Measuring the Effectiveness of Your IR Program

If you can’t measure it, you can’t manage it.

While the origins of this quote are often disputed (many attribute it to American business expert Peter Drucker) there is no denying that measuring inputs and outcomes is a key management responsibility. Only through careful analysis can we be sure that our activities are achieving stated objectives in the most efficient and effective way possible.

For IROs, measuring IR plan effectiveness begins by defining objectives and determining the Key Performance Indicators (KPIs) that will be used to gauge progress.

Just as no two companies have exactly the same goals, no two will use the same strategies/tactics or the same KPIs. However, one thing is certain: measuring IR effectiveness requires the ability to gather and analyze market intelligence both at the time objectives are set and at pre-determined points thereafter. Capturing meaningful market intelligence – whether quantitative (hard data) or qualitative (investor perceptions) – at the outset is a must because it provides a baseline from which progress can be tracked over time.

To illustrate, consider this simplistic example of a company that wishes to alter its retail and institutional shareholder mix. Today’s baseline shows institutions own just 20% of the company. The IRO, based on analysis showing that peer companies have a 50-50 split, chooses a goal of moving from 80-20 to 60-40 with a two year time frame. The longer-term nature of the objective takes into account the fact that it will take time to a) convince institutions to buy in to the story, and b) for institutions to acquire equity, since the company does not anticipate a share issuance during the period.

The goal and baseline are included in the IR plan, along with strategies to prompt the shift. Assume that institutional buying activity, ownership mix and investor sentiment toward management/the company’s value creation strategy are chosen as KPIs in determining the level of progress toward the goal and the need to alter or reinforce the means selected to reach it.

In this example, the IRO uses a contact management system to track the number of meetings held with institutional investors. Meeting volume was not, however, chosen as a KPI because the IRO reasoned that it is a measure of activity, not of success. This is made abundantly clear to the IRO when she discovers that in spite of arranging three meetings for an existing institutional account, with the goal of persuading the managers to take a larger position, the institution actually sold down shortly thereafter.

Despite this setback, after year one, the ownership base for this hypothetical company moved to 75-25. The IRO now needs to decide if this is sufficient progress, and whether the goal, timeline, strategies or support activities need to change.

Measurement and assessment are where judgment and experience come into play. It is also where the rubber hits the road for the IRO, who must justify results versus objective to the C-suite. This can be a career-threatening exercise, but in our example, the IRO kept management fully appraised of both activity and progress throughout the year, outlined challenges to meeting objectives in the initial plan and built confidence by intensifying activities within the outreach strategy (increasing outreach and revising the investor deck based on institutional feedback) to offset lower than planned results. Consequently, rather than being criticized for missing target, the IRO is praised for ‘taking a business approach.’

Qualitative or Quantitative?

In the example above, both quantitative data (institutional buying activity, ownership mix) and qualitative information (institutional investor sentiment) are used to measure progress, and number of institutional meetings is used to measure activity.

Hard data is often given preferred status in IR plan measurement, and IROs use many sources – including CDS, transfer agents and stock exchanges – for quantitative information. Settlement data, however, is a  lagging indicator, meaning, in the example above, that the ownership mix the IRO measured was dated. This issue has led many IROs to seek new data sources that attempt to predict trading activity, which can inform outreach activities and also reveal the level of high-velocity and program traders in the stock.   

While most CEOs push for more quantitative data, qualitative information can be equally important in measuring effectiveness and revealing the reasons why goals are not achieved or not reached on time.

In the hypothetical case above, the IRO conducted ‘exit’ interviews with prospective institutional investors after management meetings and combined these insights with the anecdotal information she learned from speaking to her corporate access team, and commissioning independent investor perception surveys both when the initial plan was activated and at its first anniversary. The perception survey is a frequently used measurement tool and when the questions are custom designed for the company’s needs, and asked by experienced inquirers, the value of information gleaned can be high.

In the case of our hypothetical company, the perception survey asked about the quality of management and value creation strategy and encouraged participants (current holders, prospective holders, former holders) to rank issues on a 1-10 rating scale and to provide commentary.

From these qualitative sources, the IRO determined that although the company was speaking to the right prospects, they felt her company did not have a sufficiently robust value creation strategy relative to peers to justify ownership. This insight proved to be invaluable to management. Subsequently, the company adopted a new strategy, which resulted in an improvement in return on capital employed and greater institutional interest.  

The fact remained, however, that it was difficult for institutions to acquire new positions or add to their existing positions at a cost that they deemed reasonable. After two years, the original objective was not reached, but sufficient interest was created to support a new equity offering that was dominated by institutions three years after the objective was set.

Overall, quantitative and qualitative KPIs can work hand in hand to measure plan effectiveness –  and not just when the objective is to change ownership mix. A company wishing to create a ‘positive profile’ among retail shareholders may choose to measure not only the number of inbound retail calls (quantitative) received, website traffic (quantitative), Twitter followers (quantitative) and number of/attendance at retail broker meetings (quantitative) but also the topics raised during those calls/luncheons (qualitative) and retail sentiment (qualitative). Qualitative and quantitative measures together allow the two aspects of the objective, ‘positive’ and ‘profile’, to be measured currently and over time.

Measuring IR Effectiveness

When collecting data for CIRI's 2012 Investor Relations Compensation & Responsibilities Survey, IROs were asked what formal measures, if any, their company use to measure effectiveness of its IR function. About two-thirds reported using at least one formal measure of IR effectiveness. On average, those who use formal measures tend to use three. Stock price, quality of analyst coverage, and frequency of meetings with buy-side are the most frequently indicated measures.

Increasingly, companies use formal research to measure IR performance: 25% of IROs monitor investor attitudes through perception studies (up from 20% in 2010 and 12% in 2007). Among larger gap issuers ($1.0B+), usage reached 41% (up from 27% in 2010 and 18% in 2007).
Using share price as a KPI or proxy for IRO effectiveness is somewhat surprising, given that share price relies on variables outside the control of the IRO (financial performance including ROE, performance of the capital markets and industry sector). Whether or not share price is a KPI for IR effectiveness at your company, tracking changes in share value, daily share trading patterns including volume, major buyers/sellers, short positions and block trades is important and can lead to changes in the IR program. Identifying risks to plan during the objectives-setting stage is also critical in managing management's expectations of IR.

ROI

Hand-in-hand with assessing IR outcomes is measuring IR inputs to determine whether the means justified the end. Looking critically at the IR budget versus objectives and outcomes is an important exercise that can lead to better capital allocations. By measuring, the IR team becomes more effective at managing.

Get Your Guide

For more information on setting goals and measuring the effectiveness of your program, CIRI has just updated its seminal Guide to Developing an IR Program to reflect changes to regulatory requirements since 2005 and the evolution of IR practices and communications channels. It is free to all members.

While not all management experts agree on the need for measurement (William Edwards Deming famously said “the most important things cannot be measured”), IROs who take the time to do so find it to be extremely worthwhile for the companies they represent and their own professional standing within the management team.

Where To Get More Information