The investor relations (IR) function holds a unique role in any organization as their responsibilities are not related to the product or service being sold but rather serving as the primary channel of communication with the financial community. 

More importantly, the role of Investor Relations (IR) officers has evolved to a greater extent that it has become an agent of value creation. In this article, we explore how IR officers and finance professionals can achieve that goal in a more efficient manner.

Background of IR in corporate finance

There is no doubt IR function plays a fundamental role in corporate finance. IR officers’ primary responsibility is to manage the communication process with the investment community and in doing so, shape the narrative to ensure information is properly assimilated by all financial market stakeholders. 

More importantly, IR officers must communicate with the financial community on a proactive basis. According to Bain & Company, a consulting firm, those companies that take a passive approach to investor relations, not only often experience a decline in perceived value but are also more likely to be subject to investor activism (Keuer, Shen, Suzuki & Dingermann, 2018). 

Corporations must be vigilant as S&P Global, a research agency, has noted increasing investor activism over the past five years (Lilly, 2023).   

Value creation techniques

IR officers can use different techniques to create value in a more efficient manner.  These techniques range from understanding the firm’s intrinsic value to better investor selection.

1. Define firm’s intrinsic value

Having a solid understanding of the company’s intrinsic value should be the first task in any IR officer’s priority list. By doing so, a well-grounded valuation of the company can be established.   

2. Understand the gap between intrinsic value and stock price

Once the intrinsic value has been determined, IR officers must identify what is driving the gap between this value and the stock price. There may be the possibility that investors do not have a clear understanding of company’s profitability by segment along the growth projections for each segment and how that compare to its peers.

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3. Perform investor segmentation

Investor landscape must be properly segmented to ensure investors’ different needs can be addressed. Investors have traditionally segmented into groups like growth vs. value investors, or institutional vs. retail investors. 

A better segmentation approach would focus on identifying those investors who can truly move the stock price while influencing other investors, keep a long-term investment horizon, and align with company’s strategic objectives.   

According to McKinsey, a consulting firm, investors can be broken into three groups: intrinsic investors, trading-oriented investors, and mechanical investors (Palter, Rehm & Shih, 2008).   

  • Intrinsic investors perform solid due diligence before taking a position in a company’s stock. Their investment horizon is long and their trades are large.  As a result, intrinsic investors may influence the stock price relative to its intrinsic value.
  • Mechanical investors make decisions based on criteria or rules using computer-based models. Due to their investing approach, IR officers may not be able to influence their trades.
  • Traders represent investment professionals who take a short-term position to make a quick profit. As a result, IR officers may not want to devote time to these investors as their fast trade turnover may increase stock volatility.

4. Attract the right investors

Once investors have been properly segmented, IR officers want to focus on the right investor mix that will allow them to lower the company’s cost of capital, contribute to share price stabilization, and enable a more efficient relationship management.  

5. Review the narrative to ensure it is convincing, consistent and cohesive

A huge role in the IR function is to drive the narrative so information can be properly assimilated by all financial market players. IR officers must ensure their narrative is convincing. This means their narrative must make sense based on facts and financial data. 

The narrative must also be consistent with each investor’s need and be cohesive, which means it should stick to the company’s strategy or otherwise, it will fail. By keeping a convincing, consistent and cohesive narrative, negative outcomes can be most likely avoided (Desjardine, 2024).                                                             

6. Make an efficient use of technology

Most companies offer a dedicated IR website or even a portal to their investors where press releases, and filings (e.g., 10-Ks, 10-Qs) are distributed along with detailed financial and operational information. 

However, many firms have not been able to leverage the recent technological advancements, such as data analytics, CRM systems and AI tools. These tools can enable more efficient interactions with customers while monitoring their activity and collecting their feedback. More importantly, AI-driven chatbots can address common investor questions in real-time while improving accessibility and efficiency.    

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Conclusion

The role of Investor Relations (IR) has evolved beyond just communication, it is a critical driver of value creation for firms. By fostering transparency, supporting strategic initiatives, attracting the right investors, ensuring adequate governance and compliance, and addressing crisis management, IR officers have become indispensable players between companies and the financial community.

To create value more efficiently, IR officers must understand their firm’s intrinsic value, bridge gaps in market perception, and segment investors to target those who will contribute to long-term stability and growth. Leveraging technology and refining their communication strategy also ensures IR officers can achieve their goal in a more efficient manner.

References

Desjardine (July-August 2024). How to respond to shareholder activism.  Harvard Business Review, pp 115-122. Available How to Respond to Shareholder Activism

DesJardine & Shi (2023). How to attract the right shareholders. Harvard Business Review. Available https://hbr.org/2023/08/how-to-attract-the-right-shareholders

Keuer, Shen, Suzuki & Dingermann (2018). How a strategic approach to investor relations can unlock intrinsic value. Bain & Company. Available How a Strategic Approach to Investor Relations Can Unlock Intrinsic Value | Bain & Company

Lilly (December 2023). Evolution of Investor Activism: What’s Driving Continued Activity? S&P Global. Available https://www.spglobal.com/market-intelligence/en/news-insights/research/evolution-of-investor-activism-whats-driving-continued-activity

Palter, Rehm & Shih (2008). Communicating with the right investors.  Perspectives on Corporate Finance and Strategy. McKinsey, 27. Available Communicating with the right investors | McKinsey