How Do You Measure Success? An IRO's Guide to Objective Setting

It's accepted wisdom that every investor relations program must operate with a set of well-defined goals. CIRI's Guide to Developing an Investor Relations Program devotes Chapter 3 to setting objectives and has a handy list of sample goals such as improve disclosure practices, reduce trading volatility and differentiate the company from its competition.

But when the rubber hits the road, and it's time to set the goals on which your investor relations program – and by extension you – will be judged, what specific measures should you include? For this issue of IR focus, we spoke to leading IROs in different industry sectors and put that question to them. The results follow.

Share Price? Think Twice

Every company wants a sustainably higher share price. The IROs we spoke to certainly acknowledged this to be a preoccupation, but never a blatant IR plan objective. They argue it's because there are too many competing ‘macro factors’ that drive share price movements over which the IRO has no influence. Accordingly, to be judged on the rise (and fall) of the share price would be, in the words of one IRO, ‘grossly unfair’.

However, IROs working across several industry sectors and for companies at different market capitalization levels indicated that trading multiples relative to their organization’s peers are fair game for IR plan inclusion. Specifically, these IROs make it their primary objective to achieve and sustain a premium (higher than peer) valuation or to shrink a gap in relative valuation. Although these IROs acknowledge that there are a variety of macro factors that influence trading multiple differences, they argue that relative price/book value per share, relative price/earnings or relative economic value/ EBITDA multiples are useful yardsticks for revealing gaps in market understanding. If the Street consistently puts a low relative valuation on a company, or substantially undervalues it compared to peers, these IROs feel it's their job to: a) understand what investors are missing; b) gear the IR program and associated communications to closing/eliminating the gap; and c) share investor insights with the C-suite and Board so that the company's fundamentals (including structure, strategy and management behaviour) can be improved to support a higher relative valuation.

These IROs also indicated that their C-suite sees such objectives as ‘tangible’ and ‘meaningful’ and therefore supports plans with this as a featured goal. 

Closing/eliminating a valuation gap or achieving a valuation premium is also an objective that can be achieved, even in a market where industry share prices are declining. It can also be used by small and large cap companies; in fact, by any organization, so long as there is a reasonable peer group for comparative purposes. It is also an evergreen objective: it appears in IR plans year after year after year.

Quantitative Measures

A quantitative measure mentioned more than once is ‘investor conversion’ or ‘hit rate’. This refers to investor buying activity/number of investor meetings held. A higher ratio indicates that more prospective investors are ‘buying in’. Admittedly, there are many variables that influence this ratio, some outside the IRO's sphere of influence but others inside. For example, if investor targeting is faulty, the ratio will disappoint. If management is not well prepared to address investor questions, the ratio will disappoint. In order to set an objective in this area, it is necessary to benchmark past activities to establish a baseline. This metric can be eye-opening as it reveals how much effort a company needs to make in its investor outreach efforts to gain each (significant) shareholder. Of course, tracking this metric is also a valuable educational experience as it brings focus to activities that work (and institutional accounts that are worth meeting) and activities that don’t.

Another quantitative objective is investor composition. Common objectives include achieving a certain percentage shift in retail versus institutional shareholders or a percentage gain in institutional ownership outside Canada. By stating specific objectives, the IRO can make informed targeting and resource allocation decisions. IROs who have included such an objective in their plans indicated that it usually takes much more than a year to move the needle, unless a dramatic event accelerates it.

This brings up two valid points. One, IR plans should include one, three- and five-year objectives and ways to measure them. Thinking long term about the function and conditioning the C-suite/Board to do the same avoids shortsighted decision making and rash assessments of the IRO's performance. Second, the best plan (quantitative) goals are SMART – Specific, Measurable, Achievable, Realistic and Timely. SMART IR goals should incorporate all of these criteria to help focus personal/team efforts and increase the chances of achieving success. IROs who use SMART tend to find a good level of C-suite support for IR efforts and are better able to show that IR adds value.

Although mentioned less frequently, the degree to which a company’s official perspectives on a particular topic are ‘echoed’ in sell-side research or media reports is another goal. It’s an attempt to gauge the effectiveness of the company’s communications in shaping shareholder opinion. The objective may be stated in a way that can be quantified, such as seeking to see the company’s investment thesis reiterated in at least 50% of all analyst reports in a year. Shareholder perception surveys are used both to inform IR plans and to gather evidence of the echo effect.

Qualitative Objectives

In the qualitative category, the IROs surveyed listed a variety of ways they measure progress, but agreed universally that goals should be grounded in a company’s ‘reality’. This means, for instance, that if a company does not have a disclosure issue, it should not waste time pursuing the goal of trying to improve disclosure.

That said, among the qualitative goals mentioned are:

• Improve the strength/value of sell-side relationships (an objective that could have quantitative measures attached, such as increasing the number of requests for marketing by 25%, but could also simply assess the quality of engagement(s) with the sales desk);
• Increase sell-side coverage (or create some in the first place);
• Improve the quality of investor meetings (an objective that could be assessed based on anecdotal comments collected after meetings, or on the level of engagement during meetings);
• Keep the Board informed of the latest trends in IR;
• Help the C-suite better understand the role and value of IR (an objective that is fairly common for IROs at small cap companies, whose executives could otherwise hold unrealistic expectations of the IR function);
• Move the annual meeting/annual report online (which may have quantifiable cost savings attached); and
• Introduce quarterly analyst conference calls (small/micro cap objective)

Although most IROs contacted said that they monitor social media channels as part of their daily routines, none specifically included a social media objective in their IR plans.

Strategic Versus Tactical

Some goals that make it into IR plans are more tactical than strategic, such as conduct an investor day. While hosting an investor day might be a good idea, there should be a higher purpose attached to it. For instance, bring attention to a new/important value creation engine within the company as a means of shrinking the relative trading multiple gap. The same is true of objectives that are based on activity levels. An IR plan might include a quantitative goal of hosting 100 investor meetings in the year, but to what end?

This raises a critical point: it’s important to carefully frame goals and the measures used to evaluate IR plans and personal progress. These will be closely scrutinized and could very well form the basis of IR budget allocations and staff pay increases.

Stated another way, demonstrating measurable success could establish a strong argument for higher IRO compensation and budget allocations. (On a related note, CIRI’s 2019 Investor Relations Compensation and Responsibilities Survey is now underway, with preliminary results slated to be unveiled at the Annual Conference in June 2019).

However, the big picture is that goals set – and hopefully achieved – should result in greater corporate value.

The IROs who contributed ideas to this article said that goal setting demands deep thought and considerable insight. The ability to develop SMART IR goals reflects a high level of professionalism and, in and of itself, engenders C-suite/Board confidence in the IR team. 

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