Dave Hughes
The work of investor relations is highly relevant to the work of the Board of Directors. IR is a strategic management responsibility, so it is essential to view the relationship between the IR team and the Board of Directors as an extension of that strategic focus and a key component of cultivating the strategic nature of IR.
In an age when investors are becoming more knowledgeable, have timely access to a great deal of information and are pushing for increasing stakeholder focus, effective communication between the investor relations function and a company’s Board of Directors is more crucial than ever. Governance continues to rise in focus, and investors are increasingly assessing Board effectiveness as part of their due diligence. This means IR teams are seeing much greater inbound communications related to governance topics.
What can IR bring to the Board?
There are several areas in which IR can add value to the Board:
Provide Timely and Detailed Investor Feedback
As the key interface between the company and the markets, the IRO is in a unique position to be able to provide timely feedback to the Board on how the market views the company, its performance, its peers and any concerns the investors may have. In essence, the IRO can provide insight into how investors think. This yields balanced information that is invaluable in helping shape not just decisions, but how the company approaches the market from a messaging point of view. It can help the Board understand and manage potential risks related to investor relations, especially in uncertain times or during a crisis – enhancing the effectiveness of the Board.
Provide Company Feedback to the Investment Community
A seat at the Board table allows the IRO to remain up to speed on the company’s strategic priorities and the rationale for its approach to business. The IRO can then provide appropriate feedback to the market for use in developing an investment thesis. This helps to ensure that messaging is consistent with what an investor may hear from a member of the management team. All of this is extremely important to effectively representing the company and achieving a fair valuation.
Facilitate Investor Interface with the Board
Often, investors reach out to a company with a specific request to engage with individual Board members, specifically Chairs of committees, on the issues they wish to discuss. For example, an investor looking at management compensation may wish to engage directly with the Chair of the Compensation Committee. As is the case in facilitating management/investor interactions, IR will likely be the first point of contact for investor/Board engagement requests. While there may be clear benefits to facilitating this type of engagement with key shareholders and other stakeholders, there are risks as well, and IROs would be well advised to be careful about staying within the bounds of proper disclosure. In addition, it’s important to consider how effective such an interaction would be and whether or not it would benefit the delivery of the company’s message. For instance, there may be little upside to the company in providing an opportunity for an activist to directly interact with a Board member, particularly if the activist is not a shareholder.
Developing Trust Between the Company and the Market
Working to maintain open, regular and effective lines of communication between IR and the Board will help IR build trust between the Board, management and shareholders. This is not only an important part of bolstering investor confidence but also is crucial when navigating activist campaigns or communicating in crisis situations. Investors are far more likely to give a company the benefit of the doubt after an unexpected adverse event (such as an operating issue or reporting unfavourable quarterly results) if the time has been spent to develop this relationship of trust.
How do you get access to the Board?
Given the importance of the IR/Board relationship, how does an IRO go about establishing it? Involving IR directly with the Board is not something all issuers do today, so identifying any sort of regular touchpoint may be an effort that takes some time. This means developing a plan to establish a rapport with the Board and demonstrating the importance of what IR can bring to the Boardroom table, benefitting both the Board and management.
Perhaps the simplest way to introduce the Board to the value IR can bring is to develop and provide a report before each Board meeting that updates the Board on what is happening in the markets. This is a good starting point because it does not require the IRO to attend the Board meetings, although attendance is preferable to facilitate discussion and address any questions the Board or management may have. The report should contain any information the Board and the management team would find relevant, including (but not limited to):
- Major shareholders and their holdings;
- Major buyers and sellers in the period;
- New/updated company sell-side research;
- Analyst ratings summary, including peer ratings;
- Pertinent competitor information and news; and
- Pertinent industry/sector news and updates.
A report of this nature can evolve over time, or be month-to-month, as relevant information changes.
Another opportunity is via regularly scheduled sessions with the Board to discuss not just the information provided in the report, but also the plans of the IR team (the IR strategy), including investor engagement ideas, anticipated management participation, major events (such as investor days and site visits), and discussions on major markets events (such as M&A in the sector or deep dives into the quarterly performance of peers). This type of engagement should probably occur quarterly, although this may vary based on what is happening in the sector and the markets.
Ideally, there will also be opportunities for IROs to participate in specific Board discussions. Given the nature of the role, IROs can also add value to Board discussions related to strategy and financial performance, and to committees such as Governance. Providing the investors’ perspective to these discussions can help not just the decision-making process but also the development of effective messaging.
An ideal IR-Board relationship includes elements of all of these types of interactions.
The IRO is an extremely important – even vital – link between a company’s Board of Directors and its management team, its investors and the market in general. The IRO is uniquely positioned to provide feedback to both the company and the investment community, as well as to build trust with investors. Ultimately, this improves the performance and effectiveness of the Board.
Dave A. Hughes is (retired) Vice President, Investor Relations, Imperial Oil Limited.