Advancing the Role of Investor Relations
Transcript of Advancing the Role of Investor Relations
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Advancing the Role ofInvestor Relations
William F. Mahoney
Bovespa Stock Exchange
November 28, 2007
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2 Basic Functions of IR
Service
Key Contributor to Intrinsic Value
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Most Companies Focus onService Function
Makes it Similar to HR, PR, Accounting.
Enlightened Managements UnderstandRole of Investor Relations in GrowingShareholder Value.
Ideal: Combines Service Function andRole in Contributing to Intrinsic Value.
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Main Elements of Service
Function
Combines Required Disclosure with
Proactive Communications.
Required Disclosure: Filings,
Disclosure of MaterialDevelopments.
What is Material?
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Major Activities of IR ServiceFunction
Participate in Preparing DisclosureMaterials and Filings.
Prepare News Releases: Material and
Non-material. Participate in Preparing Annual Report,
Fact Books and other materials.
Answer Requests for Information. Provide Market Information toManagement and Board.
Maintain IR Website.
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Proactive IR Within the ServiceFunction
Arrange Meetings with Analysts andInvestors.
Issue Releases/other Communications
Upgrade Website.
Prepare Presentations for Management.
Give the Presentations/Do the MeetingsYourself.
Advise Management/Board onAnalyst/Investor Attitudes.
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Key IR Roles in ValueCreation
(Leading the Value Creation Team.)
Premise: An Effective InvestorRelations Program Contributes __% to
the Companys Intrinsic Value. The Percentage Varies by Company.
Determining Factors
Commitment to IR by Management.
Effectiveness of IR Department.
Nature and Size of Opportunity.
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Vital IR Roles in Value CreationProcess
1. To Help Management Understandthe Investment Process and Investor
Behavior.
Be The Resident Expert in theCompany on the Equity Market.
--Macro Factors Driving the Market.--Industry Factors.
--Company Factors.
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What This Requires
Deep Understanding of theInvestment Process.
Expertise in the Investing Style ofEach Shareholder, Prospect and
Analyst.
Getting Right Down to the Details ofTheir Models.
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Vital Roles in Value CreationProcess
2. Identify Shareholders andAnalyze Shareholder Base.
Is Basis to Understand Why Each is
a Shareholder. Helps Determine Information
Important to Each.
Provides Basic to Compare Driversof Their Model with Drivers ofCompanys Value.
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Vital Roles in The ValueCreation Process
(2 Continued)
Enables Company to Predict InvestorsWho Will Become Shareholders.
Is Basic to Know When ShareholdersWill Add to Positions or Sell Shares.
Enables Management to Better
Understand the Strategies, Initiativesand Value Drivers the Market WillSupport and Not Support.
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Vital Roles in The ValueCreation Process
4. Help Management Understand Howthe Market Currently is Valuing the
Company.
This is the Basis for the Current Stock
Price Indicating Whether the Company isUnder, Over, or Fairly Valued.
Plus the reasons for its Valuation.
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Vital Roles in The ValueCreation Process
(4. Continued) Help Management Identify the Drivers of
Companys Value.
Compare Management Views on Value Driverswith those of Investors.
Goal is to have Management and Market Agreeon Value Drivers as Basis to Track Them in the
Future. Educates Investors on Management Views ofValue Drivers and Educates Management onInvestors View of Value Drivers.
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Vital Roles in The ValueCreation Process
5. Serve as Key Participant in
Determining Companys Value.
IROs have an Opportunity to Leadthe Analysis and Calculation of the
Companys Intrinsic Value.
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What Is Intrinsic Value?
The Calculated Worth of ALL theCompanys Assets.
Incorporates Physical and Intangible
Assets:--More Effort Is Underway to Put
Values on Intangible Assets.
--Most Investors Seek anEconomic Number (Cash Flow, notEarnings).
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Intrinsic Value Is Based onCalculating A Value For:
(Continued)
Plant and Administrative
Productivity/Efficiencies. Partnerships.
Levels of Creativity/Leadership.
Social/Environmental Citizenship.
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Intrinsic Value Is Based onCalculating a Value For:
(Continued)
Financial Assets and Capabilities:--Revenue Generation.
--Cash Flow Generation.
--Profit Margins.
--Cash Available to Reinvest.
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Subtracting from Value
Lawsuits. Regulatory Issues.
Environmental/Social Issues. Declining Market Positions.
Obsolescence.
Fading Markets.
Rising/New Competition.
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Can Executives, Investors,Analysts Put a Value on a
Firm?
Yes,
But It Never Is Precise.
Thats Why There Is a Market:
Constantly Changing, HighlyComplex
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Study: Half the Companiesare Over and Half Are Under
Valued Lesson for Companies and IR Officers
>Understand Where Your Company Stands.
>Compare Current Price with Your Calculationof Intrinsic Value.
Thats What the Market Does.
Smart Investors Try to Determine theInflection Points, Notably When the Price isStarting to Move Up Toward Intrinsic Value orDown from Intrinsic Value.
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Earnings Versus Cash Flow
Economic Measures Widely Recognized asTrue Measure of Value.
Cash Flow Is the Basic Economic Measure.
Earnings Have Grown as Most Popular of
Market.--Earnings Promote Shorter Focus.
--Market Driven Today by Short-term Action.
--Pushes Prices Faster.--Serves Traders Well.
--Frustrates Long-term Investors.
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Is All This a RidiculousExercise in Futility?
Arguments to Suggest Effort Is Futile:-- Market Isnt Focused on Intrinsic Value.
-- Market Is Driven by Change, Occurring
Daily/Hourly.-- Market Mostly Uses Imperfect Metrics.
-- Market Has Increasingly Become
Short-term Driven.-- Intrinsic Value Cannot Be CalculatedPrecisely.
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Yes, It Is Worth the Effort
Focuses Management and Board on
Creating Value.
Long-term Value Creation Must BeManagement Focus
Gives IR Function a Solid Basis toBe Effective.
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Factors Determining Intrinsic ValueAre Translated into Numbers
Numbers Are Given to Each Contributor to Value. Appraisal Techniques Are Used to Arrive atNumbers.
Numbers Are Converted to Ability to Generate
Cash Flow. Cash Flow Forms Basis to Calculate IntrinsicValue.
Process Hasnt Reached That Level ofSophistication Yet.
Cash Flow Becomes Basis to Determine ifMarket is Under, Fairly or Over Valuing the Stockand Company.
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What to Do, As a Companyand IRO
Focus Information/Communication onDrivers of Value.
Also Provide the Other Information Most
Important to Shareholders/Analysts. Advise/Prepare Management for What IsLikely to Happen to Stock Price.--Higher if Market Perceives Stock to be
Under Priced.--Lower if Market Perceives Stock to beOver Priced.
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Management Must BeWorking Always to Create
More Value
Whether Stock Currently Is Seenas Under or Over Valued.
For Sure When Stock Is Seen as
Fairly Valued.
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Analysis Of the Role of IRCombines Theoretical and
Real
At Any Time, Big Macro Factors Can
Drive or Overwhelm the Market Market/Investors Are a Big, Diverse
and Complex Group. It is Impossible to Understand and
Predict All Their Moves
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How Much Does IRContribute to Value?
You Can Put in the Number,
Based on the Role, Quality of Your
IR Program, Level of ManagementSupport and Size of the
Opportunity.
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IR Role in a Crisis
Investment Community Is CriticalAudience.
Stock Price Can Crash, or Rise.
IRO Is Best Qualified toGather/Assess Market Attitude.
IRO Should Be Able to InfluenceManagement on How Best toBehave.
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IR Role in a Crisis
IRO Is Uniquely Qualified to Know How to Actin Companys Best Interests.
--Is Expert on Company.
--Knows Various Publics Well.
IRO Is Qualified to Assess SituationAccurately.
IRO Is Qualified to Recommend Best Actions
and Determine Information to Provide. IRO Is Qualified to Project Likely Outcome.
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IR Role in a Crisis
Key Activities:--Make Sure Focus Is on the Facts. NoHype.
--Advise Management on VitalInformation to Provide.
--Assess Attitudes of Investors and
Analysts.--Serve as Information Conduit toInvestment Market.