Size Matters When Setting Budgets: So Does Discipline
For IR teams serving companies with December 31 fiscal year ends, it will soon be time to create 2019 budgets. How much should you spend, where should you spend it, and if you had more money, how would you allocate it?
These and related questions such as ‘What's the best way to get my boss to increase the IR budget?’ are important lines of inquiry and thinking for every IRO. While the conclusions you reach will be informed by your own needs, IR focus decided to weigh in by asking these questions of various IROs from small to large cap issuers. What follows may help as you begin your budgeting process.
How Much Do Canadian Companies Spend on IR?
Annual IR budgets vary greatly in size. In the last CIRI IR Compensation and Responsibilities Survey, conducted in 2014, the amounts ranged from just over $500,000 (small cap) to $1.2 million (large cap).
In our (unscientific) straw poll of small-, mid- and large cap issuers, these numbers appeared to be low in today's environment. But drilling down below the headline numbers is important in any analysis to ensure apples-to-apples comparisons. For example, some IR budgets include the cost of regulatory filings (which can easily amount to $80,000-$100,000 for a mid-cap company). Some budgets exclude these fees because they are picked up in the legal department's costs. Some IR budgets include travel expenses for non-deal roadshows. Some do not. Some include full or partial salaries for staff members who are engaged in corporate communications and government relations; others do not.
While benchmarking is helpful, it does not answer the central questions of how much a company should spend annually on IR and where the money should be spent.
How Much and Where to Spend?
The answer to this question, according to IROs approached by IR focus, is to spend to meet IR objectives for the year. Spending to meet stated goals and achieving these objectives is how value is created in IR and it's also the best way to demonstrate value to your boss. This is true no matter how large or small your IR budget allocation is and it's where budgetary and objective-setting discipline enters the picture.
IR plan objectives should be calibrated to support corporate objectives and strategies. One example provided by an IRO for this story: if your company decides that a goal for fiscal 2019 is to launch or acquire a business in a new market, the IR goals for the year could include educating existing investors/analysts about that business line, seeing corporate messages echoed in the market over the ensuing year and adding X number of institutional investors attracted by this development. This could necessitate the addition of special investor day expenses.
Budgets might also need to increase if you set a goal to expand/diversify your shareholder base. The costs of international non-deal roadshows or foreign asset tours can quickly add up, if travel needs to be funded.
Using this logic, IR budgets would need to flex annually with expenses for ‘special projects’ such as investor days in some years being larger than others. Fair enough, but since salaries are the largest cost for most IR budgets, how many staff positions are needed to operate an effective program? Participants in our straw poll survey could not offer a rule of thumb. The advice offered about staffing is that it should again relate to the company's overall goals/strategies and what it wishes to accomplish.
Practically speaking, affordability often trumps IR plan objectives for many companies, particularly small issuers and those in cyclical industries. Companies with limited resources can still design and implement an effective, goal-driven IR plan but must do so without some of the tools that larger cap companies take for granted (such as shareholder surveillance) and generally need to become more creative in their marketing and more reliant on brokerage firm support for investor outreach.
What Should Be Included Regardless?
Funds to employ an IRO – even part time – was the consensus answer in our straw poll. Other must-haves included: funding for investor websites (because they are used extensively by institutions and retail holders for research); funding for at least two non-deal roadshows across Canada per annum; and funding for a customer relationship software system to track investor information.
If Money Was No Object
If the IROs we spoke to could spend more money, where would they spend it? The answer was unique in every case but across the mid- to large cap spectrum, a common wish list item was international shareholder outreach. Or more precisely, marketing to potential institutional shareholders, with Asia Pacific being a priority destination. (In the same vein, some IROs expressed a personal desire to have more funds available to participate in IR conferences nationally and internationally.)
With more money, small cap issuers we spoke to would spend it on shareholder surveillance tools, which would give them actionable intelligence to fuel their marketing programs. A dearth of current information on ownership trends and peer company ownership was cited, as one respondent put it, as his "Achilles Heel." This was not universally the case, though. Some small-cap IROs felt their marketing needs were well enough served by brokerage firms. Interestingly, this view was politely disputed by more than one large-cap IRO who felt brokerage firm shareholder information was occasionally "wrong" or "out of date."
Shareholder perception surveys were also included by many issuers in wish list spending, although larger companies indicated their needs were already funded. Perception surveys were seen as a useful tool to build a business case for new IR initiatives.
For mid- (and some) large cap companies, more spending on environmental, social and governance (ESG) reporting was a common wish list item because of demand from institutional investors that increasingly use ESG factors in decision making. Small caps did not generally express the same view but were well aware of the need to provide such data.
Most issuers we spoke to indicated they would spend additional funds on their investor websites to upgrade content and navigation.
Where Not to Spend?
In our straw poll, printing annual reports and slide deck copies was seen as the most wasteful spending. Survey participants also suggested applying discipline to the frequency of investor days. While some companies host these events annually, this is not considered best practice by IROs who spoke with IR focus. Their view: investor days should be held only when there is something new and meaningful to discuss with investors/analysts. A less costly alternative is to hold ‘teach-ins’ or ‘lunch and learns’ where small groups of analysts/investors meet with a senior executive to review an important business concept.
Hosting too many investor tours/meetings was also considered wasteful, although there was no consensus on what the term ‘too many’ meant. If institutional investors begin to ask management why a meeting was requested, this is a telltale sign of too much activity.
How To Convince The Boss to Spend More?
One sure fire way to gain additional budget dollars is to have a large institution complain to your CEO about a deficiency in the IR program. Unfortunately, this may also result (as one IRO put it) "in blowback" on the IR department. A more positive way to attract new dollars is to create a business case to support additional spending – which brings us back to ensuring that there is a detailed IR plan for the year, that its objectives relate to the company's overall strategies and that proposed spending levels are benchmarked against the budgets of similar-size companies or companies in the industry. On this final point, much value can be derived from reviewing CIRI's formal surveys and attending seminars such as What IR Program Can You Deliver On A Small, Medium and Large Budget, which was featured at this year's Annual Conference. (A recording is available to CIRI members.)
Budget size does matter when it comes to IR. Bigger budgets enable greater staffing levels, the purchase of more surveillance tools and investments in more non-deal roadshows. Nevertheless, it's not just how much is made available, it's how the money is spent – and whether it's allocated to the right priorities – that will determine the ultimate value for you and your company.
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