Four IR tips to avoid short-termism
‘Investors should purchase stocks like they purchase groceries, not like they purchase perfume,’ wrote renowned investor Benjamin Graham. And yet many self-professed ‘fundamental investors’ fail to take an active interest in what fundamentally drives the businesses they own; they’re far more interested in the next two years than the next 20. This can create unnecessary tension and uncertainty, ultimately manifesting in a depressed valuation for the company in question.
The source of short-term thinking may be closer than you think…
While many IR teams might decry the value-destructive nature of such short-termism, the root cause of such a mentality can often be traced back to the company itself. An investor relations team that emphasizes short-term activity over longer-term fundamental forces should not be surprised when shareholders then judge failure or success based on short-term results.
Understanding the fundamental forces that affect a company’s value can be a key tool in attracting the right type of investor, aligning shareholders with management and lifting the firm’s reputation within the capital markets. Moreover, it can make shareholder engagement far more productive and create a real long-term dialogue. Of course, answers need to be provided to an investor’s questions, but a reply, if framed correctly, should be helping to actively lead the conversation rather than simply follow it.
Context, context, context
Any IR team will have an arsenal of techniques at its disposal to achieve greater investor long-termism. A key area that can quickly yield favorable results is adjusting how company performance is framed. Business and financial highlights are necessary across any given period, but what is so often desperately missing from performance reports are long-term charts illustrating trend performance over time. For instance, a simple bar chart showing sales over 10 years, accompanied by the compound annual growth rate over that period, would entirely change the tone and direction of a conversation. A shareholder’s obsessiveness over a single period’s results would suddenly seem petty, and the dialogue could be shifted to the factors shaping performance over the decades to come.
There are a variety of other levers that can help provide much needed long-term context to short-term numbers. These include providing details on long-term structural trends, a clear, concise long-term strategy and mission, plus disclosure regarding environmental and social considerations. That final point is proving particularly important, as investors become increasingly concerned about the social and policy risks arising from the impact a company has on its environment. Disclosure regarding social and environmental considerations, even if it raises concerns, will go a long way to demonstrating that these risks are being monitored and mitigated by management. Out of sight is no longer out of mind.
Bring the conversation back to basics
A further tool at an IR team’s disposal is to thoroughly ground any engagement in reality. Remind investors that underneath all the headline numbers lies a company, something that is more than a financial instrument or academic curiosity. This is often forgotten, and the wood is missed for the trees. Some of the best IROs I have come across will start a meeting with a brief overview of the company’s key operational activities and markets. No matter how well someone on the buy side might think he or she knows a company, bringing the conversation back to basics will re-engage an investor with what fundamentally matters.
Relevant photos, maps and even a short presentational video on the website can all also breathe life into an otherwise dry IR effort. These are basic but powerful antidotes. Anecdotal industry insights also add flesh and character to the numbers, engaging investors with the company’s long-term journey, rather than treating them as mere onlookers.
Understand how to value in order to then promote it
Investor relations is a critical role, one which has a considerable impact on how a company is perceived by the market, and a position where credibility is key. A thorough understanding of how a company is valued will create an informed awareness of what drives value and how best to frame shareholder engagements. Correctly prioritizing any conversation in this respect should help reduce stress, ease stakeholder tensions and enhance long-term value creation.
Charles Sunnucks is a former fund manager and author of The company valuation playbook, an easily accessible step-by-step guide on how to perform fundamental analysis and valuation