The Role of the Investor Relations Officer

Investor relations officers play a low-key but crucial role in a firm’s image on Wall Street — and on its financial success. A first-ever academic survey reveals how they do it, from managing earnings calls to swapping gossip with analysts.

By Steve Brooks

Think of investor relations officers as the Agnes de Milles of the financial world. In the delicate dance between corporations, analysts and big investors, they’re the choreographers. Although faceless to the general public, they’re often more visible to Wall Street insiders than their CEOs.

Not every big firm has an IRO. But companies that do can expect to have more analysts tracking them, more stable stock prices, and lower costs of capital, explains Michael Clement, a professor of accounting at Texas McCombs. “They perform a very important role in capital markets. They’re the ones who communicate the company’s main message.”

Yet how they achieve such financial impact has received little attention. Now, a first-ever survey — by Clement and colleagues Lawrence Brown of Temple University, Andrew Call of Arizona State, and Nathan Sharp of Texas A&M — sheds some light. With answers from 610 IROs of U.S. public companies, it paints a nuts-and-bolts picture of how to manage a corporate image for the stock market. Added detail came from personal interviews with 14 respondents.

Earning Wall Street’s Attention

More than any other task, researchers found, stories revolve around a ritual that happens four times a year: the public earnings conference call, in which analysts and investors grill management about quarterly results. These calls are the top means of getting a company’s message to institutional investors, according to 88 percent of IROs. (In fact, their handling of the calls is the №1 factor for their own performance evaluations.)

They ranked earnings calls over 10-Ks, press releases, or even meetings with investors. Explained one respondent, “You have the full attention of the market at that point.”

Preparing for that one-hour call can take weeks. Writing scripts is the most common spadework, done by 93 percent of IROs. Almost as common is making lists of possible questions and rehearsing them with CEOs and CFOs. A smaller group of IROs — 36 percent — call up analysts ahead of time, to glean what kinds of questions they’re likely to ask.

Just as exacting are the standards for which callers are bumped to the head of the line to ask those questions. First preference, for 87 percent, goes to the analysts who have covered the company the longest. Next come those whose views are more positive than Wall Street’s consensus.

“If I have an opportunity, I’m going to let the people who have a ‘buy’ on me ask questions first because they’re going to set the tone for the call,” observed one respondent. “If an analyst is going to get on there and say something negative, he’s going to the bottom of the list.”

At the bottom are often hedge-fund investors, who might be angling to push down the stock’s price. Explains Clement, “They’re viewed as being short-term investors, and they can take short positions in a company’s stock and cause all kinds of problems. These firms like to have investors who take long positions in their stock.”

A Peek at Private Calls

When a public call is over, the survey reveals, an IRO’s job is only half-done. Eighty-two percent follow up with private call-backs to key players to clarify what was said and answer further questions.

The first to get called back, by 80 percent of respondents, are big institutional investors — many of whom don’t ask questions during public calls for fear of revealing their plans.

“People who are going to get the call back first are the people who are currently the largest investors in our company,” said one respondent,” because we want them to hold the stock and not sell it, maybe buy more.”

Some arrange the order by time zones. “If I have East Coast people, I want to get them in first,” one IRO said, “because they need to get out the door as soon as they can.”

Private calls raise a touchy issue: the risk of violating Regulation Fair Disclosure, better known as Reg FD. It’s a federal rule which says a company can’t disclose information privately to one party without making it public to everyone. Several times a week, reported 21 percent of subjects, they decline to answer a question for fear of violating the rule.

It’s appropriate, however, to point an analyst to data that are public but under the market’s radar. Says Clement, “There could be a piece of public information that, when combined with private information, can give an investor a much more complete picture.”

Crafting Analyst Relationships

Between earnings calls, an IRO’s chief job is to oversee press releases and financial filings, according to 74 percent. They work closely with CFOs on spinning their company’s numbers and CEOs on its message.

Another duty is to screen which analysts and investors talk to top management — a role mentioned by 42 percent. As with conference calls, the greatest access goes to analysts who have covered the firm the longest. But many try to honor everyone’s requests.

Said one subject, “I want them all to be happy. They are simply the megaphone that I can use to reach more investors.”

Those relationships can pay off when an analyst makes a high earnings forecast, since the market tends to punish firms that don’t beat targets. Thirty percent of IROs will call an analyst to encourage a lower, more realistic prediction. Explained one IRO, “[If] I see that an analyst has a couple lines that are just off, whether it’s revenue or expense, and I know that there’s something in the public record that I can point to, I can help them rein in that line.”

Analysts give news to IROs as well as getting it, the survey found. “They talk to a lot of institutional investors, so they have a good feel for what kinds of companies they want to invest in and what their expectations are,” Clement says. “They give you feedback on how Wall Street sees your firm.”

Those personal connections, says Clement, go a long way towards answering his original question: why IROs bring such strong benefits to public companies. “If I can improve analyst accuracy, and if I can craft the right message, I can lower the volatility of my stock,” he says. “To the extent a company is more transparent, as an investor I might not feel I’m taking as much risk. That transparency can lower the company’s cost of capital, because investors might not require as big a return on their investment.”

Michael Clement is the KPMG Centennial Professor of Accounting at the McCombs School of Business at The University of Texas at Austin. “Managing the Narrative: Investor Relations Officers and Corporate Disclosure” is published in the SSRN Electronic Journal.