Investor Relations

Investor Relations

Introduction to Investor Relations

Investor relations bring together communication, finance, as well as marketing to manage the flow of information between the company, its investors, and stakeholders. It is evident from the definition that investor relations function in legal and self-regulatory conditions. As such, investor relation professionals conduct activities that may differ, such as essential and obligatory activities and self-regulatory or optional activities. Basic or minimum level activities mean adhering to legal requirements or fulfilling duties of one-way communication with shareholders. On the other hand, the non-obligatory or optional level activities focus on mutual communication that is economic or financial in nature between the organization and its investors, particularly potential shareholders. The growth and success of an organization depend on the contributions of the stakeholders. Therefore, it is imperative that companies maintain transparent and healthy relationships for their investors. Undoubtedly, this is the point where the role of the investor department comes into play.

The Origins and Fundamentals of Investor Relations

From its inception, investor relation was connected with public or corporate ties. However, it was at the start of the 20^th century when companies begin to provide specific services that included defending company reputation in the press. Initially, companies had a policy of not commenting on press reports affecting them. However, as the media continued to influence public opinion, the non-commenting system of companies caused anxiety and even decreased investor confidence. Therefore, it became necessary for companies to pay journalists and consider them as a critical component in creating a positive perception.

The General Electric (GE) coined the term investor relations in 1953. Notably, that year, the company developed a program that seeks to attract individual investors to invest in the shares of the company thanks to its specially designed communication strategy. In the end, the plan was known as Investor Relations.

It was not until the 1960s when investor relations were considered as an autonomous area. Unfortunately, negative perceptions had been created about the concept for a long duration. Due to the negative impression created against investor relations, the departments of investor relations encouraged both individual and institutional investors to consider buying shares and persuaded analysts to provide favorable recommendations.

In Europe, Germany can be used to illustrate the development of investor relations. The first department of investor relations was established in 1988 in BAS AG. The new department was created to enhance communication with the investors of the institution. It must be noted, however, that the development of investor relations in Germany occurred after the privatization of enterprises that were owned by the state through the stock exchange (https://www.tandfonline.com/doi/full/10.1080/1331677X.2016.1265894). In summary, before 2001, it appears that the primary aim of investor relations was to sell the financial instruments of companies in the market and provide reports of results according to the requirements of public security trading laws. The laws regulating such public trading focused on the minimum information that could be provided, the deadlines for the disclosure of information, and the notification mode.

The tasks were delegated to the departments that were dealing with customer care and public relations or specific spokesmen of companies. Also, there were instances when investor communications were outsourced to external companies. Nonetheless, companies published only mandatory information required by law. Most of the people that were involved in investor relations were working in sections of other departments such as public relations that were answerable to people of low cadre positions. It means many companies downplayed the critical role of investor relations in the past.

The critical role of investor relations increased clearly during the crisis that occurred early in the 21^st century. At the time, public companies were under stricter rules, for instance, disclosure obligations and the introduction of tightened sanctions for improper fulfillment of obligations (10.1111/1475-679X.00037). The Enron case and bankruptcies in America from 2001 to 2003 can be used to illustrate actions that preceded the extra commitments and requirements. The Enron case, for instance, was unexpected because the company did not send disturbing signals. Instead, the firm’s financial statements had predicted high profits with asset values that were measured in terms of billions of dollars, causing the share price of the company to grow impressively.

Due to the bankruptcies in American banks, various investors have begun to state their demands more loudly, demanding that public companies communicate differently. Besides, the worrying activity forced the departments that were responsible for investor relations to institute various changes. While the case of Enron may not be attributed directly to the changes, it undoubtedly hastened them. The changes were undoubtedly necessary because the market needed to overcome aggressive accounting as well as tendonitis tendencies as the media described them at the time.

The changes witnessed in the market ensured proper implementation of duties according to public laws on public securities and assured a two-way communication with company stakeholders in public companies. The shift in communication strategy created a new way of thinking about companies. It is worth saying that a new era of investor relations was built with public companies using modern tools of communication to enhance shareholder interactions (https://www.tandfonline.com/doi/abs/10.1080/1553118X.2014.908296). The companies that implemented the new changes enjoyed benefits such as bonuses as well as lower risks in market price. Consequently, the new standards of investor relations forced directors of companies to establish real changes in the conduct of businesses and how to convey information regarding activities, plans, as well as company status to its shareholders. The condition of investor relations officers has risen thanks to the changes.

Reputational Approach to Investor Relations

In the stock exchange market, the process of decision making is always in the hands of investors. Such decisions, however, depend on the management of public companies, particularly the experience, competence, and image created by top executives and directors. Image-building remains a crucial tool in winning over investors who seem unconvinced and intrigue potential investors who may not have heard of the company before. Apparently, the departments of investor relations have continued to grapple with the challenge of image-building. It is necessary to note that implementing the promises made to investors depends on the company’s board (http://www.ekof.bg.ac.rs/wp-content/uploads/2014/06/209.pdf). As such, a company must take off the image if its top executives and directors because productive investor relation activities regarding the building of model improve the perception that an organization and its owners are reliable. Investor confidence increases with increased capacity to raise finances in the capital market, which ensures that the company remains stable during crises.

The management of companies that are regarded as credible has greater freedoms for actions along with lower-level social control. Therefore, investors who have high confidence in the boards of their companies are more willing to support some of the decisions that might appear unfavorable in the short-term and those that are actually not right. These different aspects have direct impacts on the reputation of companies. However, reputation is broader that does not only imply image. Significantly, status is long-term and has several factors, which lead to different pictures of the company. The factors influence corporate identity, financial reliability, product or service quality, organizational strength, ethical standards, as well as relations with existing market regulators. The departments of investor relations management have an essential role in reputation management(https://scholarworks.gvsu.edu/cgi/viewcontent.cgi?article=1006&context=com_articles). A positive reputation by the shareholders yields several benefits to an organization.

Financial reputation, which forms part of the status of a company, is a tangible asset with a direct impact on the value. The status helps to derive better results, obtain additional financing using better terms, attract valuable workers, and set competitive prices. The benefits are attributed to the activities of investor relations in the management of brand image. Financial reputation may change based on how a particular company is perceived. When assessing the competence of the administration, investors will consider the following critical issues:

• Quality of financial outcomes,
• Development strategy,
• Corporate governance principles
• The credibility of commercial information or supplementary data

Employees in the investor relations department should have extensive legal, commercial, and economic knowledge, alongside coordination and organizational skills, which are very important when preparing annual general meeting reports. Failure to communicate with stakeholders who form the financial community may lead to financial or criminal penalties or both. Disgruntled shareholders may institute civil suits against executives or directors who fail to communicate economic issues (10.1016/0304-405X(96)00883-5). Such lawsuits significantly dent the company image, which is then reflected in the market value of such as the public company.  Depriving a company its federal status is the most significant sanction that it can be subjected to, and investor relation departments often consider such issues seriously. It is crucial to emphasize that participants in the capital market are not so interested in investor relations departments organizing communication. Instead, capital market participants want the activities of investor relations to contribute to reduced investment risks through reliable information regarding the status and operating environment of the company.

Business success is About Constant Communication with Various Stakeholders including Investors

The quality of investor relations departments is an essential non-financial factor that affects the decisions that financial communities make and their perceptions regarding a given company. More disclosures in on the performance of a company in the capital market improve shareholder interests. The magnitude of communication requires the competence and experience of staff in the investor relations department.

It is advisable for companies to hire qualified staff then train such staff regularly to learn to become more professional and reliable in their communication. Participants of capital markets judge information from a company based on appreciation for as well as respect for the investor relation professionals working in the companies. An investor relations team that manages to create a reputation is better placed to collect appropriate information from capital markets, dismiss rumors or false information, as well as manage the financial community and the top management. However, investors still depend on existing governance structures to ensure companies are distributed according to the wishes of investors.