Investor Relations (IR) combines finance, communication, and marketing to effectively control the flow of information between a public company, its investors, and its stakeholders.
Investors play a major and vital role in the success and growth of a company. Because of that fact, it’s of the utmost importance for companies to maintain strong, transparent relationships with investors. This is where the investor relations department of a company comes into play.
This article is designed to help you better understand investor relations in the broad sense, as well as to break it down into more manageable and specific segments. Without further adieu, let’s dive right in.
As we noted above, investors are essential to a company. Pretty much any company you’ve ever heard of (and some that you haven’t) has investors to thank for not only getting the company on its feet but also for the continuation of its operational success. Thus, it’s important for businesses to communicate effectively and honestly with investors.
To further that end, companies typically build and rely on an investor relations (IR) department. Depending on the size and scale of a business, as well as on the number of investors the business has, an IR department may be limited to one person or extend to a team of people. In a broad sense, the IR department keeps the lines of communication and information open between investors and the company.
But to truly understand the magnitude of an IR department and its importance within a company, we need to break down the different roles that individuals or teams within the department fulfill.
Working with Wall Street
The top executives of a company – namely the chief executive officer (CEO) and chief financial officer (CFO) – have a vast number of tasks they have to juggle on a daily basis. To help handle some of these tasks, the IR department will often be the place where word from Wall Street comes in, and will also be the portal through which the company communicates back.
It might be easier to understand if you think of the IR as the face of a company in the capital markets. Of course, investors and shareholders – as many people do – view the CEO or CFO as the face of the company, however, when you dissect the inner workings of the top publicly traded companies, an IR department is usually in the middle of it all.
IR acts as a portal, a passage through which investors and company executives communicate, but let’s break that down a bit more.
The first piece of IR’s role in creating channels of communication is triage. Investors, analysts, and anyone else with a request or a demand for information from a company are usually funneled to the IR department, which functions as a sort of overall catcher’s mitt. Whatever the IR department itself is capable of handling, passing off, passing down, or assigning elsewhere, it will do without involving the higher-ups. This triaging is important to avoid overloading executives, who have other important tasks to attend to, with every information request that arrives at the company’s doorstep.
The second piece of the communication puzzle is translation. IR acts as a translator for the language that Wall Street speaks. What we mean by this is that IR conveys to a company’s executives how the company is generally being viewed by Wall Street and its investors. IR works to relay what the investor community may see as assets and flaws, what they want to be changed, what they don’t understand, and, bottom line, what will drive the value of shares based on current and predicted investor wants and needs.
The final piece is for the company’s values, interests, positions, and answers to be translated back to the wizards at Wall Street in a language they understand, namely such things as profit margins, projected goals, Earnings Per Share (EPS), and dividends.
Investor Relations Functionality
Everything we’ve mentioned so far concerns functionality, but on a fairly large scale. The difficulty in breaking down IR is the myriad minutiae surrounding the functionality of the department within a company. We’re understating things when we say that IR departments serve a variety of functions and play a host of roles.
Because IR fulfills so many duties and functions in so many capacities, it’s essential that the department stay fully integrated with nearly every other department in the company, such as the legal and accounting departments, as well as with the entire executive management team.
The Need for Investor Relations (Sarbanes-Oxley Act)
If reading this article hasn’t made the essential nature of IR clear, what we’re about to tell you should make things perfectly clear. In 2002, the Sarbanes-Oxley Act, otherwise known as the Public Company Accounting Reform and Investor Protection Act, was passed, a regulation that drastically increased how much and how often publicly traded companies were required to report financial and trading information.
Since then, there continues to be a consistent and evolving push for companies to remain more transparent and honest with investors, making a strong and efficient IR department an absolute necessity.
Here’s what we hope you take away from this article: investor relations departments function in many ways to maintain clear communication channels between companies and investors. By serving that function, they are an integral part of helping to move a company forward.
Benefits of a Good Investor Relations Team
The benefits of a good IR team are:
Maintain a loyal shareholder base
Enhance long-term shareholder value
Ensure receptive capital markets for future financing at favorable terms