own self-consciousness. It didn't know exactly what it wanted to be when it grew up,and was guiltstricken about stating its most obvious purpose. From the beginning, of course, everyone agreed that investor relations was a corporate function different from advertising, public relations,treasury,legal affairs, or protocol.And yet it was expected to utilize some of the disciplines from each of these departments in helping the modern American company communi- cate more effectively with its own shareholders and the investment community at large. But why? What was it all for? In my view,investor relations has always had a four-tier objective: The second tier mandates that the company go beyond the minimumu requirements and generate an atmosphere of credibility - one in which all information pro- vided by the company can be trusted. The third tier embraces a goal of creating genuine comfort among investors holding, or considering purchase of, the company's stock. This involves not merely generating trust but real understanding of the company's accounting prac-tices, competitive positon, industry outlook, strategic business plan, manage- ment performance standards and goals, and contingency scenarios. The fourth and ultimate tier is tangible stock support. This goal involves the attainment of a climate that can produce a maximum sustainable price/earnings ratio, broad-scale expertise on the company's fundamentals among key investment professionals, consistent stock sponsorship, and strong liquidity of trading volume that can in turn offer stability in the marketplace.
However, even these nice things have not been ends in themselves. Combined withstaying power, they set the stage for the true payoff: more economical corporategrowth. This could be implemented by
Even now in the late 80s, much of the field is a quagmire of passive profes- sionals, reacting with a doorman mentality to any interest volunteered. Like an immense investor information booth, IR rates its performance on the basis of howmany of the curious go away satisfied and how few feathers are ruffled. But it takes marketing savvy, ample energy, and a truly proactive posture in order to attain tier three and four of IR's overall objective. It takes resolve and a plan to seek out those elements of the investment community who can be to-morrow's supporters of the stock. Given the inherently fickle nature of the in- vestor ー amateur and professional ー no company has ever consistently main- tained an above-average multiple without working at it deligently every quarter to attract new blood and to create new experts in the stock. If companies choose to make that commitment, can IR deliver? Is IR really ca- pable of doing more than keeping people informed and happy? Does a marketing -oriented, proactive IR program have a measurable impact? Throughout the 60s and 70s, skeptics abounded. They pointed cynically at the Efficient Market Theory propounded by University of Chicago scholars and others who loftily contended that the stock market always automatically discounts cor- porate fundamentals. Thus, they said, with virtually all public companies, all potential investors already understand all material changes in the fundamentals as they occur, and the price adjusts accordingly. No amount of good corporate communications can make a whit of difference. But as the 80s arrived, American business history became so replete with case upon case utterly disproving Efficient Market punditry that eve the pundits re- canted one by one. As more and more companies demonstrated that they can indeed wake up the investor to an undervalued set of fundamentals and make a permanent difference in the PE multiple, skepticism waned rapidly. Hence, many public companies across America have already learned the lesson andtoday are believers. More believers are created every week, as companies see IR become a resultsdriven, highly mobile weapon that can help accelerate the over- all achievements of ambitious management teams. Increasingly, CEOs are recog- nizing that they are not hired to boost sales or even profits, but to make theirshareholders rich. Plain and simple. "Enhancing shareholder value" has suddenly become a trendy buzz-phrase of the late 80s. And yet many perceptive CEOs recognized this responsibility long ago, rolled uptheir sleeves, and set to work trying to broaden the base of their street su- pport. They compared the modest amount of sweat and money required by proactive IR with the amount of sweat and money required to boost corporate sales, let's say, by 10 percent in order to attain a 10-percent gain in earnings - in order to reach (at a constant PE multiple) the same 10 percent gain in market value that might have accrued through intensified communications. What are the primary tactics of proactive IR today? In our view, they are: 1.Adopting policies that can make the stock more marketable. This means that topmanagement and directors will make a commitment to these principles: a.Establishing credibility must come before comfort. b.Information reduces risk. Management must share with investors its business plan, so that it can be evaluated. c.The smart strategy must always be to focus attention on weaknesses in com- pany fundamentals. This is the grist from whence upside potentials ( sales growth, improved margins) can appear! d.Proximity is the key. Out of sight, out of mind. The key communications job is to establish a personal bond, creating a flock of new scholars on the company story. e.This is one job the CEO cannot delegate. The CEO must personify the company, articulate the story, and do so by taking it personally to the marketplace. 2.Effectively defining the company outlook and packaging a well-documented story for maximum comprehension; and then having the courage to update it continual- ly as conditions change. 3.Upgrading the company's printed materials to focus on tomorrow. 4.Taking full advantage of high-tech hardware for broader reach: videotapes, video teleconferences, reports in disc form. 5.Aggressively working for in-depth, consistent treatment by the regional and national financial media. 6.Utilizing proven market research techniques in scouting the marketplace to identify the highest potential candidates for stock sponsorship ー rather than wasting top management time in constant wild goose chases on the general forum luncheon circuit. 7.Utilizing top management time in a rationed, focused series of private group meetings through the year with prequalified, selected investment professionals. 8.Conducting a methodical follow-up program with every audience.
And how should all this be measured?
It isn't vital that a corporate CEO get up on the soapbox and predict the com- pany's earnings per share for next quarter or next year. As former head of Arthur Andersen(and strong proponent of public forecasts) Leonard Spacek once said:"The need of the long-term public investor is not the forecast of a single year...but a reliable basis on which to approximate growth over a period of at least several years..." What today's investment professional needs most is the executive's willingness simply to share the valid ingredients of his own potimism - if indeed he is hopeful for profitable growth.And since the CEO alone is the architect of a cor-porate growth blueprint,he can best articulate the economic assumptions upon which it is based and the long-term objectives encompassed.Essentially,he must treat the investor audience as if it were a solitary individual who is consider-ing buying the entire business outright.What would the buyer have to know? The key questions that must be answered are:
5.What are management's goals and standards of performance?
Still another myth:"If I talk about the future, won't I give said and comfort to the competition?" This one is fading fast, in an era when competitive in- telligence is both widespread and easy to conduct. Most often, competitors are the first to know, not the last. Many other CEOs plead,"If I talk about the future, what happens if I'm wrong?" Today, more than ever, sophisticated investors and professional analysts fully recognize that no corporate executive has a perfect crystal ball and that any projection is only a projection. That's why few of them swallow any business plan in its entirety as an absolute prediction of things to come. Instead, they are impressed that a plan indeed exists, impressed that it is founded upon a logical scenario, and impressed with the goals enunciated by management. Contra-ly to traditional corporate lore, hard-bitten investment professionals are rath-er forgiving when companies miss the mark and things don't turn out as painted in the original picture. This is true as long as one ingredient is present in the equation: Management'swillingness to update the scenario as often as necessary. In other words, under today's ground rules, it's virtually impossible to be called either a liar or a bum if you are able to communicate your dream effectively, and then promptly return to your audience with an updated version of that dream as circumstances force alterations upon you. In fact, if the ability to adapt to changing condi- tions is revered as a lofty attribute of champion executives, then your forced exercise of altering the business plan may well lend public testimony to the measure of your agility. And finally, there's the cry:"My story isn't quite ready yet!" The funny thing about that apprehension is that, in 25 years, I've never known a CEO supremely confident that his story was totally ready to open on Broadway(much less Wall Street). By the nature of the beast, every CEO is forever agonizing over his game plan, constantly fiddling with his palette, touching up a few more specks on the canvas, reluctant to stand back, view the picture, and pronounce it com- plete. Nonetheless, he does have a plan, he is pursuing it, he does have goals and standards, the stock opens for trading every morning, and investors operat- ing in an uncomfortable vacuum are either unduly bullish or unduly bearish.
HAS IT REALLY PAID OFF? In 1977 Pullman,Inc., was plagued with the same low price/earnings multiple as the other humdrum railroad equipment manufacturers with whom it was inextricablyidentified. In truth, however, CEO Sam Casey was hard at work yanking Pullman into the 20th century and moving it rapidly into a premier position as a provid-er of construction and engineering services - a far cry from the low-margin, highly cyclical railroad parts business. The problem was that few investors un- derstood the business plan. When we interviewed him in depth, Larry Chaitt, a top analyst at The Bank of New York, observed: Pullman today is basically a multi-market company and the problem is that it is going to fall between the cracks as most institutions. You can describe the company in any one of a number of ways. As far as The Bank of New York is con- cerned, it falls in the rail equipment group. As far as the street perception ofit, the earnings will fluctuate with freight car orders.... What management has to do is clean up their breakdowns and the cash flow statement, to give us some way of relating cash to earnings. They've got to be more willing to discuss those factors that affect Kellogg and Swindell, and the background of the industries they serve. They must explain their technology better. What factors in the world economy influence it? They've got to explain the economics of their business. They are an international company. The interrelationships between Pullman and some of the factors that affect the world market are important. Thisis a stock that I like. It's one that I follow and one that I'll continue to follow. However, I've got other projects that I think are more pressing. I've got no time for Pullman.... At the same time, Robert Dunlap, a top analyst at the Irving Trust Co., said; I don't follow Pullman because they won't tell you enough about their businessto let you get a handle on it. I've looked at Pullman in the past, and I've called on the company about three times. I've always had an open mind toward thecompany, especially when the stock is cheap like this....I think it would be very helpful if management had periodic meetings with the street, but when they do so, they have to give the facts. Their annual and quarterly reports are not good. They need to be broken down. If they cange and become more open withe the street, there is no doubt that I'd take more of an interest in Pullman. The key thing is disclosing what is going on, which will take care of 85% of their prob-lems. Sam Casey decided to change things. He decided it was time for the broad-rangeinvestors to understand that Pullman was a new company, a business in which the service sector was quickly emerging as the dominant profit maker. An effort was launched to have Pullman completely recategorized in the eyes of the invesment community as a purveyor of services. The market outlook and competitive position- especially for Pullman's growing construction and engineering services - were clearly delineated through all communications channels. Sam Casey personal-ly led the effort with forays throughout the investment community to explain hisaspirations and strategies. And, in an effort to dramatize the point, Pullman asked Fortune Magazine to "delist" it from the Fortune 500, which are industrialcompanies, and spotlight the fact that Pullman should rightly be classified as aservices company. In the years that followed, the message increasingly hit home. In many securi- ties firms, the task of following Pullman stock was shifted from the rail equip-ment analysts to the analysts following services companies, most of which car- ried substantially higher PE multiples. And, despite a series of setbacks that included a major New York subway contract cost overrun and other problems, Pullman picked up broad new investor support. By 1980, its PE multiple had movedform 8X to 11X, and its total market value had moved from $338 million to $524 million. In late 1978, Chicago-based Jewel Companies,Inc., with a PE multiple of 6X, waslanguishing in a stock market quagmire along with most of its brethren classi- fied as grocery store chains. Even Jewel's modern management techniques and ag- gressive leadership in supermarketing could not convince investors that Jewel deserved a superior rating. The popular perception was of a bright company stuckin a dull industry. When she was interviewed at the time, Priscilla Perry, a senior analyst at Chicago Title and Trust, emphasized that, "the long term in- dustry outlook for retail food stores is bleak...the industry is very mature... the industry and the investment community have overplayed the benefits of infla-taion and are fooling themselves in considering inflation a positive factor." Ted Breckel, a highly respected analyst at The Northern Trust, added that, "theindustry has below average appeal...Jewel's major market share in Chicago is probably their biggest strength. Their most glaring weakness is the inability togrow in non-food merchandising." Meanwhile, Carles Wetzel, a top retail trade analyst at Citibank, New York, pointed out that "it would help their image some-what if they were involved more in the drug area." In reality, Jewel's very enlightened management team, led by Don Perkins and Wes Christopherson, had big plans to change the company's fundamental business mix and was making decisive moves to broaden the company's base. Jewel wasn't there yet, but it was aspiring to become a major diversified retailer rather than merely a supermarket chain. One key to this effort was a massive program toexpand Jewel's Osco Drug Division. But how could Jewel adjust investor percep- tion to keep pace with - or move somewhat ahead of - its accomplishments? Essentially, Jewel's answer was to draft a growth manifesto - a business plan put on paper in the form of a detailed corporate profile and also packaged for presentation to live audiences and media in a conservative, orderly sequence of events. This sequence unfolded methodically throughout 1979,1980,1981, and thereafter. In its corporate profile Jewel went to great lengths to put real substance behind its announced aspirations. The summary section of one profile said, "Although Jewel will continue to be a major food retailer, its strategic plans call for reduced reliance on the traditional supermarket format. Future plans put major emphasis on expansion of the company's 117 combination food/drugstores and its 286 solo drug stores. By 1985, the company expects that 85% of its U.S. earnings will be contributed by combination stores, side by side units,and stand alone drug stores." Jewel then provided documentation to underscore both the seriousness and ag- gressiveness of its business plan. This data included actual projections of supermarkets, drug stores, discount grocery stores, and convenience stores show-ing 1982 actual and projected figures for 1983,1984, and 1985, in both number ofunits and total square feet of retail space. Increasingly, the message hit home, especially as Jewel's management articu- lated the story personally to assembled groups of institutioanl money managers and retail brokerage executives through and extensive series of private group meetings conveniently tied to normal routine business trips. By June 1984, the company's PE multiple had advanced from 6X to 9X, and its total market value hadincreased from $220 million to $649 million. AFG Industries in 1980 was a small company in the town of Kingsport, in the hills of Eastern Tennessee, run by a colorful, enterprising young CEO named Dee Hubbard. Hubbard was trying to build a name and position for the struggling com-pany in the nation's glass industry. Rather than go up against the well-known giants in markets across the borad, the company selected several attractive seg-ments of the specialty glass market, such as the types used in solar heating andother specialized areas, and also applied new advanced technologies to the tra- ditioanl processes of producing glass. Hubbard had a game plan incorporating these new technologies, including several expansion moves - both internal and external - that could propel his company into position as the third or fourth largest glass producer in the United States within the following few years. Dee Hubbard chose to share his plans with stockholders and the investment com- munity. Obviously, there were many aspects of his strategy that could not be di-vulged for competitive reasons, but the overall goals and aims of the company were laid out in its 1981 annual report and the intensive communications programthat followed. AFG consistently updated its published strategy each step of the way and kept investors closely advised as to adjustments and modifications as the company a- dapted to changing circumstances in the glass industry. Overall, the scenario de-veloped quite close to original plan and the company's sales and profits grew rapidly. From the outset of the program effort in May 1980, when the company had a totalmarket value of $15 million and a PE multiple of only 3.7X, AFG won an increas- ingly wider scope of recognition, and by December 1982 - just two years later-found itself in an enviable position with which to capitalize on its equity lev-erage. Its market value had risen tenfold to $174 million, and its PE multiple had risen to 15X. At that point AFG elected to bring to market an additioanl 750,000 shares of common stock, raising $14.8 million, $10 million more than what would have been raised under circumstances existing just two years earlier. By 1987, AFG Industries was on the NYSE with a market value advanced to $650 million. Further, it had an extremely active following by top glass industry analysts and special situations analysts coast to coast, plus a number of top money managers in major institutions.
WHAT HAPPENS IF WE STUMBLE?
The stock gose down.
Nonetheless, I believe that for a wide range of publicly held U.S. companies business conditions in the nineties will present several compelling reasons why a more open policy should be seriously considered. First, although the capital markets have been awash with easy money, many eco- nomists are pointing to a significant tightening of the market for borrowed funds in the early years of the next decade. When this is combined with an al- ready widening debt/equity ratio trend among public companies, it seems obvious that competition for equity capital will intensify. Accordingly, the difference of even one multiple point in a company's stock value may make the difference inits ability to continue growth on an economical basis by raising expansion capi-tal. Meanwhile, in the face of this, the stock market seems to be no less inef- ficient than it ever was. Even among the academic cognoscenti who were the primeproponents of modern portfolio theory, there has been a major shift in thinking.In fact, in 1985 cult father Barr Rosenberg acknowledged in the Journal of Port-folio Management that he had come to the "inescapable conclusion that prices of the New York Stock Exchange are inefficient." Second, growth by acquisition should be a continuing option for many corporate boards. The pattern is too clear to ignore: a corporate landscape littered with cases where companies - correctly valued by the marketplace - capitalize fur- ther on that good fortune by trading stock for the shares of companies that are undervalued.
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