Mark Dunne reports.

When milk processor and distributor Robert Wiseman Dairies (RWD) joined the Official List in 1994, the board was looking to expand the business using funds raised by the flotation.

It had been a family run firm since 1947, but with the IPO the directors understood that the days of financial secrecy were over; the new shareholders were now to be kept informed of business strategy and performance. In short, RWD had to develop an investor relations [IR] side to the business.

Just prior to the flotation, the company set up a new Website for investors to access information. Risk management and strategic planning director Douglas Laing says RWD did not have the resources or expertise to build the site in-house and so approached several companies for assistance, eventually deciding to use financial data and IR services provider Ipreo [formerly Hemscott IR].

“They certainly had the greatest appetite for it,” Laing adds. “As we weren’t a big name, it wasn¹t going to be a huge fee earner for a lot of the other ones ­ so they didn¹t have the same enthusiasm.”

While the site has had a limited success for the business as a whole, it’s been essential for making the company’s financial information available. “It has taken away some of the administrative burden from ourselves,” he admits.

“If people want to find something out about the company it’s a good starting point and gives them a contact.” Good practice Ipreo¹s work with RWD highlights the value a positive attitude towards IR can bring to a company, but the role is not just about keeping shareholders happy. It is also about attracting new investors through managing meetings and road shows.

Michael Mitchell, general manager of The Investor Relations Society ­ an organisation that provides training and best practice guidance for the industry ­ says the goal of IR is to act as a conduit between companies and its investors to keep the value of the business healthy.

Mitchell: “It has never been a more important time for companies to develop excellent communications with shareholders. We have seen the rise of activist investors as shareholders and it highlights the need for companies to understand the views of their investors.”

This is a two-way process. With good IR, managers are able to explain their strategies to investors. Meanwhile, it also helps company managers to understand what the majority of their investors are looking for.

Mitchell believes IR does not make a bad strategy good, but can help to create a fair valuation of the company’s equity. “In a number of cases we have seen companies taken over or taken private by private equity operations, and valuations have not recognised the full worth to existing investors,” he says.

Win-win

Helping to build a fair price for a company’s shares benefits the business and the investor, says Edward Firth, managing director of the IR team at Financial Dynamics. “Everybody has got an interest in the share price going up.”

Mitchell concurs, claiming that it is crucial the industry is seen to benefit both parties. He claims IR is failing if a company’s shares are undervalued, adding that examples of this are where management has not responded to the market and the activist investors have come in.

Mitchell: “There is a saying that you get the investors you deserve. If a company is well run and has delivered what it has promised, then you tend to have investors who are happy and pleased to remain with the company. The opportunities for activist investors come with companies that have underperformed.”

A company’s IR operation can be the difference between getting fair value for its shares, but the problem is measuring success. “This has always been the $64,000 question,” Mitchell says. “One of the simplest methods is to do a peer group evaluation. What I have always felt is that you cannot buck the trend of the markets.

“If you are in a sector that is out of favour, it is difficult to buck that trend individually as a company. But what you can do is measure yourself against other companies in your sector and if your share price has been under-performing then maybe there are reasons why you can look to what you are doing or how you are explaining it to the market.

“IR can’t be a substitute for a sound strategy. But what you can say is if you’ve got a good strategy and we’ve used the communications tools to the best of our ability then at least we have got the message out to the market properly.”

For Firth, another method to measure the success of IR is to look at the feedback. “My own view is that the best judge is to look at your share price. Clearly that is driven by any number of things and there could be several reasons why your share price is bombed out. But if you are a company with good growth prospects that is trading at a substantial discount to all your peers, you have a problem with investor relations.”

Moreover, new research claims institutional investors may not see IR as an essential business tool. In June, accountants Baker Tilly and law firm Faegre & Benson released the results of a survey of AIM companies. Both companies spoke to 201 AIM companies, 50 private companies and 51 institutional investors.

The survey showed that 51% of the institutional investors polled considered IR to be effective. Nevertheless, one in three still viewed IR as a problem.

Mitchell claims these results reflect a trend he has seen with AIM companies and with some of the smaller businesses on the Official List.

Mitchell: “It is difficult for them when they list to make that transition from being a company that is run by an entrepreneurial team that have been accountable to themselves to being a public company where you have to be accountable to shareholders.” He admits that his organisation should be doing more to help companies understand the advantages of good IR.

George Stinnes, head of IR at British Airways, believes 51% is a good score. “IR varies in terms of how people do it in-house,” he says. “On one extreme you have a junior person who acts as a booking agent for the CFO or the CEO. At the other extreme you have companies that make it a serious commitment and have the head of IR as a senior role in the business.”

Firth, meanwhile, was puzzled by the poll’s results: “I would be amazed if an investor believes that IR doesn¹t add value. I don’t see how else they can get day-to-day information. It is impractical to imagine that a CEO or a CFO is always going to be at the end of the phone.”

Baker Tilly and Faegre & Benson’s research also highlighted a problem with promoting the need for adopting an IR role. Of the companies researched, 51% received an introduction to or instruction in IR as part of the IPO process.

One company ready for the need for good IR post-IPO was RWD. “The group finance director was brought in at the time of the flotation; he was also the company secretary, so he always had that within his remit,” Laing said.

Despite RWD¹s preparation for its post-IPO responsibilities, Mitchell believes his organisation should be doing more.

“When you are listing there are all sorts of hurdles to jump over and it’s a time-consuming and expensive process to go through. I suspect a lot of small companies breathe a huge sigh of relief once they have the listing and say ‘right, I can get back to the day job’. But they do understand that there will be different demands on them once they become a listed company and being pro-active with your investors is one of them.”

Firth agrees, claiming that not enough is explained to listing companies about life as a public company. “You only have to look at a number of high-profile cases in the last six months of companies that have come to the market, have raised a substantial sum of money and made no plans for on-going communications with the investment community at all.” He adds that institutional investors should make it clear to company directors during the IPO process that IR is a serious matter.

Firth: “For a lot of private companies, it is an area they have never heard of. They don’t realise there have to be day-to-day communications, with people asking questions such as ‘when am I going to get an annual report’ or ‘what is your strategy for the next five years’? You have to have people, or certainly somebody, who is available to answer those questions.”

See also: After the float