667 34 Investor Communications∗ The value of investor communications is a subject of considerable controversy. Some executives, practitioners, and academics argue that actively handling relations with investors is a waste of management time and has no effect on a company’s share price. Others have unrealistic expectations, assuming that you can talk up your company’s stock and, if your investor relations staff is really sharp, it can tell you why the share price went down by 1.2 percent yesterday. We fall somewhere in between. It’s virtually impossible to interpret short- term price movements with any useful insights. And even if you could talk up your share price beyond its intrinsic value, you probably shouldn’t. Neverthe- less, good investor communications can ensure that your share price doesn’t get out of line with its intrinsic value, can build a base of loyal investors, and can ensure that executives don’t make poor strategic decisions based on misunderstanding what investors are saying to them. Too often, however, ex- ecutives don’t know how to interpret what they are hearing from investors, because they are listening to the wrong investors. The point of good investor communications is to build relationships with the right kinds of investors and communicate with them at their level. It also entails being selective about which sell-side analysts to focus on, not being overly concerned with investors who have a short-term orientation, and not being overly occupied with media coverage of your company. Finally, it’s as much about executives listening to the right investors as it is about delivering the company’s message to investors. This chapter also deals with two questions linked to investor commu- nications. First, should companies provide earnings guidance? There is no evidence that companies benefit from the practice. Similarly, should companies *This chapter draws heavily on research by Robert Palter and Werner Rehm and their article with Jonathan Shih, “Communicating with the Right Investors,” McKinsey on Finance (Spring 2008): 1–4. 668  Investor Communications be concerned about meeting or beating consensus earnings forecasts? Again, the evidence shows that performance—return on invested capital (ROIC) and growth—is more important than whether a company meets the consensus earnings forecast. Objectives of Investor Communications Good investor communications must be founded on the right objectives. Achieving the highest-possible share price is not one of them. Instead, the overriding objective of investor communications should be to align a com- pany’s share price with management’s perspective on the intrinsic value of the company. When a gap forms between a company’s market value and its intrinsic value, all the company’s stakeholders are put at a disadvantage. If the share price rises too high and exceeds the company’s intrinsic value, the compa- ny’s real performance will eventually become evident to the market, and the price will fall. When that decline occurs, employee morale will suffer, and management will have to face a concerned board of directors who may not understand why the price is falling so far and so fast. A share price that’s too high may also encourage managers to keep it high by adopting short- term tactics, such as deferring investments or maintenance costs, which will hamper value creation in the long run. Conversely, a share price that is too low has additional drawbacks, especially the threat of takeover or attack by an activist investor. Furthermore, an undervalued stock makes paying for ac- quisitions with shares an unattractive option and may demoralize managers and employees. A second objective of investor communications is to develop support from a group of sophisticated intrinsic investors who thoroughly understand the company’s strategies, strengths, and weaknesses—and who can better distin- guish between the shorter and longer term. These investors will also be likely to purchase shares on short-term dips in the share price. A final objective is to learn what your investors like and don’t like about your company as an investment. Here it is important to focus on the sophis- ticated longer-term investors who own your shares or investors who follow you but don’t own your shares. Investors have many different investing strat- egies. Some will be focused on the short term. It is important to separate the concerns of the shorter-term investors from those of the long-term investors. You probably can’t please them all, so priority should be given to the views of longer-term investors. These investors can also be a source of intelligence about your customers, competitors, and suppliers. The best investors will be talking regularly with these groups and may give senior management infor- mation that is more objective than the results of the company’s own research efforts.