When Meghan Brown became Director of Investor Relations at Endeavour Silver Corp. on March 1, 2013, she never dreamt that her first major project would be slashing the IR budget 40% after gold and silver prices suddenly tanked. She reached this ambitious goal by making some dramatic cuts to advertising and to paid roadshow tours, but then faced another 20% cut the next year.
“I didn’t make many friends when I cut those programs, but it had to happen,” says Brown. “And guess what? The world kept spinning.”
Brown’s experience, which is extreme even in the mercurial corporate environment following the global downturn of 2008, is far from unique. In fact, in the biennial IR Today study conducted by the National Investor Relations Institute (NIRI) and Korn Ferry International and released in June 2014, IR budgets saw a slight shift downward for the first time since 2008.
A Detailed Plan
Although budgeting has a reputation as a tedious exercise, it’s really just the practical side of crafting a strategy.
“Everybody looks at the budget as being a painful experience, but it doesn’t have to be,” says Curtis Pelletier, Manager, Investor Relations, at Parallel Energy Trust. When it comes to successful budgeting, Pelletier is convinced that one’s mindset matters. “The way I’ve changed my approach is the IR program has to drive the budget; the budget can’t drive the IR program. When you let the budget drive the IR program, you’re no longer working towards your program. You’re working towards the cash or the capital available to manage your IR program.”
Rudy Sankovic, Senior Vice President of Investor Relations at TD Bank Group, always begins his budgeting process by envisioning the IR department’s key objectives and the activity levels he desires for the coming year. Before crunching any numbers, he advises sitting down with the CEO or CFO to discuss priorities. “You really want early buy-in,” he says.
Sankovic believes in using “history as a guide.” When planning for 2015, he knew that he and his IR team had 325 meetings in total during 2014 and so he started with that number and then made adjustments.
That said, Sankovic urges IROs to anticipate any potential changes in the coming year. For instance, Bharat Masrani became CEO at TD on November 1. “We have a brand-new CEO so, of course, we’re going to spend more time next year profiling him with investors,” says Sankovic. He also indicated an intention to ramp up the bank’s global IR program in Europe, Asia, and the Middle East, and to pay greater attention to fixed-income investors.
Once concrete goals are identified, Sankovic works backwards, asking how much time each task will take, which executives might be involved in the projects, and what each of the new initiatives will cost.
For Sankovic, the budgeting process spans two months but the lion’s share of the work is done in a single week or two. The budget is incorporated into the IR team’s planning document, which usually runs about 25 pages in length.
Anne Plasterer, Executive Director of Investor Relations at Newalta, also emphasizes the strategic aspects of the IR budget: “I’m always aligned with the CEO’s and CFO’s plans so I don’t have any struggles getting the budget approved because everything we’re doing is with them and for them.” She continues: “Everything in your budget should tie back to the strategic targets you’ve already developed and had approved by management.”
Knowing the Norms
The IR budget varies greatly by company size and by industry. Marie-Josée Privyk, Director of Investor Relations and Sustainable Development at Innergex, points out that at a smaller company like hers budgeting is not a time-consuming task.
When determining what constitutes a reasonable ‘ask’ in terms of an IR budget, it always helps to know industry standards. According to CIRI’s 2012 IR Compensation and Responsibilities Survey, staff compensation is usually the largest percentage of the budget, followed by roadshows and site visits. IR budgets vary by market cap, with $1.47 million the average at a large cap company ($1 billion and up), $575,000 at a mid-cap ($100-$999 million), and $335,000 at a small cap (under $100 million).
Comparing the dollar amounts of budgets isn’t necessarily illuminating because there’s no standard for what categories should go into an IR budget. Some public companies include the IR teams’ salaries in their budgets; others don’t. Some include listing fees in the budget, while at other companies listing fees and other disclosure expenses fall within the purview of the corporate secretary. And some IROs share the expense of website improvements with the communications department, while others bear the full brunt themselves.
Plasterer points out that even the soundest plans can be disrupted by unanticipated events. If, for instance, an activist investor surfaces or the company becomes involved in M&A, it’s easy to wrack up large additional expenses, she cautions.
“I always have cushions, but sometimes the cushions aren’t enough,” she says. And yet in Plasterer’s experience, additional expenses that stem from unforeseen events rarely rattle management so long as payouts are clearly explained and documented. “When things like that happen, you generally get a pass,” she says.
Brown agrees, noting that “the initial budget is a starting point, but it’s also a moving target.”
Deep Cuts
When Brown was asked to make draconian budget cuts, she recalls that the first 20% in reductions were easy to find because of “low-hanging fruit.” For instance, she cut a banner ad on a mining website that cost the company about $68,000 a year. “We don’t have a product we sell like Nike and Adidas so we don’t have to advertise that way,” she says.
Brown also took a scalpel to roadshow companies that charge to arrange marketing trips. With 70% retail ownership, Endeavour was eager to add institutional investors – a goal that could be best accomplished with brokers who plan roadshows free of charge.
Once initial cuts were made, continuing to pare does become harder, she admits, noting that her 2015 budget is approximately $285,000, excluding IR salaries. She also points out that slashing the budget can make an IRO unpopular. “For me,” recalls Brown, “I was brand new and I was not making any friends.”
Sankovic is also an experienced budget cutter. Although initially asked to keep his budget flat, he decided to reduce it by 20%; his current budget is $2.1 million, compared to a peak of $2.6 million just two years ago. “I felt that the department could do more with less, travel a little less, and change our vendor contracts.” He continues: “We didn’t have to go that deep but we thought it was the right thing.”
Some savings came from whittling a 12-person IR team to a nine-person one through attrition. Sankovic notes that about half of TD’s current $2.1 million budget consists of IR salaries.
Beyond staffing, Sankovic became more selective about foreign travel and the frequency of overseas conferences, communicating more via videoconferencing. Finally, he carefully examined vendor contracts and halved the cost of some external services by moving to a new service provider.
Going Forward
Sankovic notes that not only do IR budgets have a tendency to creep upward, but so does the time IROs devote to the budgeting process itself. He’s put the brakes on this expansion: “We’ve said we don’t need this much detail or this much time put into budgeting. At the heart of it, budgeting is simple: It’s figuring out your objectives, the resources you need, and how you execute.”
When asked whether IR budgets might soon rise again, he responded: “I don’t think we’ll see that for a while. We’ve been able to show we can still run with the leaner level we’re at.”
Plasterer also sees advantages to the greater fiscal restraint of recent years. “From a budgeting perspective, you definitely have to make trade-offs when looking at new things coming down the pike,” she says. “You don’t want to keep growing your budget. It’s prudent to be creative and always look at ways to save money as much as you can.”
Perhaps because of the extent of the cuts made at Endeavour and the inevitable ups and downs of the precious metals sector, Brown is less a fan of austerity and eager for brighter days: “Our strategy in a bear market, like we’re in now, is to trim the budget down to bare bones. If things start to improve mid-year, we usually can get Board approval to start layering things back on.” She concludes: “When things get frothy again, I know we’ll blow our budget, but with good reason.”