What makes great Investor Relations?
At TDM we often reflect that the difference between a good and a poor investor relations effort can mean the difference between a company trading at a chronic discount to fair value or indeed the opposite!!
We have also seen a number of other benefits for companies who excel at investor relations, and these largely include, but certainly not limited to;
· Higher quality investor interactions and conversations — that is, less time spent on clarifying facts and more time on value additive discussion between management and engaged shareholders. This often means also that there is less overall management hours spent and invested for a similar result. Win/ Win in regards to both efficiency and quality!
· Ease of attracting new investors — there is certainly less friction to a high quality shareholder register if IR is of a consistent high standard.
· Higher valuation (multiple rating) as a result of more transparency and trust
We believe many companies continue to under-estimate the benefits of a top quality IR function and to our mind, any investment in high quality IR actually saves management’s time in the long run. Often the inverse is assumed — that is, the more time spent on IR, the greater the time management are diverted from running the business. This is simply not the case.
For this reason we spend a lot of time helping our investee companies think about ways to improve their approach to investor relations.
As everybody loves an acronym, we can easily come up with one which captures the key ingredients of a great IR effort. Consistent, Clear and Comprehensive.
There also has to be an overarching framework of fairness and a commitment to equity of treatment of all shareholders. That is why we believe all earnings calls there should have a dial in and transcript; why there should be a blackout period leading into earnings calls; and why it is not ok for management to say “don’t worry, we won’t put this information into the presentation but I am ok telling some valued shareholders at our discretion”. The trust destruction from not being equitable will eventually only be matched by the share price value destruction it causes.
Great Investor Relations is…
…Consistent
The more consistent, the easier it is for investors to join the dots around basic inferences in regards to period to period performance. Think of it as your gift to investors that frees up mental capacity to focus on the important new information being disclosed. Everyone is short of time, they will reward you for giving some of it back to them.
A classic example of what not to do is to change basic financial metrics disclosed or present the same information in different ways. Many companies mistakenly believe that by presenting IR materials in a new or ‘fresh’ ways is more important than consistency. This is fundamentally not true. Think of yourself like the local favourite eatery… there is great comfort as a customer in knowing what you are going to get and great annoyance when you go for your favourite pasta, only to see a change in menu.
Many companies chop and change disclosure and miss the point that every hour an investor spends on unnecessarily piecing together a puzzle, the less time they have to focus on learning and digesting incremental information provided.
We’ve also seen companies continuously update power point templates and table styles — we believe you lose much more than you gain from these distractions.
…Clear
Warren Buffett sums it up well — when he is writing his legendary Berkshire annual letters he aims to make the letter accessible as well as informative, and he’s careful not to include too much jargon. To keep it readable, he writes the letter as if he’s talking to his two sisters.
“Berkshire is pretty much their whole investment, and although they’re smart, they are not active in business, so they’re not reading about it every day. I pretend that they’ve been away for a year and I’m reporting to them on their investment.”
It’s not a bad test. A trap we see many companies fall into is to assume too much knowledge. Yes, it can be very painful engaging in repetitious storytelling, but refreshing investors on the basics upfront is key.
Assume that many of your investors are hearing you for the very first time. How do you describe your business to somebody outside of the investment community at a BBQ in less than 2 minutes? There is a surprisingly high failure rate when it comes to companies perfecting their “elevator pitch”. Perfect it and use it over and over again.
…Comprehensive
Does the information tell the whole story? A good test here is whether management is having to field a number of similar questions following the release of results. If so, a fair bet that information is missing. If a company intends to answer these questions, it will leave investors a little bewildered and as to why they have not been addressed upfront for the benefit of all shareholders. This is a good example of good IR actually increasing the efficiency of management — by not addressing the questions in written materials, management ends up taking the time consuming (and more difficult option) of needing to repeat the same responses to numerous investors.
A company we love, Twilio is an interesting case study. Twilio is a software based communications platform enabling developers to build messaging, voice and other communications applications.
In this case, we would argue that up until recently, Twilio’s investor communications were consistent, clear but not comprehensive. In their 2017 investor day, they produced an impressive set of investor materials, but provided very little information in regards to both the composition and drivers of revenue. In their latest investor day, we saw significant improvements, with a range of new disclosures on both of these important pieces of information. See the table below for a side by side comparison.
From our perspective, this has dramatically improved transparency and presumably made it easier for management to answer the obvious questions.
It hasn’t hurt the share price either, with Twilio delivering a c12x return for shareholders since December 2017! 😲🚀
A case study..
Closer to home, a company we have been invested in for 16 years, Mineral Resources, is one of the best examples we have seen of a total shift in all three dimensions. If you look at the 13 year progression with how they communicated with investors, you can see why the company’s investor base and market rating has transformed over this period.
How it started…
Full investor presentation https://clients3.weblink.com.au/pdf/MIN/00751450.pdf
How it is going…
Full investor presentation https://clients3.weblink.com.au/pdf/MIN/02268300.pdf
Some ‘no brainer’ suggestions…
We believe many of the US companies we follow could get some easy wins from basic improvements. We consider these low effort but very high impact tweaks that are surprisingly still not adopted by many companies.
1/ Latest investor deck, date of update clearly marked — Coupa provides a great example of this
2/ Transcripts for all investor presentations/conference calls — Facebook could be considered best in class
3/Data sheet showing time series for metrics / financials routinely released — Chegg do this routinely
4/Investor day “pre reads” to get investors up to speed and so the information provided is value additive — Amazon originally championed this, but Atlassian have taken it one step further, with 3 six page documents, that sit beside their investor presentation.
Investors have a role to play too…
The overall quality of an investor relations function is similar to any other function in a company in that it requires both quality leadership in that specific domain but also the support of the C-Suite and board at a cultural level. Companies either subscribe to and support a high quality investor relations effort or they don’t. Often the investor relations approach can mirror the internal values of a business — are we transparent about challenges and opportunities? Are we focused on consistent execution and doing what we say we’ll do? Are we focusing on the long term or the short term? Do we see our investors as partners or a necessary evil? Are we willing to have an open an honest conversation with our investors if they are not holding up their end of the bargain?
As much as the attitude and approach of companies can drive successful investor relations outcomes, we believe there is also a role for investors to play. In our view, excellent IR efforts should be rewarded with better investor interactions and this requires investors to uphold their end of the bargain.
A recent blog from the Asana CEO gave a fascinating insight into the challenges companies face when dealing with certain investors:
“I like to spend my time growing Asana for the benefit of staff, customers and shareholders. I understand it is valuable to engage with potential new investors who believe Asana is a potential investor for them. If I arrange a meeting with you, please take the time to read about the company first. It’s never ok to ask “so tell me what Asana does”. I would hope that if we are meeting for 30 minutes you have done at least 30 minutes reading prior and hopefully a lot more.
We loved this open and honest approach to what is not acceptable behaviour from investors. It is no doubt a two way street.
Surely all investors should know what is expected of them when requesting management’s valuable time?
The code between company and investor should perhaps go something like this:
Dear Investor — I will give you a reasonable amount of my time each year if you value each minute of my time the same or higher than yours and recognise that every minute I am spending with you is a minute less that I can spend running the company. If it’s clear to me that you don’t value my time then I have the right not to meet with you in the future.
Perhaps each investor requesting a management meetings should consider populating the following questionnaire. With the onset of Covid there are many great apps which could effectively capture this information prior to a meeting being organized:
· Do you know the basics of what the Company does?
· Have you read most of the publicly available information which has been released over the past 6 months?
· Do you agree to not ask any questions which have clearly been answered in recent transcripts?
· Do you agree not to ask me questions on things that we clearly haven’t disclosed and have said we wont disclose?
· Do you agree not to ask us ridiculous questions like : “is your guidance conservative” and “can you recap on the last quarter”
We are always surprised when we ask management about what level of preparation investors undertake before meeting with a CEO or CFO. On many occasions we are told that XYZ investor had turned up to the meeting seemingly with zero preparation.
Everyone’s time is valuable but a CEO’s time is a particularly scarce commodity.
We typically spend many hours preparing for a meeting with company management. We try not to ask anything we could have read in publicly available information. We find that if we respect management’s time with thoughtful questions we win the right to engage as partners. Ideally we add value to the conversation through insights and feedback. It’s a two way street.
In summary, through applying simple principles better, companies can improve their rating, quality of investors and reduce time wasted on low quality investor conversations. This, combined with investors realising that they have an obligation to value management’s time properly and that there is a consequence of not doing so, will undoubtedly make for a real win win for all around the table.
Thanks to Ben Gisz, a TDM co-founder, for taking the time to write this
