Don't take risks with investor relations

Tony Featherstone warns that lax investor relations processes spell trouble and missed opportunities for some listed companies.

A glaring deficiency in executive ranks is the lack of specialist investor relations (IR) professionals in listed companies outside the S&P/ASX 100. Boards are exposed to significant risk if their organisations do not have deep expertise in this fast-moving, increasingly complex field.

Of course, not all small listed companies need a dedicated IR professional. Some cannot afford one; others get by with support from IR consultancies. But there are few excuses for ASX 300 companies to operate without an experienced IR specialist.

Ian Matheson’s comments in last month’s Company Director were timely. As the CEO of the Australasian Investor Relations Association, he has an obvious interest in this issue, but his view should be a wake-up call for boards that have not considered the strength of their company’s IR systems. He said: “Many top 100 ASX-listed companies have very good IR people, but you don’t have to go far beyond the top 100 to find organisations without a dedicated IR professional. There are even a few within the top 100 without dedicated IR staff. It creates a significant risk that the organisation’s financial reporting will not be communicated effectively to the market and in a timely fashion.”

Put another way, lax IR processes heighten the risk of continuous disclosure breaches, litigation and shareholder class actions – and they increase the risk of director liability. Poor IR is also a lost opportunity for companies to communicate their strategies and performance to the market.

I cannot understand large listed companies not having a high-calibre, dedicated IR professional or two. Or their boards being satisfied to receive advice from executives who are not solely focused on IR issues, or only from external consultancies not involved in the day-to-day operations.

Consider the growing complexities of IR for boards. The regulatory bar continues to rise, with greater pressure on boards to ensure market information is released “immediately” to the market, which means “promptly and without delay”. Knowing what to disclose and when, and informing the market correctly, requires specialist IR support, at least for complex transactions or in fast-changing market conditions.

Moreover, the need to ensure all investors can access the same information – at the same time – has become a big issue, with the Australian Securities and Investments Commission rightly concerned about the risk of companies providing selective analyst briefings. Again, the interaction between larger listed companies and financial markets requires specialist IR support.

Complexity is another issue. As listed companies grow, become more diverse and spread into more countries, they communicate complex information to a wider range of investors in different jurisdictions. It is no surprise that more sell-side analysts with technical backgrounds are moving into IR. The shareholder base is also becoming more complex for larger listed companies. The combination of retail investors, index funds, active fund managers with different investment styles, hedge funds, shareholder activists and potential predators means different communication strategies are needed.

Heightened market volatility also strengthens the case for dedicated IR professionals. Financial markets seemingly move faster each year, reactions to market surprises are more extreme and high-frequency trading is changing equity market dynamics. The rise of social media adds to the risk of misleading information and a false market in securities, and puts the onus on companies to scan key information sources and correct any misinformation.

Risks aside, a robust IR function also creates opportunities for boards. High-performing boards, with the support of the IR function, understand their shareholder base and the different information needs of investor segments, and whether the company’s strategy is appropriately aligned with its investor base. They are also comfortable with the interaction between the company and global financial markets, and know the company’s strategy, performance and governance is being communicated to the market and media in the right way, to the right people, at the right time. This is a key issue for smaller companies that must sell themselves to the global investment community.

That does not mean IR professionals should be C-level executives or that boards need to recruit directors with specialist IR skills. But it does require boards to ask whether their companies have sufficient depth in this field.

As part of their normal risk-management oversight, boards should test the IR systems and processes and be satisfied the company can reliably meet its continuous disclosure obligations and communicate effectively with stakeholders. They should ask how the company would respond to a crisis, such as a hostile takeover, that requires immediate and deep IR expertise. If they rely on an IR consultancy, how strong is that advice and should the service provider be rotated if it has done the task for many years?

Hopefully, most listed company boards have thought about this issue and are confident in their IR support. But it is hard to be optimistic when even a few ASX 100 companies choose to operate without dedicated IR professionals and expose their directors to myriad information risks.