IR in uncertain times: Ricardo Alvial of Enersis

The first step in any crisis should always be to acknowledge its cause, and the current decline in global markets was surely triggered by growing uncertainty. Once the irregularities became apparent, confidence evaporated; consequently, banking relationships folded, trust waned and people everywhere began looking out for themselves.

The cold, hard numbers once again proved to be just that: mere figures, mere symbols. Ratios turned out to be no more than theoretical creations that, taken out of context, were only marginally useful, if useful at all. Apparently, sophisticated analysts and investors, including the ratings agencies, had forgotten the hard lessons learned before. So, once again, lack of credibility and rigorous analysis gave the crisis sufficient momentum for uncertainty to become the controlling factor in market behavior.

Dealing with doubt
Much has been written about the crisis. Business schools and government policy departments are overrun with papers about the consequences, potential solutions, critical opinions, policy proposals, and so on. But in the real world, where corporate officers are daily trying to boost investor and bondholder confidence, the task is more specific and challenging: it is, above all, to diminish uncertainty. This is without doubt the top priority for IR right now. 

IROs must do their best to secure precise information and present it in easily understood, simple terms. And they should remember that numbers are not the only tools for reducing uncertainty. Too many companies have boasted generous ratios, only for these to prove meaningless as their business has grown increasingly unstable. 

Reports from risk agencies have also been found wanting. According to the agencies themselves, their role is to provide an idea of the timeframe and nature of companies’ ability to repay their debts or meet their obligations. Again, however, the numeric indicators have failed to provide useful early-warning signs. 

All of the above reinforces the premise that the most effective way to reduce uncertainty is to return to the business fundamentals of the company. Figures act only as confirmation of virtues and to provide greater certainty of revenues – that’s all.

A few months ago at an investors’ conference I asked the panelists what was the best lesson they had learned in 2008. I expected to hear some degree of self-criticism, given that only six months before these same portfolio managers had been recommending, without qualifi-cation, the buying or holding of securities whose value, as we subsequently discovered, was based on accounting and financial fiction. Yet only one of the three acknowledged that he had perhaps been over-reliant on the ‘quick screen view’ of ratios, peer comparisons and key figures.

Of course, the dynamics of business often demand a pace that is incompatible with rigorous analysis, but that is hardly a valid excuse for portfolio managers whose investors have lost billions of dollars.

So there needs to be significant change, and on both sides. On the investment side, the analyst or investor must put more time into understanding the fundamentals of the businesses in which he or she intends to invest. We have learned the devastating lesson of spending too little time on this. Good portfolio managers are not defined by the size of their portfolio but by how well they know the companies they recommend.

On the corporate side, the IR team must be trained to provide key information about the business. This entails having a complete understanding of the strategic foundation on which the company’s future is based, as well as real knowledge of how the company interacts with its economic environment and the threats to its revenue flow and long-term viability.

The IR team must have a sound background in accounting and finance so that it can grasp investor concerns and respond appropriately. It’s not about relying on generalities or getting lost in a sea of numbers; the goal is to find a sensible medium between these two extremes.

Putting things in perspective
Today, with most share prices depressed and every stock looking like a bargain, it is more important than ever to have a clear understanding of the corporate perspective and of what it is based upon. If an investor wants detailed information, therefore, the IRO must provide it as accurately as possible. If the equity investor is too focused on the maturity profile, cash, balance sheet protection, and so on, it is the IRO’s responsibility to supplement the basic disclosure requirements with a more comprehensive and context-based perspective.

This crisis may well have taught both investors and IR teams some important and positive lessons: on the one hand, not to accept numbers and ratios as being the absolute truth, however sophisticated the models may be; on the other hand, to convey a message that includes an accurate summary of business fundamentals and not to bore the investor with graphs, figures and ratios.

In an environment of uncertainty, it is difficult to boost trust, whatever the resources injected into the economy by governments. Unless there is certainty, it will continue to be difficult to have confidence in the value of securities, whether equity or debt.

In this context, the role of IROs is more important than ever, but analysts, investors and ratings agencies must also pull their weight.