Investor Relations (IR) integrates finance, communication and marketing to efficiently manage the exchange of knowledge between a public entity, its investors and its stakeholders. This article is intended to help you better understand the importance of investor relations in the broad sense and to contemplate the role of CFO in this regard.
The Importance of Investor Relations
In the past few years, IR has grown rapidly, and it is difficult to believe that it is not a significant function of large corporations with a foreign shareholder base. It provides substantial support for a company’s financing and is therefore directly involved in value creation.
Investors play a big and vital role in a company’s success and development. Mostly every company owes a debt of gratitude towards its investors for not only getting the business on its feet but also for continuing its operational success. Because of that fact, maintaining strong and transparent relationships with the investors is of utmost importance to companies. It is here that a firm’s department of investor relations comes into play.
IR is a strategic management responsibility that is required to be met incessantly, especially for publicly-traded companies. It integrates finance, communication, marketing, and securities law compliance and enables effective two-way communication between a company, its shareholders, and the financial community. Some of the standard elements of Investor Relations (IR) comprise the following:
The Goals of Investor Relations
The main objectives served by the department of investor relations/professionals working towards IT are as follows:
To ensure that the company achieves the optimum share price that reflects the company’s fundamental value
Representing the company to investors and representing investors to the company
The timely and accurate provision of financial information to investors (both retail and institutional)
Providing non-financial data to support valuations for companies
Non-aggressive sales promotion
Compliance with the rules and regulations of securities commissions and stock exchanges with which the company is registered
Presenting the feedback from investors to the company’s management and Board of directors
Lowering the cost of capital
To build long-term credibility with the investment community
Creating responsive capital markets at attractive terms for future financing
Investor Relations Department
As already stated, the importance of investor relations is paramount for any entity. And in order to communicate effectively and honestly with investors, companies usually build and rely on an IR department.
An IR department may be limited to one person or expanded to a team of people, depending on the size and scope of a company, as well as the number of investors the company has.
The IR department, in a broad sense, keeps the lines of communication and knowledge sharing open between investors and the company. Investors, analysts, and anyone else with a business question or request for information are typically drawn to the IR department.
Considering the importance of investor relations in a firm, the IR department performs the following functions:
Coordination of meetings
Arranging conferences for shareholders and the media
Releasing financial information to the stakeholders
Taking point on financial briefings
Taking care of Investor Relations on Corporate Websites
Enhancing long-term shareholders’ value
Maintaining a loyal shareholders’ base
Filing, submitting and publishing of reports with the Securities and Exchange Board of India (SEBI), or other relevant commission or stock exchanges (depending on where the company is listed)
The organization must adhere to certain rules such as strong MIS, a strong budgeting framework, good corporate governance, and other investment covenants and keep the investors constantly informed on certain milestones.
The organization has to provide clarification to the investors if the milestone has not been reached.
Since IR performs so many tasks and functions in so many capacities, it is important that the department remains completely integrated with almost every other department in the organization, such as the legal and accounting departments, as well as with the entire executive management team.
Regulatory requirements necessitating IR
The importance of investor relations is even more accentuated by virtue of various regulatory requirements.
Multiple laws apply to different entity structures that require separate event-based and annual compliance. In order to sustainably develop any business, it is important that the company complies with legal, secretarial, accounting, taxation, employee-related and other relevant compliance. The consequences of failure to comply may be punitive fines imposed on the company.
Different types of compliances need to be made by a company to keep its investors informed, some of which are enumerated below:
Filing of annual financial statements such as Income Statement, Balance Sheet, Statement of Stockholders Equity, Statement of Cash Flow
ROC compliances such as MGT-7: Annual Return, MGT-15: Report on AGM, AOC-4: Financial Statement within 30 days of holding of Annual General Meeting, Submission of Auditor’s Report and Directors’ Report
ROC compliances like KYC of Directors, Alteration in MOA and AOA, Maintenance of Statutory Registers, Appointment of Auditor, Information on Internal Auditor, Audit Committee, and Secretarial Audit report
SEBI compliances such as Submission of Annual Report within 60 days from the end of the financial year and publishing on the company’s website: Regulation 34 of LODR, 2015
Submission of Annual Secretarial Compliance Report w.r.t. compliances of SEBI Regulations: Regulation 24A of LODR, 2015
Half-yearly submission of compliance certificate signed by the share transfer agent: Regulation 7 (3) of LODR, 2015
Half-yearly submission of Certificate from Practicing Company Secretary: Regulation 40(9) of LODR, 2015
Quarterly submission of statement giving the number of investor complaints: Regulation 13(3) of LODR, 2015
Quarterly submission of shareholding pattern: Regulation 31 of LODR, 2015
Quarterly financial results to the stock exchange within 45 days from the quarter end: Regulation 33 of LODR, 2015
Quarterly Report for the purpose of reconciliation of share capital: Regulation 76 of the SEBI (Depositories and Participants) Regulations, 2018
Advance Reporting Form for reporting FDI inflows: To be filed with RBI within 30 days of receiving funds: Foreign investment compliance/ FEMA Regulations
FC-GPR Form for Certification regarding procedure compliance: To be filed with RBI within 30 days of the date of issue of shares: Foreign investment compliance/ FEMA Regulations
Disclosure of CSR activities in the Board’s Report, Constitution of a CSR Committee, Formulation of CSR Policy
Submission of corporate governance report: Within 15 days of the end of each quarter as per SEBI (LODR) as per Reg. 27(2) of LODR, 2018
Company’s policy on director’s appointment and remuneration and Corporate Social Responsibility: Website disclosure
Disclosure of Related Party Transactions to the stock exchanges as per Regulation 23(9) of SEBI, LODR, 2018
Website disclosures such as Publication of name of Officer for any queries & grievances, Alteration of Memorandum – Object Clause, Reduction of capital, Notice of the General Meetings, Investor Education and Protection Fund, CSR activities, Copy of Annual Report, Financial Statements & Consolidated Financial Statements
The role of CFO in investor relations
CFOs need to be careful because their portfolios are increasingly falling under the IR function. A CFO needs to have a much better understanding of the entity’s business model and be able to communicate the key metrics that make the company more competitive relative to other entities.
Considering the growing importance of investor relations, CFOs are recognized as the face of communication to investors and, therefore, must oversee that an effective IR department is put at place. Some of the steps that should be undertaken by a CFO for successfully accepting the responsibility of the IR function are:
Understand your shareholder base: Research your shareholders’ investment styles to determine why they may have purchased shares – and what can cause them to sell. Identifying whether your shareholders are weighted towards, for example, a growth, value or income investment style can provide an insight into what they expect the firm to achieve in the near or long term. In addition, an investor perception audit can also be considered to understand the shareholder base’s sentiments, identify any misunderstandings about the company, and to build the IR program most effectively.
Review a disclosure policy: A detailed disclosure policy controls the communications that a corporation has with the investment community. As a CFO, understand all the channels of communication at your company, and also make sure that the corporate spokespeople listed in the disclosure policy are suitable.
Develop an IR plan: Develop a strategy that takes into account messaging, targeting of investors and outreach for your company. Also, determine which conferences would be the most effective for you to attend, and then request invitations proactively.
Develop investor positioning: The main messages to the investment community within all of your communications should address the question, “Why should investors buy stock from the company?”. Develop a clear, financially oriented investment thesis that conveys the value drivers of the business. Point out specific factors such as market share potential, end-market growth, profit enhancement opportunities, and the ability to reinvest value-creating cash.
Review the IR website: The IR website of a company is one of the most important destinations for information-seeking investors. Sometimes it can get obsolete or contain inaccuracies in the absence of proper oversight. Make sure your platform has all the functionality and information which the investors typically expect on IR pages, including “push” updates, detailed Frequently Asked Questions, investor reports and a quarterly results tab.
Ensure IR execution: The value of a public company depends on its financial performance and on communicating those results to investors through good investor relationships. It is the responsibility of CFOs to ensure that the IR program is executed properly.
The importance of investor relations cannot be negated by an entity in any manner. Publicly traded companies are required to report information on financial and commercial matters. The push for companies to stay more transparent and honest with investors continues to be consistent and evolving, making a strong and efficient IR department an absolute must.
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.