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 PRAISE FOR

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The New Investor Relations 2
Expert Perspectives on the State of the Art 3
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Edited by Benjamin Mark Cole 5
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“This compendium by various experts adds significantly to 8
the body of knowledge related to contemporary investor relations 9
issues.” 10
LOUIS M. THOMPSON, JR. 11
President & CEO, National Investor Relations Institute 12
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“Executives of today’s public companies find themselves in two 15
businesses: their business, and the investor relations business. This 16
book is a useful tool for success in that second business.” 17
FREDRIC M. ROBERTS 18
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President and founder, FM Roberts & Co. 20
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those involved with public companies, whether they be blue chip 24
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management, stock buybacks, M&A, the Internet, investments, pri- 28
vate placements, the press, rating agencies, and even chat rooms.” 29
THOMAS FOREST FARB 30
General Partner and Chief Financial Officer, Summit Partners 31
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little for common sense.” 35
MICHAEL J. KOSS 36
President and CEO, Koss Corporation 37
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Expert Perspectives 14
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EDITED BY 24
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To Rah, who has just entered the world 15
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1
2
3 Contents
4
5
ABOUT THE CONTRIBUTORS xiii
6
ACKNOWLEDGMENTS xxv
7
INTRODUCTION xxvii
8

1
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11 PART 1: UNDERPINNINGS OF THE NEW ORDER
12
13 1 Fundamentals of Investor Relations 3
14 Donald Allen, The Allen Group
15 What’s the Point? 4
16 Background on Corporate Disclosure 5
17 Understanding Disclosure and Materiality 6
18 Creating and Maintaining a Disclosure Policy 7
Regulation Fair Disclosure (Reg FD) 9
19
The Softer Side of Corporate Reporting 10
20 The Art of the Message 12
21 Targeting the Right Audiences 15
22 Outreach to the Investor 18
23 Need for Flexibility and Adaptability 21
24
25
26 2 IR for Blue-Chip Companies: The New Look 23
27 Heather Harper, Hollis Rafkin-Sax, and Bryce Goodwin
28 Edelman Financial Communications
29 Where Are the Blue Chips Hiding? 24
30 A Buyer’s Market 26
31 Return of the Balance Sheet 27
32 Playing Defense 27
Investor Relations Today 28
33
Financial Reporting and Disclosures 30
34 Marketing the Company’s Investment Thesis 32
35 Corporate Governance Communications 33
36 Public Presence 36
37 Outlook for the Future 39
3 Litigation IR and the Duties of Corporate 1
Disclosure and Governance 41 2
Theodore J. Sawicki, Esq., and Scott P. Hilsen, Esq. 3
Alston & Bird LLP 4
How We Got Here 43 5
Restatement 46 6
Change in Investor Demands 46 7
The IR Challenge 53 8
9
10
4 The IR-PR Nexus 59 11
David Silver, APR, Silver Public Relations 12
The New Paradigm 60 13
Reputation 62 14
Gatekeepers 63 15
Key Responsibilities 63 16
Regulation FD 65
17
Regulation G 66
The Need for Coordinated IR and PR Teams 67 18
The Rise of Public Relations 67 19
The Advent of Investor Relations 70 20
Today’s Integrated Function 71 21
22

2
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PART 2: IR IMPLICATIONS 24
FOR SELECTED FINANCING SCENARIOS 25
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5 Sustained Stock Buybacks: An IR Tool for
28
Mature Companies 77
29
Neil G. Berkman, Neil Berkman Associates
30
The Mergers Fallacy 79
31
Why Not Buy Back Stock? 81
32
Advantages of a Permanent Repurchase Program 82
Countering the Counter-Arguments 85 33
Float Consideration 87 34
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1 6 Investor Relations in M&A Transactions 89
2 John F. Hartigan, Esq., Morgan, Lewis & Bockius, LLP
3 Regulation M-A 90
4 Business Combinations 91
5 Proxy Solicitations 91
6 Cash Tender Offers 92
Benefits of the Amendments 93
7
Flexibility in Timing 93
8 Investor Access in Tender Offers 94
9 Potential Risks Created by the Amendments 94
10 Antifraud Provisions 96
11 “Plain English” Requirement 97
12 Regulation FD 97
Scope of the Rule 98
13
Materiality 99
14 Reg FD in Practice 100
15 Interplay Between Regulation FD and Regulation M-A 102
16
17
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19 7 Investor Relations for Private Placements 105
Alexander L. Cappello, Cappello Capital Corp.
20
Role of the IR Team 105
21
The Importance of Being Discreet 107
22
Don’t Oversell and Don’t Leak 107
23 Be Prepared for the Unexpected 109
24 Do What You Say You Will Do 110
25 Don’t Be Arrogant 111
26 You May Get Away With It, But Not for Long 112
Reap Dividends From Being Forthcoming and Honest 113
27
Don’t Let an Investment Banker Be Your IR Department 114
28
Generate Goodwill With Investors 116
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32 8 Investor Relations for the IPO 119
Douglas M. Sherk, EVC Group
33
Be Optimistic, But Be Realistic, Too 121
34
Getting Started 121
35
Peer Group 123
36 Operating Metrics 123
37 Analysis 124
Drawing Comparisons 125
Back to Those Operating Metrics 126 1
Revenue Forecast Reality Check 127 2
No Rose-Colored Glasses 127
3
Disclosure Policies and Procedures 128
4
Guidance 129
Disclosure and Crisis IR 130 5
The Presentation 132 6
IR Infrastructure 133 7
8
9

9 Crisis Investor Relations

3
PART 3: IR TACTICS IN PROXY WARS
AND OTHER CRISIS SCENARIOS

Michael S. Sitrick, Sitrick and Company, Inc.

139
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To Win the Game, You Have to Get In the Game 140 16
Traditional IR Versus Crisis IR 142 17
The Basics of Crisis IR 144 18
Turning Lemons Into Lemonade 146 19
20
21
10 The Art of Winning Proxy Wars 149 22
Based on interviews with John C. Wilcox 23
Georgeson Shareholder Communications Inc. 24
Readiness for a Proxy Fight 149 25
What Is a Proxy Contest? 151 26
What Triggers a Proxy Contest? 152 27
How Vulnerable Are You to a Proxy Fight? 154 28
Preparing a Battle Plan 155
29
Proxy Alternatives: What to Do If the Odds Are Strongly Against You 157
A Strategy for Success 159 30
Putting Together a Winning Team 159 31
Identifying and Targeting Shareholders 160 32
Leveraging Your Investor Relations 162 33
Clearly Defining the Issues 164 34
Management Versus Dissident Positioning 164
35
Going on the Offensive (Without Being Offensive) 165
Every Shareholder Vote Is Critical 166 36
The Cost of Proxies 166 37
The Winning Combination: Value, Power, and Ideas 167
1 11 The Hewlett-Packard Merger: A Case Study 169
2 Kenneth R. Cone, Daniel R. Fischel, Gregory J. Pelnar,
3 and David J. Ross, Lexecon Inc.
4 The Opposing Positions 170
5 But Why? 171
6 Rational Ignorance and the Free Rider Problem 171
7 Optimistic and Pessimistic Shareholders 174
Long-Run Versus Short-Run Investors 174
8
Conflicts of Interest 175
9

4
10
11
12 PART 4: SPECIAL CASE PERSPECTIVES
13
14 12 IR for Non-U.S. Issuers Accessing the U.S.
15 Capital Markets 183
16 Sidley Austin Brown & Wood LLP, as edited by
17 Thomas E. McLain, Esq., and Yoshiki Shimada, Esq.
18 Preparing to Offer Securities in the United States 184
19 The Team 184
20 The Business Profile 184
The Jurisdiction of Incorporation 186
21
Corporate Governance and Disclosure 187
22
Accounting Matters 189
23 Communications With Investors and the Public 190
24 Press Releases 190
25 Materiality Standards 191
26 Duty to Disclose 191
Selective Disclosure 192
27
Antifraud Rules Under the 1934 Act 193
28
Internal Controls 193
29
30
31
32 13 Investor Relations and Microcap Companies 195
Ralph A. Rieves, Emerging Companies Research Institute
33 and John R. Lefebvre, Jr., Shareholder Relations
34
Attracting the Individual Investor 195
35
What Do We Really Know About Microcap Risk and Return? 196
36
Are Microcaps Diversification Plays? 198
37 The Size Effect 199
 What Risk Premium? 200 1
Targeting Advisers to High-Net-Worth Investors 201 2
The Retail Broker 202 3
Brokers to Avoid 203
4
Attracting Institutional Investors 204
Understanding the Microcap Investment Manager 204 5
The Profit Challenge for Microcap Investment Managers 204 6
Benchmarking 205 7
Where Are the Market Makers? 206 8
The Cyberspace Aggravation 207 9
10
11
14 IR and the Credit-Ratings Process 209 12
Clifford M. Griep, Standard & Poor’s 13
Role of Ratings Agencies 210 14
Composition of the Ratings Analysis 211 15
Quantitative and Qualitative Components 211 16
Rating Assignment 213 17
Request for a Rating 213
18
Conduct of the Management Meeting 216
Typical Agenda 217 19
When Capital Markets Tighten 218 20
Surveillance and Ongoing Maintenance Coverage 219 21
22
23
15 The Information Investment Managers Want 24
From Public Companies 221 25
Christopher N. Orndorff, CFA 26
Payden & Rygel Investment Co. 27
Institutional Investor Universe 222 28
Functional Categories 223 29
Strategy Orientation and Size 223 30
Institutional Investor Information Needs 226 31
Electronic Communication 226
32
Conference Calls 227
Face-to-Face Meetings 228 33
Know Your Stock and Its Place in the Universe 231 34
35
36
INDEX 235 37
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 1
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About the Contributors 3
4
5
6
7
8
Donald Allen is founding partner of The Allen Group, an investor rela- 9
tions consulting firm based in Laguna Hills, California. Prior to forming 10
the consultancy, Allen worked for several public companies as director of 11
corporate communications and investor relations. He most recently held 12
that post with Quest Software, FileNET Corp., and Wonderware Corp. 13
He began working in IR in 1970 at Digital Equipment Corp. following 14
a stint in public relations and financial communications at Xerox Corp. 15
He began his career as a journalist with United Press International. Allen 16
holds a B.A. degree from the University at Albany, has studied in the 17
M.B.A. program at the University of Southern California, and has com- 18
pleted the Advanced Investor Relations Program at the Goizueta 19
Business School at Emory University. Allen serves on the Board of 20
Directors of the National Investor Relations Institute (NIRI), based in 21
Vienna, Virginia, is a member of NIRI’s Senior Roundtable, and serves 22
as the NIRI board’s representative to the Canadian Investor Relations 23
Institute (CIRI). He is also President of the Orange County (California) 24
chapter of NIRI, serves on the Board of Directors, and is a member and 25
former director of the Orange County chapter of the Public Relations 26
Society of America. (Chapter 1) 27
28
Neil G. Berkman is president of Berkman Associates, a Los Angeles– 29
based investor relations firm he founded in 1988. He notes that many of 30
his firm’s clients, companies of all sizes in a variety of industries around 31
the country, have implemented stock repurchase programs. Previously, 32
he established and managed the Los Angeles office of a New York–based 33
investor relations firm. From 1977 to 1981, Berkman was senior econo- 34
mist at the Federal Reserve Bank of Boston, where he conducted 35
research on topics in macroeconomics and monetary policy, and pub- 36
lished numerous articles in the New England Economic Review, as well 37

xiii
 xiv ABOUT THE CONTRIBUTORS

1 as the Journal of Money, Credit and Banking; the Market Chronicle;

2 and other publications. He received a Ph.D. in economics from the
3 University of California, Berkeley, and an M.A. and B.A. in economics
4 from UCLA. (Chapter 5)
5
6 Alexander L. Cappello is the chairman and chief executive officer of the
7 Cappello Group, Inc., a boutique global merchant bank specializing in
8 the private placement of capital and merger/acquisition/strategic advi-
9 sory services for public companies with market capitalizations from $250
10 million to $20 billion. Thompson Financial Securities Data ranked
11 Cappello Capital Corp. the number five managing underwriter of pri-
12 vately placed convertible preferred stock in the period 1994–1998,
13 which included a number two ranking behind J.P. Morgan in 1996.
14 Cappello is a member of the Young Presidents’ Organization (YPO) and
15 in 2003–2004 has served as chairman of its international board. He is a
16 founding charter member and past chairman of both the Santa Monica
17 Bay and Bel Air chapters of YPO in California and a founder of the
18 Lisbon, Portugal; Moscow, Russia; and Malibu, California chapters of
19 YPO. Cappello received a Bachelor of Science degree with honors from
20 the Marshall School of Business at University of Southern California.
21 He has been a guest lecturer at the USC, UCLA, and Harvard business
22 schools. (Chapter 7)
23
24 Kenneth R. Cone is a senior vice president at Lexecon, an economics con-
25 sulting firm. Cone’s areas of expertise include financial economics, valua-
26 tion, and the operation of securities and commodities markets as well as
27 damage calculations related to securities cases. He has testified as an
28 expert witness in cases related to securities markets and valuation in state
29 and federal courts and before arbitration panels. Cone has consulted on
30 and directed studies of trading and securities-related issues in a broad vari-
31 ety of markets and industries, including equity markets, bond markets,
32 currency markets, option and derivative markets, and markets for com-
33 modities and raw materials such as copper and oil. In addition, he has
34 published articles in the fields of securities markets and securities damage
35 calculations in scholarly journals including The Journal of Law and
36 Economics, The Business Lawyer, and The Journal of Health Economics.
37 Before joining Lexecon in 1991, Cone served as senior vice president for
ABOUT THE CONTRIBUTORS xv

strategic planning at the Chicago Mercantile Exchange. Prior to his 1

employment at the CME, he was a management consultant at Booz Allen 2
and Hamilton and an assistant professor at the University of Chicago’s 3
Graduate School of Business. (Chapter 11) 4
5
Daniel R. Fischel is chairman and president of Lexecon, an economics 6
consulting firm. Fischel’s areas of expertise include securities, corpora- 7
tion law, regulation of financial markets, and the application of the 8
economics of corporate finance to problems in these areas. He has been 9
cited by state and federal courts at all levels including the United States 10
Supreme Court. Fischel has given expert testimony on numerous occa- 11
sions in federal courts, before arbitration panels, and in regulatory 12
proceedings in the areas of securities, commodities, corporation law, 13
regulation of financial markets, and the application of the economics of 14
corporate finance. For the past few years, he has been the principal dam- 15
ages witness for the United States Department of Justice in a series of 16
breach of contract cases involving over $100 billion, commonly called 17
the Winstar cases. His article “Use of Modern Finance Theory in 18
Securities Fraud Cases Involving Actively Traded Securities,” Business 19
Law 1 (1982), is considered the seminal article describing the applica- 20
tion of financial economics to securities fraud litigation. Fischel is coau- 21
thor of The Economic Structure of Corporate Law with Frank H. 22
Easterbrook and author of Payback: The Conspiracy to Destroy Michael 23
Milken and His Financial Revolution. He is the Jack N. Pritzker 24
Distinguished Visiting Professor of Law at Northwestern University and 25
the Lee and Brena Freeman Professor of Law and Business at the 26
University of Chicago. Fischel is also the chairman, president, and chief 27
executive officer of Nextera Enterprises, Inc. (Chapter 11) 28
29
Bryce Goodwin is a communications professional with expertise in a 30
wide range of financial communications disciplines including media 31
relations, mergers and acquisitions, litigation, corporate positioning, 32
investor relations, and crisis communications. Goodwin joined Edelman 33
Financial in March 2000 and is also a member of the firm’s Corporate 34
Governance Advisors practice, a group, led by former SEC Chairman 35
Richard Breeden, that provides companies with guidance on issues 36
related to corporate governance. Goodwin graduated from Georgetown 37
 xvi ABOUT THE CONTRIBUTORS

1 University with Honors, earning a B.S. in foreign service. He also earned

2 a Certificate of Political Science with Honors from l’Institut d’Études
3 Politiques in Lyon, France, and has studied at La Universidad Católica
4 de Ecuador in Quito, Ecuador. (Chapter 2)
5
6 Clifford M. Griep is executive managing director and chief credit officer
7 of Standard & Poor’s. As CCO, Griep chairs the firm’s Analytical Policy
8 Board and serves as the ratings group chief rating officer. The Analytical
9 Policy Board directs the rating firm’s criteria and rating methodologies
10 and is comprised of senior regional credit officers, general counsel, and
11 the heads of criteria and ratings policy for each of the global practices.
12 Griep joined Standard & Poor’s in 1981. Prior to his current posi-
13 tion, he headed Standard & Poor’s Global Financial Institutions ratings
14 unit and before that, its Global Structured Finance unit. He is an active
15 contributor to Standard & Poor’s publications and a frequent speaker on
16 credit market developments. Griep is a former president of the Fixed
17 Income Analysts Society. He received an M.B.A. in Money and Financial
18 Markets from Columbia Graduate School of Business and a B.A. in
19 English Literature from Rutgers University. (Chapter 14)
20
21 Heather Harper is a senior vice president at Edelman, the world’s
22 largest independent public relations firm, and leads an investor rela-
23 tions account team within the firm’s financial communications prac-
24 tice. While at Edelman, Harper has handled engagements involving
25 communications for corporate governance issues, financial crises,
26 transactions, and shareholder litigation as well as marketing clients to
27 the investment community. Recently she advised pharmaceutical com-
28 pany Elan on crisis communications, CIT Group on its IPO and spin-
29 off from troubled Tyco International, and utility company Aquila on
30 restructuring issues. Harper worked with Belgium-based Delhaize
31 Group on its cross-border purchase of minority interests in its U.S.
32 subsidiary. Additionally, her team’s work has included investor rela-
33 tions for small- and mid-cap companies in the biotechnology, telecom-
34 munications, and professional services industries. Her team’s programs
35 for clients have won industry recognition including PR Week’s 2003
36 “Campaign of the Year” and best investor relations program awards as
37 well as a Silver Anvil from Public Relations Society of America and a
ABOUT THE CONTRIBUTORS xvii

Golden World award from International Public Relations Association 1

for best investor relations programs. Harper earned a bachelor’s degree 2
in economics and French from Denison University and an M.B.A. in 3
finance from New York University’s Stern School of Business. 4
(Chapter 2) 5
6
John F. Hartigan is the managing partner of the Los Angeles office of 7
Morgan, Lewis & Bockius LLP and chairs the firm’s Securities Practice. 8
He advises clients, including some of the nation’s largest financial insti- 9
tutions, in the areas of securities law, mergers and acquisitions, and cor- 10
porate finance. Named one of the top mergers and acquisition attorneys 11
and one of the fifty most powerful attorneys in Los Angeles, Hartigan, 12
who was with the SEC for more than eight years and served as assistant 13
director of the Division of Enforcement, is a frequent lecturer, panelist, 14
and author on topics relating to securities law, mergers and acquisitions, 15
corporate finance, SEC enforcement, and broker-dealers. Active in pro- 16
fessional organizations, Hartigan has served as vice chair and a member 17
of the Executive Committee of the Business Law Section of the State Bar 18
Association of California, and chaired the Education Committee of the 19
Business Section of the State Bar Association of California. He is cur- 20
rently and has been the chair of the Securities Regulation Seminar 21
cosponsored by the SEC. He has also served on the Executive 22
Committee of the Business and Corporations Section of the Los Angeles 23
County Bar Association and chaired that Broker-Dealer Committee. 24
Hartigan received a bachelor’s degree in finance from the University of 25
Illinois and his law degree from the Georgetown University Law Center, 26
where he was case and notes editor and a member of the executive board 27
of The Tax Lawyer. (Chapter 6) 28
29
Scott P. Hilsen is a partner at the Atlanta office of Alston & Bird LLP in 30
the Securities Litigation Group. His practice includes securities class 31
actions, derivative suits, broker/dealer matters, and corporate investiga- 32
tions. Hilsen is a frequent speaker at various CLE seminars on securities 33
litigation issues. He recently played a major role on a trial team that won 34
a $50 million jury verdict in a securities-related case that involved claims 35
for breach of contract, business fraud, and tortious interference. He 36
received his J.D., cum laude, from Georgia State University, where he 37
 xviii ABOUT THE CONTRIBUTORS

1 was managing editor of the Georgia State University Law Review. While
2 in law school, Hilsen clerked for Justice Leah Sears of the Georgia
3 Supreme Court. He received an M.B.A. from Georgia State University
4 and a B.A. from the University of Florida. (Chapter 3)
5
6 John R. Lefebvre, Jr. has twenty-five years of experience in the securities
7 industry, having been trained by Merrill Lynch in the late 1970s. His
8 Colorado-based firm, Shareholder Relations, has performed investor rela-
9 tions work for more than seventy clients in twenty different industries
10 since 1988. Shareholder Relations runs cost-effective, pragmatic investor
11 relations campaigns designed to raise investor awareness and broaden the
12 shareholder base and has advised clients on matters as diverse as investor
13 relations, corporate development, and corporate finance. The website of
14 The Harvard Business Review said that Investor Relations for the
15 Emerging Company (a guidebook coauthored with Ralph Rieves) was
16 “a must read for anyone even thinking of going public.” (Chapter 13)
17
18 Thomas E. McLain is a partner in the Los Angeles office of Sidley
19 Austin Brown & Wood LLP. McLain’s practice concentrates on
20 international business and technology transactions. He advises both
21 international and domestic entities in joint ventures, private equity
22 investments, strategic acquisitions and investments, privatizations,
23 and restructurings. Significant transactions include negotiating the
24 rights to build Tokyo Disneyland, establishing the joint venture to
25 build and operate Osaka Universal Studios, and representing the Koran
26 Asset Management Corporation to sell portfolios of nonperforming
27 real estate loans and to restructure the foreign assets of Daewoo
28 Corporation. McLain is a trustee and member of the Executive
29 Committee of the Asia Society and chairman of The Asia Society
30 Southern California Center, a member of the Board of Directors and
31 Executive Committee of the Library Foundation of Los Angeles, and
32 a member of the Steering Committee for the Japan-American Young
33 Leaders Project of the U.S.-Japan Foundation. He has served as a
34 commissioner of the Japan-U.S. Friendship Commission and the
35 United States-Japan Conference on Cultural and Educational Inter-
36 change, as a director of the U.S.-Japan Bridging Foundation, and as
37 member of the Board of Visitors of the Terry Sanford Institute
ABOUT THE CONTRIBUTORS xix

of Public Policy at Duke University. He has taught courses on the 1

Japanese legal system at the University of Southern California Law 2
Center, and has been a featured speaker at numerous conferences. 3
McClain received his A.B. degree, with highest honors, from Duke 4
University and his J.D. degree, also with highest honors, from Duke 5
University School of Law. (Chapter 12) 6
7
Christopher N. Orndorff, CFA, is managing principal at Payden & 8
Rygel, where he oversees the firm’s equity strategy group, high yield 9
credit group, and investment grade corporate credit group. He is one of 10
six members of Payden & Rygel’s investment policy committee. Before 11
joining Payden & Rygel, he was a vice president at Northern Trust 12
Company, where he managed domestic and global institutional portfo- 13
lios. Orndorff has published several articles on global investing as well as 14
being a contributor or coauthor of three investment books. He has spo- 15
ken at many investment forums, including the AIMR Investing 16
Worldwide Conference. He is frequently quoted in the press, including 17
CNBC. He is a member of the Investment Counsel Association of 18
America, Inc. (ICAA), the Los Angeles Society of Financial Analysts, and 19
the Association of Investment Management and Research (AIMR). He 20
also serves as a trustee of the Children’s Bureau of Southern California 21
Foundation and as a trustee of Westridge School. A Chartered Financial 22
Analyst, Orndorff holds a master’s degree in Business Administration 23
with an emphasis on finance and international business from the 24
University of Chicago and a bachelor’s degree in finance from Miami 25
(Ohio) University. (Chapter 15) 26
27
Gregory J. Pelnar is a vice president at Lexecon, the economics consult- 28
ing firm, where he is responsible for researching and summarizing “the 29
state of economic knowledge” on issues of concern to clients. His research 30
is integral in the formulation of opinions of Lexecon’s experts and their 31
criticisms of opposing experts. In addition, Pelnar has assisted with the 32
research, editing, and proofreading of two books, Dennis W. Carlton and 33
Jeffrey M. Perloff’s Modern Industrial Organization and Daniel R. 34
Fischel’s Payback: The Conspiracy to Destroy Michael Milken and His 35
Financial Revolution. Pelnar has an M.A. in economics from the Univer- 36
sity of Chicago. He is a member of Phi Beta Kappa. (Chapter 11) 37
 xx ABOUT THE CONTRIBUTORS

1 Hollis Rafkin-Sax has been a leading professional in the financial and

2 public relations industry for more than twenty years. She is currently the
3 global managing director of Edelman’s financial practice. As a longtime
4 strategic communications adviser, Rafkin-Sax specializes in corporate
5 positioning, M&A, investor communications, crisis situations, and finan-
6 cial restructurings and reorganizations. She also created and leads
7 Edelman’s Corporate Governance Advisors, which is chaired by former
8 SEC Chairman Richard C. Breeden. Edelman’s CGA is an industry first,
9 blending communications consulting, regulatory, and board-level
10 expertise; capital markets experience; and strong investment community
11 and media relationships. This group deals with critical corporate gover-
12 nance and corporate credibility issues as well as board composition and
13 financial transparency and reporting. Rafkin-Sax is a graduate of
14 Bowdoin College in Brunswick, Maine. She was elected to the Bowdoin
15 College Board of Governors in 1988 and served two terms as a Trustee
16 of the College. Rafkin-Sax did graduate work at the London School of
17 Economics in international relations and defense issues and completed
18 the Karl Landeggar Mid-Management Training Program in Inter-
19 national Business-Government Relations at Georgetown’s School of
20 Foreign Service. She also serves on the advisory board of the Make-A-
21 Wish Foundation. (Chapter 2)
22
23 Ralph A. Rieves is managing director of the Emerging Companies
24 Research Institute (ECRI), a division of Farragut, Jones & Lawrence.
25 ECRI advises recently listed companies about current research in the
26 areas of financial reporting, compliance, capital markets, and institu-
27 tional investors’ portfolio strategies. He was managing editor of the
28 Journal of Investment Consulting and was previously the executive
29 editor for capital markets publishing for Dow Jones–Irwin books and
30 Irwin Professional books. Rieves is the recipient of the book industry’s
31 Bowker LMP Award for distinguished achievement. He is the coauthor,
32 with John Lefebvre, of Investor Relations for the Emerging Company
33 (John Wiley & Sons, 2002). (Chapter 13)
34
35 David J. Ross is a senior vice president at Lexecon, the economics con-
36 sulting firm, where he specializes in finance, labor economics, and the
37 economic analysis of the law. He has testified and authored expert
ABOUT THE CONTRIBUTORS xxi

reports regarding such issues as causation, materiality, damages, and val- 1

uation in cases involving allegations of breach of contract, illegal insider 2
trading, investment neglect, misappropriation of business opportunities, 3
stock manipulation, unsuitable trading, securities fraud, and improper 4
tax-avoidance schemes. He has consulted and directed studies on a wide 5
variety of industries, including banking and communications. Ross is the 6
author of several academic articles on topics in finance and the economic 7
analysis of the law in such scholarly journals as The Journal of Law and 8
Economics, Harvard Law Review, and The Journal of Derivatives. 9
(Chapter 11) 10
11
Theodore J. (Tod) Sawicki is a partner in the Securities Litigation Group 12
in the Atlanta office of Alston & Bird LLP and focuses his practice on 13
the litigation and arbitration of securities and business disputes as well as 14
class action litigation. Sawicki has successfully represented a number of 15
companies, financial services firms, executives, and professionals in a 16
wide range of litigation matters. In addition, Sawicki is one of the 17
Securities Litigation Group’s specialists in broker-dealer and investment 18
advisory litigation, arbitration, regulatory counseling, and representa- 19
tion. In September 1997, Sawicki spent two weeks in Croatia as part of 20
a Financial Services Volunteer Corps independent expert assessment 21
team evaluating shareholder rights following that country’s privatization 22
effort. In March 1999, at the request of the Financial Services Volunteer 23
Corps, he provided commentary and proposed revisions to the Varazdin, 24
Croatia OTC Market Surveillance and Enforcement Rules. Sawicki 25
received his B.A. degree, cum laude, from Duke University and his J.D. 26
degree from Emory University School of Law, where he was notes and 27
comments editor of the Emory Law Journal. Upon graduation from law 28
school, he served as a law clerk to The Honorable John H. Moore, II, 29
United States District Judge for the Middle District of Florida. He is a 30
member of the State Bar of Georgia and the Florida Bar. (Chapter 3) 31
32
Douglas M. Sherk is the founder and CEO of San Francisco–based EVC 33
Group, LLC, a consultancy dedicated to creating communications 34
programs that generate enhanced valuation for companies with market 35
capitalizations below $1 billion. With nearly twenty-five years of experi- 36
ence, Sherk is considered one of the thought leaders and innovators in 37
 xxii THE NEW INVESTOR RELATIONS

1 business communications. During his career, he has personally developed

2 investor relations strategies for more than fifty initial public offerings and
3 created a proprietary program for companies planning to go public
4 called IPO Prep. Sherk holds a bachelor of science degree from the S.I.
5 Newhouse School of Public Communications, Syracuse University,
6 where he was best known as being basketball coach Jim Boeheim’s first
7 manager. A frequent speaker on business communications and investor
8 relations issues, Sherk currently teaches a graduate course on investor
9 relations at Golden Gate University, San Francisco. He is a member of
10 the National Investor Relations Institute. He also serves as treasurer of
11 the Black Adoption Placement and Research Center and is a past board
12 member of the Omega Boys Club. (Chapter 8)
13
14 Yoshiki Shimada is a partner in the New York office of Sidley Austin
15 Brown & Wood LLP. He has more than seventeen years of experience as
16 a corporate attorney and has advised on capital market transactions, joint
17 ventures, and cross-border entertainment transactions. Shimada currently
18 serves as special securities counsel to a major Japanese securities ex-
19 change and major Japanese publicly reporting companies in connection
20 with their filings with the U.S. Securities and Exchange Commission. As
21 adviser to Japan’s leading theatrical company (Shiki Theatrical
22 Company), he has negotiated cross-border production/licensing
23 agreements with major Broadway producers, including Walt Disney
24 Theatrical Productions, to bring Beauty and The Beast and The Lion
25 King musical productions to Japan. He also represented a major
26 Fukuoka real estate developer during its joint venture negotiations with
27 AMC Entertainment. Shimada has published articles on corporate gov-
28 ernance practices in Japan and the United States in Gaiko Forum,
29 International Legal Strategy, International Securitization &
30 Structured Finance Report, International Financial Law Review,
31 Harvard International Law Journal, Harvard Asia Quarterly,
32 Virginia Journal of International Law, International Legal Strategy,
33 and Columbia International Law Journal. He is admitted to the bars
34 of the State of New York and the District of Columbia. Shimada received
35 his A.B. (Phi Beta Kappa) from Cornell University and his J.D. from
36 Harvard Law School. (Chapter 12)
37
ABOUT THE CONTRIBUTORS xxiii

David Silver, APR, is president of Silver Public Relations, a financial pub- 1

lic relations and investor relations firm based in Los Angeles. His firm 2
provides strategic counseling and advice on financial public relations, lit- 3
igation public relations, crisis communications, and investor relations 4
issues for Wall Street companies and national law firms. Silver has 5
degrees from UCLA and the University of Southern California, is 6
accredited APR by the Public Relations Society of America, and is a 7
graduate of the Investor Relations certificate program at the University 8
of California, Irvine, which has been developed in collaboration with the 9
National Investor Relations Institute in Washington, D.C. (Chapter 4) 10
11
Michael S. Sitrick is chairman and chief executive officer of Sitrick and 12
Company. A nationally recognized expert in the strategic use of com- 13
munications, Sitrick has been the subject of numerous articles and pro- 14
files focusing on the results he has achieved for clients. Since founding 15
the firm, he has provided advice and counsel to more than 500 com- 16
panies, including some of the nation’s largest corporations—and some 17
of its highest-profile individuals—both on routine and extremely sen- 18
sitive matters. Prior to forming the firm, Sitrick served as senior vice 19
president of communications for Wickes Companies, Inc., where he 20
was the architect of Wickes’ Chapter 11 communications programs 21
and director of the company’s communications efforts through a series 22
of takeover attempts and defenses, litigation issues, a major product 23
liability problem, and numerous other critical matters. Before joining 24
Wickes, Sitrick headed communications and government affairs for 25
National Can Corporation; was a group supervisor for the Chicago 26
public relations firm Selz, Seabolt and Associates; and served as 27
Assistant Director of Public Information in the Richard J. Daley 28
administration in Chicago. He also worked as a reporter for such pub- 29
lications as the Washington Star and the Baltimore News American. 30
Sitrick has lectured on public relations and crisis management before 31
numerous professional groups and forums as well as at the graduate 32
schools of UCLA, USC, and Dartmouth, and the Journalism Fellows 33
Program at the University of Michigan. He is the coauthor of Spin: 34
How to Turn the Power of the Press to Your Advantage (Regnery 35
Publishing, 1998) and a contributing author to Workouts and Turn- 36
arounds II (John Wiley & Sons, 1999). (Chapter 9) 37
 xxiv THE NEW INVESTOR RELATIONS

1 John C. Wilcox is vice chairman of Georgeson Shareholder Communica-

2 tions Inc. During his thirty years with the firm, Wilcox has specialized in
3 corporate governance and has consulted with many corporations on
4 defensive and offensive tactics in proxy contests and tender offers. He is
5 a member of the American Society of Corporate Secretaries and its
6 Securities Law Committee, a member of the National Investor Relations
7 Institute, a member of the Issuer Affairs Committee of The National
8 Association of Securities Dealers, a member of the Board of Governors of
9 the International Corporate Governance Network and chairman of its
10 Committee on Cross-Border Voting Practices, and serves on the Board of
11 Trustees of Woodrow Wilson National Fellowship Foundation and
12 Bennington College. Wilcox has written articles on securities regulation,
13 takeovers, corporate governance, investor relations, and globalization of
14 the securities markets. His articles have appeared in the Financial Times,
15 the New York Times, The New York Law Journal, The American
16 Lawyer, Insights, Pensions & Investments, and other publications. He has
17 appeared as an expert witness in court cases involving shareholder matters
18 and has testified before Congress and regulatory agencies on matters
19 relating to securities regulation. Wilcox received a B.A. from Harvard
20 College, where he was a member of Phi Beta Kappa; an M.A. from the
21 University of California, Berkeley, where he studied as a Woodrow Wilson
22 Fellow; a J.D. from Harvard Law School; and an LL.M. degree from
23 New York University Graduate School of Law. He is a member of the
24 American and New York Bar Associations. (Chapter 10)
25
26
27
28
29
30
31
32
33
34
35
36
37
 1
2
Acknowledgments 3
4
5
6
7
8
9
I WISH TO ACKNOWLEDGE the expertise and talents of the con-
10
tributing authors of the book, each of whom made a special effort to
11
bring this evolving field—investor relations—into focus.
12
I also wish to thank Kathleen Peterson and Tracy Tait at
13
Bloomberg Press for their guidance in bringing this entire book
14
together. Anyone who has edited a book involving a small platoon of
15
writers will know of the great demands placed on editorial and logis-
16
tical skills.
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37

xxv
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3
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5
6
7
8
9
10
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 1
2
Introduction 3
4
5
6
7
8
9
T HE LANDSCAPE FOR WALL S TREET and publicly held American 10
corporations in the past several years has changed more than at any 11
time since the Great Depression, and with that, the operating envi- 12
ronment for investor relations professionals. Arguably, only the early 13
years of the Great Depression, with the seminal Securities Act of 14
1933 and the Securities and Exchange Act of 1934, resulted in 15
greater alterations for public companies than the reforms and changes 16
in sentiment resulting from the post-1990s meltdown on Wall Street. 17
Yet as important as relatively recent legal and regulatory changes 18
are—such as Regulation Fair Disclosure (Regulation FD) or the 19
Sarbanes-Oxley Act—Wall Street and publicly held companies were 20
already entering an environment much different from that existing 21
just a generation ago. A most notable advent has been the prolifera- 22
tion of financial media, especially electronic services. Few Americans 23
need to be reminded of the ubiquity of cable television, which ren- 24
dered “narrow casting” economically feasible. Amid the flood of new 25
shows were the all-financial stations, which now routinely air in news- 26
rooms and trading houses across the nation, seemingly incessantly. 27
And the Internet, with its marvelous ability to immediately present 28
and then archive news stories, press releases, and data, and its “chat 29
rooms” about company stocks—and rumor-mongering online 30
traders—was virtually unknown only a decade ago. Now, every com- 31
pany must consider the effectiveness of its website, at the minimum. 32
There has also been a floodtide of new business publications, as 33
well as a beefed-up Wall Street Journal, and a new national daily, 34
Investor’s Business Daily. Many major daily papers have expanded 35
their business coverage. One could contend, with just a little hyper- 36
bole, that it is difficult to live in any major city in America and not be 37

xxvii
 xxviii INTRODUCTION

1 aware of the trading range of the Dow Jones Industrial Average.

2 Public companies today address a radically larger, and in many
3 ways a better-informed, press corps than ever before. One could even
4 argue that the phenomenon of the “corporate crisis” is as much
5 fueled by the avalanche of media coverage as by bona fide corporate
6 misdeeds. A generation ago, would accounting scandals have attract-
7 ed nearly the attention they receive today or have elicited calls for
8 systemic reforms?
9 The same might be said for the perhaps quixotic campaign of New
10 York State Attorney General Eliot Spitzer and the Securities and
11 Exchange Commission (SEC), to reform brokerage analyst research.
12 Such research has been compromised for decades, some would say
13 ever since brokerage houses could both underwrite securities and
14 then advise investors to buy them. Why the reforms now? There was,
15 after all, a prolonged and ugly bear market after the 1960s boom
16 years on Wall Street, but no reforms or even talk of a regulatory
17 shake-up. To be sure, the transgressions of the 1990s seemed to epit-
18 omize all that was wrong with Wall Street, and on a grander scale
19 than ever before. But surely, media coverage played a role in the
20 actions of Spitzer and the SEC.
21 In addition, Wall Street and corporate America have been pressed
22 by other tectonic shifts in the economic and business scenes, which
23 have been building for years. These include the following factors,
24 notably:
25
The number and size of mutual funds have exploded in the last
26 two decades, representing an enormous financial stake for many
27 American households—and that much more reason for legisla-
28 tors to scrutinize Wall Street and push regulators to be more
29 aggressive. Moreover, a generation or two ago, pension funds
30 hewed closely to bonds, but they now invest heavily in equities
31 as well, while millions of Americans hold equities in 401(k)
32 plans. A few brave foundations, declaring themselves “perma-
33 nent investors,” even went so far in the late 1990s as to invest
34 only in equities, which historically have outperformed bonds.
35 Consequently, how the enormous baby boom population of
36 America—those born after World War II through 1968—will
37 fare in retirement is tied to Wall Street, a daunting thought.
INTRODUCTION xxix

One can guess that in the years ahead, the intertwined fortunes 1
of stocks and wanna-be retirees will lead to a gathering level of 2
interest and concern about Wall Street, corporate governance, 3
and accounting standards, as has already begun. 4

Like so many other business sectors, Wall Street has been glob- 5
alized during the past twenty years. Many foreign corporations 6
now seek listing on U.S. exchanges, and many foreign compa- 7
nies often wish to buy U.S. companies. Oftentimes, such enti- 8
ties will have to learn to comply with the increasingly rigorous 9
U.S. regulatory mandates and accounting standards. 10

Though recently cooling, the last decade saw an unprecedent- 11
ed upsurge in mergers of public companies, a trend one can 12
expect to revive a bit when economic conditions allow— 13
although the M&A salad days may be over for good: Too many 14
mergers have not panned out, a fact that will force public com- 15
panies to concentrate on generating returns for shareholders 16
through improved operations, organic profits, or even share 17
buybacks. 18

New funding mechanisms have emerged, including much more 19
sophisticated financing for mergers and acquisitions (which 20
helped the M&A boom of the 1990s), and more recently, pri- 21
vate investments in public equity, or PIPEs. 22

Wall Street has become increasingly litigious, with seemingly 23
every stock plunge or accounting scandal bringing an onslaught 24
of lawsuits. 25

Proxy wars are likely to become more common, due to ever 26
more forceful shareholder activism. Mergers or expansion cam- 27
paigns that appear to be empire building and not in the inter- 28
ests of shareholders are more likely to be challenged. 29
30
Given all of the above developments, I have selected a retinue of 31
investor relations or Wall Street professionals to present their expert 32
opinions on the current status of investor relations, or IR. The roll 33
call is as follows: 34
Don Allen, IR practitioner and board member of the National 35
Investor Relations Institute bats lead-off, in Part 1, “Underpinnings 36
of the New Order.” Allen, together with IR authorities Heather 37
 xxx INTRODUCTION

1 Harper, Hollis Rafkin-Sax, and Bryce Goodwin of Edelman Financial

2 Communications Worldwide, present chapters on what might be
3 called “the state of the art” in the nuts-and-bolts practice of IR. As
4 one will discover from reading their chapters, good IR these days
5 involves as much good corporate governance and compliance with
6 regulation as it does timely and accurate disclosure. These two chap-
7 ters are also a superb introduction to the craft of IR.
8 Meanwhile, litigation seems to have become a permanent fixture
9 of American corporate life, so that IR professionals today do well to
10 bone up on their obligations in this arena. Theodore J. Sawicki and
11 Scott P. Hilsen of law firm Alston & Bird have authored Chapter 3
12 with that intent. They also admonish IR professionals that to provide
13 investor relations today—the era of cable financial shows and the
14 ever-active Internet—is to be “on call, 24/7.” The Sarbanes-Oxley
15 Act, remind Sawicki and Hilsen, puts corporate executives directly in
16 the path of financial steamrollers, should they be found wanting for
17 accurate and timely disclosure. It becomes the job of IR profession-
18 als to keep disclosures both timely and accurate, but also universal
19 (i.e, made available to everybody in the market simultaneously, as
20 much as practicable).
21 Rounding out the book’s opening section is Chapter 4, “The IR-
22 PR Nexus, by author David Silver, president of Silver Public
23 Relations, who presents a fascinating review of the public relations
24 and investor relations trades, including a historical glimpse into the
25 emerging crafts and how they evolved—and why the two businesses
26 evolved separately. Silver argues powerfully that the separation is no
27 longer practical nor appropriate in today’s marketplace.
28 Part 2 of The New Investor Relations peers closely into the IR
29 challenges implicit in a variety of financial scenarios facing corpora-
30 tions today. Stock buybacks are already an increasingly popular
31 method to reward shareholders, and IR authority Neil Berkman
32 offers advice in Chapter 5, in terms of both strategy and impact on
33 investor relations, for the right way to present such plans to share-
34 holders. As Yogi Berra once said, “Making predictions is really hard,
35 especially about the future,” but one guess is that more public com-
36 panies will turn to buybacks in the years ahead.
37 The mergers game is a bit sullied as an avenue to growth, and
INTRODUCTION xxxi

market average price-earnings multiples are not likely to double, and 1

then double again, as they did in the 1980s and 1990s. Yet even 2
though the pace of corporate mergers has slowed, another wave is 3
likely in the offing because if asset values were to fall any further, buy- 4
out artists or corporations would look to expand operations—or, 5
conversely, if the economy were to perk up, so would the merger 6
trade. Low interest rates and cheap money also bode well for the 7
merger game. Every IR professional needs to be armed and ready to 8
handle a merger scenario, and Chapter 6 by John Hartigan, of the 9
national law firm Morgan, Lewis & Bockius, reminds IR teams of 10
their obligations and opportunities in and around mergers. 11
In recent years, the financing vehicle known as private investment 12
in public equity (PIPE) has become a relatively prominent method of 13
raising capital on Wall Street, yet its IR requirements are unique, and 14
nearly the opposite of those called for in an initial public offering. 15
Boutique investment banker and private placement expert Alex 16
Cappello in Chapter 6 counsels public companies on the right way to 17
broach this topic with investors. 18
And let’s not forget initial public offerings (IPOs), even if Wall 19
Street has, for now, done so. Someday, the IPO will make a come- 20
back, and corporate communications guru Doug Sherk, of the EVC 21
Group LLC, in Chapter 7 offers cogent suggestions to would-be 22
public companies on how to avoid a post-IPO meltdown. Having 23
excellent internal lines of communication set up in advance (espe- 24
cially for business data) and relating those facts to the market in a 25
timely way are two key elements of successful IPO investor relations, 26
argues Sherk. 27
With “crisis du jour” all too often defining the climate for publicly 28
held companies today, Part 3’s lead-off chapter on Crisis IR, by 29
author Michael Sitrick, is not only pertinent but also essential 30
reading for many managers. In something of a departure for the IR 31
community, Sitrick counsels not just responding to rumors but, 32
rather, actively engaging them and the journalists reporting on them. 33
To hide in the shell like a turtle is to allow others to define the news 34
landscape, argues Sitrick, in this guideline-filled chapter. Although 35
Sitrick’s maxims are designed for full-on crisis modes, many of his 36
arguments and action plans make sense for less serious corporate 37
 xxxii INTRODUCTION

1 troubles as well. By the way, Sitrick is the consummate voice of expe-

2 rience—it was he who handled key PR and IR communiques behind
3 the scenes in America’s biggest corporate bankruptcy ever, the 2002
4 WorldCom filing.
5 Of late there have been some rip-roaring proxy wars on Wall
6 Street, as the days of genteel boards of directors and timid share-
7 holders retreat further into the past. Although proxy wars are hardly
8 common, shareholders are likely to grow increasingly restless in years
9 ahead in their search for returns. Many large investors, such as the
10 pension fund for California state employees (the California Public
11 Employees Retirement System, or CalPERS), have announced that
12 they are forced to be “permanent” investors in most large-cap stocks,
13 and thus must be more aggressive in preserving shareholder value
14 against the predations of wayward managements. John Wilcox, of the
15 leading proxy solicitation firm Georgeson Shareholder, warns that
16 proxy fights are inherently destabilizing and should be fended off
17 early, when possible. Wilcox, in Chapter 10, argues that the best
18 defense can be a good offense, and that means communicating with
19 shareholders often and knowing who they are.
20 Following Wilcox’s presentation, we have a fascinating chapter
21 highlighting the shareholder opposition in the renowned Hewlett-
22 Packard proxy battle of 2002, authored by principals Kenneth R.
23 Cone, Daniel R. Fischel, Gregory J. Pelnar, and David J. Ross, of the
24 economics consulting firm Lexecon. This remarkable proxy tussle
25 was precipitated by Hewlett-Packard’s decision to merge with
26 Compaq Computer. Even though proxy fights may become more
27 commonplace, these authors warn corporate revolutionaries that the
28 swimming is upstream. Too many shareholders do not have the time
29 to study thoroughly the issues and so defer to management, and if
30 not management, then to the Rockville, Maryland–based
31 Institutional Shareholders Services, the consulting firm. But ISS does
32 not—and does not even pretend to—examine the business merits of
33 proxy questions, but only whether management is following proper
34 corporate governance practices. The Lexecon chapter makes for a
35 thought-provoking look at proxy votes and the role of ISS.
36 In the late 1990s, we saw many foreign companies becoming
37 listed on American exchanges, in search of credibility and attendant
INTRODUCTION xxxiii

higher valuations. Like so much on Wall Street, that trend has turned 1
a bit quiescent for now, but nothing is permanent on the Street. 2
Moreover, there is talk of a tidal wave of Asian companies seeking 3
U.S. listings as the behemoth economy of China expands. Sidley 4
Austin Brown & Wood’s Tom McLain and Yoshiki Shimada explain 5
the requirements of doing business in a style acceptable for a U.S. 6
listing, which may compel foreign entities into some serious refor- 7
mulations of business practices. At times, something so elemental as 8
enforceable contracts with suppliers is missing in foreign companies, 9
warn Shimada and McLain. Any IR professional helping an offshore 10
company seek a U.S. listing should read this chapter, which intro- 11
duces the book’s Part 4, “Special Case Perspectives.” 12
Next up in this section of the book, Ralph Rieves, author and IR 13
consultant, with his colleague John R. Lefebvre Jr., contributes a 14
chapter on IR for emerging public companies, filled with guidance 15
both sage and timely, in light of recent events. Although readers, by 16
this point in the chapter lineup, may feel a bit beat about the head 17
with admonitions to be honest and frank, Rieves and Lefebvre point 18
up that emerging companies, too, must walk the walk if they want to 19
survive on Wall Street (and stay out of the courtroom or worse). 20
And though sometimes overlooked in this context, dealing with 21
the bond-rating agencies is also a critical part of IR, but it requires a 22
much different approach than that generally applicable in the equities 23
market. A fact perhaps not widely known, the credit-rating agencies 24
are privy to much information that is effectively “classified” and 25
would not otherwise be disclosed, except to all market participants. 26
In fact, there is a special clause in Regulation FD that allows the rec- 27
ognized rating agencies to have access to otherwise nonpublic infor- 28
mation, writes Chris Griep, of Standard & Poor’s, in Chapter 14. The 29
credit-rating agencies, like so much of Wall Street, have come under 30
fire of late, for not raising red flags early enough on such huge deba- 31
cles as WorldCom. One can assume a “get-tough” stance from rat- 32
ings agencies going forward, and nothing in this, the penultimate 33
chapter of the book, suggests otherwise. IR professionals are going 34
to have to play ball with the ratings agencies, and on their terms. 35
Finally (and maybe it should have been first), this volume includes 36
a chapter from a money manager, presenting a fresh consumer view on 37
 xxxiv INTRODUCTION

1 what constitutes good investor relations. It is a chapter well worth

2 reading: After all, notwithstanding that the experts assembled here
3 have weighed in at length, with invaluable guidance on effective IR
4 practice, bear in mind that the real “buyers” of IR today are largely
5 institutions, be they pension funds, insurance companies, money man-
6 agers, or mutual funds. All the expert advice in the world won’t help
7 a company if this brand of consumer is not impressed. Chris Orndorff,
8 managing principal and head of equities at Payden & Rygel, a money
9 shop with $45 billion under management, explains what he wants
10 from good IR, and it’s a lot less polish and lot more candor than per-
11 haps many public companies are attempting.
12
13
14 A NY PUBLIC COMPANY has obligations to shareholders and the
15 larger capital markets to be as open as possible at all times, and to
16 share information in a timely manner. In the long run, this has the
17 happy coincidence of benefiting a company’s shareholders: The more
18 a market trusts a public company, the higher the valuation, or price-
19 earnings ratio, that stock will have (all other things being equal).
20 Conversely, errant, misleading IR will hurt shareholders and, in some
21 small way, help to decrease the public’s faith in capital markets.
22 The deceptive course—from outright cooking the books to any
23 corporate shenanigans that skirt accurate and timely disclosure—may
24 temporarily enrich or seemingly offer short-term solutions, but could
25 incur financial and even criminal penalties for those involved.
26 Moreover, with the advent of the Internet, one’s career at public
27 companies has a very long tail. It is very easy for future employers or
28 business partners to review all regulatory actions and news articles
29 ever written about a particular individual or company. Questionable
30 or illegal behavior can be revisited every time somebody plugs a com-
31 pany’s name into a search engine on the Web.
32 Without question there are guidelines and words of wisdom in
33 abundance in the chapters of The New Investor Relations: Expert
34 Perspectives on the State of the Art—and some of it may indeed be
35 critical advice for an IR professional facing a crisis. However, it would
36 also be accurate to say that much of this book boils down to one sim-
37 ple phrase: “Tell it like it is.”
B ENJAMIN M ARK C OLE
The New Investor Relations
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Underpinnings 12
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of the New Order 15

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 1

1 Fundamentals 2
3
4
of Investor Relations 5
6
7
DONALD ALLEN 8
The Allen Group 9
10
11
12
13
14
15

T O MOST CORPORATE EXECUTIVES , the term investor relations

(IR) conjures up images of financial communications with a pub-
lic company’s shareholder base. The present-day practice of IR,
16
17
18
however, encompasses far more than communicating with one’s 19
shareholders. Investor relations is a proactive and strategic executive 20
function that combines elements of finance, communications, and 21
marketing to provide the investment community with an accurate 22
portrayal of both a company’s current performance and its future 23
prospects. IR incorporates multiple program elements that work in 24
concert to market the company and its stock and to help increase 25
shareholder value in the long term—while operating within the pre- 26
scribed framework set by the Securities and Exchange Commission 27
(SEC), the Financial Accounting Standards Board (FASB), and 28
other agencies. Given that good investor relations can also help 29
enhance a stock’s price-earnings ratio, a solid IR program should be 30
considered a fiduciary responsibility of management. 31
The basics of investor relations include the following practices: 32

Developing and maintaining a corporate disclosure policy, 33
including an internal “process” for timely disclosure of mate- 34
rial information 35

Managing required financial reporting to shareholders, regula- 36
tory agencies, stock exchanges, and other key audiences 37

3
 4 THE NEW INVESTOR RELATIONS

1
Creating targeted outreach programs designed to increase mar-

2 ket awareness and understanding of a company
3
Building and maintaining relationships with the investment
4 community
5
6 An effective IR program emphasizes not only prospects, but also
7 accountability, good corporate governance, and transparency. Such a
8 program can help build credibility for your company and obtain bet-
9 ter market valuations. It can help lower your cost of capital. And it
10 can help your company achieve the capital growth that investors seek.
11 Properly planned and executed, the IR function serves both the com-
12 pany and the investment community. It’s a two-way conduit between
13 the public markets and the corporation, providing information of
14 value to both investors and management. For the investor, the infor-
15 mation that’s communicated helps drive investment decisions. For
16 the company, investor feedback can help management adjust business
17 strategies and facilitate creation of long-term shareholder value.
18
19
20 What’s the Point?
21 It’s axiomatic that when companies perform well, their stock prices
22 go up. When companies don’t meet expectations, share prices go
23 down. This means that companies must provide a consistent flow of
24 good, reliable, and transparent information so that investors can eval-
25 uate future performance with confidence. And since perception is
26 often reality, it’s important to manage expectations as well. Working
27 in tandem with corporate communications, a good investor relations
28 program will manage five vital steps in creating a strategic program
29 and enhancing its tactical success:
30 1. Define the company image and then support that image with
31 information that positions the company as a positive and iden-
32 tifiable investment opportunity. Although it may be trouble-
33 some, sometimes public companies discover that by thinking
34 about their image and what they can offer to the Street they
35 have to change their substance—perhaps spinning off divisions
36 that blur the company’s focus. In this sense, good IR can help
37 shape a company. For example, it may be enough to be a good
FUNDAMENTALS OF INVESTOR RELATIONS 5

real estate investment trust—but to empower investors (and 1

thus gain their favor) would it be better to be a REIT with a 2
certain type of portfolio, such as apartments only? Or a REIT 3
that emphasizes not only dividends but also dividend growth? 4
2. Conduct market research to identify investors who have invest- 5
ed in opportunities before and thus might do so again. 6
3. Determine the best vehicles to communicate the information 7
to targeted investors and the financial media. 8
4. Implement the program that broadly defines your company 9
image on Wall Street. 10
5. Measure results and adjust the program accordingly. 11
12
13
Background on Corporate Disclosure 14
The first public company in the United States, reportedly, was the 15
Boston Manufacturing Company, which was founded in 1814 in 16
Waltham, Massachusetts. The company was a textile maker, and in 17
order to fund expansion of higher volume production, its founder 18
sold stock to ten associates. Happily enough, the ten investors all 19
received substantial returns on their investments during the next sev- 20
eral years, and thus was born a new business model that has flour- 21
ished for close to two centuries. The novel idea of stock ownership 22
was enticing to investors, especially in the unfettered environment 23
reflecting the near-absence of government or stock exchange over- 24
sight prior to and during the early decades of the twentieth century. 25
Spasms of speculation—and it was rank speculation, given the lack of 26
financial information available to investors—resulted in the Roaring 27
Twenties and subsequent Crash of 1929. 28
The federal government’s response to this market crisis and the 29
resulting Great Depression of the 1930s was to create the Securities 30
Acts of 1933 and 1934, which established the Securities and 31
Exchange Commission (SEC), the government agency that regulates 32
and supervises stock market activities in the United States. These acts, 33
and subsequent case law during the past seventy years, have defined 34
what information companies must disclose to investors and how they 35
must disclose it. 36
37
 6 THE NEW INVESTOR RELATIONS

1
2 Understanding Disclosure and Materiality
3 The 1933 and 1934 acts define two types of disclosure: structured
4 and unstructured. Structured disclosure refers to explicit information
5 about a company’s operating results and must be provided in a pre-
6 cise manner, as stipulated in required SEC documents such as Form
7 10-K (annual financial report), Form 10-Q (quarterly financial
8 report), Form 8-K (event reporting), and other documents such as
9 registration statements, prospectuses, proxy statements, and the man-
10 agement discussion and analysis (MD&A) section of the annual
11 report to shareholders. The intent of setting such reporting standards
12 for all public companies was to provide a structure that allows
13 investors to easily compare corporate reporting and, in theory, better
14 evaluate a company’s performance relative to its peers and to other
15 industries.
16 Unstructured disclosure describes information that companies
17 may disclose at will, within certain broad guidelines. These implicit
18 disclosure obligations are defined under the general antifraud provi-
19 sions of the 1933 Securities Act, Rule 10b5, and include media such
20 as annual reports, letters to shareholders, press releases, advertise-
21 ments, speeches, investor meeting presentations, conference calls,
22 and telephone conversations with investors or analysts.
23 Because hard and fast rules are not specified under the act,
24 unstructured disclosure can have untoward results, especially if some
25 investors learn material facts that others don’t, or some investors con-
26 tend they were misled. Two major factors affect this type of unstruc-
27 tured disclosure: the definition of “material” information and what
28 constitutes an “insider.” In general, material information is knowl-
29 edge that would cause an ordinary person to make a decision to buy,
30 sell, or hold a stock. It’s basically any information that might change
31 someone’s evaluation of your stock—either upward (to buy), down-
32 ward (to sell), or reinforcing an opinion to hold the stock.
33 An insider is someone who is deemed to have material informa-
34 tion prior to its public disclosure and who thus cannot trade based on
35 that information—and cannot pass the information along to anyone
36 else to trade on it. There are several famous cases of insider trading.
37 For example, in a classic case involving IBM’s acquisition of Lotus
FUNDAMENTALS OF INVESTOR RELATIONS 7

Development Corp. in 1995, more than thirty people in Westchester 1

County, New York, were charged with insider trading because a sec- 2
retary who was simply copying legal documents told her husband of 3
the pending acquisition. The news spread like wildfire through the 4
community. A more recent case is the alleged insider trading in 5
ImClone stock in 2002, which snared famous names such as Martha 6
Stewart. Routinely, however, insiders usually are corporate manage- 7
ment and employees, outside IR consultants, attorneys, accountants, 8
investment bankers, or even suppliers such as printers working on 9
stock offering documents. 10
The issues of materiality and disclosure of quantitative information 11
aren’t unusually complex. When considering whether information is 12
material, use the Five Minute Rule suggested by Louis Thompson, 13
president and CEO of the National Investor Relations Institute 14
(NIRI). According to Thompson: “If it takes more than five minutes 15
to discuss whether something is material or not, it’s material. Disclose 16
it.” Nobody has ever gone to jail for too much accurate disclosure of 17
a company’s financial or business matters to the broad investing pub- 18
lic. And it is hard to fight the perception that nondisclosure may be in 19
management’s interests, but not that of shareholders. 20
Quite often, the question of materiality arises from qualitative data 21
about a company’s operations and anticipated results. This type of 22
information, usually nonfinancial in nature, is protected by provisions 23
of the Private Securities Litigation Reform Act of 1995. This law pro- 24
vides a so-called safe harbor for forward-looking statements and 25
makes it somewhat more difficult for lawyers to file suits on behalf of 26
shareholders claiming to have lost money because of something the 27
company did or didn’t say. 28
29
Creating and Maintaining a Disclosure Policy 30
Given the importance of ensuring consistent, nonselective disclosure 31
of material information, it’s important that companies have a disclo- 32
sure policy that makes clear who is allowed to speak for the company, 33
how they may do so, and what guidelines they must follow. NIRI lists 34
the basic elements for a suggested corporate disclosure policy in its 35
publication Standards of Practice Handbook for Investor Relations. 36
Here are their suggestions: 37
 8 THE NEW INVESTOR RELATIONS

1 ❏ Designate a disclosure policy committee, which should include

2 legal counsel, the CFO or treasurer, the chief investor relations offi-
3 cer (IRO), and chief corporate communications officer.
4 ❏ Designate authorized spokespersons and make a corporate
5 commitment to keep these spokespersons fully apprised of company
6 developments. Both the financial media and professional investment
7 community quickly size up IR or PR representatives as either knowl-
8 edgeable spokespersons or mere company stooges.
9 ❏ Instruct all employees who are not authorized to speak for the
10 company to forward any calls or inquiries to the authorized spokes-
11 persons.
12 ❏ Have a policy on reviewing analysts’ reports on the company. If
13 your policy is to review reports, restrict comments to correcting
14 errors in fact and don’t comment on forecasts. Provide corrections
15 only in writing.
16 ❏ Implement a policy on commenting on analyst earnings esti-
17 mates. Most companies don’t officially comment on estimates, but
18 try to provide a steady and consistent flow of information to help
19 analysts arrive at their own good estimates.
20 ❏ Have a policy on responding to rumors. A simple “Our corpo-
21 rate policy, at this time, is that we don’t comment on rumors” will
22 sometimes suffice, so long as the company itself is not the source of
23 the rumor, but it can backfire with the financial media and even the
24 professional investing community. Obviously, some rumors are per-
25 sistent, or they may appear grounded in fact due to particular cir-
26 cumstances. If a rumor is a rumor, say so forthrightly. If a rumor is
27 partially accurate clarify the situation by truthful disclosure. If a
28 rumor is affecting the price of a stock, then it has become a material
29 event, certainly in investors’ minds. It’s a judgment call, but it’s
30 always smart to err on the side of good disclosure.
31 ❏ Have a policy on providing forward-looking information.
32 Follow the provisions of the Safe Harbor Act in providing qualitative
33 information while not inviting lawsuits.
34 ❏ Have a policy on providing fair distribution of and access to
35 corporate information.
36 ❏ Have a policy on the conduct of analyst meetings, conference
37 calls, and webcasts.
FUNDAMENTALS OF INVESTOR RELATIONS 9

❏ Have a policy regarding media participation in analyst meetings 1

and conference calls. Most companies prohibit media from partici- 2
pating, but the use of live webcasts of conference calls makes it easier 3
to provide information to the media. 4
5
Regulation Fair Disclosure (Reg FD) 6
The SEC issued new disclosure requirements in October 2000, in the 7
form of Regulation Fair Disclosure, or Reg FD, as it’s popularly 8
known. This regulation was aimed specifically at leveling the playing 9
field between institutional investors (the professionals) and individual 10
shareholders (the amateurs). In the past, companies all too often 11
favored analysts or institutional investors by conveying information 12
to professionals that wasn’t officially available to the broader invest- 13
ing public until after the fact. In effect, the institutions were used as 14
an information conduit to the retail market. This gave certain insti- 15
tutions an unfair advantage. Rightly so, it is now required to disclose 16
material information to all investors simultaneously as much as tech- 17
nologically feasible so that no investor has an advantage over any 18
other investor. 19
In practice, Reg FD applies only to a company’s communications 20
with market professionals and investors. It does not include the press, 21
customers, or suppliers. Reg FD also covers only communications by 22
senior management, investor relations staff, and others who regularly 23
communicate with investors and market professionals. 24
The regulation specifically does not apply to communications with 25
certain people: 26

Any person who owes a duty of trust or confidence with the 27
company, such as accountants or attorneys. 28

Any person who expressly agrees to maintain the information in 29
confidence (by signing a nondisclosure agreement, for exam- 30
ple) such as investment bankers or potential merger partners. 31

Any entity whose primary business is the issuance of credit rat- 32
ings, such as Standard & Poor’s or Dun & Bradstreet. 33

Any person contacted in connection with a registered offering, 34
such as during a “quiet period,” since it’s assumed that docu- 35
ments related to that registered offering will provide sufficiently 36
broad disclosure. 37
 10 THE NEW INVESTOR RELATIONS

1 How does a company accomplish broad, nonexclusive disclosure

2 under Reg FD? There are three primary ways:
3 1. Via distribution of a press release using a news wire service, and
4 simultaneous posting of information on the company’s website.
5 2. Via a Form 8-K filing with the SEC. Form 8-K is the “current
6 report” that is used to report any material events or corporate
7 changes, which previously have not been reported and which
8 are important to investors or security holders.
9 3. Via a conference call (by telephone and/or Internet webcast-
10 ing), with properly broad notice to potential audiences.
11
12 Simply posting news on a company’s website is not considered
13 broad public disclosure. Good disclosure requires that people be
14 notified that the information is there, which is why distributing a
15 news release, holding a conference call, and/or filing a Form 8-K are
16 considered proper solutions.
17 What should a company do if it discovers it has unintentionally
18 made a selective disclosure of material information? The company is
19 required to promptly make a public disclosure of that information.
20 This must be done as soon as is reasonably practical, but no later than
21 twenty-four hours following discovery by any “senior official.” This
22 may even require an update to previous guidance in some cases.
23 The SEC has said that its top enforcement priority concerns selec-
24 tive disclosure of anticipated earnings. It specifically warns that private
25 discussions with analysts seeking guidance will involve a high degree
26 of risk. A company will be in violation of Reg FD if it communicates
27 selectively to an analyst that earnings will be higher, lower, or the same
28 as what analysts have been forecasting. In other words, management
29 can no longer communicate with analysts with a “nod or a wink”
30 when it comes to commenting on anticipated financial results.
31
32
33 The Softer Side of Corporate Reporting
34 Any analyst or investor can read all about a company’s financial per-
35 formance in the required reporting that’s done via SEC filings. This
36 structured reporting is what a company has to do to meet its legal
37 requirements. In theory, this is all anyone would need to know about
FUNDAMENTALS OF INVESTOR RELATIONS 11

1
2
FIGURE 1-1 Reg D Disclosure Requirements 3
4

Corporate information must be disclosed broadly to all audiences simul- 5
taneously. 6

Selective disclosure of material information is prohibited. 7

What is “material” often can be unclear, so when in doubt, disclose. 8

Selective earnings guidance will be the element most likely to trigger SEC 9
enforcement action. 10
11
12
a company. But theory is very different from practice, and potential 13
investors usually want to know considerably more about a company 14
than just what’s happened in the past. 15
In addition, formal financial reporting documents such as Forms 16
10-K (the annual report) and 10-Q (the quarterly report) are 17
required to include information about potential risk factors. These 18
risk disclosures, even when disclosed in dull boilerplate, can cast a 19
dark light on even the best prospects. The SEC also is exerting 20
greater pressure for the management discussion and analysis 21
(MD&A) section of the annual report to anticipate scenarios in which 22
revenues do not hit targets, and what that would mean in terms of 23
capital availability—in short, in what scenario would the company 24
run out of money? 25
To offset the negative, even “doomsday” impact of some of this 26
reporting, many IR programs create documents and presentations 27
that are based on the SEC disclosure documents, but that don’t 28
include the risk factors or the harsher portions of the MD&A. Such 29
presentations allow for more than mere reporting on activities. They 30
can provide a forward look at where a company is headed and how 31
management plans to get there. 32
This approach often involves discussions about nonmaterial infor- 33
mation that can help analysts and institutional investors create the 34
“mosaic” from which they form an opinion about a company’s 35
future. Just as a mosaic involves the creation of a large image from 36
many small pieces of tile, the mosaic theory allows analysts and 37
 12 THE NEW INVESTOR RELATIONS

1 investors to create the big picture of operations from many small tid-
2 bits of information that, by themselves, wouldn’t be considered
3 material.
4 For example, there are many professional investors who believe
5 that predicting the future is close to impossible, so they back compa-
6 nies that have excellent management in place, come what may. To
7 reach such investors, management can be made accessible, at which
8 point managers should communicate their drive for profitable per-
9 formance, while honoring all corporate governance and disclosure
10 standards. Indeed, proactively assuring Wall Street that, due to exist-
11 ing conservative accounting practices, there will not likely be down-
12 ward earnings re-statements can be a wise course (in substance, as
13 well as in terms of IR).
14 Within SEC guidelines, there is considerable latitude to use non-
15 financial information to help “market” a company and its stock. This
16 can take the form of news releases, annual reports, company profiles,
17 investor relations Web pages, fact books, speeches at financial confer-
18 ences, and even shareholder information packets. It’s all a matter of
19 defining who you are as a company and what type of investment
20 opportunity you therefore represent to potential investors. Once
21 these elements are defined, do targeted research to find those
22 investor types and begin communicating with them. It’s a classic mar-
23 keting situation—only now you’re marketing your company, not just
24 your products. Your target audiences hopefully will want to hear all
25 about you and they’ll want to get to know your top management and
26 build relationships with them in the process.
27
28
29 The Art of the Message
30 Message development focuses mainly on why a company is a good
31 investment prospect. As noted, a lot of important company facts have
32 nothing to do with financial information. To go beyond merely
33 reporting the results of operations, however, consider the investors’
34 perspective and develop answers to the basic questions they will ask.
35 Be prepared to tell them why they should invest in your company. If
36 they’re already shareholders, explain why they should continue to
37 hold the company’s stock or perhaps buy more. And provide analysts,
FUNDAMENTALS OF INVESTOR RELATIONS 13

money managers, brokers, and specialized financial media with infor- 1

mation so that they can recommend the stock to their customers and 2
back up the recommendation with solid information. 3
To prepare a good message, explain corporate strategies and pro- 4
grams, competitive strengths and advantages, the company’s man- 5
agement and employee base, and its corporate ability to use all these 6
factors to enhance your performance (such as increases in revenues 7
and net income, improvements in margins, or generation of excess 8
cash). Note, for example, that in the future, there may be a reduction 9
or elimination of federal taxes on dividends, which have been an 10
important and longstanding component of total long-term returns 11
on Wall Street. Should the law change, a good IR program explain- 12
ing dividend policy should be developed and implemented. In the 13
meantime, the issue of stock buybacks needs to be addressed. 14
The following are examples of some of the factors to consider 15
incorporating in your message: 16
❏ Build on your reputation for (and the reality of) delivering 17
customer service that is truly better than your competitors’ and 18
take advantage of your good brand name, if you have one. If you 19
are number one or number two in your market, promote that— 20
many investors seem to gravitate to companies that are the largest 21
within their industry or segment. If you are lower on the food 22
chain, perhaps explain that you intend to take over a top position, 23
or mine a more-lucrative corner of the market the “big boys” can- 24
not get to as well. 25
❏ Explain “franchise” technology that allows you to innovate, 26
create new products, maintain good product quality, and push the 27
envelope in your particular business or technology. Though some- 28
times Wall Street forgets, the reality is that a service or good that is 29
replicable is not a franchise. Competition will inevitably drive down 30
profits; explain why you have a defensible niche. 31
❏ Explain production efficiencies (which make you a low-cost 32
supplier). If you are not the low-cost supplier, explain why you are 33
relatively a low-cost supplier (for example, if your service is twice 34
what the competition offers, but only 50 percent more expensive). If 35
you have customers who are fans of your product or service, make 36
them available to researchers. 37
 14 THE NEW INVESTOR RELATIONS

1 ❏ Show how your margins give you cost or price advantages and,
2 therefore, higher profitability and cash generation.
3 ❏ Show the advantages of your strong marketing and sales organ-
4 izations.
5 ❏ Explain your corporate culture and how it’s helped to build a
6 smart management team as well as an extraordinary family of employ-
7 ees. Included in this idea of culture should be that the company follows
8 strict ethical and corporate governance standards. This minimizes the
9 risk of a “time bomb” in the form of earnings restatements or a sudden
10 exodus of top management. Investors increasingly want to know that
11 management is ethical.
12 ❏ Show how you not only have the ability to generate strong
13 internal, organic growth but also have the management capabilities to
14 make heavily screened acquisitions that can help the business grow
15 and round out your market offerings through external additions of
16 new technologies, products, or other elements. However, be aware
17 that the M&A growth story is a tattered one, as the vast majority of
18 M&A campaigns flop. Talk along the lines of a few, very heavily scru-
19 tinized acquisitions, or that (if market values fall low enough) you are
20 buying on the cheap, well below replacement cost.
21 ❏ Show that the administration knows how to manage money, so
22 you’re able to fund future operations as well as earn income on
23 invested cash. A permanently funded stock buyback program can be
24 a component of this money management expertise. Such a program
25 also shows shareholders you care about them, not just about build-
26 ing a bigger empire. The name of the game is increasing earnings per
27 share, not expanding executive profiles and compensation.
28 ❏ Show that your company knows how to find new applications
29 for its existing technology and products.
30 ❏ Show that you can enter new markets to capitalize on existing
31 or related skills.
32 ❏ Show that you’re globally oriented, positioned to take advan-
33 tage of world markets and greater growth opportunities.
34
35 This type of information is the foundation on which you’ll create
36 multiple media opportunities for reaching prospective investors. Such
37 information will find its way into everything you publish and say.
FUNDAMENTALS OF INVESTOR RELATIONS 15

Whether you’re making a corporate presentation or preparing a new 1

printed document, these factors should be divided among three pri- 2
mary message categories: 3
1. Financial and operating information, which is a requirement for 4
proper disclosure 5
2. Corporate vision, mission, strategies, direction, and programs, 6
which provide a contextual framework for the numbers you 7
report 8
3. Industry context, which places your company relative to others 9
in your industry so that potential investors will better under- 10
stand your future prospects 11
12
One note of caution, however: Be careful when communicating 13
vision and mission information and make sure that your goals are 14
attainable. One CEO with whom I worked a few years ago said it best 15
when he repeatedly admonished middle management: “The differ- 16
ence between vision and hallucination is delivery.” 17
Always remember that performance is what ultimately counts, so 18
don’t set yourself or your company up for failure by communicating 19
goals that aren’t achievable. That can hurt you in the long run. 20
21
22
Targeting the Right Audiences 23
Once you’ve determined what sort of investment opportunity your 24
company represents and have created the basic messaging to convey 25
that positioning, you then need to research what potential investors— 26
both institutional and individual—might be interested in your stock. 27
There are several financial industry suppliers that provide everything 28
from printed directories to comprehensive databases of institutions on 29
the sell side (brokerages and investment bankers) and buy side (pen- 30
sion funds, mutual funds, banks, insurance companies, foundations, 31
endowments, and so forth). By querying these databases (or poring 32
over the directories, which is much more time-consuming) you can 33
sort the thousands of professional investors according to their invest- 34
ment interests—and identify those whose investment styles match up 35
with your company’s characteristics. 36
Institutional investors can be classified in several broad categories: 37
 16 THE NEW INVESTOR RELATIONS

1 Momentum investors. Momentum investors seek out stocks that

2 are moving up in price. They don’t really care what a company does,
3 but are interested only in upward price movement. Once that upward
4 momentum wanes or a stock’s price falls, they sell and are gone. They
5 won’t be at all interested in your company’s message.
6 Growth investors. Growth investors look for solid companies that
7 operate in industries where steady growth is expected. This focus
8 emphasizes good upward stock price movement for the long term,
9 and if a company is growing within a growth industry, it’s obviously
10 more attractive. Growth investors commonly look at industry sectors
11 first, and then scout out company opportunities within them.
12 Value investors. Value investors tend to look for companies that
13 are undiscovered or that have gone through a bad period and are
14 about to recover. Such conditions would also indicate upward price
15 potential in a stock; therefore, a company may be more attractive
16 from this perspective. Value investors often seek out company oppor-
17 tunities first, with industry sector as a secondary issue.
18 Both growth and value investors find appealing a company strate-
19 gy of sustained stock buybacks. Buybacks increase earnings per share
20 (creating the same effect of a growth stock). At the same time, your
21 company could be considered undervalued, which is why you are
22 buying back the stock. (For a detailed discussion of stock buybacks,
23 see Chapter 5.)
24 Since the corporate scandals that began in 2001 and have contin-
25 ued to occur on a regular basis, many investors once again are look-
26 ing for income stocks, i.e., those that pay dividends and therefore
27 may be expected to supply a steady income stream into the future.
28 Historically, companies that have paid dividends or have had low
29 earnings growth rates (such as public utilities or heavy industry) have
30 usually been viewed as stodgy. They paid dividends in order to attract
31 investor interest because they weren’t in high-growth sectors.
32 However, some of today’s leading technology companies, whose
33 growth rates are slowing, are now considering paying dividends
34 instead of retaining cash, as a means of proving they’re a good invest-
35 ment that will generate cash flow.
36 In addition to attracting institutional investors, you may want to
37 establish a parallel program to generate interest among retail investors.
FUNDAMENTALS OF INVESTOR RELATIONS 17

This can best be done by tailoring a program through organizations 1

such as the National Association of Investors Corporation (NAIC), 2
the World Federation of Investors, or the Value Investors’ Club. 3
Organizations such as these offer many avenues to reach individual 4
investors through membership in investment clubs. You can also use 5
“advertorial” tools in several well-known financial industry trade jour- 6
nals that are designed to equip retail stockbrokers with information 7
about your company as a means for promoting your stock. 8
Additionally, a public relations effort to “sell” your company to 9
the mainstream financial media is another way to reach retail 10
investors. It is remarkable how many high-net-worth individuals say 11
they get investment ideas from reading newspapers and watching the 12
business news television shows. If you have a particularly charismatic 13
chairman or CEO, consider promoting his or her image to the pub- 14
lic. The classic example of this is Berkshire Hathaway’s Warren 15
Buffett—there are investors who put money with his company simply 16
because they have faith in Buffett. Moreover, a chairman or CEO 17
who is quoted frequently in the media gains credibility—a big plus 18
with retail investors. 19
Although it may seem obvious, it is remarkable how many CEOs 20
fail to show that they put shareholders first during media interviews, 21
often allowing ego to show large. Before media interviews, CEOs 22
should be coached to have several talking points they emphasize, 23
and certain catchphrases they repeat, one of which should be 24
“I work for my shareholders, and I answer to them.” Or, in answer 25
to a question, a sentence can be led with the phrase, “It is in my 26
shareholder’s interests to...” 27
There are several facets to the IR research effort that are benefi- 28
cial for targeting appropriate investor types for both communica- 29
tions activities and relationship building. First, monitor your exist- 30
ing shareholder demographics, to see who already owns your stock. 31
It’s easier to retain your existing holders than to attract new ones. 32
Develop a balance among momentum, growth, and value investors 33
over time so that you maintain good trading activity in your stock 34
but aren’t too volatile with wild price swings that have no bearing 35
on reality. Over time you’ll likely want to enhance the mix of insti- 36
tutional and individual retail holdings. A key part of this effort is to 37
 18 THE NEW INVESTOR RELATIONS

1 identify key opinion leaders among analysts and investment man-

2 agers. You may also want to extend your domestic IR programs
3 globally to key international financial markets, in particular Europe,
4 Asia, and Latin America.
5
6
7 Outreach to the Investor
8 When it comes to communicating with a company’s various audi-
9 ences, you’ll need to develop several tactical elements in tandem.
10 Primary among these is the preparation and distribution of corpo-
11 rate news releases. This can include disclosure of your quarterly and
12 annual financial results as well as other corporate news (such as
13 acquisitions, joint ventures, and executive changes) that would be
14 material and of interest to investors. The goal, of course, is to
15 ensure full and fair disclosure in all communications activities.
16 Earning a reputation for clear and forthright communications prac-
17 tices can be of great assistance in managing expectations in the
18 investment community.
19 A related communications effort is the setup and conduct of con-
20 ference calls with analysts and investors. This is especially important
21 under Regulation FD. The simplest way to conduct these is to use a
22 telephone conference call service through which professional
23 investors can listen to your management’s discussion of periodic
24 results and can ask questions for clarification. A simultaneous live
25 feed of the call can be broadcast on your Internet website (using any
26 of several webcasting companies) so that retail investors and the
27 financial media can listen to your presentation. This webcast version
28 can then be archived for some period of time on your IR Web pages
29 for listening by those people who couldn’t attend the original call.
30 Notify your potential audience via e-mail and fax of the call details
31 and repeat those details in your quarterly news release.
32 One note about preparation for conference calls: It’s important
33 that you script remarks so that you not only don’t omit any details
34 that should be included, but also so you don’t disclose any informa-
35 tion beyond what’s being reported.
36 The growth of the Internet and its positioning as one more key
37 communications channel for reaching people has brought marvelous
FUNDAMENTALS OF INVESTOR RELATIONS 19

new capabilities to any company’s IR program. A major effort should 1

be the setup of a well-planned, well-designed, and content-rich cor- 2
porate IR website. Such sites are now the first place any investor goes 3
to obtain basic information about your company, and some of the 4
cost of developing an IR website will be offset by significant reduc- 5
tions in telephone and mail expenses for communicating with 6
investors. IR contact phone numbers should be displayed frequently 7
and prominently, perhaps even on the home page. Work closely with 8
good Web producers to create a complete set of pages with appro- 9
priate information that can be used for research on your company as 10
well as for broad distribution of information as it becomes available. 11
People should be able to easily subscribe to a publish-on-demand 12
system for quickly and automatically obtaining the latest news about 13
your company. 14
This isn’t to say, however, that the Internet will replace traditional 15
printed materials such as annual reports, investor profiles, fact sheets, 16
corporate backgrounders, or capabilities brochures. Indeed, if you’re 17
serious about marketing your company and your stock, you’ll still need 18
to produce these materials. Nearly every investor has a computer 19
today, yet many still prefer hunkering down with research materials in 20
a comfortable den, or while commuting. 21
Note that in regard to printed materials, the SEC recently has rec- 22
ommended transparency standards in several areas. This includes a 23
meaningful, clear, and communicative MD&A section of the 10-K and 24
annual reports. In addition, in October 2002 NIRI promulgated a set 25
of “best practices” recommendations to improve earnings releases. 26
While they tend to parallel what any good company should have been 27
doing all along, the NIRI recommendations have been adopted as an 28
SEC guideline. 29
Among these practices are the following: 30
❏ Include both a complete income statement and a complete bal- 31
ance sheet with your earnings announcements. 32
❏ Put GAAP earnings up front, preceding any pro forma results 33
and be sure to reconcile the two. 34
❏ Include key MD&A information in the earnings announce- 35
ment. 36
37
 20 THE NEW INVESTOR RELATIONS

1 Legislative changes affecting corporate disclosure have come

2 about with the passage of the Sarbanes-Oxley Act, which took effect
3 for all public companies in 2002. The act contains several sections
4 concerning corporate responsibility, disclosure, and new penalties for
5 improper conduct. Among its provisions are the following:
6
Certification of periodic financial reports including signature by
7 the CEO and CFO
8
A ban on loans to executive officers and directors
9
Shortening of the timing for reporting executive stock transac-
10 tions to two business days after the transaction has been executed
11
New standards on director independence
12
New standards for board audit committees, especially the
13 independence of such committees, and the qualifications of com-
14 mittee members
15
Elimination of certain executive compensation upon restatement
16 of financials
17
New whistleblower protection for employees
18
Management assessment of internal accounting controls
19
Codes of Ethics for senior financial officers
20
21 Within the area of disclosure requirements, the Sarbanes-Oxley
22 Act requires:
23
Full disclosure of off-balance sheet transactions
24
Pro forma financial information reconciliation with GAAP
25 results
26
Plain-English disclosure on a “rapid and current basis” of any
27 additional information concerning material changes in the
28 financial condition or operations
29
30 Because there is more to this legislation than can be covered in
31 summary form, consult with your board of directors, general coun-
32 sel, executive management, and IRO about compliance with the
33 Sarbanes-Oxley Act. Case law and SEC rule and interpretation will
34 help clarify and expand the impact of this act over time.
35
36
37
FUNDAMENTALS OF INVESTOR RELATIONS 21

1
Need for Flexibility and Adaptability 2
Perhaps the greatest attribute you can develop in your investor rela- 3
tions program is to be flexible and adaptable over time. Good IR is a 4
moving target, and although you should do your best to operate 5
within the perimeters of the regulations promulgated by the SEC and 6
FASB, not all of your communications efforts will be planned in 7
advance. There will be times when you’ll need to implement crisis 8
communications activities—such as responding to financial or market 9
crises related to your information programs or providing a response 10
about the implications of unplanned corporate events such as prod- 11
uct defects, recalls, plant disasters, or labor issues. For this reason, it’s 12
important that any major IR program includes good “inbound” 13
communications to company management. No one can work well in 14
a vacuum, so everything that executives do must be done relative to 15
the environment in which they operate. Management doesn’t decide 16
a company’s value, shareholders do. 17
Some IR shops annually poll their largest ten or twenty share- 18
holders with standard questionnaires, to find out how management 19
and the company are viewed. Often they discover that a certain 20
planned venture or corporate executive is not well received. That’s 21
why feedback to management is more important than ever. It’s essen- 22
tial to have an IR person or staff personnel who can maintain good 23
contact with the investment community and advise management on 24
what should be done, rather than the other way around. That com- 25
munications loop must be closed in order to achieve the most suc- 26
cessful investor relations program possible. 27
28
29
30
31
32
33
34
35
36
37
 1

2 IR for Blue-Chip 2
3
4
Companies: The New Look 5
6
7
HEATHER HARPER 8
HOLLIS RAFKIN-SAX 9
10
BRYCE GOOD WIN 11
Edelman Financial Communications 12
13
14
15

F RAUD , INDICTMENTS , GREED , and deceit have destroyed the

comfortable feelings of trust that traditionally formed the founda-
tion of relationships between investors and blue-chip companies. As
16
17
18
trust has been fractured and operating performance has generally weak- 19
ened, market volatility has grown and valuations have plummeted. In 20
this environment, investor relations officers face the daunting task of 21
rebuilding and strengthening relationships with a highly skeptical 22
investment community. 23
Such difficulties are only the most recent in a series of business 24
challenges that blue-chip market leaders face. New threats to estab- 25
lished business models emerge regularly, including the dot-com wars 26
of the 1990s, the corporate raiders of the 1980s, and the economic 27
and social turmoil of the 1970s. Today, leaders of blue-chip compa- 28
nies also face challenges that stem from internal sources. 29
Because of the spectacular failures of some high-profile compa- 30
nies, even firms with the most sterling reputations for integrity are 31
being questioned about governance issues, accounting policies and 32
procedures, management practices, and protection of stakeholder 33
interests. This skepticism has resulted in a conflict of perception that 34
is based on highly subjective issues rather than the easily quantifiable 35
performance measures and breakdown in share values on which the 36
market has focused in the past. Gone are the days when a blue-chip 37

23
 24 THE NEW INVESTOR RELATIONS

1 company’s market leadership, presence, and historical performance

2 insulated it from the effects of criticism and questions in the markets.
3 Success or failure now rests with the willingness of blue-chip companies
4 to conduct introspective, honest assessments of their own weaknesses
5 and take meaningful action if needed.
6 Communication has become a key resource for fighting and winning
7 this battle over perception and reputation. Once companies better
8 understand their strengths, weaknesses, and any needed corrective
9 actions, key leaders—such as investor relations officers, senior man-
10 agers, and board members—can embark on a communications effort
11 to preserve, build, or restore investor confidence. Above all, these
12 initiatives must be used to foster understanding of policies and
13 philosophies embraced by the organization and its management,
14 rather than to create perceptions that are misaligned with the inter-
15 nal values of the firm and its people.
16 In addition to accomplishing the objectives relevant to the indi-
17 vidual business, blue-chip companies carry the burden of market
18 leadership. Leadership in today’s markets requires reaching beyond
19 minimum standards and the narrowest legal interpretations of new
20 regulations, and adhering to the spirit of rules intended to promote
21 fair, timely, and transparent sharing of information.
22
23
24 Where Are the Blue Chips Hiding?
25 Before considering what blue-chip companies must do to succeed
26 fully in managing relationships with today’s investors, we must first
27 understand the definition of a “blue chip” and examine the compa-
28 nies that make up the category today.
29 Blue-chip companies have traditionally been defined as companies
30 meeting three primary criteria:
31
Returns that have been consistently positive and delivered over
32 time
33
Risk that is lower than the market average
34
Reputation for quality and ethical leadership
35
36 These factors have allowed blue-chip companies to benefit from a
37 Teflon coating. They have enjoyed almost unquestioned public con-
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 25

fidence and built reservoirs of goodwill that can insulate them from 1
the effects of momentary spikes in negative public opinion. 2
Historically, companies that came to be considered blue chips 3
seemed to hold the distinction almost indefinitely. However, actions 4
at companies such as Enron and WorldCom showed that breeches of 5
trust can and will revoke membership in the blue-chip club. Similarly, 6
the rise of entrepreneurs and the Internet in the late 1990s present- 7
ed challenges to established business models, taking its toll on the 8
ranks of companies once considered invincible blue-chip performers. 9
As a result of these recent business dynamics, we have seen a rad- 10
ical transformation in the leading blue chip sectors. For example, 11
numerous companies in the quintessential blue-chip industry—utili- 12
ties—plunged into deregulated markets and speculative trading to 13
compete with the faster growing companies of the 1990s. In the 14
process, these firms fundamentally altered not just their business 15
models but also their basic investment thesis in an attempt to remain 16
attractive to investors. At the same time, Microsoft—just a fledgling 17
start-up in 1975—now has a market capitalization of more than $250 18
billion, is paying a dividend, and ranks high on many investors’ lists 19
of dependable new economy blue chips. 20
In facing these market changes, it is certain that previously 21
unquestioned industry leaders can no longer take their position for 22
granted. Now, more than ever before, market leaders and emerging 23
companies that seek to join the blue chips as peers have to actively 24
and effectively communicate their accomplishments in the areas of 25
returns, risk, and reputation that truly define the blue-chip category. 26
With accounting scandals and widespread allegations of aggressive 27
bookkeeping, investors are questioning quality of returns as well as 28
actual reported figures. As the market scrutinizes earnings quality and 29
the Securities and Exchange Commission (SEC) helps weed out cases 30
of misleading financial reporting, the other two factors that define 31
the blue-chip category—low risk and first-rate reputation—are 32
becoming an even higher priority for investors. Addressing these 33
areas of investor interest in an effective way is an increasingly sophis- 34
ticated and complex task, considering the dynamics in the market, 35
proliferation of media and information sources, new securities regu- 36
lations, and the changing role of securities analysts. 37
 26 THE NEW INVESTOR RELATIONS

1 Before taking into account how investor relations professionals

2 address market issues and use communications most effectively, it is
3 important to have an updated and thorough understanding of the
4 audiences that financial communications programs must reach and
5 successfully influence.
6
7
8 A Buyer’s Market
9 Above all, blue-chip companies must understand and accept the new
10 power dynamic in the market. Investors in today’s market are more
11 in control than ever before, voting with their dollars on the credibil-
12 ity and worth of public companies—and making judgments quickly.
13 Corporate issuers are on the defensive in this buyer’s market and
14 must adapt to new investor demands rather than remain complacent
15 with old practices.
16 This new realism in the investment community follows the burst-
17 ing of the market bubble and public revelations about corporate and
18 executive misconduct. Current skepticism and intense scrutiny from
19 fund managers is in sharp contrast to the irrational expectations at the
20 height of the bubble. Experienced hedge fund managers such as
21 Soros Fund Management’s Stanley Druckenmiller, Tiger Manage-
22 ment’s Julian Robertson, and Vinik Asset Management’s Jeffrey
23 Vinik exited the markets at that time because they found it hard to
24 justify valuations and deliver competitive returns.
25 Executives of market-leading companies are beginning to set
26 examples of how to address this new environment by adapting their
27 reporting, governance policies, and communications practices.
28 General Electric in particular is among a handful of blue-chip com-
29 panies taking proactive steps to adapt to new demands of the market.
30 In addition to splitting the company into four separate reporting divi-
31 sions in summer 2002 to improve transparency, the company holds
32 and webcasts quarterly earnings conference calls. And in the fall of
33 2002, GE made public new guidelines on executive stock ownership
34 and corporate governance.
35 General Electric and other blue chips will certainly have to con-
36 tinue responding to concerns about corporate governance, disclo-
37 sure, and accounting practices that are at the top of investors’ minds
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 27

throughout the market. In addition to addressing these issues and 1

meeting the more traditional needs of institutional—and sometimes 2
individual—investors, blue-chip companies must consider the moti- 3
vations and demands of two other types of players that have become 4
increasingly influential in today’s markets. 5
6
Return of the Balance Sheet 7
Nearly forgotten at the height of the equity bubble in the late 1990s, 8
fixed-income investors and analysts are making a comeback. These 9
analysts often have been some of the first observers to spot the early 10
warning signs of a corporate decline and have in many cases issued 11
critical reports that countered the prevailing sentiment in the equity 12
market. Now, as a larger number of investors are raising balance sheet 13
questions and considering liquidity and solvency issues more closely, 14
fixed-income teams and ratings agency analysts are getting more time 15
and attention from investor relations officers at blue-chip firms. 16
For example, following its return to the public markets as an inde- 17
pendent company, finance company CIT Group established a new 18
investor relations department that includes a dedicated point of con- 19
tact for fixed-income investors staffed by a professional who had 20
spent years working in the company’s treasury department. This 21
approach was lauded by investors in a perception study conducted by 22
the company. 23
Even for companies with limited need to access the debt markets, 24
investor relations professionals should understand the best practices 25
in fixed-income communications and consider them as models. At a 26
minimum, a thorough, regular review of balance sheet and cash flow 27
statements with the finance staff will prepare investor relations offi- 28
cers for questions and help them gain an early warning on issues that 29
could become of interest to equity investors in the near future. 30
31
Playing Defense 32
While making plans for marketing to desired investors, blue-chip 33
companies must also have a defensive communications strategy in 34
place. Blue-chip companies are not immune to the tactics of share- 35
holder activists, short sellers, and momentum players, especially in a 36
fragile market when corporate credibility is at an all-time low. 37
 28 THE NEW INVESTOR RELATIONS

1 Shareholder activists have recently caused a great deal of concern

2 for blue-chip companies. Shareholder litigation continues to increase
3 and is a primary tool of activists, who use the media to bolster their
4 causes. Blue-chip companies can expect these suits following any
5 sharp drop in a firm’s share price.
6 In addition to ongoing litigation activity, a new type of activist is
7 emerging in the form of more aggressive hedge funds and financial
8 advisers who claim to represent groups of well-known institutional
9 investors holding a large portion of a company’s outstanding shares.
10 Corporate governance issues have been a primary focus for these
11 activists who use public pressure and threats of control battles to
12 push for management reforms, changes to board composition, sep-
13 aration of chairman and CEO roles, and other actions. In recent
14 high-profile cases, Disney and Aetna both came under attack over
15 governance issues.
16
17
18 Investor Relations Today
19 In the middle of these unsettled markets, the investor relations function
20 sits as a link between investors and management teams. The role, scope,
21 and influence of this function vary greatly from company to company,
22 as do the skills required of the professionals staffing the departments.
23 The diversity in approach to investor relations results in part from the
24 hybrid nature of the function. The National Investor Relations Institute
25 (NIRI) defines investor relations as “a strategic management responsi-
26 bility using the disciplines of finance, communication and market-
27 ing….”1 This definition highlights the need for the combination of
28 both financial analysis and marketing skills in one function and in
29 investor relations officers themselves. In difficult markets where
30 rebuilding credibility is often a primary objective, blue-chip companies
31 must have investor relations officers who are experts in both areas.
32 Only by drawing on a solid base of financial knowledge and using
33 proven communications techniques will investor relations officers be
34 able to effectively convey their companies’ strengths in the three
35 “Rs”—return, risk, and reputation—that define a blue-chip company.
36 Ultimately, the most important duty of a corporate investor rela-
37 tions officer is to serve as a bridge between management and market
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 29

participants. The investor relations officer is responsible for commu- 1

nicating the company’s investment thesis in a compelling way and, in 2
the process, attracting and maintaining investor interest. However, 3
the IRO has a second and equally critical role as the carrier of both 4
positive and negative information from the market back to the man- 5
agement team. This intelligence includes feedback to management 6
on investor perceptions of financial performance, management cred- 7
ibility, company strategy, and other issues that influence an investor’s 8
decision to buy, hold, or sell the stock. A frequent and ongoing flow 9
of information between top executives and investors can ensure that 10
leaders truly understand market sentiment. Feedback from a broad 11
range of market participants can keep senior managers from becom- 12
ing insular in their thinking—from listening only to either company 13
insiders or a static set of top investors. Candid, timely input from the 14
market back to executives is critical, and often it can best be gained 15
and passed through the investor relations function or a third-party 16
consultant. Investor relations officers have a duty to fill the gap 17
between management and the markets by constantly soliciting this 18
type of feedback from their constituency and finding ways to present 19
this intelligence internally in a constructive fashion. Guidelines issued 20
in April 2002 by NIRI suggest that investor relations officers take this 21
process one step further by meeting with a committee of independ- 22
ent board members (preferably the audit committee) to give this 23
market feedback directly to the directors.2 24
On a practical level, the responsibility of the investor relations offi- 25
cer can be broken down into four key areas: 26
1. Financial reporting and disclosures. Always at the core of the 27
investor relations department responsibilities, effectively com- 28
municating financial results and disclosures to the investment 29
community has never been more complex and, at the same 30
time, has never been more important. 31
2. Marketing the company’s investment thesis. Also central to the 32
duties of corporate investor relations officers is the job of 33
responsibly communicating why their companies are good 34
investment opportunities. 35
3. Corporate governance communications. As one of the top 36
investor concerns in the early twenty-first century, corporate 37
 30 THE NEW INVESTOR RELATIONS

1 governance issues are a topic that investor relations officers

2 must incorporate into their communication programs.
3 4. Public presence. Management of the company’s public corporate
4 presence and reputation is typically conducted in partnership
5 with a firm’s media relations team. Investor relations officers must
6 now play an integral role in managing and strengthening cor-
7 porate reputation.
8
9 Financial Reporting and Disclosures
10 Corporate reporting and disclosure practices have come under height-
11 ened scrutiny as regulators and others search for ways to help rebuild
12 investor confidence after a series of high-profile business failures.
13 Pro forma reporting. Aside from cases of outright fraud, “pro
14 forma” reporting—or use of nonstandard performance metrics—has
15 been one of the most widely criticized corporate reporting practices.
16 Although frequently associated with financial reporting from young,
17 growing companies, a study by NIRI released in January 2002 found
18 that companies with market capitalizations above $1.5 billion were
19 more frequent users of pro forma reporting methods.3
20 If used appropriately, pro forma figures allow companies to help
21 analysts, investors, and the media understand underlying strengths
22 that might be obscured by one-time, unusual events. The choice of
23 pro forma figures provides perspective on the market drivers on which
24 senior executives focus most. Additionally, pro forma reporting is fre-
25 quently useful in cases of business combinations or divestitures to give
26 investors a common basis for comparison of financial results.
27 Unfortunately, in their zeal to meet analysts’ consensus expecta-
28 tions, numerous corporate issuers took the use of pro forma reporting
29 to the extreme, resulting in communications that confused
30 investors and misled the market about the underlying strength of the
31 businesses.
32 The market itself appears to be forcing a degree of cleanup in this
33 area, although regulators have already adopted stricter rules on the
34 use of pro forma reporting. The NIRI study found that of 233
35 companies examined, only slightly more than half reported pro forma
36 figures with prominence.4 Interestingly, 90 percent of the companies
37 using pro forma numbers voluntarily followed suggested reporting
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 31

guidelines published by NIRI and the trade group Financial 1

Executives International (FEI) in April 2001.5 2
In January 2003 the SEC adopted a new rule for issuers that sets 3
guidelines for use of pro forma reporting. The rule mandates that 4
companies using pro forma figures also include the most relevant gen- 5
erally accepted accounting principles (GAAP) measure and explain 6
how the pro forma measures differ from related GAAP figures.6 7
Although the SEC rule puts in place a more defined mandatory 8
framework for using pro forma reporting, blue-chip companies 9
should seize this opportunity to set an example by going beyond the 10
strict legal interpretation of current or future rules. This type of 11
action demonstrates the values of an organization and can help 12
rebuild credibility and trust within the investment community. 13
In addition to using a principle-based approach, companies that 14
issue earnings reports including pro forma measures should consider 15
the following practices: 16
❏ Include GAAP figures prominently and provide reconciliation 17
between the two measures, as the SEC now mandates and FEI/NIRI 18
had proposed. The reconciliation might be in the form of an expla- 19
nation in the text of the release or in tabular form, depending on its 20
complexity. 21
❏ Provide detailed, clear definitions of pro forma measures and 22
consider how they compare to metrics used by others in the same 23
industry. Even basic metrics such as operating earnings may be 24
defined differently from company to company within one particular 25
sector. Companies should understand how their definitions differ 26
from competitors’ disclosures and make a conscious decision about 27
whether to use accepted industry standards or to define metrics in a 28
different way. The company should keep definitions consistent and 29
make them easily accessible to investors through the company web- 30
site and as a regular addendum to the earnings release. 31
❏ Include all key information in the release that will be discussed 32
on the related conference call with analysts, investors, and media. As 33
FEI/NIRI notes in its proposed guidelines, it is important to include 34
comments that will be given on the conference call on topics such as 35
context or factors affecting the operating performance, as well as out- 36
look for future performance, using appropriate safe harbor warnings. 37
 32 THE NEW INVESTOR RELATIONS

1 Qualitative disclosures. In addition to meeting the concerns

2 about pro forma reporting and quantitative measures, blue-chip
3 investor relations officers must examine their disclosure practices for
4 qualitative information to help ensure that their reporting effectively
5 conveys the company’s economic condition.
6 The qualitative portions of annual and quarterly reports, particu-
7 larly management’s discussion and analysis (MD&A) sections, are
8 tools that can be of great value in an investor communications effort
9 if they are used to paint a picture of the company’s performance and
10 the factors driving it. These disclosures present the opportunity for
11 management to describe its perspective and to help investors better
12 understand the softer factors driving strategy and results.
13 Unfortunately, companies frequently do not take advantage of this
14 opportunity, and these documents become little more than a recount-
15 ing in prose of the numbers presented in the accompanying tables.
16
17 Marketing the Company’s Investment Thesis
18 The dynamics of today’s market—damaged executive credibility,
19 shifting relationships with sell-side analysts, and volatile operating
20 performances—make proactive marketing to investors more difficult,
21 but more important than ever before. It is a buyer’s market, and even
22 the most respected blue-chip companies cannot afford to sit back and
23 let quality investors find them. Many blue-chip investor relations offi-
24 cers are besieged by demands from current and potential investors for
25 management’s time. By taking a proactive approach to managing
26 these demands and keeping the pipeline of new investors full, investor
27 relations officers can ensure the interest of the most desirable share-
28 holders and make the best use of management’s time.
29 To succeed in proactively managing the shareholder makeup, the
30 company should take the following actions:
31 ❏ Demonstrate what is behind the numbers. Talk beyond the
32 most recent financial metrics. Use a marketing program to ensure
33 that audiences understand the factors and forces driving the results.
34 ❏ Set multiple benchmarks for success. The appeal of the single
35 consensus earnings number is decreasing, and investors are looking at
36 other metrics to incorporate into their analyses. By using marketing
37 meetings to reinforce multiple benchmarks, blue-chip companies can
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 33

proactively guide investors to the metrics that most appropriately 1

demonstrate the value of the company. When investors begin to con- 2
sistently look beyond one quarterly consensus number, they will have 3
a better understanding of performance that can help build their con- 4
fidence, which will decrease stock volatility. 5
❏ Don’t hide when times are bad. Management accessibility and 6
consistent information flow in the time of a crisis can help stabilize a 7
situation and maintain or rebuild credibility. Companies typically are 8
rewarded or penalized based on the manner in which they handle a 9
crisis, not solely because of the cause of the crisis itself. 10
❏ Understand which investors are buying and selling your stock. 11
Most blue-chip companies arrange for shareholder identification 12
studies at least on an annual basis. The most successful efforts go well 13
beyond an annual or even six-month review. Knowing which 14
investors are coming in and out of a company’s shares on at least a 15
monthly basis is one of the few concrete ways that investor relations 16
officers can begin to understand stock movements and gauge the suc- 17
cess of marketing programs. 18
19
Corporate Governance Communications 20
In addition to communicating basic financial and strategy informa- 21
tion as part of disclosure and marketing activities, blue-chip compa- 22
nies must increasingly address concerns about corporate governance 23
policies. Many blue chips have scrambled recently to publish policies 24
and update old practices, but Pfizer, for one, has long made gover- 25
nance a priority and set an example for others to follow. 26
Defining the term. In 1992 Pfizer took an unusual step and 27
named Terrance Gallagher vice president for corporate governance. 28
Few people understood the role of this new position. Even five years 29
later, Business Week ran a story about him titled “Vice-President for 30
What?”7 It is hard to imagine the term “corporate governance” 31
stirring much bewilderment today. However, while it has become 32
one of corporate America’s hottest topics, few companies know what 33
to do with it. 34
This confusion arises partly due to the difficulty in defining corpo- 35
rate governance. The term broadly refers to a nonfinancial, intangible 36
asset that undoubtedly affects a company’s strength and long-term 37
 34 THE NEW INVESTOR RELATIONS

1 performance. Essentially, corporate governance describes intangible

2 assets such as the quality and effectiveness of the board of directors
3 and high-level policies put in place to help ensure protection of share-
4 holder interests.
5 Until now, an afterthought. General counsels and corporate sec-
6 retaries have typically handled corporate governance issues, but in the
7 past actions have often centered on issues of protocol. Even as large
8 investors became interested in governance in the late 1980s and the
9 California Public Employees’ Retirement System (CalPERS) formal-
10 ized its standards, it was a sleepy topic. It certainly remained so
11 throughout the 1990s boom.
12 Recent scandals, however, have damaged public trust in compa-
13 nies and raised questions in the minds of investors about the ability
14 of executives to act ethically without a system for monitoring their
15 activities. In a June 2002 survey of 400 opinion leaders in the United
16 States by Edelman’s Strategy One research group, only 40 percent of
17 respondents said that they had a favorable opinion of business insti-
18 tutions and 48 percent said trust in business had declined during the
19 past year. Moreover, only 41 percent said they trust business to do
20 what is right.
21 Decline in trust and accompanying scandals have focused the
22 attention of the internal investment community, governments, and
23 even the general public on corporate governance issues. A Thomson
24 Financial survey found that 89 per cent of institutional investors see
25 corporate governance as either a primary or secondary consideration
26 in their decision to invest in a company.8 Moreover, shareholder res-
27 olutions, often a sign of conflict, are presented more frequently, news
28 articles on corporate governance appear continuously, and analysts
29 increasingly pay closer attention to management practices when cov-
30 ering a company. In short, corporate governance practices affect a
31 company’s reputation today more than ever.
32 To help manage the reputation risk that corporate governance can
33 play in a company, consider the following strategies:
34 Keeping an open dialogue. One of Gallagher’s most successful
35 strategies as vice president of corporate governance for Pfizer was
36 open dialogue. Many investors, even today, complain that companies
37 do not listen to them. As a first step, Gallagher visited Pfizer’s twenty
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 35

largest institutional investors to establish an ongoing discussion of 1

governance issues. According to news reports, this willingness to 2
communicate was one of the factors that helped convince TIAA- 3
CREF to abandon its contest against Pfizer’s poison pill (attempt to 4
prevent a hostile takeover).9 Moreover, shareholder activists are 5
increasingly media-savvy, often fighting their battles in the press. Wit- 6
ness billionaire investor Sam Wyly’s very public campaign against 7
Computer Associates, which unnecessarily displayed the company’s 8
dirty laundry and ended in a controversial $10 million payout.10 9
Maintaining an open dialogue also keeps a company ahead of the 10
curve. Often best practices germinate from investors’ ideas. According 11
to a Dow Jones article written at Gallagher’s retirement in 2000, 12
TIAA-CREF backed down on its poison-pill objections because Pfizer 13
worked with it and other institutions to create a shareholder rights 14
review process every three years by the wholly independent gover- 15
nance committee.11 16
Blue chips today should look to Pfizer as a model. Many large 17
companies with active, vocal investors still tend to haphazardly and 18
ineffectively disperse governance responsibilities. One company that 19
has taken a more serious approach of late is Tyco. Beset by investor 20
disillusionment and a crumbling reputation, in 2002 the company 21
appointed Eric Pillmore senior vice president for corporate gover- 22
nance, as part of an effort to restore confidence in the company with 23
its audiences.12 24
Increasing the importance of intangibles. In addition to keeping 25
the dialogue open, every investor relations officer should leverage the 26
company’s intangible assets. Investors today ask as many questions 27
about the nonfinancials as they do about the financials. Intangibles, 28
such as corporate governance, director independence, strategy, and 29
management strength, seriously influence their investment decisions. 30
It’s important to remember that having effective governance does 31
not mean merely complying with recent stock exchange listing stan- 32
dards. Those standards represent minimum best practices. It is not 33
enough to prove that the majority of board members are independent; 34
companies must also prove that they can govern effectively. To do this, 35
blue chips can leverage the important intangible factors that are not 36
part of the public record, but which are critical to articulate, such as 37
 36 THE NEW INVESTOR RELATIONS

1 board members’ various expertise, irreproachable character, and com-

2 mitment to the company, as well as a culture that fosters independence
3 of expression and diversity of thought.
4 To make sure these points find their way to investors, investor
5 relations officers should add important detail about the board and its
6 activities to the annual report and the company’s website. According
7 to an analysis by Toronto-based IR consultant Blunn & Co., of 135
8 investor relations websites from leading companies, immediately
9 following the New York Stock Exchange board’s approval of its new
10 listing requirements proposal, 84 percent did not have a stand-alone
11 corporate governance section.13 Additionally, the Edelman Strategy
12 One survey found that 74 percent of respondents did not find com-
13 pany websites to be “extremely” or even “very” credible sources of
14 information. Other tactics that demonstrate an engaged and effective
15 board might include raising the profile of the audit committee during
16 earnings conference calls and increasing the visibility of board mem-
17 bers at the annual shareholders meetings.
18
19 Public Presence
20 With corporate and management reputation playing an increasingly
21 important role in the investment decision-making process, investor
22 relations officers must consider how to ensure that overall public
23 perception of the company and management supports, complements,
24 and enhances the very specific objectives and messages for the invest-
25 ment community. Investor relations audiences—analysts, shareholders,
26 potential investors—are all influenced by overall perceptions in addi-
27 tion to the direct financial communications put forward at the time
28 of earnings, one-on-one meetings, and investment conferences.
29 Most often, general corporate and management reputation is
30 shaped by media coverage, although activities such as philanthropy
31 and executive civic involvement also play a role.
32 In order to help manage the overall company reputation, investor
33 relations officers must work closely with the organization’s media
34 relations team, which, at many blue-chip companies, is structured as
35 a separate department reporting to a different senior executive. In
36 addition to the organizational separation, professionals in the two
37 groups often have distinctly different professional backgrounds and
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 37

experiences, making it sometimes hard to find a common language 1

and platform from which to operate. 2
Although it can be difficult to overcome the divisions between the 3
two departments, it is worth the effort. By working productively 4
together, media relations and investor relations professionals can team 5
up to ensure that overlapping corporate messages and communications 6
objectives are not only coordinated, but are financially responsible and 7
substantive while being compelling and effectively delivered at the 8
same time. 9
The cooperation of the investor relations officer and media rela- 10
tions team in dealing with the regional, national, and international 11
business media is critical to successfully managing corporate reputa- 12
tion, especially because the media landscape has changed dramatically 13
during the past five to ten years. Among the changes, note in particu- 14
lar the following: 15

Reporters have become more sophisticated and critical about 16
financial topics as the public appetite for business and financial 17
news has increased. Many reporters have proactively sought 18
education, cultivating their own sources to serve as instructors. 19
In some cases, news organizations have provided tutors. As a 20
result, many business reporters now have better understandings 21
of formerly arcane accounting rules, disclosure regulations, and 22
the overall business and competitive landscape. This additional 23
level of knowledge among reporters is enabling them more 24
than ever before to ask the tough, challenging questions once 25
received only from analysts and institutional holders. 26

Intense competitive pressure among news organizations and 27
individuals drives many reporters on an eternal quest for the 28
“next big story.” Investigative financial journalism is common 29
today, with reporters poring over details of corporate securities 30
filings to find disclosures that may surprise the markets or be 31
hidden to all but the most careful reader. In fact, the major wire 32
services have dedicated reporters to focus on corporate filings 33
and the stories that result from them. 34

The media also has more sources for fueling ideas about poten- 35
tial news and investigative stories. Information generated by 36
research reports from short sellers as well as information posted 37
 38 THE NEW INVESTOR RELATIONS

1 on Internet chat boards may be unsubstantiated and in many

2 cases untrue. Nevertheless, these sources serve as idea genera-
3 tors for inquiring reporters. Even at the numerous respected
4 national news organizations today that maintain strict rules on
5 fact confirmation and balanced reporting, reporters regularly
6 are turned onto story ideas through short reports and chat
7 room postings. Although these leads in their raw form may not
8 be entirely accurate, reporters may frequently use the ideas as a
9 starting point for uncovering a related story.
10
11 Given this demanding environment, a true partnership between
12 the investor and the media relations teams can be a powerful combi-
13 nation for today’s blue chip in managing its reputation. The most
14 successful programs typically involve efforts from the investor rela-
15 tions team to add their financial knowledge and up-to-date market
16 intelligence to the messaging savvy and knowledge of the media rela-
17 tions group. This combination forms a base of underlying support for
18 the proactive investor relations efforts and serves as a first line of
19 defense against media crises.
20 In addition to the need for investor and media relations teams to
21 work closely together, the key underlying principles of these success-
22 ful programs often include the following efforts:
23 ❏ Educate reporters about the company and its industry to pro-
24 vide a background when there is no immediate breaking news.
25 Although these efforts are not designed to generate specific stories,
26 this type of outreach, which can include lunch briefings, meetings
27 with executives, tours of facilities, and other activities, gives reporters
28 the knowledge needed to accurately report on the company and to
29 critically evaluate rumors fed to them by opponents of the company.
30 ❏ Build media relationships in advance with both the communi-
31 cations team and senior executives. Although a friendly relationship
32 does not guarantee a company a positive story, having an advance
33 working relationship with a reporter typically provides that the com-
34 pany’s opinions and responses have a fair hearing.
35 ❏ Communicate substance over spin. The investor relations
36 departments’ in-depth knowledge of the business and financial issues
37 can add significantly to efforts to communicate with reporters. At the
IR FOR BLUE-CHIP COMPANIES: THE NEW LOOK 39

same time, an investor relations officer’s market intelligence gather- 1

ing can help the media professionals plan for potentially difficult 2
issues and reporters’ questions that may be on the horizon. 3
❏ Coach the principal spokespeople in advance on both content 4
and technique. Some executives are natural media spokespersons, but 5
many are not. Training and role playing in advance can help them feel 6
more comfortable when talking to the media, allowing them to focus 7
entirely on their content at the time of an interview. At the same 8
time, this advance training with executives provides a valuable oppor- 9
tunity for the communications team to test and refine messages about 10
the company in general or in response to a particular issue. 11
12
13
Outlook for the Future 14
The field of investor relations is at a crossroads. Changing securities 15
regulations, new demands from skeptical investors and analysts, and 16
increasing financial sophistication of the media are combining to 17
require a thorough and robust assessment of investor relations prac- 18
tices and the function’s role within a corporation. 19
Investor relations officers at blue-chip companies have a duty to 20
go beyond their traditional roles as chief disclosure officers and 21
investment community marketing advocates. Investor relations offi- 22
cers must embrace their responsibility as bridges for information 23
between investors and senior managers as well as constantly strive to 24
set benchmarks in transparent and fair shareholder communications. 25
26
27
Chapter Notes
28
1. National Investor Relations Institute, Who’s Who in Investor Relations, 29
2002–2003 edition, p. i. 30
2. National Investor Relations Institute, “NIRI Ten Point Program to Help
31
Restore Investor Confidence,” Executive Alert, April 9, 2002.
3. National Investor Relations Institute, “NIRI Releases Survey: An Analysis of 32
Corporate Use of Pro Forma Reporting,” Executive Alert, January 17, 2002. 33
4. National Investor Relations Institute, “NIRI Releases Survey: An Analysis of 34
Corporate Use of Pro Forma Reporting,” Executive Alert, January 17, 2002. 35
5. National Investor Relations Institute, “NIRI Releases Survey: An Analysis of 36
Corporate Use of Pro Forma Reporting,” Executive Alert, January 17, 2002.
37
 40 THE NEW INVESTOR RELATIONS

1 6. U.S. Securities and Exchange Commission, “Proposed Rule: Conditions for

2 Use of Non-GAAP Financial Measures,” Release No. 33-8145, 34-46768; U.S.
3 Securities and Exchange Commission, “SEC Adopts Rules on Provisions of
Sarbanes-Oxley Act,” Release No. 2003-6.
4
7. John A. Byrne, Business Week, “A Vice-President for What? Terrance Gallagher
5 helped Pfizer build a reputation as a governance stalwart,” December 8, 1997.
6 8. Howard Stock, Investment Management Weekly, “Institutions Prize Good
7 Governance,” October 28, 2002.
8 9. John A. Byrne, Business Week, “A Vice-President for What? Terrance Gallagher
9 helped Pfizer build a reputation as a governance stalwart,” December 8, 1997.
10. Marcelo Prince, Dow Jones News Service, “Computer Assoc. To Pay $10M
10
To Wyly To End Proxy Fight,” July 24, 2002.
11 11. Phyllis Plitch, Dow Jones News Service, “Pfizer’s Retiring Governance
12 Chief Is No ‘Dinosaur,’” April 12, 2000.
13 12. Tyco press release, “Tyco Appoints Eric M. Pillmore Senior Vice President
14 of Corporate Governance,” August 6, 2002.
15 13. Howard Stock, Investor Relations Business, “Most Companies Don’t
Disclose Governance Policies Online,” November 4, 2002.
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

3 Litigation IR and the 2

3
4
Duties of Corporate 5
6

Disclosure and Governance 7

8
9
10
THEODORE J. SAWICKI, ESQ.
11
SCOTT P. HILSEN, ESQ. 12
Alston & Bird LLP 13
14
15

I NVESTOR RELATIONS OFFICERS are on the front lines of corporate

disclosure and governance as never before—including during those
unfortunate periods when a public company is under legal assault or
16
17
18
restating financials. Adding to the pressure, since the advent of the 19
Internet with its all-news-all-the-time-in-your-face financial media 20
and even after-hours trading, IR professionals are under the gun to 21
disclose not only accurately but also very quickly. In short, like ath- 22
letes, IR professionals have to be better and faster than they were just 23
a generation ago. 24
As the 1990s and the secular bull market came to an end, so did 25
the trust and confidence investors placed in American corporate man- 26
agement. Investors read one tale after another of corporate fraud on 27
a scale unparalleled since the Roaring Twenties ended with a crash. 28
Following that period, the Securities Act of 1933 and the Securities 29
Exchange Act of 1934 brought much-needed control over the secu- 30
rities markets and necessary protection to investors. As a result, 31
American public companies in the 1930s shifted from closely guard- 32
ing their financial conditions to periodically disclosing their current 33
situations. Investors, given timely statements about their investments, 34
naturally placed more faith in Wall Street—and that is a fundamental 35
reality that should always be remembered: Greater transparency and 36
disclosure nearly always result in greater investor confidence in capi- 37

41
 42 THE NEW INVESTOR RELATIONS

1 tal markets and in individual companies, with benefits for all.

2 But by the mid-1990s, some contended that, if anything, Wall
3 Street was being held too accountable, even to those with specious
4 interests, such as plaintiffs’ lawyers. Mired with frivolous class action
5 lawsuits filed at the instant a stock price declined, public companies
6 called on Congress to reform securities litigation. The Private
7 Securities Litigation Reform Act of 1995 (the 1995 Reform Act) was
8 designed to protect public companies and, ultimately, their investors
9 from “strike” suits alleging violations of the Securities Act of 1933
10 and the Securities Exchange Act of 1934 in the hope of compelling a
11 quick settlement that lined the pockets of attorneys. Backers felt the
12 Reform Act evened out the playing field and returned a level of con-
13 fidence in securities markets.1
14 However, the pendulum has swung again. The avalanche of news
15 stories covering overt corporate malfeasance even at name-brand
16 companies, and the complicity of a then major Big 5 CPA firm in the
17 Enron Corp. meltdown, shocked investors. The key to investor
18 knowledge—public disclosure—has been undermined by suspicion
19 and distrust. From the crippling debt hidden in off-balance sheet
20 entities by Enron, to the improper accounting of staggering expenses
21 reported by WorldCom, Inc., to the lavish pilfering by executives at
22 Tyco International Ltd. and Adelphia Communications, corporate
23 scandals have dominated the headlines. Even sophisticated institu-
24 tional investors must wonder if they can truly trust any management.
25 The disclosure systems designed to regulate and protect investors
26 have been skirted by executives who misstated earnings to achieve
27 artificially high stock prices. Weaknesses in corporate governance,
28 stock-based executive compensation, and a lack of integrity in the
29 accounting profession all have contributed to an environment that
30 mirrors the pre-1930s stock market.
31 The vital upshot of the recent scandals is that public company offi-
32 cers and directors today have increased responsibility and personal
33 accountability for the accurateness of public disclosures. These
34 increased responsibilities and risks to officers and directors concomi-
35 tantly have affected insurance protections. Even the personal assets of
36 officers and directors are not off-limits from disgruntled shareholders
37 or regulatory and legal agencies. Jail time is a potential reality.
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 43

Unfortunate as it may be, even straight-arrow executives will find 1

their public disclosures are no longer blindly accepted as truth, but 2
instead are studied for flaws and deceptions. The cost of compliance 3
with disclosure requirements has increased considerably as companies 4
struggle with new and untested rules and regulations. And, in this 5
litigious environment, a company’s exposure based on the quality and 6
accuracy of its communications with investors and the public has 7
raised the stakes for investor relations officers. The IR officers are the 8
shock troops in this new battle for investor confidence and proper 9
compliance. The IR team must not only tell Wall Street that a com- 10
pany has good prospects (if it does), they must also assure investors 11
and the financial media that proper corporate governance and disclo- 12
sure is a priority at all times. 13
14
15
How We Got Here 16
Prior to the 1995 Reform Act, public companies often were saddled 17
with frivolous class-action lawsuits. These strike suits, as they are 18
called, primarily were generated by plaintiffs’ attorneys seeking a 19
quick settlement. The excessive cost of locating and producing mas- 20
sive amounts of documents and the disruption to business operations 21
caused by depositions of executives outweighed the cost of settling 22
the claims. 23
As the Chairman of the Senate Committee on Banking, Housing, 24
and Urban Affairs, Alfonse D’Amato, remarked: 25
26
There is broad agreement on the need for reform. Shareholders’ groups, 27
corporate America, the SEC, and even lawyers all want to curb abusive 28
practices. Lawyers who bring meritorious suits do not benefit when 29
strike suit artists wreak havoc on the nation’s boardrooms and court- 30
houses.2 31
32
Strike suits also acted to quell the information being disclosed to 33
investors. Companies were fearful that communicating freely with 34
investors and analysts would make them vulnerable to shareholder lit- 35
igation.3 As a result, voluntary disclosures, especially forward-looking 36
statements, were chilled. For investors, less information is bad for the 37
 44 THE NEW INVESTOR RELATIONS

1 market. Investors and markets thrive in a climate of transparency and

2 disclosure.
3 The 1995 Reform Act brought about measures to rescue business
4 from the stifling costs of frivolous class actions. Among other things,
5 the 1995 Reform Act imposed a stay of all discovery against the com-
6 pany (such as document requests and depositions) until after the
7 court determined the threshold viability of the class action com-
8 plaint.4 Plaintiffs’ attorneys also are required at the initial complaint
9 stage to set forth facts with particularity that show a strong inference
10 that the defendant intended to make a misrepresentation or omis-
11 sion.5 The Reform Act specifically protects forward-looking state-
12 ments by creating a safe harbor generally for projections of financial
13 results and economic performance and statements of management’s
14 plans and objectives.6
15 Of importance to lawyers and IR professionals, however, the
16 Reform Act did not dramatically reduce the number of securities class
17 actions. In 1994, approximately 220 securities cases were filed, which
18 represented a 41 percent increase from 1993, and a 30 percent
19 increase from the average of the prior three years.7 This increase in
20 1994 can be attributed, in large part, to plaintiffs rushing to file
21 claims before the Reform Act took effect. Nevertheless, securities
22 class action filings have steadily increased since 1995 and have aver-
23 aged over 200 filings per year between 1995 and 2001. Of course,
24 the stock market meltdown and onslaught of corporate governance
25 scandals since 1999 have brought forth a gusher of suits.
26 As Figure 3-1 shows, the practice of filing lawsuits against public
27 companies is a thriving one. If there is a silver lining, it is that
28 although the number of filings is high, the numbers of cases that are
29 being dismissed at an early stage has increased. Before the Reform
30 Act, only 12 percent of cases were dismissed compared with 26 per-
31 cent after the passage of the Reform Act. Investor relations profes-
32 sionals are well within their prerogatives to quickly inform the media
33 and institutional investors when a suit is dismissed, or that they are
34 reasonably moving for dismissal, if defense lawyers so advise.8
35 On the downside for public companies, however, the lawsuits that
36 survive dismissal have succeeded in satisfying the heightened plead-
37 ing standard and have a stronger factual basis. More often than not,
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 45

1
2
FIGURE 3-1 Lawsuits Filed Against Public Companies 3
4
Year Number of Filings9 5
1996 122 6
1997 167 7
1998 245 8
1999 207 9
2000 201 10
2001 48310 11
2002 18011 12
13
14
these cases lead to settlement—and a job for an IR professional 15
explaining to investors and rating agencies the true fallout of the set- 16
tlement. 17
Also worth noting is that the stakes are higher than ever before. 18
Public companies that were sued in 2001 lost more than $2 trillion in 19
market capitalization combined during the class period (the period in 20
which shareholders lost value), which was 157 percent greater than 21
the losses of all the companies sued in shareholder class actions in 22
2000.12 Cisco Systems, Inc. has the dubious honor of leading the 23
pack with a loss of $331 billion in market capitalization during its 24
class period from August 1999 to February 2001, followed by Intel 25
Corporation with a $231 billion loss.13 Enron Corp. placed sixth 26
with a $60 billion drop in market capitalization.14 No wonder 27
investors are peeved. 28
These vast losses have, not surprisingly, led to a dramatic increase 29
in the size of settlements. Prior to the passage of the Reform Act, the 30
average settlement in a securities class action was just under $8 mil- 31
lion.15 By 2001, the average settlement value increased almost 150 32
percent to $17.2 million.16 When allegations of improper accounting 33
practices are added to the mix, lawsuits filed in 2001 cost 280 per- 34
cent more to settle than nonaccounting cases.17 It is clear that proper 35
accounting procedures, good corporate governance, and solid IR 36
have a role in minimizing legal costs. 37
 46 THE NEW INVESTOR RELATIONS

1
2 Restatement
3 The most dreaded word in financial reporting is restatement. In
4 today’s litigious environment, a company that restates financial state-
5 ments, except perhaps as a result of an accounting change, virtually
6 guarantees that it soon will be a defendant in a securities class action.
7 IR professionals would be well-advised to prepare battle plans well
8 before a restatement is issued. Restatements are considered by plain-
9 tiffs’ lawyers as nothing less than an admission by the company’s
10 management and auditors that its accounts were materially misstated.
11 It therefore should come as no surprise that the most significant set-
12 tlements have resulted from restatements. For example, Cendant Corp.
13 recently restated earnings and was compelled to settle a class action for
14 $2.83 billion.18 MiniScribe Corp. settled a restatement case for $550
15 million, and Waste Management Inc. settled for $220 million.19
16 Restatements have increased every year since the Reform Act,
17 from 116 in 1997 to 270 in 2001.20 Investor relations professionals
18 may wish to note that no industry sector is immune to restatements.
19 From 1997 to 2001, 25 percent of companies in the manufacturing
20 sector restated financial statements, 16 percent of all software com-
21 panies announced a restatement, and 10 percent of service companies
22 had a restatement.21 Thus, it is highly advisable for investor relations
23 professionals to have contingency plans on the shelf, in the event of
24 a restatement. Of course, IR professionals should always counsel
25 clients that conservative accounting procedures, indeed procedures
26 relatively immune to restatement, might be a course well worth con-
27 sidering.
28
29 Change in Investor Demands
30 Whereas the revolution of securities laws in the 1930s focused on
31 periodic disclosures, the paradigm shift in 21st century disclosure
32 philosophy is that of instant transparency. No longer are public com-
33 panies allowed to reserve disclosures for periodic filings. With the
34 dawn of instantaneous communication through the Internet, web-
35 casting conference calls, real-time market participation, the wire serv-
36 ices, and the growing practice of “preannouncements” (making early
37 announcements that the company will not make quarterly earning
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 47

estimates), companies now must immediately disclose material infor- 1

mation. Indeed, with after-hours trading and trading on foreign 2
exchanges, IR professionals are in effect on call 24/7. Furthermore, 3
under SEC Regulation Fair Disclosure (Reg FD), press releases and 4
other disclosures cannot be limited merely to securities analysts and 5
insiders, but also must be made reasonably available to all investors. 6
Investor relations truly has pushed to the forefront of corporate com- 7
munications. 8
The Sarbanes-Oxley Act of 2002, passed in the summer of that 9
year, represents another defining moment for investor relations pro- 10
fessionals. The far-reaching act establishes a host of new corporate 11
governance, reporting, and disclosure requirements for public com- 12
panies. The act enhances criminal and civil liability provisions of the 13
securities laws, and also adds a new layer of checks and balances to 14
financial reporting by establishing a new accounting industry over- 15
sight board, funded by publicly traded companies, to monitor CPAs 16
who vet financial statements. Although the act responds to many 17
shortcomings in the accounting profession, the primary targets of 18
reform clearly are corporate executives. As the Wall Street Journal 19
reported, “The law gives a straight path of liability to the pocket- 20
books of individual executives.”22 21
Some of the notable provisions of the Sarbanes-Oxley Act, espe- 22
cially as they relate to investor relations, are the following: 23

Enhanced financial disclosures and accuracy of financial 24
reports. The act requires that financial statements filed with the 25
SEC reflect all material correcting adjustments under generally 26
accepted accounting procedures (GAAP) and SEC rules that 27
have been identified by the auditor.23 28

Real-time disclosures. Of particular challenge to IR profession- 29
als, the act requires companies to disclose on a “rapid and current 30
basis” information concerning material changes to their opera- 31
tions and/or financial condition. In practice, of course, each 32
company is unique. But IR professionals should likely be in daily 33
contact with accounting, audit, and legal departments, on the 34
lookout for items that might soon require a “hurry up” release. 35
It would not be dramatic to require that IR professionals have 36
the home and cell phone numbers (and e-mail addresses), and 37
 48 THE NEW INVESTOR RELATIONS

1 vice versa, of their colleagues within the accounting, audit, and

2 legal departments. Thus, it often falls upon IR to smooth ruf-
3 fled feathers and restore confidence in the company. Manage-
4 ment must disclose material facts immediately, then get on with
5 the business of running the company.24
6
Off-balance-sheet transactions. In direct reaction to the Enron
7 debacle, the act mandates that the SEC adopt rules requiring
8 annual and quarterly reports filed with the SEC to disclose all
9 material off-balance-sheet transactions, arrangements, obligations
10 (including contingent obligations), and other relationships of
11 the company with unconsolidated entities or other persons that
12 may have a material current or future effect on the organization’s
13 financial condition. Again, although this topic seems arcane, IR
14 professionals must be versed in the full range of a company’s
15 financial obligations and capital structure.25
16
Pro forma financial disclosures. The act mandates that the SEC
17 adopt rules requiring companies to reconcile any published pro
18 forma data to the financial condition and results of operation
19 calculated according to GAAP.26
20
Management assessment of internal controls. The act requires
21 the SEC to adopt rules requiring companies to include in their
22 annual reports an internal control report.27 This report must
23 contain a statement by the company’s management that it is
24 responsible for creating and maintaining adequate internal con-
25 trols and procedures for financial reporting, and an assessment
26 of the effectiveness of those controls and procedures as of the
27 end of the company’s most recent fiscal year.28
28 In addition, the company’s auditor must report on and attest
29 to management’s assessment of the company’s internal con-
30 trols. IR professionals should be aware of the potential land
31 mine created if the company’s outside auditing firm decides to
32 issue a qualified opinion as to a company’s internal controls—
33 somewhat akin to when an outside auditing firm does not fully
34 endorse a company’s reported figures. IR professionals need to
35 know about any tension between auditing firms and management
36 and be prepared to handle the news of an qualified opinion,
37 should it occur.
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 49

Corporate responsibility for financial reports and officer certi- 1

fication. The act requires the SEC to adopt rules requiring 2
CEOs and CFOs of public companies to certify in all quarterly 3
and annual reports filed with the SEC that the officer has 4
reviewed the report and that there are no untrue or misleading 5
statements, that the officer is responsible for and has reviewed 6
internal controls, and that there are no deficiencies in any inter- 7
nal controls. Already, many companies are moving to boiler- 8
plate statements in this regard, so this does not appear to pose 9
much of a challenge for IR professionals.29 10

Forfeiture of certain bonuses and profits. The act requires that 11
any CEO or CFO preparing to make an accounting restatement 12
because of misconduct in compliance with SEC financial 13
reporting requirements must forfeit any bonuses or other 14
incentive-based or equity-based compensation, including prof- 15
its from the sale of company securities, received during the 16
twelve-month period following the publication of the financials 17
being restated. Again, this rule is fairly straightforward and 18
should not pose a challenge for IR professionals.30 19

Insider transactions. The act requires directors, officers, and 20
any entity owning more than 10 percent of the company’s out- 21
standing stock to disclose any transaction (as required under 22
Form 4) within two business days following the transaction. It 23
is illegal for any insider to purchase or sell any security of the 24
company during a “blackout” period. Insiders certainly have 25
the right to sell their stock, whenever it is legal. However, IR 26
professionals may wish to be informed as quickly as possible 27
about sales, or pending sales, so as to be ready to field questions 28
from institutional investors. And if anyone consults with IR 29
prior to a sale, the answer should be “don’t.” Investors never 30
like to see management sell stock, no matter how, where, or 31
when it is reported.31 32

Securities litigation and statute of limitations. The act modi- 33
fies the previous statute of limitations for securities litigation of 34
one year after discovery of the alleged violation or three years 35
after the violation, to the earlier of two years after discovery or 36
five years after the alleged violation.32 37
 50 THE NEW INVESTOR RELATIONS

1
No bankruptcy discharge. The act amends federal bankruptcy

2 laws to immediately prevent the discharge of debts under any
3 claim relating to a violation of state or federal securities laws, or
4 any securities fraud or manipulation.33
5
6 Suffice it to say that the Sarbanes-Oxley Act, even with its sweep-
7 ing reforms, will not end the call for accountability. As the horizon is
8 scanned by those calling for reform, individuals and entities outside
9 the company are coming into view as potentially responsible parties.
10 Historically, accountants, attorneys, and bankers who were involved
11 in advising the company with respect to financial reporting and dis-
12 closures have avoided liability for securities violations as aiders and
13 abettors. The United States Supreme Court, in Central Bank of
14 Denver, N.A. v. First Interstate Bank of Denver, (N.A., 511 U.S.
15 164, 114 S. Ct. 1439 [1994]), overturned years of precedent in rul-
16 ing that the securities laws do not provide the basis for a claim against
17 any person or entity that aids another who makes material misstate-
18 ments.34 The Supreme Court acknowledged that it could not amend
19 the securities laws, but instead that Congress has the authority to
20 write laws that could make outside lawyers and accountants liable for
21 abetting misdeeds at publicly held companies.35
22 A resounding call has been sent recently to Congress by plaintiffs’
23 lawyers to accept the Supreme Court’s implied invitation to revise
24 securities laws to include liability for aiding and abetting securities
25 violations. Several bills even were proposed on the coattails of the
26 Sarbanes-Oxley Act that would have included civil penalties for aiders
27 and abettors.36 In fact, former SEC Chairman Arthur Levitt opined
28 that a key failure of Sarbanes-Oxley was the absence of an aiding and
29 abetting provision, which would, in effect, hold the feet of complicit
30 accountants and lawyers to the fire as well.37
31 With the outcry for reform, liability for secondary actors such as
32 CPAs and attorneys will likely come into focus. Indeed, the policies
33 behind imposing such liability are difficult to question. Individuals
34 who intentionally assist others in committing torts and crimes have
35 long been held responsible for their involvement.38 Although aiding
36 and abetting liability for securities law violations has not yet been res-
37 urrected in most jurisdictions, the tide may be turning. For investor
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 51

relations professionals, this may pose new challenges. In particular, if 1

a law or accounting firm is fingered in a bad deal at a public company, 2
should its work be trusted with any public company? (In part, this 3
lack of trust played a role in the demise of Arthur Andersen.) Alert 4
IR professionals must be ready for such bad news, certainly given that 5
most major accounting and law firms today have national practices. 6
The waves of change also may begin to erode the protection for 7
corporations put in place through the 1995 Reform Act. Consumer 8
groups, plaintiffs’ attorneys, and a growing contingency of lawmakers 9
are casting blame on the 1995 Reform Act for creating an environ- 10
ment conducive to fraud by corporate executives.39 Class action law- 11
suits are thought by some to be an effective deterrent to corporate 12
fraud, and the 1995 Reform Act’s provisions increasing the stan- 13
dards to file such lawsuits are seen as hindering this restraint.40 The 14
climate was different when the Reform Act was passed in 1995. The 15
economy was in a boom, Congress was Republican-controlled, and 16
corporate fraud was not headlining the news. In fact, Arthur 17
Andersen, the accounting firm decimated by the Enron scandal, was 18
out front leading the charge in favor of the Reform Act.41 Now, 19
with investors losing billions of dollars as the result of corporate 20
wrongdoing, the 1995 Reform Act’s restraints on securities class 21
actions are under fire. 22
So far, the efforts to “reform” the Reform Act have faced resist- 23
ance among lawmakers. Most of the legislators who supported the 24
Reform Act remain in Congress and continue to defend the securities 25
litigation reforms.42 Indeed, the Sarbanes-Oxley Act did not include 26
any substantive changes to the Reform Act. Whether that line can be 27
held remains to be seen. It is an area IR professionals must watch. 28
Another factor for IR professionals to consider is that personal 29
assets of executives and board members will be at risk as never 30
before. Changes in director and officer insurance protection are 31
being considered to better protect their personal assets: such as reg- 32
ulating entity coverage that has limited coverage for individuals, 33
increased coverage for officers and directors, and excess coverage of 34
officers and directors for claims in which the company is not permit- 35
ted to provide an indemnity.43 IR professionals must consider how to 36
convey the reality of these protections to institutional investors, with- 37
 52 THE NEW INVESTOR RELATIONS

1 out suggesting that directors and officers are making themselves bul-
2 let proof, despite wrongdoing. The reality of increased executive lia-
3 bility, it should be noted, can also be a legitimate angle for an IR
4 professional to pursue. “I don’t think the chief executive would do
5 anything to endanger his own finances,” is an argument with merit.
6 Another consequence resulting from changing investor demands
7 has been reforms to executive compensation practices. The primary
8 source of executive compensation over the past decade has been stock
9 options.44 Options ten years ago accounted for only 27 percent of
10 median compensation to CEOs, compared to 60 percent today.45
11 Some critics have contended that one effect has been to push execu-
12 tives into focusing on short-term stock price gains instead of valuing
13 the long-term health of a company.46 Some have also complained that
14 CEOs and CFOs, worried about their options, approved accounting
15 procedures which inappropriately propped up stock prices. However,
16 stock options remain an appealing way to align executive and share-
17 holder interests, something IR professionals need to emphasize to
18 investors.
19 Still, when corporate executive salaries and bonuses reach stratos-
20 pheric levels, IR personnel are the first to hear complaints. Indeed,
21 some famous investors with followings, such as Warren Buffett, have
22 lamented about executive compensation. IR professionals will have to
23 work in a climate in which big compensation carries with it not an
24 aura of great success but a whiff of cronyism, or even corruption.
25 Executives like Kenneth Lay of Enron Corp. and Bernard Ebbers of
26 WorldCom, Inc. made millions, even hundreds of millions, while
27 their companies crumbled, leaving shareholders and employees
28 empty-handed. Jack Welch, the retired chairman of General Electric
29 Corp., was provided with a retirement package—since amended in
30 the harsh light of the bear market—that included a $9 million-a-year
31 pension, use of a company jet, a shining new Mercedes-Benz, and
32 tickets to premiere events.47
33 Moreover, the disparity between executive and corporate earnings
34 has dramatically increased, surely causing even more disgruntled
35 investors. According to a recent study of twenty-three companies
36 under investigation for accounting practices, the top executives pock-
37 eted $1.4 billion in compensation during the past three years, while
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 53

the share values plunged $530 billion, or about 73 percent of their 1

total value from January 1, 2001, through July 31, 2002.48 That’s a 2
tough sell for IR professionals. In response to abuses in executive 3
compensation, the Conference Board Commission on Public Trust 4
and Private Enterprise (a twelve-member commission including a 5
former Federal Reserve chairman, a former SEC chairman, and former 6
U.S. senators) recommended strengthening independent compensa- 7
tion committees, encouraging performance-based compensation, 8
expensing fixed-price stock options, and providing advance notice by 9
executives of an intent to sell stock.49 Adopting these kind of compen- 10
sation reforms could go a long way to changing investor perception— 11
and could give IR professionals some much needed ammunition and 12
advance warning for dealing with institutional investors. 13
There must be symmetry, however, between protecting against 14
manipulation of compensation practices and providing motivation for 15
growth and innovation. Incentives should always exist for talented 16
and qualified individuals who are willing to take a chance or create 17
new products and services, or who deliver consistently better earnings 18
per share through careful cost controls and stock buybacks.50 19
Communicating these objectives to investors in a way that restores 20
confidence in the market will be the challenge of investor relations 21
personnel in every industry. 22
23
24
The IR Challenge 25
The challenge to investor relations personnel in this brave new world 26
is to restore investor confidence in a highly politicized and changing 27
corporate atmosphere. No longer are public companies presumptively 28
on the moral high ground with respect to disclosures, and no longer 29
are investors blindly accepting corporate communications as fact. The 30
presumption that corporate executives deal honestly with the public 31
has been eroded by a few examples of corruption. The burden now 32
lies squarely on public companies to rebuild trust with investors and 33
to restore the integrity of financial reporting. Investor relations per- 34
sonnel will no doubt shoulder much of this responsibility. 35
One consequence as the pendulum swings toward greater regula- 36
tion is the flood of new disclosure rules that have not been tested or 37
 54 THE NEW INVESTOR RELATIONS

1 applied. Many companies are taking a wait-and-see approach before

2 implementing changes; however, any delay could squander vital
3 time.51 As Lou Thompson, chairman of the National Investor Rela-
4 tions Institute warned, “To put it simply, time is not on our side in
5 the battle to restore investor confidence.”52 Moreover, the speed in
6 which the Sarbanes-Oxley Act was passed likely will give rise to diffi-
7 cult interpretive issues and, consequently, future clarifying amend-
8 ments and SEC statements.
9 Investor relations personnel will need to actively communicate with
10 investors about a company’s existing corporate governance policies,
11 as well as any changes to those policies.53 If the company governance
12 policies and disclosure practices do not comply with current standards,
13 then investors should be told what the company is doing and what it
14 intends to do.54
15 A misconception is that waning investor confidence and problems
16 with governance are limited to large companies with huge market cap-
17 italization; on the contrary, it is likely that the opposite is true. If even
18 blue-chip companies are not exempt from suspicion, why would any
19 investor trust a smaller shop, perhaps not even audited by a national
20 CPA firm? Thompson said, “Anyone who doesn’t recognize that the
21 scandals created by a few greedy executives have painted Corporate
22 America with a broad brush is not seeing the big picture.”55
23 As regulations tighten, so does the margin for error. Investors
24 today are less tolerant of public disclosures that are ambiguous or lag-
25 ging. In the new age of instant transparency, any minor stumble could
26 lead to a serious fall. Disclosures will be dissected and any mistakes are
27 more likely to be blown out of proportion or misinterpreted as inten-
28 tional. Again, for IR professionals, the stakes are raised quite a bit: You
29 have to speak clearly and quickly, and you have to get the message
30 right the first time you put it in print or open your mouth. IR is no
31 longer a game for the genteel. And IR professionals must tell manage-
32 ment that only sterling corporate governance standards are acceptable
33 on Wall Street today. Wall Street wants strong audit committees,
34 good, solid, independent boards of directors, and conservative
35 accounting strategies. These themes are critical to effective communi-
36 cations with investors and will remain so for the foreseeable future.
37
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 55

A LL IS NOT LOST. Despite the increased scrutiny placed on corpo- 1

rate actions and corporate communications, and the recent falter in 2
investor confidence, business in America is resilient. Patience and per- 3
severance are needed to move past the scandals and recriminations 4
that have dominated the recent upheaval. Notwithstanding the pres- 5
ent downturn, investors can count on the fact that the vast majority 6
of directors, officers, and IR personnel have the integrity and the 7
intent to restore faith in their companies and in Wall Street. 8
9
10
Chapter Notes
11
1. In passing the Reform Act, Congress noted that “The hallmark of our secu- 12
rities laws is broad, timely disclosure to investors of information about the finan- 13
cial condition of publicly traded companies.” Sen. Report No. 104-98 at 5
14
(1995), reprinted in 1995 U.S.C.C.A.N. at 684.
2. Sen. Report No. 104-98 at 5 (1995), reprinted in 1995 U.S.C.C.A.N. at 15
684. 16
3. Ibid. 17
4. The stay takes effect if the company files a motion to dismiss. See 15 U.S.C. 18
§ 78u-4(b)(3)(B). 19
5. 15 U.S.C. § 78u-4(b)(2).
20
6. 15 U.S.C. § 78u-5(i)(1).
7. PricewaterhouseCoopers, 1997 Securities Litigation Study, 1. 21
8. National Economic Research Associates, Securities Litigation Study, figure 11. 22
9. PricewaterhouseCoopers data. 23
10. The 2001 figures include 308 cases relating to the allocation of shares to 24
purchasers of stock in Initial Public Offerings (IPOs). Although these cases are 25
not traditional securities class action alleging violations of the Securities Act of
26
1933 and the Securities Exchange Act of 1934, it is possible that they replaced
temporarily traditional class actions. 27
11. Through August 2002, according to “Class-Actions Lawsuits Target Bigger 28
Fish,” Investor Relations Business (September 23, 2002): 1. 29
12. “Companies Face a Record Number of Shareholder Lawsuits,” Investor 30
Relations Business (April 22, 2002): 1. 31
13. Ibid.
32
14. Ibid.
15. Ibid. See also, National Economic Research Associates, Securities Litigation 33
Study; PricewaterhouseCoopers, 2001 Securities Litigation Study, 7. 34
16. National Economic Research Associates, Securities Litigation Study; 35
PricewaterhouseCoopers, 2001 Securities Litigation Study, 7. 36
17. PricewaterhouseCoopers, 2001 Securities Litigation Study, 6–7. 37
 56 THE NEW INVESTOR RELATIONS

1 18. William Cotter and Chris Barbee, National Union Fire Ins. Co. of
2 Pittsburgh, Pa. 2002 D&O White Paper, 6.
3 19. Ibid.
20. William Cotter and Chris Barbee, 7.
4
21. Ibid.
5
22. Sullivan & Cromwell, memorandum entitled “Congress Passes Broad
6 Reform Bill in Substantially the Form Passed by the Senate Last Week:
7 President’s Signature Expected Shortly,” July 26, 2002.
8 23. H.R. 3763, 107th Cong. § 401(a)(2002)(enacted)(“Sarbanes-Oxley”).
9 24. Sarbanes-Oxley, supra note 23, § 409.
25. Sarbanes-Oxley, supra note 23, § 401(a). Pursuant to Title IV, Section 401
10
of the Act, the SEC must adopt these rules within 180 days of the enactment of
11
the Act.
12 26. Sarbanes-Oxley, supra note 23, § 401(b). Pursuant to Title IV, Section 401
13 of the Act, the SEC must adopt these rules within 180 days of the enactment of
14 the Act.
15 27. Sarbanes-Oxley, supra note 23, § 404(a).
28. Ibid. A similar requirement was enacted in 1991 and has been imposed on
16
depository institutions through Section 36 of the Federal Deposit Insurance
17
Act.
18 29. Sarbanes-Oxley, supra note 23, § 302(a).
19 30. Sarbanes-Oxley, supra note 23, § 304(a).
20 31. Sarbanes-Oxley, supra note 23, § 306(a).
21 32. Sarbanes-Oxley, supra note 23, § 804(a).
33. Sarbanes-Oxley, supra note 23, § 803.
22
34. 511 U.S. at 177, 114 S. Ct. at 1448.
23
35. Ibid.
24 36. Senators Richard Shelby (R-Ala.) and Richard Durbin (D-Ill) introduced
25 legislation in February 2002 that would have added liability to aiders and abet-
26 tors. The bill, however, was denied in a vote on the Senate floor. Similarly, the
27 House Financial Services Committee rejected a bill on a party-line vote that
would have clarified the Supreme Court’s decision. Shawn Zeller, “Holding the
28
Line on Investor Lawsuits,” National Journal (July 27, 2002).
29
37. Ibid.
30 38. Accounting Industry Oversight Board Before The House Committee on
31 Financial Services, 107th Cong. 2d Sess. (April 9, 2002), testimony of Professor
32 Donald C. Langevoort.
33 39. Dan Carney, “Don’t Toss This Stock-Fraud Law. Just Fix It,” Business Week
(August 5, 2002).
34
40. Lisa Girion, “Battling Over Shareholder’s Right To Sue,” Chicago Tribune,
35
August 6, 2002.
36 41. Ibid.
37 42. Ibid.
LITIGATION IR: CORPORATE DISCLOSURE AND GOVERNANCE 57

43. William Cotter and Chris Barbee, National Union Fire Ins. Co. of 1
Pittsburgh, Pa. 2002 D&O White Paper at 15. 2
44. Tim McElligott and Toby Weber, “Drum Beat of Reform Grows Louder,” 3
Telephony (September 23, 2002).
4
45. Ibid.
5
46. Ibid.
47. “Companies Should Heed Ethics Recommendations,” Austin American- 6
Statesman, September 23, 2002. 7
48. Sally Roberts, “CEO Pay Draws D&O Scrutiny, Underwriters Looking Closer 8
At Compensation, Corporate Boards,” Business Insurance (September 16, 2002). 9
49. Ibid.
10
50. Tim McElligott and Toby Weber, “Drum Beat of Reform Grows Louder,”
11
Telephony (September 23, 2002).
51. “Semantic Hair-Splitting May Stall Current Disclosure’s Adoption,” Investor 12
Relations Business (September 23, 2002). 13
52. Ibid (comments of National Investor Relations Institute Chairman Lou 14
Thompson). 15
53. Ibid.
16
54. Ibid.
17
55. Ibid.
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

4 The IR-PR Nexus 2

3
4
5
6
7
DAVID SILVER, APR 8
Silver Public Relations 9
10
11
12
13
14
15

I T HAS BEEN ROUGHLY FORTY YEARS since Marshall McLuhan, the

famed communications theorist, popularized and defined the terms
“mass media,” “global village,” and “Age of Information.” McLuhan
16
17
18
wrote in 1964 in his seminal work, Understanding Media: The 19
Extensions of Man, “In a culture like ours, long accustomed to split- 20
ting and dividing all things as a means of control, it is sometimes a bit 21
of a shock to be reminded that, in operational and practical fact, the 22
medium is the message.” 23
One could argue his vision becomes truer with each passing year. 24
With the rise of business news cable stations and the Internet, the 25
medium plays a leading role in shaping public opinion on the scan- 26
dals raking public companies, accountants, and sell-side analysts on 27
Wall Street—and, importantly, how individual companies and man- 28
agements are perceived in the mix. 29
Consider the flood tide of financial television shows such as 30
CNN’s Moneyline, CNBC’s Squawk Box, and Fox’s Your World 31
with Neil Cavuto, as well as 24/7 Internet news services such as 32
TheStreet.com and CBSMarketwatch.com. The medium (somtimes 33
as slickly staged as a Broadway production) provides viewers—and 34
investors—oceans of financial information on public companies, 35
their management, and the surrounding regulatory and business 36
environment. 37

59
 60 THE NEW INVESTOR RELATIONS

1
2 The New Paradigm
3 In the wake of the Wall Street scandals about ersatz brokerage
4 research and creative accounting—and the resulting tougher regula-
5 tory environment—there is a new investor relations and public rela-
6 tions paradigm for public companies to follow, if they wish to use the
7 mass media to get their story to institutional investors and the 100+
8 million individual investors. The more than 8,000 public companies
9 listed on Wall Street must consider coordinating, if not proactively
10 merging, their IR and PR programs. There is little sense anymore in
11 treating institutional investors as important and serious through a
12 cogent and significant IR program, while having a Wild West—or
13 even unrelated or underfunded—PR campaign underway.
14 In addition, IR and PR professionals, while working and talking
15 with each other, must become familiar with the phalanx of new and
16 stringent federal regulations governing corporate disclosure. Ideally,
17 corporate managements should be secure in turning to their IR/PR
18 staffs for guidance on proper and timely disclosure (although IR and
19 PR staffers should never presume to walk on a legal counsel’s turf).
20 The convergence of IR and PR has become so important that not
21 combining those functions could have negative consequences for a
22 public company’s share price. Today it is a fiduciary responsibility of
23 management and directors to make sure IR and PR work together (at
24 the minimum), and certainly not at odds. Although certainly acceler-
25 ated by Wall Street ethics issues, the need for blending IR and PR has
26 been building since the 1980s. The market capitalization of public
27 companies is increasingly determined by “intangibles,” which include
28 a solid senior management team; employee satisfaction; and ethical,
29 but profitable, business partnership arrangements. But the most
30 important intangible is a company’s reputation. In particular, Wall
31 Street must trust management and its accounting procedures.
32 Some market studies indicate that as much as 40 percent of a com-
33 pany’s market capitalization is determined by the intangibles. That
34 percentage probably rose even higher in the late 1990s, although
35 maybe not for the right reasons. By the 1990s a typical company’s
36 book value represented less than half its market capitalization, which
37 still holds true in this decade.
THE IR-PR N EXUS 61

The investor perception of intangibles means a stock could trade 1

for, say, $20 a share, or $14 a share, based on the fundamentals but 2
also depending on how Wall Street perceives management, and its 3
“story.” Like it or not, management is often perceived through the 4
lens of the financial news media. The resulting obligation of man- 5
agement and directors is to make sure that the IR team and the PR 6
team are in fact on the same team. As a result, we are now entering 7
what could be called the “Golden Era of Investor Relations and 8
Public Relations.” 9
The seemingly endless flaps over brokerage or “sell-side” research, 10
crooked corporate management, bogus accounting practices, and the 11
recurrent Wall Street obsession with quarterly earnings statements 12
have made for an equities market as volatile as any in memory. 13
Managing IR and PR is especially necessary in choppy waters, and the 14
wavy ride in the markets has caused some companies—even such 15
giants as Coca-Cola Inc., AT&T, and PepsiCo.—to forgo providing 16
financial earnings guidance for analysts and investors. 17
Although it may seem self-serving to say so, the awkward situation 18
corporations find themselves in plays to the benefit of IR and PR 19
professionals, who have key roles to fill in educating investors, 20
employees, and the financial media. This includes communicating 21
that the quarterly-earnings game cycle will not always be of utmost 22
importance, especially for those companies now stepping off the field 23
of the quarter-by-quarter game. IR and PR professionals will have to 24
intelligently argue that strategic positioning and long-term fundamen- 25
tals will be the value drivers in the future, backed up by the company’s 26
reputation. It always behooved a company to be open and aboveboard 27
to gain Wall Street’s trust, but with the flood of new regulations from 28
Washington, such behavior is now mandatory. With the new laws and 29
regulations, most notably Regulation FD and the Sarbanes-Oxley 30
Act of 2002, public and investor relations executives or consultants 31
at public companies must help—even lead—in representing their 32
company’s financial information to institutional and individual 33
investors. 34
Certainly, with Reg FD in place, any thought of the IR team con- 35
fidentially telling institutional investors the “real story,” while the PR 36
team keeps up a rosy facade for the financial media is not only out- 37
 62 THE NEW INVESTOR RELATIONS

1 dated but also illegal. Given that reality, there never has been a bet-
2 ter opportunity for public relations and investor relations executives
3 to become trusted and important advisers to boards, CEOs, and
4 CFOs to help interpret and communicate important information
5 about a company’s financial health and reputation to the financial,
6 legal, and mass media.
7 This new role has been recognized within certain industry groups,
8 including the Washington, D.C.–based National Investor Relations
9 Institute (NIRI). NIRI recently created the Center for Integrated
10 Communication to deal particularly with issues of IR and PR inte-
11 gration. President Louis Thompson Jr. declared that the center
12 would advocate the importance of integrated corporate communica-
13 tion, conduct or foster research on integration as it relates to corpo-
14 rate value creation, and provide development opportunities for IR
15 and PR professionals.
16
17
18 Reputation
19 To get a premium price for a stock based upon the fundamentals,
20 there are three things that really count: (to borrow an approach from
21 real estate mavens) reputation, reputation, and reputation.
22 Every company has a story to tell, be it growth, or share buybacks,
23 or value. Presumably, that story should be self-evident to manage-
24 ment and IR and PR professionals, and not hard to repeat to
25 investors. (If you don’t know what your story is, you are soon going
26 to need a lot more than just IR and PR help.) The reputation of a
27 company determines how much faith Wall Street investors place in a
28 story. That reputation, by and large, is earned by being able to talk to
29 investors, analysts, and the financial media quickly, cogently, and
30 without an “attitude.”
31 Yet many a public company operates on a daily basis without
32 understanding the crucial importance of managing its number one
33 asset: reputation. Sometimes companies let calls from financial news
34 reporters go unanswered or refuse to comment on rumors, even ones
35 that are patently false. Recently a publicly held real estate investment
36 trust (REIT) listed on the Big Board did not respond to a reporter’s
37 question about whether a dividend would be maintained (a very
THE IR-PR N EXUS 63

important question, from an investor’s perspective, especially for a 1

REIT). The reporter did his job and wrote a story stating the com- 2
pany did not return calls about the dividend. You can imagine the 3
result. This same company almost certainly would not have disre- 4
garded a call from a major institutional investor. But the effect on the 5
stock price was just as real. 6
The IR and PR teams in this example were not working together; 7
in fact, the REIT planned to maintain its dividend. There was even a 8
secondary fallout from the unanswered reporter’s call: institutional 9
investors wondered why management didn’t alertly respond to the 10
reporter’s call—were they asleep at the switch? Did they hire incom- 11
petent in-house PR staffers? If they had incompetent PR staffers, who 12
else was running around loose? Did management have a policy so 13
rigid that it could not respond to a basic question about its dividend? 14
Bad PR was in fact bad IR. 15
The company cited here did not guard its reputation. One blun- 16
der did not ultimately harm the REIT (although shareholders who 17
sold shortly after the story might have a different point of view). 18
However, a company cannot endure too many flubs like this one 19
without hurting shareholders on a more permanent level. 20
21
22
Gatekeepers 23
The example of the Wall Street REIT illustrates the point: As unlikely 24
as it seemed only ten years ago, today’s gatekeepers of a company’s 25
financial information on Wall Street must be part of an integrated 26
investor relations and public relations team. With the proliferation of 27
financial media, the posting of news stories on Yahoo! company sites 28
and message boards, and day traders pouncing on rumors, it makes 29
little sense to treat the two functions separately. Both functions serve 30
to enhance the perception of a company’s fundamental value. 31
32
33
Key Responsibilities 34
It was only a few years ago that companies viewed public relations 35
officers as news release writers, more tactical than strategic, and 36
investor relations officers as the disclosers of company numbers and 37
 64 THE NEW INVESTOR RELATIONS

1 handlers of the “dog and pony shows” on Wall Street. But not any-
2 more. Today’s IR and PR officers must understand regulatory man-
3 dates and obligations that affect their jobs, while at the same time
4 alertly fielding questions from institutional investors, analysts, and
5 the media.
6 The IR/PR team must also decide (with management approval)
7 how to package the company “story” so that it is consistent and true.
8 Shading the story for retail or institutional investors or the financial
9 media simply doesn’t hack it anymore. In addition, and as impor-
10 tantly, the IR/PR team must actively put management before
11 investors and the media (naturally, it helps if management is charis-
12 matic, but intelligence and earnestness will carry as much weight on
13 most days). With investors retreating from equities, and with more
14 than 8,000 public companies competing for the investor dollar, pub-
15 lic company management must be proactive in meeting with
16 investors and the media. Wallflowers rarely make the party happen.
17 Naturally, there will be managers who do not feel like being
18 “paraded around” to handle reporter’s questions, or being “brought
19 out on the carpet” in front of institutional investors. Their reserva-
20 tions will be greatest during or after any bad quarter. The IR/PR
21 team must try to convince management that running a public com-
22 pany inevitably entails public obligations, much like holding public
23 office. Part of the job, given the enormous power of institutional
24 investors and the pervasiveness of the media, is to be the company’s
25 face. Management teams cannot hide from investors and the media
26 and expect to be trusted. Shareholder value will suffer. Anything that
27 hurts market capitalization is a breach of fiduciary responsibilities to
28 shareholders.
29 At times, getting management on board is a difficult task. Many
30 managers are accustomed to being answered to, not the other way
31 around. However, the appeal of being in the media is also great. In
32 addition, institutional shareholders tend to be a rather genteel lot
33 when discussing matters affecting their stock value.
34 Meanwhile, it will fall upon the IR/PR team to develop new rigor
35 in regards to the chairman’s letter (which accompanies annual
36 reports) and, critically, the management discussion and analysis sec-
37 tion of annual 10-K and quarterly 10-Q filings. In particular, liquid-
THE IR-PR N EXUS 65

ity under different scenarios (such as slower sales) must now be 1

addressed. 2
A competent IR/PR team should play a role in helping senior 3
management frame messages in 10-K and 10-Q filings, as the per- 4
ceived accuracy, honesty, and transparency of these messages will 5
create corporate value. The team must also micromanage the com- 6
pany’s website so that shareholders and potential investors will have 7
updated, accurate material financial information. The team will have to 8
involve the CEO, CFO, and internal house counsel in working on key 9
messages for investors, the media, and employees. 10
The financial media and the investing public want to know more 11
about corporate governance and ethics than ever before. The company 12
website should make clear that the company is devoted to trans- 13
parency and has independent directors, particularly on the audit com- 14
mittee of the board. Investors are still willing to place their bets on 15
Wall Street—but only if they can trust the public companies they are 16
considering. 17
Now, some specifics on the new rules mandated from 18
Washington, D.C., and their effect on IR and PR practices. 19
20
Regulation FD 21
In 2000, the Securities and Exchange Commission adopted Regulation 22
FD (fair disclosure, or “Reg FD”). This rule was enacted to ensure that 23
all investors, but especially individual investors or out-of-management- 24
favor analysts, concurrently receive the same “material information” 25
regarding a public company that select institutional investors and 26
market makers had been getting first. 27
Reg FD was and is intended to level the playing field and also to 28
create more information, as even “tough” analysts would not be 29
“locked out” or punished as before. More honest analysis, and thus 30
more accurate market information, was the intended goal. Many 31
public companies immediately abided by the new regulation, and 32
without undue difficulty. After all, it is only right that material infor- 33
mation be available simultaneously to all investors and analysts. But 34
other companies decided not to communicate at all unless forced to 35
do so in an earnings announcement or other material information 36
that a public company was required to disclose. 37
 66 THE NEW INVESTOR RELATIONS

1 This was, and is, a seriously flawed response to Reg FD. Indeed,
2 some companies have been hammered on Wall Street, as they choose
3 to be mute, while the investing public is being drenched in media
4 stories about corporate fraud and accounting shenanigans.
5 The markets can be efficient only when company IR/PR officers
6 communicate sufficient and appropriate information to a wary invest-
7 ing public so that investors can understand, value, and feel comfortable
8 with a company’s stock. Therefore the IR/PR teams’ disclosure of
9 material information on an ongoing basis will be seen as maintaining
10 market efficiencies and fair valuations for those public companies.
11 On another level, Reg FD is good argument for the coordinating
12 of IR and PR teams. The same message has to be delivered simulta-
13 neously to everybody. A company cannot deliver materially different
14 messages to different groups of investors or analysts, or give material
15 information to institutional shareholders, but not to the financial
16 media. If IR and PR are not coordinated, mixed, possibly illegal, mes-
17 sages could result—to nobody’s benefit.
18
19 Regulation G
20 In 2003, the Securities and Exchange Commission (SEC) adopted
21 Regulation G regarding earnings release disclosure requirements. This
22 ruling affects both investor relations and public relations professionals
23 at publicly traded companies. In fact, its adoption was considered so
24 important that NIRI issued an executive alert on Regulation G for its
25 thousands of members.
26 The NIRI clarification is worth mentioning. Briefly, if a public com-
27 pany issues an earnings release, then the SEC requires the company to
28 furnish the earnings release under the new item 12 of an 8-K,
29 whether or not the earnings release contains non-GAAP information.
30 If a company uses non-GAAP information in the earnings release, the
31 information must be reconciled with the relevant GAAP information
32 in the release. GAAP information must be presented with the same
33 prominence as the non-GAAP information. Additionally, the release
34 must state why the non-GAAP information is relevant.
35 Public companies that present information regarding a completed
36 reporting period during an accessible conference call do not have to
37 provide this information in a Form 8-K after the conference call if:
THE IR-PR N EXUS 67

the accessible conference call is held within forty-eight hours of 1

the earnings release 2

the earnings release was furnished on Form 8-K prior to the call 3

the company issued a widely disseminated news release notify- 4
ing the public of the date and time of the call and how to access 5
it, and then placed that information on the company’s website 6

the conference call is accessible to the public by webcast, dial- 7
in conference call, or similar means 8

the financial information included in the conference call is 9
provided on the company’s website, along with accompanying 10
disclosures required by Regulation G 11
12
It is of paramount importance that public relations and investor 13
relations professionals understand and comply with the new govern- 14
ment regulations that affect publicly traded companies. Mistakes or 15
misstatements could be costly to a public company’s reputation and 16
the credibility of its public relations and investor relations. 17
18
19
The Need for Coordinated IR and PR Teams 20
Since this chapter advocates the melding of the investor relations and 21
public relations function in public companies, it is appropriate to 22
review how both of these professions evolved—and why they should 23
now be coordinated, or even merged. 24
25
The Rise of Public Relations 26
The rise of public relations as a profession correlated with the rise of 27
mass circulation newspapers and magazines from 1900 through 28
1917. During this period, known as the “Seedbed Era” in American 29
corporate history, there were fifty well-known national magazines 30
with circulations of more than 100,000—remember, there was no 31
television. Ladies Home Journal, which was founded in 1883, had a 32
circulation of close to 1 million. The muckraking journalists of this 33
era—Lincoln Steffens, Upton Sinclair, and Ida Tarbell—used these 34
national forums to rail against abuses of big business and corpora- 35
tions. This was also the time when high school education had become 36
compulsory and literacy in America rose dramatically. 37
 68 THE NEW INVESTOR RELATIONS

1 Corporations at this time, in general, had a policy of not com-

2 menting to the press, and, of course, there was no SEC to require
3 accurate disclosure. But as the negative stories kept coming out, the
4 public attitude toward large enterprises darkened, in some quarters to
5 near black. President Theodore Roosevelt still figures prominently in
6 history books for his legislation against the “robber barons” and for his
7 trust-busting endeavors. One could argue that Roosevelt followed and
8 answered to the national press. Corporate America learned a lesson—
9 no one is above the court of public opinion in an age of national
10 media.
11 One of the first serious practitioners of proactive public relations
12 in representing corporations was Ivy Lee, a former journalist. He all
13 but pioneered the field of public relations, attempting to represent
14 corporations in an honest and professional manner. In the early
15 1900s, Lee issued a “Declaration of Principles” that set the profes-
16 sional standards of modern public relations and mailed his manifesto
17 to all relevant editors of newspapers and magazines. It read in part:
18
19 This is not a secret press bureau. All our work is done in the open. We
20 aim to supply news. This is not an advertising agency. In brief, our plan
21 is, frankly and openly, on behalf of business concerns and public institu-
22 tions, to supply to the press and the public of the United States prompt
23 and accurate information concerning subjects which is of value and inter-
24 est to the public to know about.
25
26 Lee was among the first public relations professionals to issue
27 “press reports,” which today we would classify as news releases, to
28 reporters on a large scale. Among his clients was John D. Rockefeller
29 Jr., who at the turn of the century was a favorite target of Ida Tarbell,
30 a skilled muckraker. She wrote the History of the Standard Oil
31 Company, in which she lambasted both Rockefeller and the Standard
32 Oil Company. For a spell, Lee was successful in helping to “balance”
33 Rockefeller’s image in the media, by artfully representing Rockefeller’s
34 business accomplishments and philanthropy to journalists.
35 Another early leader in public relations was Edward Bernays
36 (interestingly, a double nephew of Sigmund Freud). Bernays started
37 practicing PR in the early 1900s and continued providing public rela-
THE IR-PR N EXUS 69

tions counsel until his death in 1995 at 103 years. In many regards, 1
Bernays laid the theoretical groundwork for the field of public rela- 2
tions in 1923 with his seminal work Crystallizing Public Opinion. 3
Much of his work remains cogent today, in that it recommends 4
proactive PR. 5
Bernays pioneered the technique of using “third party authori- 6
ties” to plead for his clients’ causes. “If you can influence the leaders, 7
either with or without their conscious cooperation, you automatically 8
influence the group which they sway,” he wrote. In order to promote 9
sales of bacon, for example, he conducted a survey of physicians and 10
reported their recommendation that people eat hearty breakfasts. He 11
sent the results of the survey to 5,000 physicians, along with public- 12
ity touting bacon and eggs as a hearty breakfast. 13
Bernays’s clients included President Calvin Coolidge, Procter & 14
Gamble, CBS, the American Tobacco Company, General Electric, and 15
Dodge Motors. To this day, corporations that commission “independ- 16
ent” studies are following in the footsteps of Bernays (although the 17
public has grown a lot more skeptical of industry-financed studies). 18
As important as these pioneers are, it is more important to 19
remember that they operated in an era before the huge upsurge of 20
financial media, particularly the electronic media. Giants they may 21
have been, but they didn’t have to wrestle with CNN, or Yahoo! 22
company websites and message boards. They navigated a world dom- 23
inated by general circulation newspapers and magazines, many of 24
which were susceptible to skilled PR campaigns, perhaps backed up 25
by advertising dollars. 26
As a result, corporate PR emerged first, and separately from IR, 27
and was thought of more in connection with marketing, government 28
relations, and general corporate image campaigns. 29
The public relations profession is changing rapidly, and for the bet- 30
ter. Bernays and Lee would be very impressed with how the reputa- 31
tion of the field is being elevated, most recently by the federal courts. 32
In a groundbreaking ruling in a federal court in New York in June 33
2003, the judge ruled that legal advice that is intended to shape pub- 34
lic opinion and that is part of discussions between lawyers and public 35
relations executives and individuals under investigation (such as 36
Martha Stewart, among other Wall Street corporate executives) is 37
 70 THE NEW INVESTOR RELATIONS

1 now protected under attorney-client privilege. In a previous case rul-

2 ing, this privilege had been recently granted to accountants—a field
3 that is currently under investigation and undergoing scrutiny as well.
4 The ruling relates only to legal advice that is discussed among
5 lawyers, public relations professionals, and individuals under investi-
6 gation, but with all of the scandals brewing on Wall Street, public
7 relations is fast becoming a sought-after specialty by law firms and
8 their corporate clients under investigation. Public relations coun-
9 selors are now strategic corporate players on Wall Street and with
10 large national law firms representing public companies in litigation
11 matters. The boardrooms are now opening for public relations and
12 investor relations professionals, especially if that position is integrated
13 and functioning in a senior management role that provides counseling
14 on a range of issues to the CEOs and CFOs of public companies. The
15 investor relations side of the team is fast becoming an important part
16 of this equation.
17
18 The Advent of Investor Relations
19 Investor relations emerged into its own in the 1960s, often
20 associated, as has been noted, with the so-called dog and pony shows
21 for sell-side analysts and retail investors, usually held at the offices of
22 securities brokerages. At the time, the important clients were stock-
23 brokers with “big books” (lots of rich clients) and individual
24 investors—Wall Street was a much smaller avenue back then. Soon,
25 earnings news releases, annual reports, and other financial disclosures
26 became the province of IR.
27 However, from the 1970s through the 1990s, the money man-
28 aged by institutional investors swelled—indeed, exploded. Assets of
29 equity mutual funds (let alone insurance companies and pension
30 funds) jumped to $4.31 trillion in 2000, from a mere $37.5 billion
31 in 1975. Appropriately enough, IR evolved into handling relations
32 with the new, sophisticated, jumbo investors that stalked heavily
33 down Wall Street.
34 In IR, it became important to know how to “talk the talk.” More
35 Wall Street professionals started going into investor relations, often
36 from the broker-dealer and investment banking side of the business.
37 Furthermore, the rise of institutional owners, many armed with trigger
THE IR-PR N EXUS 71

fingers on the sell button, led to companies’ placing much greater 1

emphasis on “making the numbers” and the quarterly earnings 2
statement. 3
As with PR, the IR function really evolved before the financial 4
news explosion of the 1990s, or the Internet, and, of course, before 5
Reg FD and the Sarbanes-Oxley Act. It goes without saying, IR 6
emerged before the present-day ability of financial news reporters to 7
access online nearly all news articles ever written about a public com- 8
pany. Today, a “bad” story is archived and permanently retrievable, a 9
part of a company’s reputation forever. 10
Historically, the financial media was not important enough to be 11
a priority client of either IR or PR. This allowed the two trades to 12
evolve separately. But times have changed. 13
14
15
Today’s Integrated Function 16
We are now in many ways living McLuhan’s vision, that the “medi- 17
um is the message.” Business news stations market their journalists 18
like rock stars, with labels such as the “Money Honey,” and “The 19
Brain.” There is an incessant demand to fill the “news-hole” at 20
financial cable stations. Effective, proactive IR/PR teams use the 21
electronic media to help get their story out to investors. Airtime is 22
always likely to be brief, and so it is wise to decide before going on 23
the air what message needs to be told, and then to stay on point 24
throughout the interview. It is fair to make interviews conditional, 25
in that only certain topics are to be addressed (although once on the 26
air, anything can happen). 27
Bear in mind that McLuhan’s observations are more apparent in 28
television than anywhere else. Being technically correct won’t help if 29
a company executive appears ill humored or unsure. And if the 30
ground rules are too loose, the whole interview could revolve around 31
a surprise topic, such as sexual harassment. An executive wandering 32
“off point” could easily make an innocent gaffe, but one with reper- 33
cussions on Wall Street. 34
But on a more substantive level, financial reporting has never been 35
more sophisticated or trenchant, certainly at premier publications 36
such as Forbes, the Wall Street Journal, Business Week, Investor’s 37
 72 THE NEW INVESTOR RELATIONS

1 Business Daily, or the New York Times. And, as mentioned, these

2 articles are archived and accessible for other reporters and investors—
3 for good or ill, they become part of a company’s record. A significant
4 portion of the financial media, in a very real sense, aspire to the same
5 level of sophistication as these major publications, with access to
6 numbers that IR used to provide solely to institutional investors. In
7 any event, a company’s financials are now available online 24/7.
8 Given these realities, it is imperative that the IR and PR functions
9 be at least coordinated, or even combined, in public companies, so
10 the same “story” is consistently told to investors, shareholders, and
11 the media. And it better be an accurate story. Chief executive officers,
12 chief financial officers, and their investor relations/public relations
13 officers who think they are clever in deceiving shareholders, investors,
14 and analysts are, rather, grotesquely myopic. Once the media per-
15 ceives the deceit, the company becomes the center of negative stories
16 that will hurt the reputation of the company for quite some time.
17 To gain a competitive advantage, inspire trust, and have consistent
18 messages, it is recommended public companies using the new hybrid
19 investor relations/public relations model follow these basics:
20 ❏ Update company information on operations and finance issues
21 for analysts and investors on a regular basis, while adhering to
22 Regulation FD and Regulation G.
23 ❏ Determine levels of interest with sell-side and buy-side analysts,
24 brokers, and portfolio managers. Spend as much time as possible with
25 managers and analysts who “like the stock.” Keep them comfortable,
26 keep them in the loop, and try not to surprise them.
27 ❏ Have an easy-to-use interactive website for all audiences, espe-
28 cially for viewing financials. Consider using a few examples of real-time
29 reporting on your website—such as daily sales at stores, or units pro-
30 duced. Although much information may be proprietary, investors
31 today like to know that a company is able to track its performance daily.
32 Find a way to show investors you can, and feature it on your website.
33 ❏ Outside IR/PR consultants can be extremely helpful to a pub-
34 lic company, especially on the media side. Large-cap and midcap
35 companies can often get positive results in media relations from the
36 regional IR/PR firms that have built relationships with the local
37 media. This can be crucial should a crisis PR situation arise.
THE IR-PR N EXUS 73

❏ In some situations, make the outside consultant an integral part 1

of the company’s IR/PR team. The consultant can be an intelligence 2
gatherer for the company and quickly discover the media’s perception 3
of the company. 4
❏ Remember, the media drives what much of Wall Street thinks 5
about public companies. Reputation management is the most impor- 6
tant aspect of a company’s perception with investors, shareholders, 7
government regulators, and employees. Be alert, respond quickly, 8
and act in a way that demonstrates the conviction that running a pub- 9
lic company entails responsibility to the public and capital markets. 10
❏ Employees are a public company’s foot soldiers in the credibil- 11
ity campaign in the marketplace. Be sure to communicate with them 12
on a consistent basis. 13
14
When working with the Fourth Estate (historian Thomas Carlyle’s 15
description of the press)—whether on a local, statewide, or national 16
basis—make sure you observe the following protocols: 17
❏ Return phone calls quickly or, better yet, talk with an inquiring 18
reporter immediately. As a rule, reporters are not an imperious lot. 19
But they are working under deadlines. The IR/PR officer who 20
returns a call quickly, engages in friendly banter, and expresses a 21
desire to hear from the reporter anytime, will get called often. 22
Remember names, and call to congratulate reporters on advance- 23
ments, or for an especially well-written article. And if you think some 24
reporter is too “small time” to deal with, think twice. Some will rise 25
through the ranks. Others may tip bigger reporters off to a story. 26
Nobody likes being snubbed. 27
❏ As reporters write their stories, be proactive and keep an open 28
line of communication between the reporters and your senior man- 29
agement. Provide the media with analysts who cover your company, 30
and push those analysts to talk. The later you return a call, the less 31
chance you will get to “tell your story” and to make sure that the 32
reporting is balanced. If you return a call past deadline, you may dis- 33
cover just how surly a reporter can be. 34
❏ Consider developing a list of reporters’ e-mail addresses. On a 35
monthly basis, shoot out a message with company news or your lat- 36
est observations on Sarbanes-Oxley, corporate governance, or ethics, 37
 74 THE NEW INVESTOR RELATIONS

1 and make sure to include your phone number. If an official at your

2 company is brave enough to become a regular commentator on
3 proper corporate governance—in the process perhaps occasionally
4 alienating others—you will have earned a prized position.
5 ❏ On earnings calls, make sure you comply with the Regulation
6 FD rule and Regulation G. Communicate all material company infor-
7 mation to reporters and put out a news release on a news wire such
8 as Bloomberg, AP, Reuters, or Dow Jones.
9
10
11 T HIS IS A WATERSHED ERA for Wall Street and Washington, and rep-
12 utations will be made for those public companies savvy enough to
13 understand how to work with a public company’s diverse audience
14 base. Converging the investor relations and public relations func-
15 tions, and becoming known as a public company that is transparent
16 will win big points with analysts, investors, and the media and will
17 enhance market capitalization.
18 Even though the opportunities for IR and PR officers with finan-
19 cial and communications skills have never been better, the demands
20 are also greater. Today, IR/PR professionals not only have to be
21 proactive and media-savvy, they also must have a working command
22 of finance, accounting, economics, and the capital markets. The
23 more information that is relayed to investors, shareholders, analysts,
24 and the media in a factual, truthful, timely manner, the more senior
25 management will view the IR/PR function within a public company
26 as a crucial component, important to growth and higher market cap-
27 italizations.
28
29
30
31
32
33
34
35
36
37
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P A R T 2 3
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8
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IR Implications 12
13
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for Selected 15
16
17
18

Financing Scenarios 19
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29
30
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32
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 1

5 Sustained Stock Buybacks: 2

3
4
An IR Tool for 5
6

Mature Companies 7
8
9
10
NEIL G. BERKMAN
11
Neil Berkman Associates 12
13
14
15

W ALL S TREET AND THE financial media love the explosive earn-
ings-growth story, the next Microsoft, the next Amgen, the
Next Big Thing. They love the story, even though in reality the com-
16
17
18
pany they are chasing could be the next Tyco International, Worldcom, 19
Enron, or Global Crossing. 20
So how do you run an established, solid, profitable company and 21
keep the earnings-growth story alive? It’s common knowledge that 22
most merger-and-acquisition campaigns fail. Yet if your firm respon- 23
sibly sticks to its knitting, there is a strong possibility your stock will 24
be overlooked among the more than eight thousand publicly held 25
enterprises and trade at a lower price/earnings ratio than any num- 26
ber of flimsy but hyped unseasoned stocks. 27
Investors may be fickle, but they are your shareholders. In days 28
of yore, established companies paid good dividends and produced 29
slick annual reports to foster loyalty. Modern tax planning eschews 30
dividends, which, even after the 2003 tax cuts, on average, are 31
taxed at higher rates than capital gains. And hardly anybody is seri- 32
ously impressed by well turned-out annual reports in this era of 33
online filing with the Securities and Exchange Commission. 34
Nevertheless, it should be remembered that only a generation ago, 35
paying dividends regularly was seen as a reassuring sign of financial 36
strength. 37

77
 78 THE NEW INVESTOR RELATIONS

1 So what to do now? For many companies, a sustained stock buy-

2 back program, coupled with a reaffirmed commitment to trans-
3 parency, good corporate governance, and a vow of Spartan leader-
4 ship and management, is a course well worth considering. Indeed,
5 the regular stock buyback may be poised to become what the regu-
6 lar dividend was thirty years ago: a sign of financial resilience and
7 management commitment to shareholders. Of course, Wall Street
8 must be clued in to such a strategy through regular and sustained
9 investor relations.
10 The operative words here are regular and sustained. Too many
11 companies announce buyback programs that are sporadic or simply
12 investor relations hype. Wall Street can be fooled for a while but gen-
13 erally is not impressed with this sort of grandstanding. The key is sus-
14 tainability, an understanding that management intends to buy back
15 stock this year, next year, and annually into the foreseeable future,
16 just as dividends were paid a generation ago.
17 The dot-com era may have been fun while it lasted, but it under-
18 lined one of life’s truisms: Trees do not grow to the sky. It is the rare
19 gem of a company that can sustain double-digit earnings growth for
20 more than a few years. It’s even rarer to find companies with organic
21 growth opportunities that can support above-average growth indef-
22 initely. Even the most reliable growth companies with the longest
23 records of success ultimately encounter the limits of their opportu-
24 nities. Such glory stories as IBM, McDonald’s, and Home Depot
25 come to mind. As in life, every company enters a stage when it may
26 be considered “mature.” At this stage—which, not incidentally,
27 defines the bulk of public companies—it’s up to management to
28 articulate to Wall Street its plans to enhance shareholder value. The
29 old “we’re going to grow earnings by 20 percent every year” won’t
30 hold water and, in fact, will lead to a vicious backlash when projected
31 earnings fail to materialize. Effectively communicating a sensible
32 strategy—whether it consists of targeted new-product development,
33 more intensive sales and marketing, debt reduction, stock repur-
34 chases, or some combination of these—is the essence of investor
35 relations and the key to protecting a company’s multiple and share-
36 holder value.
37
SUSTAINED STOCK BUYBACKS: AN IR T OOL FOR MATURE COMPANIES 79

1
The Mergers Fallacy 2
There are tempters aplenty for managements who seek overnight 3
facelifts for their mature companies. Wall Street is full of profession- 4
als who brandish merger plans as corporate fountains of youth. 5
Investment bankers are expert at identifying likely candidates and 6
arranging financing, and they will aggressively call upon public- 7
company executives unbidden. 8
Investment bankers know how to package and sell a proposed 9
acquisition to company management and investors. They know how 10
to make even the most mundane transaction look attractive, loaded 11
with a magic “synergy” that will sustain rapid growth for years to 12
come and be “accretive” to earnings. Besides, it’s fun to make acqui- 13
sitions. The road shows, the meetings with professional investors, the 14
travel are exciting, at least for a while. There is the undeniable thrill 15
of being at the helm of a larger company, having more underlings, the 16
perceived muscle to move into new markets and gain access to larger 17
lenders and institutional investors. And if the benefits turn out to be 18
more apparent than real, the remedy is simple: Do another deal, or 19
jump ship to another company, leaving shareholders to hold the bag. 20
This acquisition strategy always works for the bankers and the bro- 21
kers, whose fees are paid regardless of the outcome. The strategy even 22
works on rare occasions for the companies involved, although the 23
investment universe is littered with the remains of acquisitions gone 24
sour, synergies that failed to materialize, cost-reduction programs 25
that somehow didn’t lower costs, and once-lofty multiples that are 26
now nothing but painful memories. For an excellent account of the 27
perils of M&A mania, see Profit From the Core, by Chris Zook and 28
James Allen (Harvard Business School Press: 2001). 29
The M&A strategy is analogous to the hare in the fabled race 30
between the tortoise and hare. The prosaic alternative to the M&A 31
rush for huge profits is the share buyback plan, executed slowly and 32
relentlessly, just as the tortoise walks. It’s easier to increase earnings 33
per share when the share count is falling and you are demonstrating 34
to Wall Street that you have extra cash, and thus the financial 35
strength, to buy back shares every year. You are also demonstrating 36
to Wall Street that you would rather put money in shareholders’ 37
 80 THE NEW INVESTOR RELATIONS

1 pockets than engage in Wild West roundups of like companies or

2 even unlike companies. Moreover, if Wall Street is told, and is shown
3 evidence, that the share count will be falling for a long, long time, a
4 group of patient investors will form who are willing to buy the stock.
5 Switching analogies from fables to Hollywood, the stock buyback
6 strategy could also be characterized as “build it, and they will come.”
7 With more than nine thousand mutual funds, thousands of profes-
8 sional money managers, and millions of individual investors out
9 there, a company that delivers higher earnings per share on a sus-
10 tained basis, for clear and understandable reasons, will develop
11 “sponsorship,” or a following. If the company doesn’t, it needs to
12 hire better IR staff or consultants.
13 Another word on the IR challenges presented by M&A cam-
14 paigns: These deals fly in the face of the new Wall Street, which
15 demands transparency and clarity from managements and balance
16 sheets. Analyzing a company in one line of business is itself a
17 demanding job. When a company branches into multiple businesses,
18 serious forecasting of revenues and, especially, of profits becomes still
19 more problematic and unreliable. Even acquisitions of like companies
20 lead to dubious pro forma statements and write-downs. Going for-
21 ward, there will likely be heightened suspicion that profits are being
22 “managed” in any conglomerate or merger campaign and, along with
23 that, heightened suspicion that the company in question may soon
24 take a fall. It is worth noting that Howard Schilit, author of Financial
25 Shenanigans: How to Detect Accounting Gimmicks and Fraud in
26 Financial Reports (McGraw-Hill Trade: 2002) and founder of the
27 Rockville, Maryland–based Center for Financial Research and
28 Management, believes that merger campaigns and industry “roll-
29 ups” are “time bombs with a live ticker running.” Any company on
30 a buying binge will almost certainly purchase a dud along the way,
31 since sellers know a lot more about what they are selling than buyers
32 know about what they are buying. Not surprisingly, many companies
33 have been spinning off divisions lately, in an attempt to pay down
34 debt and become focused, for themselves and for Wall Street.
35 Indeed, Wall Street’s preference for transparency increases with
36 every fresh accounting scandal and instance of egregious corporate
37 transgression hidden behind an impenetrable veil of complexity. The
SUSTAINED STOCK BUYBACKS: AN IR T OOL FOR MATURE COMPANIES 81

market value of transparency has also been enhanced recently by the 1

proliferation of increasingly stringent disclosure requirements. By 2
encouraging open conference calls, webcasts, and timely disclosure of 3
material information to all market participants simultaneously, 4
Regulation FD has enhanced the value of a simple story. Similarly, the 5
Sarbanes-Oxley Act of 2002 has increased the value of transparency 6
by mandating, among other things, that senior executives certify their 7
companies’ financial statements. A CEO and CFO would surely find 8
affixing their signatures less worrisome in a focused company than in 9
a conglomerate. 10
All of this is not to say that an acquisition-led growth strategy is 11
always and everywhere a bad choice. Perhaps in certain very 12
depressed markets, buying on the cheap makes sense. But it does sug- 13
gest that management should consider other ways to sustain earnings 14
growth and perhaps pursue a diversified value-enhancement strategy 15
that limits overall risk. The simple expedient of reducing the number 16
of shares outstanding through stock repurchases can usually become 17
a key component of such a plan. 18
19
20
Why Not Buy Back Stock? 21
Although acquisitions can be risky as sources of consistent growth, 22
the Street frowns on the accumulation of cash for its own sake, espe- 23
cially when the returns on the cash are far below the returns normally 24
earned in the business. There are times when a company should not 25
to do a stock buyback, or at least not when it is a hastily conceived 26
and temporary fix. When a company’s stock price declines suddenly 27
—whether because the company has failed to meet earnings expecta- 28
tions, because of rumors that it won’t make its numbers, or for rea- 29
sons not immediately clear—Wall Street often demands that manage- 30
ment “do something!” The common knee-jerk reaction to this 31
demand is to hastily convene a board meeting and announce a stock 32
buyback. Such repurchases rarely achieve any material impact on 33
earnings per share, nor do they work to reverse any decline in the 34
company’s market value that may be rooted in the fundamentals. In 35
long bear markets, moreover, when the prices of stocks tend to fall 36
whether a company is meeting expectations or not and the best out- 37
 82 THE NEW INVESTOR RELATIONS

1 come may be simply not to get clobbered, a onetime buyback will

2 almost certainly fail to stem the tide.
3 Such on-the-fly repurchase programs, entered into under duress,
4 can have at most a minimal, transitory effect, although they probably
5 will please outsiders who are looking to dump their stock and are glad
6 to have a ready market in the form of the company’s treasury. On a
7 recent conference call announcing a disappointing quarter, an irate
8 institutional shareholder of a midcap stock asked if the company
9 would purchase its shares, which that day had declined to just a frac-
10 tion of tangible book value. The company agreed that this might be
11 a wise idea. To no one’s surprise, the block of stock that traded the
12 next day turned out to have been sold by none other than this same
13 irate shareholder. Unfortunately, since the eighty-five thousand
14 shares repurchased represented only about 1 percent of those out-
15 standing, this onetime buyback did little to improve the outlook for
16 earnings per share but did set back the company’s treasury.
17 Unlike the announcement of an acquisition or some other corpo-
18 rate event, a share repurchase program is not dramatic or particularly
19 visible, although IR should put it on investors’ radar screens. Rather,
20 such a program is like the tortoise that succeeds through persever-
21 ance. In fact, a large, permanent repurchase authorization can have
22 long-lasting impact, compared with the onetime variety.
23 However, although simply announcing the adoption of a buyback
24 program may once have been sufficient to generate fresh buying in
25 the stock by Wall Street professionals, it has been a long time since
26 such an effect could be depended upon. Today, Wall Street wants to
27 see a company actually repurchase shares if it announces that it has
28 the authority to do so.
29
30
31 Advantages of a Permanent Repurchase Program
32 Because many shares must be repurchased over an extended period to
33 have a significant impact on earnings per share, stock buybacks are
34 most effective when used as a permanent element of a company’s
35 long-term strategy to build shareholder value. Thus, in keeping with
36 this strategy, the implementation of a buyback program should be
37 announced during a regularly scheduled earnings release conference
SUSTAINED STOCK BUYBACKS: AN IR T OOL FOR MATURE COMPANIES 83

call or at the annual meeting of shareholders, rather than under the 1

duress of a weak share price. Announcements at such regular events 2
send a positive signal that management is bullish about the com- 3
pany’s prospects and that it is serious about using all the tools avail- 4
able to enhance returns for its shareholders. Looked at in this way, 5
buyback programs are essentially no different from continuing pro- 6
grams to enhance productivity through employee training and invest- 7
ing in new technology. They serve the same function as efforts to 8
source raw materials from the lowest-cost providers and are every bit 9
as important as advertising programs to increase market share. 10
One element of stock buybacks has undeniable appeal over and 11
above those other types of programs. A spiffed-up advertising pro- 12
gram may or may not work, and efforts to cut costs can be swamped 13
by unexpected events, such as electricity shortages or unforeseen bot- 14
tlenecks. In contrast, a stock buyback program, adhered to over the 15
years necessarily pushes earnings per share higher than they would be 16
otherwise. In effect, it is something investors can count on. 17
Additionally, a properly handled, permanent repurchase program 18
gives management the flexibility to quickly purchase blocks of stock 19
that might become available from time to time at attractive prices, 20
such as from the disgruntled institutional shareholder mentioned 21
above. Such negotiated trades are not subject to the strict volume, 22
timing, and tick restrictions of open-market repurchases. Although a 23
hastily arranged buyback initiated in panic mode can also accomplish 24
this task, under these circumstances a company is typically able to 25
repurchase only small amounts of stock, certainly too small to have a 26
meaningful impact on future earnings per share. But with a perma- 27
nent, sizable authorization always in place, over time a company can 28
repurchase a significant amount of stock and make a meaningful con- 29
tribution to building value for shareholders. 30
Consider the example of a midsized manufacturing company that 31
supplies highly engineered parts to the cyclical but enormous auto- 32
mobile industry. This company dominates its niche, steadily increases 33
market share, earns the highest returns on capital in its industry, has 34
a substantial and rising cash position and no debt, and has never 35
made an acquisition despite Wall Street’s best efforts to encourage it 36
to do so. The company demonstrates its commitment to building 37
 84 THE NEW INVESTOR RELATIONS

1 shareholder value in every aspect of its operations. Management takes

2 justified pride in maintaining gross and operating margins that are
3 among the industry’s highest in good times and bad. Although still
4 small, the cash dividend has increased every year for more than fifteen
5 years. In addition, the company has consistently repurchased its
6 stock. Its board sees to it that at any given time management is
7 authorized to repurchase up to about 20 percent of shares outstand-
8 ing. When this authorization has been used up over several years, the
9 board authorizes the repurchase of another 20 percent.
10 In its regular quarterly earnings releases, the company routinely
11 reports the number of shares repurchased during the past three
12 months and how many shares are left to repurchase under the existing
13 authorization. Repurchases have amounted to several hundred thou-
14 sand shares in some quarters, when the stock price was low for what-
15 ever reason, and have shrunk to zero from time to time when the
16 stock price was high. Over the many years that this buyback program
17 has been in place, neither the analysts who cover the company nor any
18 of its institutional shareholders have ever suggested that the number
19 of shares repurchased in a given quarter is too low or too high.
20 Over the past five years, the company has repurchased approxi-
21 mately five million of its shares on the open market. As a result, the
22 average number of shares outstanding has fallen from the roughly 30
23 million there would have been in the absence of the buybacks to
24 only about 25 million. So instead of reporting, say, diluted earnings
25 of $1.00 per share without the repurchase program, the company
26 actually reports something much closer to $1.20. Of course, the
27 exact increment to earnings per share attributable to the buybacks
28 depends on the interest income foregone on the cash used to repur-
29 chase the stock (or the increase in interest expense, if the company
30 borrowed to finance the repurchases). Assuming the multiple
31 remains constant, this company’s shareholders end up with nearly 20
32 percent more value with the buyback than they would have received
33 without it.
34 Interest costs, in the current low-interest rate environment, are
35 favorable for buybacks. The loss in interest income is reduced when
36 Treasury yields hover around 4 percent.
37
SUSTAINED STOCK BUYBACKS: AN IR T OOL FOR MATURE COMPANIES 85

1
Countering the Counter-Arguments 2
The suggestion that a company initiate a stock repurchase program 3
often elicits groans from management, which may incorrectly see the 4
adoption of a buyback plan as an admission to Wall Street that the 5
company has exhausted its high-growth investment opportunities. 6
A typical response is “I didn’t raise money from the public to use it 7
to buy back my shares. I raised it to grow my company.” Managers 8
sometimes fear that the announcement of a buyback plan sends a 9
signal to Wall Street that their company lacks organic growth oppor- 10
tunities and will thus put pressure on the multiple. This is a serious 11
concern and one that calls for good investor relations. 12
One solution is to tell investors that they should watch the price 13
at which a company is buying back its shares. A plan to buy back 14
stock at or below tangible book value, for example, would probably, 15
and perhaps correctly, be perceived by Wall Street as a negative 16
signal. On the other hand, repurchasing shares at a substantial 17
multiple of earnings, albeit a multiple below some prior peak, signals 18
management’s belief that the current multiple does not fully reflect 19
the long-term growth opportunity. Thus stock buybacks offer a 20
subtle way for management to tell Wall Street that the growth expec- 21
tations built into the current stock price are too conservative. In this 22
context, a buyback is a bullish, and not a bearish, sign. 23
In one case, a small publicly traded California wine producer 24
leaked to the media that it would buy back its own shares whenever 25
they fell below $4 a share, and in fact it did. This effectively placed a 26
floor on the stock and helped keep some institutional investors on 27
board. When the company later stopped buying back shares at under 28
$4, the stock fell sharply. 29
If a company stops repurchasing shares when its stock reaches a 30
higher multiple, isn’t that a signal that management feels the stock is 31
fully priced? Yes, it is, which suggests the further question: Why 32
should Wall Street be expected to pay more for the shares than the 33
company itself feels they are worth? If, on the other hand, the 34
company continues to buy back shares at the higher multiple, the 35
consistent upward pressure on earnings per share will have a positive 36
and telling effect. This is because, without saying so directly, a man- 37
 86 THE NEW INVESTOR RELATIONS

1 agement that buys back shares at certain price-earnings ratios is

2 informing Wall Street there is a floor under the stock price—a not
3 insignificant advantage, in bearish markets.
4 A company goes public to fund growth and provide a vehicle to
5 monetize management’s accomplishments, so it’s natural for man-
6 agement to worry about defending the stock price. Wall Street, in
7 contrast, must make buy, hold, and sell decisions continuously, based
8 on an outlook for growth that may change every day. A company’s
9 past growth is irrelevant to the market, whether the story has
10 improved or deteriorated. What matters to Wall Street is simply
11 whether today’s stock price appropriately discounts current growth
12 expectations: If not, then buy; if so, then sell. Properly implemented,
13 a stock repurchase program is an effective way for management to
14 nudge expectations in the right direction.
15 A common argument against a buyback authorization is that a
16 company won’t earn a premium multiple if its earnings per share
17 growth results from a shrinking number of shares, rather from the
18 sexier cause of rapidly increasing earnings. As stated at the begin-
19 ning of this chapter, Wall Street and the financial media love the
20 next Big Thing or hot stock. If earnings are growing rapidly any-
21 way, buying back shares during temporary downturns in the stock
22 price is not likely to reduce the long-term multiple, and in situa-
23 tions where earnings growth is slowing, the multiple is going to
24 decline anyway. Buybacks are not an either-or proposition. Stock
25 repurchases are but one element of a complete program to build
26 shareholder value.
27 Certain circumstances make it difficult to buy back shares despite
28 management’s best intentions. The most common obstacle is financ-
29 ing. Bank lines of credit often explicitly prohibit the funds from being
30 used to repurchase stock, and cash often is in short supply at precisely
31 those times when the buyback opportunity is most attractive from the
32 company’s point of view. A permanent buyback program permits the
33 repurchases to proceed at a deliberate pace, perhaps more rapidly
34 when cash flow is strong and not adequately reflected in the stock
35 price but never so fast as to “break the bank” or dangerously deplete
36 cash reserves in the event of a temporary slump in business or an
37 extended recession.
SUSTAINED STOCK BUYBACKS: AN IR T OOL FOR MATURE COMPANIES 87

A large, permanent repurchase plan allows a company to buy 1

shares whenever financial circumstances and the stock price warrant, 2
without having to seek explicit board approval or make an announce- 3
ment to Wall Street. Again, buyback programs must be thought of in 4
terms of years and even whole decades. While business prospects for 5
even key products or services might wither from season to season 6
(depending on competition or markets), a properly executed stock 7
buyback program is a fundamentally sound idea now and ten years 8
from now. 9
10
11
Float Consideration 12
A serious issue, especially for smaller companies, is float. Specifically, 13
companies fear that reducing an already small public float through 14
buybacks will harm the stock in the long run by reducing liquidity 15
and making it harder for potential institutional shareholders to estab- 16
lish positions. Moreover, institutional shareholders, as witness such 17
behemoths as Fidelity or Capital Research & Management, have 18
tended to become larger in recent years. 19
Note, however, that many stocks trade actively and at attractive 20
multiples even with floats of less than a million shares. And al- 21
though many institutions will be precluded from participating in a 22
particular situation because of a small float (or more typically a 23
small total market capitalization), many other institutional investors 24
running tens to hundreds of millions of dollars specialize in pre- 25
cisely such situations. The relevant issue is growth in earnings per 26
share, not float per se. Besides, the smaller the number of shares 27
outstanding, the fewer the shares that need to be repurchased to 28
make a dramatic difference to earnings per share. Remember, more- 29
over, that stocks can be split. 30
As noted previously, properly implemented stock repurchases 31
financed with corporate funds can send a bullish signal to Wall Street. 32
An even stronger signal is sent when a company’s stock is purchased 33
in the open market by members of senior management using their 34
own money. Small changes can have large effects. Insider purchases 35
make a dramatic statement of management’s confidence in the future 36
even when the number of shares involved is small relative to the com- 37
 88 THE NEW INVESTOR RELATIONS

1 pany’s own formal buyback program. Anyone who reads Yahoo!’s

2 and other sites’ online message boards about public companies knows
3 that many shareholders—especially bear theorists and short traders—
4 watch management purchases and sales closely.
5
6
7 F AR FROM AN ADMISSION OF DEFEAT, far from representing the last
8 gasp of a company on the slippery downslope of its growth opportu-
9 nity, a large, permanent stock repurchase program is an excellent way
10 for management to signal its confidence to Wall Street and add value
11 for shareholders. It takes company performance plus effective com-
12 munication to build a premium multiple. A large, permanent stock
13 repurchase program is among the most effective tools available to
14 bring your story to Wall Street’s attention. There is no substitute for
15 action. Repurchasing shares is a savvy investor relations strategy.
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

6 Investor Relations 2
3
4
in M&A Transactions 5
6
7
JOHN F. HARTIGAN, ESQ. 8
Morgan, Lewis & Bockius, LLP 9
10
11
12
13
14
15

G OOD INVESTOR RELATIONS practices during corporate merger-

and-acquisition (M&A) transactions are crucial in keeping com-
panies from running afoul of federal securities laws and, ultimately, to
16
17
18
the success of the transaction. Recognizing the importance of share- 19
holder communications, the federal securities laws are structured in a 20
way that enhances public disclosure of information. The disclosure 21
requirements are intended to achieve efficient securities markets 22
through the mandatory disclosure of firm-specific information. 23
In addition to efficiency, the securities laws seek to achieve fairness 24
and investor protection based on the premise that complete information 25
allows market participants to fully evaluate their investment and voting 26
decisions before acting. Investor relations teams and management must 27
not only honor these principles but also adopt them as their own. 28
The type of investor relations strategies available to companies are 29
dictated largely by rules and regulations promulgated by the 30
Securities and Exchange Commission (SEC). With evolving deal 31
structures and advancements in technology, the regulatory schemes 32
are periodically revised and amended to keep pace with these trends 33
to maintain the correct balance between the interests of the transac- 34
tion parties and those of the investors and the markets. 35
In recent years the SEC has adopted two rules that have changed 36
the landscape of information disclosure in M&A transactions. The 37

89
 90 THE NEW INVESTOR RELATIONS

1 first, Regulation M-A,1 seeks to provide greater transparency in busi-

2 ness combination transactions by allowing parties to a transaction to
3 have more freedom in communicating with investors and the markets.
4 The second, Regulation FD,2 seeks to protect investors by prohibiting
5 selective disclosure of material, nonpublic information.
6
7
8 Regulation M-A
9 In October 1999 the SEC released a comprehensive set of amend-
10 ments to the rules governing mergers, acquisitions, tender offers, and
11 similar extraordinary transactions entitled Regulation of Takeovers
12 and Security Holder Communications, the so-called M&A Release3.
13 The changes were prompted by trends that have emerged in the M&A
14 arena that the SEC believes are likely to continue. These trends include
15 the increased use of securities as consideration in M&A transactions,
16 the increase in hostile transactions involving proxy or consent solicita-
17 tions, and the increase in the amount and speed of communications
18 with security holders and the markets as a result of advancements in
19 technology. The intended purpose of the revisions promulgated by the
20 M&A Release, as noted previously, is to create a more well-informed
21 and efficient marketplace. To effectuate this purpose, the amendments
22 allow companies to communicate with security holders and the markets
23 more freely and on a more timely basis. In addition, the amendments
24 serve to harmonize the disparate treatment of cash and stock tender
25 offers in the regulations, to simplify and centralize the disclosure
26 requirements, and to eliminate regulatory inconsistencies in mergers
27 and tender offers.
28 In making its cost-benefit analysis, the SEC concluded that an envi-
29 ronment conducive to earlier and less restrictive communications
30 regarding business combination transactions would enhance price dis-
31 covery and market efficiency and, at the same time, be consistent with
32 the protection of investors. The amendments permit companies to dis-
33 seminate oral and written information about a planned transaction more
34 freely to security holders prior to and after filing a registration, proxy, or
35 tender offer statement; such activities were previously restricted by the
36 Securities Act of 1933 and the Securities Exchange Act of 1934.
37
INVESTOR RELATIONS IN M&A TRANSACTIONS 91

1
Business Combinations 2
Before the amendments, a business combination or exchange offer 3
involving the issuance of securities was considered an offer of securi- 4
ties, triggering the registration requirements under the Securities Act. 5
So-called gun-jumping restrictions prohibited most statements 6
regarding such a transaction before a registration statement was filed. 7
Rule 165 of Regulation M-A creates safe harbors under the Securities 8
Act for communications in stock-for-stock mergers and exchange 9
offers. Under the rule, parties to a stock-for-stock merger or exchange 10
offer are not subject to a violation of Section 5(c) or Section 5(b)(1) 11
of the Securities Act for oral or written communications about a 12
transaction made prior to filing of a registration statement, during the 13
waiting period before effectiveness of the registration statement, and 14
in the posteffective period, so long as any written communication 15
from and including the first public announcement until the closing of 16
the transaction is filed upon first use. The rule further clarifies that 17
“an immaterial or unintentional failure to file or delay in filing” will 18
not result in the loss of the exemption as long as “a good faith and 19
reasonable effort was made to comply with the filing requirement” 20
and the filing requirement is satisfied “as soon as practicable after 21
discovery of the failure to file.” 22
The challenge for companies and their IR professionals is to be 23
familiar with current rules and regulations and to interface with coun- 24
sel to ensure that releases comply with those rules and regulations. 25
26
Proxy Solicitations 27
The M&A Release also removes restrictions on communications dur- 28
ing proxy solicitations. Before the amendments, persons intending to 29
initiate a proxy solicitation not involving a contested election or other 30
exempt solicitation were prohibited from making public statements 31
about their intentions until preliminary proxy materials were filed 32
with the SEC. In line with the new rule as applied to securities merg- 33
ers and exchange offers, there is safe harbor under the proxy rules as 34
well for communications in which target or acquirer stockholder 35
votes are solicited. The revised rule, which applies equally to security 36
holders and companies, allows oral and written communications 37
 92 THE NEW INVESTOR RELATIONS

1 regardless of when the proxy statement is filed if all solicitation-

2 related written communications include the information required by
3 the rule and are filed on the date of their first use.
4 The revised rules dealing with proxy solicitations significantly
5 loosen restrictions on management and parties to a transaction in
6 communicating with investors on matters that could potentially
7 require a vote. However, the SEC believes that the necessary safe-
8 guards are in place to protect investors, including the antifraud pro-
9 visions of Rule 14a-9. Furthermore, the M&A Release makes it clear
10 that the amendment does not allow parties to secure a shareholder’s
11 vote prior to providing a proxy statement.
12 There is now more room for developing and implementing IR
13 strategy than before, and to do so effectively, IR professionals would
14 be well advised to consult with experienced legal counsel or proxy
15 solicitation firms when preparing strategies, news releases, and com-
16 munications with shareholders.
17
18 Cash Tender Offers
19 Rules dealing with communications during cash tender offers have also
20 been amended. The tender offer rules in effect prior to the revisions
21 restricted bidders’ and targets’ communications regarding proposed
22 tender offers. The so-called five business day rule provided that an offer
23 “commenced” once the identity of the bidder and the target, the ten-
24 der price, and the amount of securities sought were publicly
25 announced, unless a tender offer statement was filed and disseminated
26 to security holders within five business days or withdrawal of the offer
27 was subsequently announced.
28 The revised rules thus eliminated the five business day rule and
29 modified the definition of “commencement” to denote the time
30 “when the bidder has first published, sent, or given the means” to
31 security holders to tender securities in the offer.
32 Bidders are now permitted to communicate freely regarding a
33 planned tender offer, both orally and in writing, prior to commence-
34 ment of the offer. As in the other contexts, the rules require filing of
35 all written communications related to a tender offer on the date the
36 communication is made, beginning with the first public announce-
37 ment of the transaction.
INVESTOR RELATIONS IN M&A TRANSACTIONS 93

1
Benefits of the Amendments 2
In adopting the revised rules contained in Regulation M-A, the SEC 3
intended that the increased flow of information would help security 4
holders in making well-informed voting or investment decisions. 5
Another benefit the SEC expected as a result of the amendments was 6
a reduction in the occurrence of selective disclosure. By requiring the 7
filing of all written communications relating to a transaction, the 8
amendments would make the information available to a broader base 9
of investors. The SEC did not ignore the possibility that the amend- 10
ments may lead companies to use oral rather than written communi- 11
cations to sidestep the filing requirement. It concluded, however, 12
that the market would “likely demand that information be reduced 13
to writing and companies generally [would] want to disseminate 14
information broadly in order to sell their transaction to the market,” 15
thus reducing selective disclosure overall. 16
Note that the SEC adopted Regulation FD to deal specifically 17
with the problem of selective disclosure, as discussed later in this 18
chapter. 19
20
Flexibility in Timing 21
The M&A Release also provides bidders in exchange offers more flex- 22
ibility with respect to the timing of exchange offers. Prior to the 23
release, bidders were prohibited from commencing an exchange offer 24
until after the filed registration statement became effective. The 25
amendments allow the beginning of an exchange offer without hav- 26
ing to wait for its becoming effective, as long as the registration state- 27
ment has been filed. The SEC provided this added flexibility as an 28
incentive for issuers to file their registration statements sooner, which 29
would lead to increased public disclosure of information and a 30
decreased incentive to selectively disclose the information to a limited 31
number of investors. 32
The SEC recognized that by allowing an early offer, the amount 33
of time needed to complete an exchange offer would be shortened, 34
thereby shortening the time a security holder had to consider the 35
available information. The SEC believed that the investors would be 36
adequately protected in this instance by various rules. For example, a 37
 94 THE NEW INVESTOR RELATIONS

1 bidder is only permitted to purchase securities in an exchange offer

2 once the registration statement becomes effective, and exchange
3 offers cannot expire until after twenty business days have elapsed
4 from commencement. Furthermore, bidders offering securities must
5 disseminate supplements to investors disclosing material changes to
6 information previously provided, and investors can withdraw their
7 tendered securities any time prior to a bidder’s purchase.
8
9 Investor Access in Tender Offers
10 Another benefit the amendments provide is that bidders are allowed
11 more access to investors in tender offers. If the target company main-
12 tains a list of non-objecting beneficial owners, the bidders are per-
13 mitted to contact and communicate with them directly, similar to the
14 proxy context. The SEC noted that this change would be beneficial
15 to both bidders and investors by making communications regarding
16 tender offers more efficient.
17
18
19 Potential Risks Created by the Amendments
20 In addition to the benefits, the SEC also considered the potential risks
21 created by the new regulatory scheme. One risk the SEC recognized
22 was that the more permissible communications could lead some indi-
23 viduals to “condition the market with false, misleading, or confusing
24 information.” Nevertheless, it concluded that the new and existing
25 regulatory safeguards, as discussed below, would sufficiently deter
26 such behavior. Furthermore, the SEC believed that investors would
27 benefit from the more timely receipt of information and the fact that
28 before they made an investment decision with respect to a particular
29 transaction, they would receive a registration, tender offer, or proxy
30 statement. Therefore, investors would have adequate opportunity to
31 review the full information made available to them in the mandated
32 disclosure document along with any prior information that had been
33 disseminated, before making a voting or investment decision.
34 Because issuers are permitted to disseminate certain information
35 prior to filing certain disclosure documents, another risk is that
36 investors may make investment decisions prior to having complete
37 information. However, the SEC concluded that although some
INVESTOR RELATIONS IN M&A TRANSACTIONS 95

investors might act prematurely, the risk was no different from what 1
it had been under the prior rules. As discussed above, for instance, 2
five business days were allowed between the announcement of a ten- 3
der offer and the filing of the required disclosure statement. Even 4
upon filing, the security holders might not have received the infor- 5
mation until several days after the filing, given possible delays and 6
vagaries in the delivery of that information, whether by mail or other 7
means. The amended rules permit the dissemination of transaction- 8
related information prior to the filing of a mandated disclosure 9
statement, as long as all written communications are filed. The SEC 10
stated in the M&A Release that these rules would provide investors 11
with more information and more time to come to a better informed 12
investment decision rather than lead to premature decisions. It is 13
important for the IR community to recognize that guidance from 14
legal counsel should be sought whenever communications relating to 15
an M&A transaction are involved. Careful planning and choreography 16
are required to comply with the rules. Written communications them- 17
selves, for example, must include a prominent legend that advises 18
investors to read the applicable registration, proxy, or tender offer, 19
filed or to be filed with the SEC, because they contain important 20
information. The legend must also advise that copies of the filed 21
document can be obtained for free at the SEC’s website and explain 22
which documents are available free from the filing person or issuer, 23
as applicable. 24
These written communications must be filed on EDGAR, the 25
SEC’s electronic filing system, on or before the date of first use, 26
which may require coordination with financial printers. Because the 27
process of filing requires some time, dissemination of the information 28
should be planned in advance, and to the extent possible, written 29
communications should be EDGARized ahead of time. Legal coun- 30
sel should always be contacted before the written communications 31
have been released and never after the fact. 32
Since certain communications may not appear to trigger the filing 33
rules at first glance, IR professionals should also be aware of the scope 34
of the rules’ coverage. Letters and e-mails to a company’s employees 35
discussing the effects of a potential merger on them, for instance, may 36
require filing. IR professionals should also be mindful when it comes 37
 96 THE NEW INVESTOR RELATIONS

1 to all publicity and communications during a transaction, including

2 road shows and slide shows. In addition, the M&A Release states that
3 “written communications include all information disseminated other-
4 wise than orally, including electronic communications and other
5 future applications of changing technology.” Videos and CD-ROMs,
6 for example, should be transcribed and filed on EDGAR.
7
8 Antifraud Provisions
9 Numerous antifraud provisions are in place to protect investors from
10 false or misleading information, and all IR professionals should
11 understand these provisions thoroughly. All communications remain
12 subject to Rule 10b-5 under the Exchange Act, which may impose
13 liability for materially false or misleading information. Section
14 12(a)(2) of the Securities Act also continues to impose civil liabilities
15 in transactions involving the Securities Act. Furthermore, registration
16 statements that are ultimately declared effective must include all
17 material facts and must not be false or misleading in order to avoid
18 liability under Section 11 of the Securities Act.
19 Proxies are subject to the antifraud provisions of Rule 14a-9, and
20 tender offers are subject to Section 14(e). The SEC adopted an addi-
21 tional safeguard to protect security holders from possible misleading
22 information in the tender offer context. To encourage only bona fide
23 tender offers in the absence of the five business day rule, the SEC
24 adopted Rule 14e-8, which makes it fraudulent to announce a poten-
25 tial tender offer if the bidder
26 1. has no intention of commencing the offer within a reasonable
27 time and completing the offer,
28 2. intends to manipulate the bidder or target’s stock price, or
29 3. does not reasonably believe that it will be able to purchase the
30 securities sought in the offer.
31
32 The SEC concluded that, in aggregate, these safeguards would
33 adequately discourage parties to a transaction from disseminating
34 false or misleading information, while the amendments of the M&A
35 Release would enable investors to have access to an increased flow of
36 information on a more timely basis.
37
INVESTOR RELATIONS IN M&A TRANSACTIONS 97

1
“Plain English” Requirement 2
In addition to these safeguards, the M&A Release puts into effect 3
another investor protection mechanism. The rule requires “plain 4
English” disclosures for all issuer and third-party cash tender offers, 5
cash mergers, and going-private transactions. 6
Disclosure documents for these transactions often include detailed 7
information that is difficult for investors, even sophisticated investors, 8
to understand. The required plain English summary term sheet is 9
intended to facilitate their understanding by providing a concise 10
summary of the important and relevant information regarding the 11
transaction, allowing investors to better inform themselves prior to 12
making a voting or investment decision. Again, IR professionals need 13
to review the “plain English” summary sheet carefully to affirm that 14
it is sufficiently clear and accurate. 15
16
17
Regulation FD 18
On August 10, 2000, a controversial set of rules was adopted by the 19
SEC called Regulation FD (for “fair disclosure”).4 20
The SEC provided three reasons for adopting the regulation: First, 21
the SEC wished to cure what it perceived to be an unfair advantage 22
given to market professionals and institutional investors at the expense 23
of the general investing public. The SEC believed that public compa- 24
nies were selectively disclosing material, nonpublic information to a 25
small group of Wall Street professionals before making the informa- 26
tion public. Those in possession of this information, in the view of the 27
SEC, could potentially make profits or avoid losses to the detriment of 28
investors not privy to the information, ultimately resulting in an ero- 29
sion of investor confidence in the integrity of the securities markets. 30
The second impetus that led to the adoption of Regulation FD 31
was the SEC’s concern that material nonpublic information was 32
being used as a tool by corporate management to influence analysts 33
and institutional investors to report favorably about a company or 34
else risk losing continued access to the selective information. A 35
prohibition on selective disclosure would relieve this pressure on 36
analysts, resulting in unbiased reports. 37
 98 THE NEW INVESTOR RELATIONS

1 The final reason the SEC adopted Regulation FD was because

2 technological advancements have made the broad dissemination of
3 information economically and logistically feasible. Previously, limita-
4 tions in communications technologies necessitated the use of market
5 analysts to act as intermediaries in disseminating information. Since
6 various cost-effective, broadscale methods of communicating directly
7 with investors have become available (for example, through the use
8 of Internet webcasting and teleconferencing), the use of such inter-
9 mediaries is no longer necessary or desirable.
10 The proposed adoption of Regulation FD ignited a flurry of
11 public comment. Although most comments were from individual
12 investors favoring the adoption of the regulation, many Wall Street
13 professionals voiced their concerns that Regulation FD could have a
14 chilling effect on information flow to the marketplace. Company offi-
15 cials would become too restricted in the manner they released infor-
16 mation, it was argued. These commentators believed that due to the
17 uncertainty in determining whether information would be deemed
18 “material” under the rules, issuers would refrain from disclosing
19 information altogether rather than risk potential liability.
20
21 Scope of the Rule
22 Regulation FD prohibits the selective disclosure of material, nonpublic
23 information by an issuer, or persons acting on its behalf, to certain enu-
24 merated persons, including market professionals or holders of the
25 issuer’s securities, under circumstances in which it is reasonably foresee-
26 able that such persons will trade based on the information. If such dis-
27 closure is made to the enumerated persons, then the issuer must at the
28 same time publicly disclose the information, if the disclosure was inten-
29 tional, or do so promptly thereafter, if the disclosure was unintentional.
30 Although Regulation FD does not exclusively apply to business
31 combination transactions, the SEC lists mergers, tender offers,
32 changes in assets, and changes in control or in management, as “types
33 of information or events that should be reviewed carefully to deter-
34 mine whether they are material.” For IR professionals, the central
35 point is that information about mergers should be tightly controlled,
36 and safeguards should be put in place to protect against inadvertent
37 or selective disclosure.
INVESTOR RELATIONS IN M&A TRANSACTIONS 99

It should be noted that the SEC limited the application of the rule 1
to “enumerated persons” in an attempt to narrow the rule’s scope of 2
coverage. Communications to those persons who owe a duty of trust 3
or confidence to the issuers and would therefore be expected to 4
maintain confidentiality, including lawyers, accountants, and invest- 5
ment bankers, are excluded. Similarly, disclosures made to credit 6
rating agencies, those made to persons who expressly agree to keep 7
disclosed information confidential, and those made in connection 8
with most securities offerings registered under the Securities Act are 9
also excluded. It should be noted that communications continue to 10
be subject to prohibitions against insider trading under Rule 10b-5. 11
Regardless of whether the person is an “enumerated person,” selec- 12
tive disclosure of material nonpublic information could result in, for 13
example, tipper liability. IR professionals should educate themselves 14
and keep abreast of developments in this area. 15
16
Materiality 17
The major difficulty companies are having in following Regulation 18
FD is in determining what is material, especially in the preliminary 19
stages of initiating a business combination transaction, tender offer, 20
or proxy or consent solicitation. Unfortunately for IR professionals 21
and others, the SEC does not define “materiality” for purposes of 22
Regulation FD, rather leaving its interpretation to existing case law. 23
The FD Release cites the 1976 case, TSC Industries, Inc. v. North- 24
way, Inc., a seminal Supreme Court case holding that information is 25
material if “there is a substantial likelihood that a reasonable share- 26
holder would consider it important” in making an investment decision, 27
and a reasonable shareholder would have viewed the information as 28
having “significantly altered the ‘total mix’ of information made 29
available.” 30
This definition does not afford a bright-line or formulaic test for 31
companies seeking to initiate a transaction to apply. Instead, compa- 32
nies and their IR professionals would be well advised to consult with 33
experienced legal counsel in making a good faith determination of 34
what is “material” under facts and circumstances of a particular situ- 35
ation. Some commentators have suggested that the fact that a partic- 36
ular transaction is being considered by a corporation may, under 37
 100 THE NEW INVESTOR RELATIONS

1 Regulation FD, be considered material, since it could move the

2 market for the company’s stock if that fact became public.
3 In the preliminary stages and throughout a transaction, compa-
4 nies should, therefore, enter into confidentiality agreements with
5 third parties to protect themselves.
6
7 Reg FD in Practice
8 With the adoption of Regulation FD, company and consultant IR
9 professionals must be more mindful when communicating with
10 analysts, the public, and other investment professionals about their
11 firm’s M&A-type transactions, whether planned or actual. Numerous
12 commentators have suggested tips on how companies should proceed
13 in dealing with Regulation FD.5 Indeed, it should be highlighted that
14 Regulation FD specifically applies to IR professionals, and all others
15 “acting on behalf of the issuer.”
16 On the side of caution, the National Investor Relations Institute
17 (NIRI) has suggested that companies adopt a written disclosure pol-
18 icy authorizing only a limited number of spokespersons to speak on
19 behalf of the company. Further, they suggest that those employees
20 not covered by the rule should be advised to refrain from commu-
21 nicating with analysts and other market professionals, since analysts
22 might particularly target such employees as a source of information
23 (this is an example of how FD might indeed inhibit the flow of
24 information to the markets, even while making for a more flattened
25 playing field).
26 Regulation FD does not specifically require policies be in place,
27 but the SEC noted in the FD Release that “the existence of an appro-
28 priate policy, and the issuer’s general adherence to it, may often be
29 relevant to determining the issuer’s intent with regard to selective
30 disclosure.”
31 Once the company knows that it must make a public disclosure of
32 its material nonpublic information, it must decide how to disseminate
33 the information. The FD Release provides considerable flexibility in
34 the acceptable means of public disclosure. The rule states that an issuer
35 can make a disclosure by submitting the information on a Form 8-K
36 or “through another method (or combination of methods) of disclo-
37 sure that is reasonably designed to provide broad, nonexclusionary
INVESTOR RELATIONS IN M&A TRANSACTIONS 101

distribution of the information to the public.” Generally, companies 1

use the business news wire services to issue a news release. 2
If disclosing through a Form 8-K, the issuer has the option of either 3
“filing” the information under Item 5 of the form or “furnishing” it 4
under Item 9. This distinction is important in that a filing is subject 5
to liability under Section 18 of the Exchange Act and Section 11 of 6
the Securities Act, whereas furnishing information on Form 8-K in 7
the manner designated is not. All Form 8-K disclosures, regardless of 8
whether filed or furnished, remain subject to the antifraud fraud provi- 9
sions of the securities laws. 10
To alleviate the concern of some commentators, the SEC noted 11
in the FD Release that submitting the information on a Form 8-K 12
solely for the purpose of satisfying Regulation FD would not be 13
construed as an admission that the information is material. 14
Alternative methods of public disclosure suggested by the SEC that 15
would satisfy the statute include “press releases distributed through 16
a widely circulated news or wire service, or announcements made 17
through press conferences or conference calls that interested members 18
of the public may attend or listen to either in person, by telephonic 19
transmission, or by other electronic transmission (including use of the 20
Internet).” 21
In its December 2001 report on Regulation FD, the SEC noted 22
various ways issuers had been complying with that section of the new 23
rule since its effective date.6 Press releases were still the most fre- 24
quently used means of dissemination, mainly because Self-Regulatory 25
Organization (SRO) rules mandate them. Another method gaining 26
popularity among issuers was the use of webcasts. Wire services noted 27
significant increases in the number of corporate webcasts during the 28
months after Regulation FD took effect. In practice, webcasts tend to 29
be used in conjunction with press releases. 30
The report recommends that the SEC work together with SROs 31
to remove obstacles that impede issuers from taking full advantage of 32
new communications technologies. At the present time, the SEC 33
does not consider a posting on a website as sufficient public disclo- 34
sure. As technology improves and the Internet becomes more acces- 35
sible to investors, however, the SEC envisions this medium becoming 36
an acceptable method of public disclosure. (This prospect may be a 37
 102 THE NEW INVESTOR RELATIONS

1 bit surprising to some, in that most people, even investment profes-

2 sionals and the financial media, are not online at all times and rely
3 heavily on wire services to bring them pertinent information.)
4 Whatever standard may develop in the future as to sufficient public
5 disclosure, in the interim, companies should be careful not to post
6 material, nonpublic information on their websites without making
7 other arrangements to satisfy the disclosure requirement.
8
9
10 Interplay Between Regulation FD and Regulation M-A
11 During an M&A transaction, companies must consider the implica-
12 tions of both Regulations M-A and FD. As discussed above,
13 Regulation FD excludes from its coverage communications made in
14 connection with most securities offerings registered under the
15 Securities Act. The policy rationale behind the exclusion is that the
16 registration requirements of the Securities Act provide sufficient pro-
17 tection against selective disclosure.
18 Although Regulation FD may not require public disclosure in
19 these instances, written statements would have to be disclosed if they
20 fall within Regulation M-A. Unregistered offerings such as cash ten-
21 der offers, cash mergers, stock-for-stock mergers done through pri-
22 vate placements, and certain proxy or consent solicitations remain
23 subject to Regulation FD and are also subject to Regulation M-A.
24 Generally, Regulation M-A only requires the filing of written
25 communications. However, when oral communications of poten-
26 tially material information are made during one of these transactions
27 to an enumerated person as defined under Regulation FD, and that
28 information was never previously filed or made public, the company
29 may be required to publicly disclose the oral communications in
30 satisfaction of Regulation FD. Thus, while Regulation M-A was
31 intended to allow parties to a business combination transaction
32 to communicate more freely, Regulation FD may limit this ability.
33 The SEC has yet to comment on this potential inconsistency in the
34 rules. IR professionals (and, indeed, securities lawyers) will have to
35 watch this corner of the legal world closely and converse with com-
36 pany legal counsel when their company is in, or about to enter,
37 merger talks.
INVESTOR RELATIONS IN M&A TRANSACTIONS 103

T HE ROLE OF THE SEC is to ensure that investors and the securi- 1

ties markets are fully informed in order to preserve the integrity of 2
markets and thereby allow capital to move to its most efficient uses. 3
More information, however, is not useful if that information is mis- 4
leading or if that information is not received by the investors in a 5
timely fashion. To obtain the right balance and protect investors, 6
SEC rules and regulations serve to determine how and when the 7
information must be disseminated. Regulation M-A attempts to pro- 8
vide investors with an increased flow of information during business 9
combination transactions by providing companies with more free- 10
dom to communicate. Regulation FD, on the other hand, restricts 11
selective communications, which could potentially chill the flow of 12
information. Companies are still adjusting to these new sets of rules. 13
Only time will tell whether the SEC will need to step in to recalibrate 14
its scale. 15
16
17
Chapter Notes
18
1. Regulation M-A, 17 CFR 229.1000-229.1016, 1999. 19
2. Regulation FD, 17 CFR 243.100-243.103, 2000. 20
3. 64 Fed. Reg. 61408; SEC Release No. 33-7760; 34-42055; IC-24107; File
21
No. S7-28-98; Oct. 22, 1999, which is available at http://www.sec.gov/rules/
final/33-7760.htm. 22
4. For the complete text of the FD Release, see http://www.sec.gov/rules/final/ 23
33-7881.htm. 24
5. See, for example, Louis M. Thompson, Jr., “Guidance for Compliance with 25
Regulation FD,” at http://www.niri.org/publications/alerts/RegFDTips.cfm; 26
Steven E. Bochner and Jason S. Frankl, “Suggestions for Best Practices Under
27
Regulation FD,” at http://www.stratosforum.com/images/Regulation.pdf; and
IR Guide: Regulation FD, at http://www.ironthenet.com/static/disclosure/ 28
guidtofd.html. 29
6. See U.S. Securities and Exchange Commission, Special Study: Regulation Fair 30
Disclosure Revisited, Dec. 2001, at http://www.sec.gov/news/studies/regfd- 31
study.htm. 32
33
34
35
36
37
 1

7 Investor Relations 2
3
4
for Private Placements 5
6
7
ALEXANDER L. CAPPELLO 8
Cappello Capital Corp. 9
10
11
12
13
14
15

T HE PIPE, AN ACRONYM that stands for “private investment in

public equity,” has become a major source of funding for public
companies in the last several years, far exceeding the role of initial
16
17
18
public offerings. With a PIPE, a relatively large slug of capital is raised 19
from one or just a few equity investors; the equity can be straight 20
common stock or a mix of common stock, preferred stock, convert- 21
ible bonds, and warrants. Generally speaking, the common stock will 22
be sold to the investors at some discount to its market price. 23
From an investor relations viewpoint, PIPEs and IPOs are about as 24
different as could be imagined. For an IPO, publicity is sought, road 25
shows are conducted, and hundreds of brokers and perhaps even thou- 26
sands of investors are educated about a new investment opportunity. 27
For PIPEs, a few large investors must be discreetly approached, at first 28
without even revealing the name of the company seeking to raise capi- 29
tal. Only after serious interest is determined are confidentiality agree- 30
ments signed, binding all parties to silence until the deal is announced. 31
32
33
Role of the IR Team 34
The job of the IR team is to maintain silence, review all corporate 35
communications, and ensure that the pending PIPE deal is not inad- 36
vertently revealed in corporate releases, statements, or other outlets. 37

105
 106 THE NEW INVESTOR RELATIONS

1 If the IR team is skilled at PIPEs, it might help management prepare

2 materials and presentations for the few select large buyers of stock.
3 Corporate executives may also practice verbal presentations with the
4 IR team.
5 Investors in PIPEs are generally institutions and, before investing
6 a large amount of capital, will conduct extensive due diligence. This
7 includes meeting at least once and perhaps several times with man-
8 agement. Investors will also ask for access to information generally
9 not publicly available, such as lists of customers, vendors, and finan-
10 cial projections. At this point, in conjunction with lawyers and
11 investment bankers, a good IR team should have all the necessary
12 materials in order to make meetings go as smoothly as possible. The
13 IR team should notify those in charge of “trade secrets” in advance
14 that they will be called upon to reveal this information to a key
15 investor. In general, company employees and management should be
16 schooled to be courteous and efficient. The goal is to solicit a major
17 investment, under a veil of secrecy.
18 After a PIPE deal closes, the IR team’s job is to explain to Wall
19 Street why the deal is a good one for the public company. Of course,
20 filing Form 8-K—the current report—with the Securities and
21 Exchange Commission (SEC) is immediate and mandatory.
22 As noted, PIPE investors usually buy common stock in large vol-
23 ume but at a discount to market. In addition, they may take positions
24 in convertible bonds or warrants. All of this is technically dilutive, and
25 there is no dancing around that fact. The IR team should not be sur-
26 prised to receive calls from investors who will want to know why the
27 company sold a large block of shares for $9.50 when they just bought
28 the same equity for $10, the market price. More sophisticated
29 investors will want assurances that when the convertible bonds in fact
30 convert, more dilution will not be a problem. These inquiries will
31 present challenges for the IR team.
32 Most important, the IR team should explain to investors how the
33 raised capital will be put to use. (The company’s PR team should be
34 making the same effort with the financial media.) The team should
35 clarify if the equity funding makes possible business expansion, for
36 example, or a very well-conceived acquisition, or the paying down of
37 debt. The IR team should also point out that an investment bank has
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 107

just vetted the company and that a large institutional investor has just 1
placed a vote of confidence in the stock. 2
As for the rationale behind PIPE investors’ receiving a discount to 3
market, there are several explanatory responses. First and foremost, 4
the investor is being compensated for illiquidity. Often, the shares 5
sold in a PIPE are restricted and cannot be sold immediately. This can 6
apply even if the stock is unrestricted. After all, a large position in a 7
stock cannot be sold on a whim, and even slow sales of a large posi- 8
tion can drag down share prices. In short, a PIPE investor is a long- 9
term investor in a world in which everyone wants profits now and the 10
ability to sell in a minute. 11
The better the name and reputation of the investment banker and 12
the institutional investor, the more convincing these arguments will 13
be. The IR team should counsel management early to seek out blue- 14
chip names, when possible, for participation in PIPE transactions. 15
16
17
The Importance of Being Discreet 18
Despite the best efforts of investor relations experts and skilled 19
investment bankers, PIPEs have a way of getting clogged or bursting, 20
usually because of aggressive management, arrogant bankers, or some 21
combination of the two. The following real-world stories are good 22
illustrations of how PIPEs fail or succeed. 23
24
Don’t Oversell and Don’t Leak 25
Restaurant Corp. (a fictional name) is a publicly traded company and 26
a popular place to eat healthy food in a better-than-usual fast-food 27
environment. At some restaurants, customers wait in lines stretching 28
around the block for a chance to eat. Obviously, this was an idea that 29
could be franchised or duplicated coast-to-coast. Many of the cus- 30
tomers also purchased the company’s stock, following Warren Buffet’s 31
suggestion to invest in businesses you understand. Eventually, the 32
number of shareholders reached several thousand, increasing the 33
stock’s liquidity and profile. 34
At about the same time, the phenomenon of the Internet chat 35
room blossomed, and Restaurant Corp.’s chat rooms were very 36
active. At one memorable annual shareholders meeting, a large ball- 37
 108 THE NEW INVESTOR RELATIONS

1 room was rented and filled with a standing-room-only crowd of hun-

2 dreds of shareholders eagerly anticipating announcements. The com-
3 pany had funded an effective IR and public relations campaign, and
4 the results showed.
5 While Restaurant Corp. was in the midst of completing the first of
6 three private placements, staff of its financial adviser on the deals
7 quietly tracked many of the Internet chat room discussions about the
8 company. Much to the financial adviser’s amazement, chagrin, and
9 frustration, items that had been discussed in confidence with man-
10 agement would show up minutes later, virtually verbatim, in the chat
11 rooms. Was it a secretary? A director? An officer? The financial adviser
12 never knew for sure and never found out. In spite of this lack of dis-
13 cretion and violation of legal and ethical protocols by someone inside
14 the company, a private placement was completed for $30 million in
15 convertible preferred stock and $3.5 million in common, necessary
16 growth capital.
17 At the time of the first financing engagement, the stock was trad-
18 ing for a few dollars per share, with modest volume. Several months
19 following this initial private placement, the stock reached a zenith of
20 $10 per share on heavier volume. The company had “buzz,” the
21 result of a great product and excellent (if short-term-oriented) IR
22 and PR efforts.
23 The problem was that the great product cost a lot to put out,
24 maybe more than could be charged. Approximately a year later, after
25 the company burned through what was supposed to be three years’
26 worth of capital, the financial advisory firm was asked to do another
27 private placement for Restaurant Corp. This was successfully com-
28 pleted for an additional $30 million.
29 Upon the public announcement of the second financing, which
30 calmed concerns of a shortage of capital, the company’s stock again
31 traded up on strong volume for some time. The company was eating
32 money but told investors that growth was expensive. It was true that
33 new shops were being opened, but existing stores weren’t exactly
34 gold mines. Operating a high-end fast-food joint was marginal at
35 best. Better IR might have conditioned investors to be more patient
36 and understand that building a national chain is not done overnight.
37 Management also decided to enter a new line of business, blurring
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 109

the picture and creating new problems for the IR experts who had 1
been selling the story of a successful restaurant chain. 2
The problem of material information showing up in chat rooms 3
seemed never to go away. Too many people who were close to insid- 4
ers always seemed to know significantly more than they should before 5
public announcements. Stock traded suspiciously at times. 6
Investor confidence in the company soon sagged, battered by 7
repeated reported losses and changes in business plans. Institutional 8
investors no doubt noticed the breaches in confidentiality. Eventually 9
the company had to merge with a much larger food service company 10
that brought in all new management. 11
The IR lesson: Don’t oversell a PIPE, don’t oversell a stock, and 12
have strict controls on the flow of information. 13
14
Be Prepared for the Unexpected 15
Global Electronics (a fictional name) was the third-largest computer 16
and electronics distributor in the world, when it undertook a $350 17
million PIPE transaction, this one for convertible preferred stock. A 18
major New York–based securities brokerage evidently took umbrage 19
at a small West Coast shop winning the assignment, and conducted a 20
smear campaign against the chosen firm. It contacted the ten largest 21
institutional shareholders in Global Electronics and repeated stories 22
raising questions about the underwriting firm’s competency and 23
ethics. The New York house went so far as to spread “research” that 24
the other company’s clients usually tanked. 25
The large shareholders started calling Global Electronics and ask- 26
ing the CEO why he selected the firm in question to do the job. The 27
West Coast firm had to work carefully with Global Electronics’s man- 28
agement for several weeks, to give them the true track record of its 29
clients. When provided with the facts, the company reprimanded the 30
sour bankers at the bulge-bracket firm and told the story to their 31
largest shareholders. 32
The IR lesson: Sometimes, IR is neither proactive nor defensive. 33
It’s just plain old warfare and hard work, and making phone calls, 34
talking to people, and battling misinformation. IR professionals need 35
to be aware that there can be disgruntled investment bankers, 36
snubbed analysts, or short traders who have agendas of their own. 37
 110 THE NEW INVESTOR RELATIONS

1
2 Do What You Say You Will Do
3 International Pharmaceuticals Corp. (IPC, a fictional name) had been
4 brought public by the investment banking department of a major Wall
5 Street firm. It was followed by several analysts, but regrettably had
6 been dealt a severe blow by the Food and Drug Administration. The
7 FDA was taking about two years longer than expected to approve two
8 separate drug compounds. The cash flow from existing drugs was
9 being consumed rapidly by ongoing clinical development; IPC had
10 invested heavily in marketing and sales infrastructure in anticipation of
11 prompt FDA approvals for its two compounds.
12 The cost of carrying the additional overhead had severely
13 impacted the company’s liquidity, and it had some debt coming due
14 just months ahead. After intense due diligence, the adviser conduct-
15 ing the PIPE managed to place $115 million of convertible preferred
16 and $11 million of common stock with a few institutional investors.
17 Investors were running more than phantom risks—the unpredictable
18 FDA, for example—so their anticipated returns were hefty and thus
19 costly for the company. But the capital IPC earned allowed it to sur-
20 vive and move forward.
21 The role of the IR team was to be up front with investors about
22 the risk, while at the same time educating them about the drug com-
23 pounds and pointing out the meaty returns if the company per-
24 formed as slated. If the stock went up, the convertible preferred stock
25 would return plenty.
26 During the course of due diligence, the management of IPC dis-
27 closed to the PIPE advisers that a certain amount of assets would be
28 written down. These would be non-cash write-offs of an immaterial
29 amount. The company stressed that there would be no need for fur-
30 ther write-offs, much to the satisfaction of the investors.
31 As the PIPE team was gearing up for the placement to save this
32 company from running out of cash, Forbes, the national financial mag-
33 azine, ran a cover story on great short opportunities, with IPC near
34 the top of the list. About the time the PIPE advisers finished reading
35 the article, management called to explain that they had decided to take
36 a major write-off on a substantial percentage of its assets, exactly what
37 it had promised it wouldn’t do just a few weeks earlier.
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 111

The stock temporarily tanked. No amount of IR, PR, or invest- 1

ment banking could save it at the time. The following year, however, 2
the company experienced improved financial performance and got the 3
FDA approval for its products. The stock then doubled and shortly 4
thereafter sold out to a larger company at an even higher price. 5
The IR lesson: There were several IR lessons in this experience. 6
The first was the oldest and the same one noted earlier: Never mis- 7
lead your investors, especially on the upside. They will not forgive 8
that. Anticipate major write-offs. Think about what can go wrong, as 9
well as what can go right. Good IR starts with honest management, 10
but IR professionals have to be persistent in asking about possible 11
bad-case scenarios. 12
The second lesson was that the public relations people have to talk 13
to the IR people. (See Chapter 4, “The IR-PR Nexus.”) Did anybody 14
know that Forbes was working on a negative article on the company? 15
A shrewd PR professional would have at least gleaned a hint that the 16
magazine had its hatchet out and passed along a warning. True, not 17
all reporters tip their hand, but usually when questions follow a cer- 18
tain tack, one can guess at the tone of an article. Additionally, skilled 19
PR professionals know how to contact reporters and find out what is 20
up. If a reporter is evasive about the tone of an article, that’s a clue. 21
Properly warned, the IR team could have told institutional investors 22
that a potentially negative article was being prepared by Forbes, 23
although of course, no one knew when or if it would run. A good PR 24
shop might even have been able to steer Forbes away from publishing 25
such an article. 26
27
Don’t Be Arrogant 28
Some companies seeking PIPE financing seem to think that arro- 29
gance is a selling point. One such firm turned in to the SEC a docu- 30
ment so obscure that the regulatory agency took the relatively rare 31
step of kicking it back as unsuitable for filing. The company was out- 32
raged and blamed the rejection on nitwit regulators, failing to ask the 33
more important question: If even SEC attorneys had trouble deci- 34
phering the document, how would ordinary investors, or even most 35
institutional investors, understand the filing? 36
This biotech company had burned through $100 million in 37
 112 THE NEW INVESTOR RELATIONS

1 investment capital and wanted to raise more. The FDA had yet to
2 approve any of its drugs, however. In a meeting with potential
3 investors, the firm’s management appeared to take offense at simple
4 questions, while tossing about obscure acronyms as if all in the audi-
5 ence had been deeply involved in life science research their whole
6 lives. The PIPE adviser doggedly lined up more and more investors
7 to look over the PIPE, which was not a bad deal on paper. There was
8 some promising research, to be sure, possibly of benefit to investors
9 and even to the practice of medicine. But the deal couldn’t get
10 funded. Potential PIPE investors noticed that company management
11 wasn’t overly concerned at having already spent more than $100 mil-
12 lion of investor money. Perhaps the management thought confidence
13 bordering on braggadocio would convince investors that the product
14 was a sure winner. The company didn’t raise any more money until
15 after it replaced its CEO. Under new management the company
16 became one of the best-performing biotechs globally in 2003.
17 The IR lesson: If you are burning through capital and need to raise
18 more, show that you recognize the seriousness of your situation to
19 investors. Be prepared to give away a lot of the company to get sur-
20 vival capital, be happy if you get it, and relate that attitude in your IR.
21 Professional investors in PIPEs are not impressed by arrogance; they
22 have seen plenty of it. On the other hand, it never hurts to look
23 earnest, even with professional investors. Sure, the business plan has
24 to be solid, but management counts, too. In a PIPE, management
25 has to be very accommodating to investors.
26
27 You May Get Away With It, But Not for Long
28 Despite recent press reports, most people who run publicly traded
29 companies are ethical and forthright in all of their dealings. They
30 know the penalties for dishonesty, and they also know that share-
31 holders deserve good corporate governance and transparency. There
32 are, however, management teams that think they can get away with
33 deceitful behavior. Such a team managed a company listed on the
34 New York Stock Exchange, which had a prestigious board of direc-
35 tors, and numbered among its largest shareholders a longtime mem-
36 ber of the Forbes 400 Richest Americans who enjoyed an excellent
37 reputation. The placement agent secured a $70 million convertible
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 113

preferred PIPE rather easily, given its stellar connections. Institu- 1

tional shareholders trusted the company and the agent. The IR was 2
based not only on the company’s prospects but also on the solid 3
group that made up the company’s board of directors. 4
A few months after the PIPE, management informed the advisers 5
that it soon expected to be in technical default on some terms of the 6
placement. One of those terms was to get a registration statement 7
from the SEC covering the common stock underlying the PIPE. That 8
meant the stock was unregistered with the SEC and much less liquid. 9
The management said that the company was on track to report 10
$50 million in earnings before interest, taxes, depreciation, and amor- 11
tization (EBITDA) for the latest quarter. On the eve of reporting the 12
quarterly numbers, management reiterated the $50 million EBITDA 13
and confirmed that this was the figure to be reported publicly the next 14
day. That evening the advisers were asked and agreed to waive the 15
penalty provision for a late registration, to allow the company to make 16
a clean report the following day. Just six hours later, the company 17
reported a major operating loss and restatement of its numbers— 18
downward, of course—for prior periods. Needless to say, lawsuits 19
erupted overnight. The capital markets cut this company off imme- 20
diately. One can only speculate why management chose such an odd 21
course of action. Investigations followed with the bankruptcy filing, 22
and years later, the company is tangled in litigation. 23
The IR lesson: Just like investment bankers, IR professionals 24
should never allow credentials to outweigh skepticism. It is easy to be 25
impressed with somebody of stature, to be assured by the friendly 26
greeting, the easy handshake, the camaraderie, and the confidence. 27
But IR professionals should keep their eyes focused on fundamentals 28
and try to keep management in the same zone. Another IR lesson: 29
Fool with professional investors who put money into PIPEs, and you 30
will lose access to capital forever and end up in court. With recent 31
securities-law reforms, you may end up in prison, too. 32
33
Reap Dividends From Being Forthcoming and Honest 34
As a contrast to the preceding example, consider a Fortune 500 35
company. This one was consistently honest, open, and candid in its 36
communications throughout the private placement process. Bad news 37
 114 THE NEW INVESTOR RELATIONS

1 was always delivered promptly, and management was responsive and

2 articulate. Even though a major billion-dollar subsidiary had lost
3 nearly $100 million from operations the prior year, the placement
4 agent was able to procure a substantial line of credit for the company.
5 Because of the quality of the management’s communications, its pre-
6 sentations to investors and lenders, and the confidence and trust it
7 instilled, the company was able to privately place an institutional cap-
8 ital commitment in a tough market.
9 Although the company was largely operating in out-of-favor
10 industries, carried a large debt load, used off-balance-sheet partner-
11 ships, and faced another rating downgrade on its debt, it still suc-
12 ceeded. It did so because the management team never did anything
13 to call its integrity into question. Members were open and honest and
14 provided hours of detail in their reports, filings, and conference calls.
15 Whether the disclosures or communications were prepared for the
16 public or for a restricted insider doing a private placement, they were
17 always credible and easy to understand.
18 The IR lesson: Credible investor relations should be a permanent
19 feature of any public company’s operations and should focus on the
20 long term.
21
22 Don’t Let an Investment Banker Be Your IR Department
23 Super Tech (a fictional name) was confident but not arrogant. With
24 its business fundamentals and very presentable management team,
25 the company was able to place a $20 million PIPE, in the form of
26 common and convertible preferred stock.
27 Unfortunately, Super Tech was caught in the “tech wreck” of
28 2000–2001. Projected sales and profits did not materialize, and it
29 began to run out of money. The convertible preferred had a feature
30 that allowed the company to use its future stock price to settle
31 redemptions or conversions. This would have been a great feature
32 had the stock price gone up, since the company would have had to
33 give away less equity (a smaller ownership stake) when the convert-
34 ible preferred was converted into common. But the stock instead fell
35 to a lower price, and conversion would mean giving the PIPE
36 investors a substantial chunk of the company, far more than originally
37 anticipated. As a result, management wanted to exchange the con-
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 115

vertible preferred for a more traditional fixed-price convertible that 1

would be redeemable for cash at maturity instead. 2
Asking PIPE investors for a change of rules midgame is never a 3
pleasant task, and such a course requires very deft IR. In a PIPE, you 4
are dealing with professional investors who expect returns on their 5
investment at above-market rates. In addition, PIPE investors, 6
unlike scattered retail investors or even the numerous mutual funds, 7
are few in number and can organize easily if they feel they are being 8
taken for a ride. 9
Still, Super Tech was determined to change the terms of the 10
convertible preferred portion of the PIPE. To do so, the company 11
chose to hire an investment banker from a major brokerage. The 12
banker proceeded to tell the PIPE investors what the new deal 13
would be, as if being from a large brokerage meant he could dictate 14
to the institutional investors that had invested in this particular 15
PIPE. In the process, he made the company look as if it took its 16
investors for granted because it treated them cavalierly. Any good- 17
will that remained for the management was eliminated during that 18
first meeting with the new banker. When the investors arrived, they 19
had intended to cooperate and restructure the paper, but a day or 20
two after the banker’s presentation they all hired litigators. 21
Fortunately, the original PIPE advisers came back on the scene to 22
help smooth things over and somehow managed to broker a mod- 23
ified deal between the PIPE investors and the company. 24
The IR lesson: Even if management does a superior job communi- 25
cating through its investor relations program, in the PIPEs context, 26
a single arrogant adviser or agent can spoil the goodwill earned over 27
an extended period. Public companies should be careful about whom 28
they hire and always emphasize to advisers that it is the shareholders 29
who own the company, not the management. There is a tremendous 30
temptation for management to succumb to obsequious or brash 31
advisers who promise an easy way out of a mess. Shareholders are not 32
stupid and should not be treated as such; they are the real owners of 33
the company. For PIPE investors, that concept is paramount. 34
35
36
37
 116 THE NEW INVESTOR RELATIONS

1
2 Generate Goodwill With Investors
3 The management at a troubled but promising software company was
4 refreshingly candid. It bluntly stated that the company needed more
5 capital to launch a new range of products—and even that would be
6 no guarantee of success—or else it would need to merge with another
7 company. By carefully explaining to institutional investors the need
8 for the new product line, the financial adviser convinced PIPE buyers
9 of the company’s fundamental prospects. As usual in a PIPE, the
10 company had to offer an incentive: Investors would get not only a
11 yield but also a big upside if the company rallied. The management
12 successfully completed a very complicated transaction, placing $29.5
13 million in convertible preferreds.
14 A little more than a year later, virtually all of the convertible bonds
15 were still outstanding. But the software company’s new product line
16 had produced only marginal results. The firm would run out of cash
17 within a quarter or two, barring a tremendous surge in demand.
18 However, because the management had credibility with all the
19 investors, had always explained that this was a risky situation, and had
20 let them know each step of the way the progress the company was mak-
21 ing (or lack thereof), it still had some capital-raising options. The solid
22 IR with PIPE investors all down the line was now going to pay off.
23 The management sought advice on how to get the group of insti-
24 tutions who held the investment to agree to a short-term standstill/
25 lock-up in order to complete a merger with another industry player
26 that had an interest in acquiring the company. The six institutions
27 were asked to agree to the lock-up but, because the company was
28 publicly traded, were not told why.
29 The existing goodwill and trust were sufficient to allow the lock-
30 up to be accomplished in a few hours. The management was then
31 able to engineer a deal with its eventual acquirer. The deal saved
32 everyone’s investment and allowed the parties to cash out at a profit.
33 All this was only possible because of the superb investor relationships
34 that had been developed.
35 The IR lesson: When captaining a company, you never know what
36 storms you might encounter or in what directions you may sail. If
37 your investors like and trust you, your options for maneuvering will
INVESTOR RELATIONS FOR PRIVATE PLACEMENTS 117

be that much greater. In this case, because of good IR with PIPE 1

investors, the software company was able to arrange a merger. 2
Without good relations, suspicious investors might have scotched the 3
deal before it could unfold. 4
5
6
T HE LESSONS FROM THESE EXAMPLES ARE SIMPLE . What works 7
are the old-fashioned virtues of humility, courtesy, respect, candor, 8
underpromising and overdelivering, communicating often and clearly 9
in plain English, and not surprising people with bad news. Investor 10
relations in PIPEs is unique in that discretion and a certain level of 11
secrecy during the solicitation process are vital. A PIPE is a material 12
event, and the curtains must be kept shut until players give the go- 13
ahead to make information public. In this zone of silence, IR profes- 14
sionals must work effectively to show institutions the rewards of 15
investing. 16
Investor relations in PIPE transactions is just as critical as in any 17
other type of transaction, and in some respects perhaps more so, 18
because of the close relationship with investors, their sophistication, 19
and the size of their holdings. This is an investor class one can ill 20
afford to alienate. After all is said and done, institutional Wall Street 21
is a small place, where professionals migrate from firm to firm and 22
names are remembered. No manager or IR professional should con- 23
sider misleading any investor but especially not institutional investors 24
such as those who participate in PIPEs. 25
26
27
28
29
30
31
32
33
34
35
36
37
 1

8 Investor Relations 2
3
4
for the IPO 5
6
7
DOUGLAS M. SHERK 8
EVC Group 9
10
11
12
13
14
15

T HE FOLLOWING TRUE STORY is relevant to every chief executive,

chief financial officer, and board director of any private company
thinking about going public. The names of the people involved and
16
17
18
the name of the company have been changed to—well, read on, and 19
you’ll understand why. 20
Max, the chief financial officer of Flying High Technology Corpo- 21
ration, calls in his outside investor relations firm for a meeting barely 22
a year after Flying High completed one of the most successful initial 23
public offerings (IPOs) ever. The meeting is taking place before 24
Christmas, around the time the calendar officially declares the begin- 25
ning of winter. 26
“Well, guys,” Max says with a sigh as he sits down at the table in 27
the windowless conference room. He pauses to look at Flying 28
High’s general counsel, Bart, and the three consultants. “We aren’t 29
going to make the quarter. We’ve got to come up with a strategy for 30
breaking the news.” 31
“If the miss is less than 5 percent, we could just wait until we 32
release actual results in January,” says David, the senior counselor 33
from Flying High’s IR firm. 34
CFO Max nods knowingly. “Right now, the best we can do on 35
the revenue side is 12 percent less than we projected on the last 36
call. And,” he adds as the consultants pull out their pads to take 37

119
 120 THE NEW INVESTOR RELATIONS

1 notes, “we could be as much as 20 percent light.”

2 The consultants all nod their heads and steal glances at one
3 another. “Where are you coming up short?” asks David, his consult-
4 ant hat on.
5 “We don’t know,” responds Max.
6 The consultant cocks his head to the right as if his hearing has
7 momentarily failed him. “Well, which product lines are off plan?”
8 he asks.
9 “It looks like the widgets are softer than the other two, but we
10 don’t have the details,” responds Max.
11 “What about markets? Are you okay in Europe?” David asks, try-
12 ing to hide his consternation but perhaps betrayed by the tone of his
13 voice.
14 Max leans forward, his thick-fingered hands clasped. “Look, I
15 know what you are looking for, but we just don’t have the answers.
16 All I know is that we are short, and the best information I can get
17 from the field is that we’ll be about $9 million to $11 million below
18 our original estimates. Until we get the new system up and running,
19 we just have to wait for the end of the quarter to get the details. Now,
20 what should we do?”
21 Three days later, Flying High issues a news release updating its
22 outlook for the quarter ending on New Year’s Eve and hosts a con-
23 ference call. Max and Harry, the company’s CEO, aren’t able to get
24 much more information on the factors behind the quarter’s revision.
25 During the call, their comments reflect this lack of knowledge. Not
26 surprisingly, investors suspect that management has little real-time
27 command of Flying High’s “operating metrics”—the ability to track
28 revenues, profits, operating margins, and other important operating
29 trends. The stock flounders badly the next trading day, losing 60 per-
30 cent of its value.
31 Unfortunately, Flying High’s story isn’t unique. Most manage-
32 ment teams of IPOs underestimate the need to stay apprised of their
33 companies’ operating metrics while a quarter is in progress. They fol-
34 low the traditional approach to investor relations and start thinking
35 about their IR needs once they are public and the quiet period passes,
36 just after the pricing, or, at best, shortly after Form S-1 (signaling a
37 company’s intent to go public) has been filed with the Securities and
INVESTOR RELATIONS FOR THE IPO 121

Exchange Commission (SEC). By then, it is too late to do the detail 1

work required to be optimally prepared for the operational surprises 2
and ensuing communications issues that invariably develop. By then, 3
it is also too late to create and implement the systems needed to 4
properly monitor operating performance as a quarter progresses and 5
be a “best practices” publicly traded company. 6
7
8
Be Optimistic, But Be Realistic, Too 9
As of early 2003, the 976 companies that had completed IPOs since 10
the beginning of 1998 (and for which information was available) 11
were trading at only 54 percent of their offering prices. That consti- 12
tutes a large sample—nearly 1,000 companies—and it highlights a 13
fact: Most IPOs are not going to the moon, either on Wall Street or 14
operationally. 15
Many such companies trade at half-off IPO pricing because, at 16
some point in their relatively young lives as publicly traded stocks, 17
they have either negatively surprised Wall Street or proved to have an 18
undistinguished product, service, business model, or some combina- 19
tion thereof. 20
This chapter discusses the steps you should take to avoid match- 21
ing the average performance of those 976 IPOs. It supplements the 22
comprehensive list of investor relations dos provided by SEC legal 23
counsel and the large accounting firms. A few of those basics are cov- 24
ered here, but the focus is on a step-by-step process to maximize the 25
potential of a company’s IPO and minimize the risks on the pricing 26
date and into the future. At the same time, the process recommended 27
here may lead the board and management to determine that going 28
public is not the best way to maximize the value of the company. 29
30
31
Getting Started 32
A variety of factors cause boards and management teams to think 33
about going public. In many cases, the motive is to bring wealth to 34
the early backers and members of management. In other instances, 35
being public provides increased visibility that enhances marketing 36
opportunities; competitors have a harder time telling your prospec- 37
 122 THE NEW INVESTOR RELATIONS

1 tive customers that the company is about to go under when financial

2 statements are being filed with the SEC that prove otherwise. Finally,
3 companies sometimes go public to diversify their sources of capital.
4 Whatever their reasons, after deciding to go public, most company
5 managements become swamped during hectic days that run into the
6 weeks and then months. The board and the other interested parties
7 keep the heat on to get the deal done while the market is receptive.
8 Management typically loses control of various aspects of the process
9 when warnings about the consequences of delay become the cry of
10 the day. En route to the IPO, it finds itself not only trying to run a
11 company and outwit competitors but also sitting through endless
12 meetings with lawyers, accountants, investment bankers, and other
13 experts.
14 Additionally, as would be expected, many managements haven’t
15 yet been through an IPO, or their experience has become outdated
16 by new corporate governance requirements. As a result, they defer to
17 experts, and experts try to get the deal done as quickly as possible,
18 motivated by the lucrative fees they stand to earn. Routines are fol-
19 lowed, but to management they are new routines. Reliance on the
20 routine process means that the typical management team isn’t as pre-
21 pared to be publicly traded as it could or should be.
22 Rather than wait until you’re caught up in the IPO whirlwind,
23 start preparing as soon as you receive the first inkling that your com-
24 pany could be an IPO candidate. Among the signals to watch for are
25 the following:
26
A competitor just filed an S-1 with the SEC to offer shares.
27
Investment bankers are calling on your company and talking up
28 an IPO.
29
The venture backers or board members have brought up the
30 subject.
31
Companies with similar investment characteristics are being
32 well received in the market.
33
Your company is the only private company among your com-
34 petitors.
35
Your company is growing rapidly and will need additional cap-
36 ital to fund additional growth.
37
Your debt has become more expensive than diluted equity.
INVESTOR RELATIONS FOR THE IPO 123

Your company has achieved certain internal milestones and is 1

progressing toward a long-planned entry into the public 2
markets. 3
4
Peer Group 5
From an investor relations perspective, the first step in preparing to go 6
public is to identify a peer group. Which companies will your compa- 7
ny be gauged against by the investing public? Which companies have 8
similar operating characteristics or compete for the same customer 9
base? Although every management team believes its company is one- 10
of-a-kind, the market prefers comparisons and analogies. Analysts, 11
investment bankers, and fund managers seek to compare your com- 12
pany with other publicly traded companies as a way to determine val- 13
uation. Many one-of-a-kind businesses are less diligently followed by 14
analysts and less desirable to institutional investors once they become 15
publicly traded. This is especially true for smaller-capitalization com- 16
panies. The IR goal should be to align your enterprise with a peer 17
group and then be one of the stars of that group. 18
Look at the potential peer group from a 360-degree perspective. 19
Aside from your competitors, what other publicly traded companies 20
are in industries related to yours or have financial fundamentals sim- 21
ilar to yours? In late 2002, a hospice care company went public. At 22
that time, only one other publicly traded company focused solely on 23
hospice care. In creating a peer group, the newly public company 24
determined that many of the analysts following its sole pure peer also 25
followed “bricks and mortar” health care companies such as hospitals 26
and skilled nursing facilities. Understanding the operating metrics of 27
that broader peer group became important to understanding how 28
those analysts might view the company. 29
30
Operating Metrics 31
Once the peer group is created, identify the specific operating metrics 32
used by investors to evaluate the companies. These can be gleaned 33
from reviewing information published by the companies, conference 34
call transcripts, analyst reports, discussions with professional investors, 35
and the investor relations representatives of the peer group companies. 36
Revenue, gross margins, operating margins, and net margins are a few 37
 124 THE NEW INVESTOR RELATIONS

1 of the operating metrics used to evaluate companies in general. Other

2 metrics are specific to particular industry segments.
3 EVC Group has identified as few as twenty-four operating metrics
4 for a company and as many as thirty-seven. For example, with the hos-
5 pice client, employee turnover became an important operating metric
6 to follow because the industry’s level was quite high. Our client’s level
7 of employee turnover was comparatively low and became a distin-
8 guishing investment characteristic—a selling point to investors.
9 Another example occurs more commonly with companies using
10 distributors to access their customers. Monitoring sales and inventory
11 levels within the distribution channel during a quarterly period has
12 become critical to understanding the progress of a business. Yet many
13 companies still get reports from their distributors quarterly or, at
14 best, monthly. In this age of real-time information, finding out that
15 sales from an important distributor were less than expected for the
16 last month of a quarter creates the impression that management
17 doesn’t have control over the business. Better to set up real-time, or
18 close to real-time, reporting systems for sales well in advance of an
19 IPO, or even talk of an IPO.
20
21 Analysis
22 Apply some analysis to the list of operating metrics. Determine if there
23 are any other operating metrics that could help to distinguish your
24 company within its peer group. Consider the example of a company in
25 the recycling industry. This company was rare in that it had facilities
26 along waterways that made shipping to customers both easier and less
27 expensive. Because of onerous regulations and land costs, potential
28 competitors had little chance of getting permits to build facilities with
29 similarly advantageous shipping locations. Obviously, this distinction
30 is not going to be readily apparent to Wall Street investors, who usu-
31 ally spend their days far from industrial waterfronts and dumps. Until
32 effective IR positioning was brought to bear, investors didn’t appreci-
33 ate this operating metric, which was a value enhancer.
34 The analysis of operating-metric distinction must include an
35 evaluation of how long the distinction might last. In the case of the
36 hospice company, the employee-turnover advantage could disap-
37 pear as the peer group implements programs to retain nurses. In the
INVESTOR RELATIONS FOR THE IPO 125

case of the recycling company, significant public policy changes 1

would have to occur. And even if that were to happen, they aren’t 2
making more waterfront land. For public company management, 3
the point is that once awareness is created for a metric, monitoring 4
has to be thorough and consistent to minimize the surprise factor, 5
should there be one. 6
7
Drawing Comparisons 8
How do your company’s operating metrics compare with the peer 9
group’s? If its performance is distinctly better, you may wish to con- 10
sider some strategies to maximize awareness before the IPO process 11
starts. The quiet period, the SEC-mandated hiatus during which a 12
company must do nothing that could be interpreted as conditioning 13
the market to purchase the shares, usually begins when management 14
has selected investment bankers and the organizational meeting— 15
including underwriters, attorneys, and accountants—is held. But it is 16
totally legal to implement awareness programs before the quiet period. 17
One opportunity is offered by investor conferences held by bro- 18
kerages. Some brokerages invite a select number of private companies 19
to present to institutions attending their conferences. Giving two to 20
three of these types of presentations can generate awareness and 21
understanding of your company among the institutions that may later 22
be buyers of your IPO. It is also good practice for your senior man- 23
agement team. However, there are some risks that must be consid- 24
ered. The presentation needs to be professional and public-company 25
caliber, or investors will not consider the company ready for prime 26
time, nor their investment dollars. And if your company isn’t plan- 27
ning to go public within the next twelve months, any awareness cre- 28
ated is likely to recede as time passes. 29
Another strategy to consider is to establish financial media relations 30
efforts. Coverage of your company in regional or national business 31
media can generate increased awareness among professional investors 32
and have positive implications for business development. However, 33
this awareness strategy needs to begin well before the organizational 34
meeting. Even the most successful efforts can take several months to 35
bear results. In pursuing both the awareness strategies discussed, it is 36
best to use outside professionals with successful track records. 37
 126 THE NEW INVESTOR RELATIONS

1
2 Back to Those Operating Metrics
3 While building market awareness on stage, companies should be
4 working backstage to ensure their ability to monitor the operating
5 metrics that were identified. In the beginning, the goal should be to
6 produce weekly reports on each metric. For those readers who
7 haven’t fainted or slammed this book shut after reading the previous
8 sentence, here’s why it is important to aim for weekly reports: A
9 quarter is only thirteen weeks long, and Wall Street is notoriously
10 impatient in the 21st century. Taking the pulse of the business fewer
11 than thirteen times during the quarter reduces your opportunities to
12 create and execute strategies that address emerging operating and
13 financial performance issues.
14 Monitoring the operating metrics of the business on a weekly
15 basis provides you with a better understanding of the developing
16 financial performance. You’ll also have more operating knowledge
17 from which to make decisions, including what to communicate if a
18 situation arises similar to the one faced by Flying High at the begin-
19 ning of this chapter. There may be nothing management can do in
20 the short term to correct a downdraft in the business. However, there
21 is a lot that management can do to protect credibility and long-term
22 shareholder value if a clear command of the issues facing the business
23 can be communicated.
24 Some operating metrics are not very volatile, and weekly moni-
25 toring will prove to be unnecessary. However, it can be argued that
26 the best time to make that judgment is after your company has been
27 public for at least two quarters. The key motive behind assessing
28 the operating metrics of your company on a weekly basis is to
29 understand how your business is doing relative to the plan you’ve
30 presented to your investment bankers and to Wall Street in general.
31 Putting systems into place for monitoring your operating metrics
32 before starting the S-1 drafting process will allow management to
33 gain a better appreciation of how the company’s financial perform-
34 ance compares with that of its peer group. Such an appraisal can
35 help both the board and management determine the market’s
36 appetite for the company’s shares and target areas that need partic-
37 ular management focus.
INVESTOR RELATIONS FOR THE IPO 127

1
Revenue Forecast Reality Check 2
There’s one more process that should be completed before conduct- 3
ing the contest to choose your underwriting investment bankers: the 4
Revenue Forecast Reality Check (“the Check”). The first step in this 5
procedure is to review the revenue forecasts of your peer group for 6
the past four consecutive quarters. This information can be found in 7
the analyst reports of the peer group companies. In addition, many 8
companies provide quarterly forecasts in SEC filings and during quar- 9
terly conference calls. Services such as ccbn.com—the website run by 10
the Corporate Communications Broadcast Network—also sell tran- 11
scripts of these calls. 12
The next step is to determine the peer companies’ actual revenue 13
results for the same past four consecutive quarters and compare these 14
with their forecasts, creating a ratio of forecast-to-actual revenue 15
results. Now, perform the same analysis on your own company’s per- 16
formance. Have your forecasts been higher or lower than actual 17
results? How does your ratio compare with the peer group average? 18
The answers to these questions can have implications for how your 19
IPO is received by the market. 20
21
No Rose-Colored Glasses 22
One of the greatest mistakes the management of an IPO company can 23
make is to provide potential investment bankers with optimistic rev- 24
enue forecasts. Once the underwriting process begins, going to the 25
underwriting team and letting it know that the 25 percent growth rate 26
you had expected is now looking more like 21 or 22 percent may 27
result in a bit less underwriter enthusiasm and passion for your com- 28
pany. Management has effectively planted a smidgen of doubt about 29
its control over operations and its ability to monitor and forecast the 30
performance of those operations. There is also the practical matter of 31
what type of valuation the market will give a 21 percent grower versus 32
a 25 percent grower. 33
There are other issues to consider. A peer group that has consis- 34
tently exceeded company guidance or analyst revenue forecasts has an 35
investor base accustomed to results that exceed expectations. Conse- 36
quently, Wall Street may very well expect your company’s actual 37
 128 THE NEW INVESTOR RELATIONS

1 results during the first few quarters of its public life to be better than
2 analysts had predicted. Such expectations can create tremendous
3 pressures on management, especially if its own forecasts were
4 optimistic to begin with. Implementing the Check before sharing
5 forecasts with potential underwriters can reduce these pressures and
6 forestall investor disappointment, enhancing the market’s regard for
7 both the company and its management team.
8 Here’s a real-life example to consider. EVC Group conducted the
9 Check for a company whose peer group, on average, posted about 95
10 percent of their forecasted revenues. In other words, the peer group
11 often undershot expectations by 5 percent. This company forecast a
12 35 percent revenue growth rate for the next year. However, after the
13 Check results for the company’s peer group were presented to man-
14 agement, they decided to cut back revenue forecasts by 5 percentage
15 points, to a 30 percent growth rate. (This rate turned out to be the
16 company’s norm in recent years.) Six months later, the company was
17 having a very good year, growing at that 30 percent rate, not the
18 originally expected higher one. As a result, management gained a
19 reputation in the marketplace for having a solid command of the
20 business and fostering the fastest growth in its peer group, without
21 the added pressures or opportunity for disappointment the original,
22 higher forecast would have created. Good IR dictates sensible rev-
23 enue and profit forecasts, with an eye for potential shortfalls. This is
24 true in particular for IPO companies.
25
26
27 Disclosure Policies and Procedures
28 Disclosure Policies and Procedures (DPPs) provide the written
29 framework for all disclosure decisions. Most companies have some
30 form of DPPs, but they are typically informal. As a company prepares
31 to go public, underwriters of directors-and-officers (D&O) liability
32 coverage will require that the DPPs be put into writing. And since no
33 director in his or her right mind will serve on the board of a publicly
34 traded company without proper D&O coverage, your company is
35 going to need to create a formal DPP document.
36 Just like many other aspects of the IPO process, the creation of
37 corporate DPPs tends to follow a template and not be very effective.
INVESTOR RELATIONS FOR THE IPO 129

Customized DPPs make the disclosure process less complicated, help 1

reduce risk, and can boost credibility. So use the DPP template 2
document provided by attorneys or investor relations counsel as a 3
start, but only a start. 4
Refer back to the list of operating metrics. To the template docu- 5
ment, add a discussion of the specific operating metrics your company 6
will periodically release to investors. Including these operating metrics 7
in your DPP document will help focus your entire organization on the 8
company’s performance with respect to those metrics and facilitate 9
rigorous monitoring throughout the quarter. 10
Not every metric belongs in the DPP document. Some items 11
may be highly sensitive from a competitive perspective. Although 12
monitored, these items are not disclosed. The DPP document 13
should note which, if any, metrics won’t be disclosed for competitive 14
reasons. The identification of which metrics will not be included 15
should be done early in the underwriting process, so that manage- 16
ment maintains tight control over the flow of information from the 17
company. 18
19
Guidance 20
Including specific operating metric disclosure information in the 21
DPP document will also enable the company to avoid a hazard that 22
is sometimes referred to as the guidance trap. Many companies have 23
responded to the passage of Regulation Fair Disclosure (Reg FD) 24
by providing in their quarterly results new releases and during the 25
quarterly results conference calls specific revenue and earnings per 26
share guidance. In less predictable businesses, this approach has 27
increased the risk of shareholder lawsuits and damaged manage- 28
ment credibility. Many companies, including Coca-Cola and 29
Gillette Company, have discontinued the practice but still provide 30
enhanced operating metric data. In the case of an IPO, Wall Street 31
may demand some sort of guidance in the first few years, a chal- 32
lenge for management. 33
Once a company starts providing top- and bottom-line guidance, 34
curtailing the practice can necessitate some difficult explanations to 35
investors. It is possible that IPOs can avoid this dilemma by clearly 36
stating in the DPP document that they will not provide specific top- 37
 130 THE NEW INVESTOR RELATIONS

1 and bottom-line guidance. There have not been enough IPOs in

2 recent years to know if this newer approach will stick in future mar-
3 kets. However, if an IPO decides on a “no guidance” strategy, all par-
4 ties, from investment bankers to senior management, need to be
5 informed of this decision.
6 There is a middle ground for IR professionals to consider. In place
7 of specific top- and bottom-line forecasts, companies can provide
8 general goals for revenue growth—for example, 10 to 15 percent.
9 These revenue goals are supported by an operating model that out-
10 lines how management intends to manage the business from a cost
11 perspective. Operating metrics that are essential to understanding the
12 status of the business should be provided within the operating model.
13 For many companies, these metrics will include gross margin; selling,
14 general, and administrative expenses (SG&A); operating margin;
15 research and development; tax rate; and net income. For these and
16 other operating metrics included in the operating model, the
17 approach should be to provide a very tight range expressed as a per-
18 centage of revenue. A sample operating model for a manufacturing
19 company is shown in Table 8-1.
20 This approach allows brokerage analysts and others to develop
21 their own forecasts for the company’s financial performance. At the
22 same time, it enables management to focus on running the business,
23 as opposed to just monitoring it, and not to worry solely about short-
24 term results.
25 One word of caution: Not all investors are content with the oper-
26 ating model approach to guidance. Institutions—the bulk of the
27 market nowadays—tend to want forecasts for the top and bottom
28 lines. They may put pressure on the management of a new public
29 company to provide such forecasts. However, it is our belief that the
30 operating model approach will be accepted by institutions.
31
32 Disclosure and Crisis IR
33 Beyond identifying how the company will provide guidance and the
34 specific operating metrics to be used in doing so, the DPP document
35 includes other information, such as the executives authorized to serve
36 as spokespersons to the media and investment community. The com-
37 pany should identify what types of information, in addition to the dis-
INVESTOR RELATIONS FOR THE IPO 131

1
2
TABLE 8-1 Sample Operating Model 3
(Manufacturing Company) 4
5
Revenue 100% 6
Gross margin 52–53%* 7
SG&A 22–23%* 8
R&D 9%* 9
Operating income 15–17%* 10
Tax rate 30% 11
Net income 10–12%* 12
*Percentage of revenue 13
14
15
closed operating metrics, it considers material. The approval process 16
for the disclosure of all information, material or not, should also 17
appear in the DPP document. The company should form a disclosure 18
committee to ensure that the DPPs are regularly reviewed and 19
amended as appropriate. 20
General guidelines for handling a crisis situation should be includ- 21
ed in the DPP document as well. Some companies consider it pru- 22
dent to attach a crisis communications program. It is also wise to 23
identify the timeframe that will constitute the quarterly quiet period 24
once the company is public. For many companies, this blackout on 25
comment about financial or business performance or prospects 26
begins two weeks before the end of the quarter and ends after the 27
release of results and the conference call. 28
These are just a few examples of what goes into a thorough DPP 29
document. The general rule should be to create as explicit a docu- 30
ment as practicable and recognize that changes to the business will 31
most likely mean changes to the DPPs. Once they are created, the 32
policies and procedures need to be clearly communicated throughout 33
your company. Distributing the DPP document is the traditional 34
mode of communications. However, generating broad understand- 35
ing of the policies within your company requires a wider effort. Some 36
companies post the DPP document on their intranet and corporate 37
 132 THE NEW INVESTOR RELATIONS

1 websites. Others conduct meetings to review the key points, and still
2 others require employees to sign a statement acknowledging that
3 they’ve read the document.
4
5
6 The Presentation
7 Whole books have been written on the presentation and the “road
8 show” (the presentation made in meetings with investors across the
9 country to pitch an offering) that companies should develop before
10 an IPO. This section discusses some general guidelines for these pre-
11 sentations.
12 Follow the sequence of activities outlined in this chapter.
13 Developing the pitch to investors before determining the operating
14 metrics, performing the Revenue Forecast Reality Check, or creating
15 the disclosure policies and procedures, presents two potential risks:
16 one, that information later determined to be best kept confidential
17 may be disclosed, and two, that forecasts may be made that later look
18 amateurishly optimistic. Worse, if aggressive outlooks are scaled back,
19 investors may conclude that the company’s prospects are souring and
20 that the IPO is being staged merely to give private-equity investors
21 an “exit strategy.” Once information is released or forecasts made, it
22 is very awkward to tell investors that a topic is off-limits.
23 You may use a laptop or printed version of the presentation during
24 a road show, but, keep in mind that it is the company, the fundamen-
25 tals, and the management team that generate maximum valuation for
26 an IPO, not the most beautiful presentation. Be aware as well that
27 most investment bankers, especially when few IPOs are coming to
28 market, want to control the presentation. It is easier for you to posi-
29 tion your company the way you want if you develop a presentation
30 that is used to interview investment bankers. Although this presenta-
31 tion will have other components, it should focus on the following six,
32 essential topics:
33 1. a brief definition of the company
34 2. its unique operating characteristics and why they create value
35 for the customer and for shareholders
36 3. the barriers to other companies replicating those character-
37 istics
INVESTOR RELATIONS FOR THE IPO 133

4. how long the barriers can be maintained and what is being 1

done to extend them 2
5. the company’s financial performance 3
6. the operating model to be used in managing the business going 4
forward. 5
6
Once the presentation is created, it is necessary to practice the 7
delivery, which should be no more than twenty-five minutes long. It 8
is advisable to invest in a professional presentation trainer who knows 9
how Wall Street works. Even the most polished presenter learns from 10
such training, given the unique characteristics and needs of the pro- 11
fessional investor audience. 12
13
14
IR Infrastructure 15
As its S-1 is being finalized for filing with the SEC, a well-prepared 16
company will put in place an investor relations infrastructure. The 17
first step in building an infrastructure for investor relations is to 18
determine who is going to be responsible for the strategic direction 19
of the program once the company is public. Given the youth of most 20
IPO companies, this responsibility is typically given to executives at 21
the C-level: the CEO or CFO. 22
The demands of the activities described in this chapter, and the 23
communications demands of being a successful publicly traded com- 24
pany, are onerous. We recognize that they represent a new set of 25
responsibilities for management teams already running flat out. But 26
the reality remains that you have to win not only in your industry but 27
also on Wall Street. There are eight thousand-odd publicly traded 28
companies. Most live in obscurity and many trade for far less per 29
share than they would if they had solid IR. 30
As a result, it is a good idea for most companies considering an 31
IPO to hire early assistance in developing and executing the program. 32
This assistance can be in the form of either an investor relations pro- 33
fessional or an IR consulting firm. 34
Once the responsibility decision is made and implemented, the 35
plan for the IR infrastructure can be created and acted upon. It goes 36
without saying in this era of Internet communications that IR Web 37
 134 THE NEW INVESTOR RELATIONS

1 content needs to be created and managed. Because of the limitations

2 of the pre- and postoffering quiet periods, it is advisable to leave an
3 investor relations component off the website until twenty-five days
4 after the period ends. However, the website should be used during
5 the quiet period to collect the names and e-mail addresses of inter-
6 ested parties for post–quiet-period follow-up. One way to accomplish
7 this is to place a notice on the home page that allows people to send
8 their names and e-mail addresses for future postoffering announce-
9 ments. Once people send their information, they receive automatic
10 responses thanking them for their interest and referring them to the
11 digital address to review the S-1.
12 During the quiet period, the IR Web content can be built. Various
13 services provide good templates for this content, and some will even
14 host the content. Outsourcing this aspect of the IR program can be
15 quite effective for those companies not willing or able to dedicate the
16 internal resources or whose managements are already stretched. An
17 outsourcer can provide seamless links from other site content, match
18 the corporate branding with regard to look and graphics, and ensure
19 prompt posting of news releases and links to SEC filings. The National
20 Investor Relations Institute (www.niri.org) and many outsourcers pro-
21 vide excellent input on what makes for good IR Web content.
22 Another decision to be made regarding the infrastructure is how
23 to manage the inquiries that will come in beginning on the day the
24 S-1 is filed. These include inquiries from the media, from individual
25 investors, brokers, analysts, and institutions, and possibly even from
26 credit-rating agencies. Although each group needs to be managed
27 differently, they all need to be managed promptly if the company is
28 going to be successfully received in the public markets. The general
29 rule of thumb here is that the media need to be asked what their
30 deadlines are. Institutions and analysts should have their calls
31 returned within the same day. Brokers and individual investors should
32 have their calls returned within twenty-four hours.
33 An investor relations voicemail box should be set up so that there
34 is a convenient place for the operator to direct calls from the main
35 number. That voicemail box needs to be checked daily and should
36 have a greeting that indicates what the company’s general response
37 policy is, to help manage the caller’s expectations.
INVESTOR RELATIONS FOR THE IPO 135

Vendors should be selected during the quiet period. These include 1

any outside providers of IR Web hosting, conference call providers, 2
and news release distribution services. Years ago, using one of the 3
major news release distribution services became a commonly accept- 4
ed means to satisfy SEC disclosure requirements. The key is to select 5
one of the internationally known services and not a small upstart. It 6
is too chancy to rely on a service of unknown quality and quantity to 7
meet SEC disclosure needs. 8
Another component of the infrastructure is the information that 9
will be distributed in response to inquiries. During the first twenty- 10
five days after the IPO is priced, the only document that should be 11
distributed is the final prospectus. But after those twenty-five days, 12
the restrictions loosen up. Then kits can be created that include 13
recent news releases and a fact sheet and other digestible information 14
that helps investors understand the company. Do not include analyst 15
research reports in these kits, regardless of any disclaimer that might 16
be imprinted on their covers. 17
18
19
E XECUTING THE IR FUNCTIONS presented in this chapter requires 20
an investment of time and money. Many companies may well wonder 21
why they should go public” if it entails developing weekly monitor- 22
ing systems for much of the their operating and financial data (the 23
metrics) and then enduring a skeptical Wall Street that wants hard 24
forecasts to be met to the penny, if not exceeded. 25
The benefits of being a public company are well known, however, 26
including access to capital and profits for pre-IPO equity investors. 27
Once the decision is made to go public, a company might as well do 28
it in a way that allows shareholders to benefit to the greatest degree. 29
Good IR for IPOs will significantly reduce the risk that your com- 30
pany will end up like Flying High Technology. This preparation will 31
benefit management, early investors, and public shareholders. 32
33
34
35
36
37
 1
2
P A R T 3 3
4
5
6
7
8
9
10
11

IR Tactics in 12
13
14

Proxy Wars and Other 15

16
17
18

Crisis Scenarios 19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
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24
25
26
27
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 1

9 Crisis Investor Relations 2

3
4
5
6
7
MICHAEL S. SITRICK 8
Sitrick and Company, Inc. 9
10
11
12
13
14
15

T HE CALL CAME IN EARLY on a Wednesday afternoon. It was the

chief executive officer of a large pharmaceutical company, and he
sounded frantic.
16
17
18
“The short sellers are at it again,” he told me. “We just got a call 19
from a reporter at the Wall Street Journal who wants to speak to one 20
of our executives about some accounting issues. Our IR firm has 21
advised us to refuse comment. They say this reporter is in the shorts’ 22
pocket.” The CEO paused, then asked plaintively, “What do you 23
guys think?” 24
It was a classic dilemma. A publicly traded company receives what 25
it takes to be a hostile inquiry. Fearing that no matter how it 26
responds, its position will be misrepresented, the company is inclined 27
to stonewall. The temptation to batten down the hatches in such cir- 28
cumstances is both understandable and hard to resist. But it is almost 29
invariably the wrong thing to do. Which is exactly what I explained 30
to the CEO. 31
“Just because the reporter got his information from short sellers 32
doesn’t mean it’s not true,” I advised him. “I’d recommend calling 33
the reporter to find out exactly what he knows and exactly what he 34
wants. After that, we can decide whether or not to comment.” 35
The CEO agreed, and I called the reporter. It turned out he had 36
information indicating that the company hadn’t disclosed a signifi- 37

139
 140 THE NEW INVESTOR RELATIONS

1 cant purchasing arrangement between it and an entity controlled by

2 the CEO. Not surprisingly, he wanted to ask the CEO about it. I said
3 I’d see what I could do.
4 When I informed the CEO, he told me flatly that the reporter’s
5 information was wrong.
6 “In that case,” I said, “if we go through it allegation by allega-
7 tion, providing as much documentation as we can, we can probably
8 kill the story.”
9 Within thirty minutes, we had assembled not only the answers to
10 the reporter’s questions but also documentation for the assertions we
11 were making. In the end, our efforts prevailed.
12 “Well, I guess I won’t be writing that story,” the reporter told me.
13 “Thanks for your help. I know you know that I want to get it right.”
14 Needless to say, the CEO was pleased.
15
16
17 To Win the Game, You Have to Get In the Game
18 As I am fond of telling our clients, if you want your side of the story
19 to be represented in the media—or on Wall Street, for that matter—
20 you have to tell it. While not responding to a media inquiry doesn’t
21 excuse the reporter from ensuring his or her story is accurate, your
22 company can certainly be guilty of, at a minimum, contributory neg-
23 ligence if you don’t, at least, (1) find out what the reporter is writ-
24 ing, and (2) even if, for whatever reason, you can’t comment, tell the
25 reporter that he’s got it wrong.
26 Not too long ago, most public companies expected their investor
27 relations departments to focus solely on the Street. Reflecting this,
28 the post of IR director was usually held by a former treasurer or
29 financial executive whose job it was to “give the analysts guidance”
30 and handle institutional shareholder relations. Not anymore.
31 Over the past decade, investment news has moved from the third
32 section of the Wall Street Journal to the home page on most
33 Americans’ computers. We now live in a world where accounting
34 scandals have become major media events. What’s more, analysts,
35 fund managers, and even business executives have become media per-
36 sonalities themselves. To put it another way, media relations and
37 investor relations have become intertwined.
CRISIS INVESTOR RELATIONS 141

The interplay between the Street and the media became readily 1
apparent at the height of the dot-com boom, when an executive’s 2
appearance on CNBC’s Power Lunch would often result in his or 3
her company’s share price getting a boost in the afternoon trading 4
session. 5
Just as Wall Street has bonded with the media, so too must the IR 6
executive. Where traditional IR was based mainly on Street work and 7
contact, crisis IR also incorporates media, CEO positioning, messag- 8
ing, process control, and extensive consulting at a much higher level 9
than ever before. In short, investor relations is really morphing into 10
financial communications. 11
Ironically, the reaction of many companies’ executives to this 12
increasing flow of information has been to bury their heads even 13
deeper in the sand. That’s especially true since the implementation of 14
full-disclosure rules and, more recently, with the sight of chief finan- 15
cial officers of major companies being led away in handcuffs. The 16
result is a greater reluctance at many companies to talk. Increasingly, 17
executives are hiding behind quiet periods and speaking at only a 18
handful of well-choreographed press and analyst conferences. 19
One problem with this type of response is that it can be counter- 20
productive. Analysts who no longer get the level of detail to which 21
they’ve been accustomed start to feel left out. As a result, some may 22
resort to attacking companies via the media. Lack of corporate 23
communicativeness tends to push the investment and analyst com- 24
munity—to say nothing of the “shorts”—even further into the arms 25
of the media. 26
As information from companies becomes more difficult to obtain, 27
news organizations find themselves forced to rely more and more on 28
outside sources. This trend poses grave risks for public companies. 29
Not only does it allow a company’s image to be determined by third 30
parties, it also, and all too often, results in the publication of incor- 31
rect information, whether because an analyst was misquoted or sim- 32
ply misinformed. An important point to remember: Reporters are not 33
obligated to get your side of the story in their articles. They are only 34
obligated to provide you with the opportunity to respond. 35
36
37
 142 THE NEW INVESTOR RELATIONS

1
2 Traditional IR Versus Crisis IR
3 People often ask me to define the difference between crisis investor
4 relations and traditional investor relations. More often than not, I
5 say, it’s nothing more than a phone call. I am reminded of the call a
6 retailing executive got from one of the country’s leading newspapers
7 asking him to comment on reports that vendors had stopped ship-
8 ping goods to his company because of concerns about its financial
9 viability.
10 “That is hogwash,” the executive said and slammed down the
11 phone.
12 The next day, the newspaper published a major article in which
13 three vendors were quoted, with attribution, as saying they had
14 stopped shipping goods to the retailer because of concerns over its
15 financial stability. The thirty-column-inch story also contained the
16 executive’s three-word response.
17 The company was immediately flooded with calls from other ven-
18 dors worried that they were going to become creditors to a company
19 that might be headed for bankruptcy. Although the company assured
20 the callers that the three vendors named in the article had actually
21 been cut off because of late delivery and quality problems, the story
22 so panicked the company’s other vendors that it became a self-fulfill-
23 ing prophecy. Vendors began demanding cash on delivery, and before
24 long, the company was forced into bankruptcy.
25 How could the problem have been avoided? For one thing,
26 instead of snarling an angry response and hanging up the phone, the
27 executive should have asked the reporter to name the vendors who
28 had supposedly stopped shipping goods. Had he done so, he would
29 have been able to explain why they were bad-mouthing his company.
30 The executive should also have offered to provide the reporter with
31 the phone numbers of fifty or one hundred other vendors who were
32 continuing to provide the company with credit on an ongoing basis.
33 Had he done this, chances are that the story would have either been
34 killed or taken a very different tack.
35 Another distinction between traditional and crisis investor rela-
36 tions is that while the former is about maintaining relationships with
37 Wall Street and keeping the Street apprised of the company’s
CRISIS INVESTOR RELATIONS 143

progress, the latter is about solving problems—ideally, before anyone 1

outside the company is aware of them. 2
In this sense, crisis IR is not just about short sellers or properly 3
handling a media call. It is about having the wherewithal to handle 4
situations that could have a major impact on the company and its 5
market value. This includes situations such as proxy battles, earnings 6
restatements, announcements of significant losses, aborted acquisi- 7
tions, delayed bond payments, unexpected management changes, 8
product recalls, and shareholder or other significant lawsuits. At the 9
very least, such crises can severely dent both a company’s credibility 10
and its share price. In extreme cases, they can mark the beginning of 11
a death spiral that ends in bankruptcy court or worse. Crisis IR spe- 12
cialists can explain the facts to investors and the media and ensure, 13
whenever possible, that perceptions reflect reality. 14
A classic example of how crisis IR can correct misperceptions 15
occurred late in 2002, when a merger was announced between two 16
publicly traded companies in the health care industry. The deal was 17
applauded on both Main Street and Wall Street, and everything 18
appeared to be going fine. Then, just before the closing was sched- 19
uled to take place, the acquiring company uncovered what it believed 20
to be accounting irregularities in the overseas operations of the tar- 21
get company. All of a sudden, it looked as if the deal might fall apart. 22
The news broke on a Friday evening. Sitrick and Company was 23
called in on Sunday by the target company to help “deal with” Wall 24
Street and the press. As is almost always the case, the facts were not 25
quite as they appeared. 26
After receiving a complete briefing from the company, working 27
with the company’s management and attorneys, we drafted a news 28
release putting the matter into perspective and explaining that, while 29
it might affect the price somewhat, this discovery was not expected 30
to derail the merger. At the same time, the release explained that no 31
deal is done until the ink is dry and that if for some reason the trans- 32
action did not go through, the fact was that the company was in ter- 33
rific shape and would continue to prosper on its own. The release 34
included facts and figures to support this contention. 35
We also put together a fact sheet for investors and the media out- 36
lining the company’s strengths, including the potential of the market 37
 144 THE NEW INVESTOR RELATIONS

1 in which it operated. Concurrent with these activities, we initiated

2 and responded to investor, analyst, and media calls.
3 The strategy, which obviously our client supported, was full dis-
4 closure, no denials, and a proactive explanation of what the company
5 was doing to make sure this sort of irregularity never happened again.
6 We issued a news release announcing that the company had termi-
7 nated the executives responsible for the problem, hired independent
8 counsel to ensure that similar or other problems were not occurring
9 anywhere else in the company, and informed the Justice Department
10 and Securities and Exchange Commission of what was going on.
11 The results were evident: Both Wall Street and the media reacted
12 favorably, as did the company’s employees, customers, and vendors.
13 The merger concluded roughly a month after the initial crisis
14 emerged, with only a minor decrease in transaction value for the
15 client’s shareholders.
16
17 The Basics of Crisis IR
18 Although every IR crisis is different, in most cases the tactics used to
19 calm the market, reassure creditors, placate the press, and fend off
20 raiders are relatively straightforward. They can be summed up in the
21 following basic rules:
22 1. Understand the facts. Knowledge is power, especially when fac-
23 ing a crisis. Understand the facts of the situation—not only the
24 proverbial, who, what, when, why, and where that journalists
25 are taught to determine but also how and, most important, “So
26 what?” What happened and why, and what is the significance?
27 Do perceptions reflect the facts? If not, why not? It’s hard to
28 explain the facts if you don’t know them. The worst thing you
29 can do is provide an explanation that turns out to be wrong.
30 Even if your mistake was an honest one, your credibility will
31 suffer, and a bad situation will be made worse.
32 2. Understand your audiences. To tailor your message properly—
33 or, putting it another way, to address the relevant points of a sit-
34 uation—you must understand the concerns of the company’s
35 various audiences. Analysts do not always have the same con-
36 cerns as investors. Reporters might have a totally different
37 focus, as, probably, will employees, customers, and vendors.
CRISIS INVESTOR RELATIONS 145

Understanding the mind-sets of your various audiences will 1

help you craft and communicate your message better. 2
3. Communicate with all key audiences. This rule pretty much 3
speaks for itself. If the audience is important and has a concern, 4
speak to it. Nothing feeds fear (or fortifies a short-seller’s 5
rumors) like uncertainty, and nothing reinforces the concern 6
that something is worse than it seems than silence. 7
4. Be proactive. You are almost always better off acting at the 8
onset of a problem than waiting until it reaches terminal pro- 9
portions. Bad news tends to feed on itself. It’s like a snowball 10
rolling down the mountainside that turns into an avalanche. 11
Identify the problem, develop a solution, and communicate 12
both to your various constituents. If you don’t have a solution, 13
at least let the world know that you have identified the problem 14
and are working on solving it. In this world of 24-hour media 15
coverage and online investor chat rooms, silence is interpreted 16
as secrecy, and secrecy means you have something to hide. 17
5. Prepare for every contingency. In planning to deal with a situ- 18
ation that has caused you to break out the Rolaids, ask yourself 19
what effect news of this event is likely to have on the company’s 20
various constituencies. What are the worst-case scenarios? 21
Identify them, and prepare for them. 22
6. React appropriately. Although you should never ignore an 23
incipient problem, overreacting to a situation can be just as bad 24
or worse than underreacting. It can often cause a crisis where 25
none existed before. In assessing the issue, look at the various 26
“what ifs” and react accordingly. Do a risk-benefit analysis of 27
each step in your reaction to the matter. Sometimes, less is 28
more. Sometimes, it is not enough. 29
7. Speak with one voice. Nothing is more important in a crisis, or 30
in business in general, than credibility. Credibility depends on 31
honesty and accuracy, which in turn depends on consistency. It 32
is difficult, if not impossible, to maintain credibility if different 33
people at your company are saying different things. If you have 34
separate IR and PR functions, make sure the two teams are on 35
the same page—both with each other and with your legal and 36
management teams. 37
 146 THE NEW INVESTOR RELATIONS

1 8. Focus on the solution as well as the problem. Companies often

2 issue news releases that announce the large loss they incurred in
3 the last quarter without addressing what they are doing to turn
4 that loss into a profit. Many times companies talk about a prod-
5 uct recall, but not what they are doing to fix the problem
6 behind it. Identifying the solution is just as important to
7 investors as identifying the problem. In fact, it may be more
8 important.
9 9. Focus on the future as well as the past. Wall Street is interested
10 in the past only to the extent that it believes it will affect the
11 future. I am not suggesting that you make earnings projections.
12 Your communications, however, should always focus on the
13 future. This is essential in a crisis.
14 10. Be forthright, with others and with yourself. Three words sum
15 up this rule: “Tell the truth!”
16 11. Use experienced professionals. You wouldn’t go to a podiatrist
17 for heart surgery. Neither should you allow a lawyer or IR pro-
18 fessional who lacks experience in sensitive, “bet your company”
19 situations to handle your legal, investor relations, or communi-
20 cations activities in a high-stakes crisis. You owe it to your
21 shareholders to get someone who is experienced and has a high
22 level of expertise and an outstanding track record.
23
24
25 Turning Lemons Into Lemonade
26 Sitrick and Company was recently involved in a case where a large
27 publicly traded utility faced possible bankruptcy because one bank in
28 its syndicate had refused to agree on a renewal of its credit facility.
29 Our flight from Los Angeles landed at 6 P.M. in the city where the
30 company was headquartered. That evening we met with senior exec-
31 utives, were briefed on the situation, and discussed the various poten-
32 tial outcomes of the bank negotiations. We then went back to our
33 hotel rooms where we worked through the night drafting various
34 contingency documents.
35 While the company’s executive team was focused on getting the
36 bank deal completed, we were preparing for the various eventualities.
37 We drafted a press release explaining that the bank had refused to
CRISIS INVESTOR RELATIONS 147

renew the credit facility, what this meant for the company, and what 1
the management team was doing to deal with the situation. We 2
drafted a second release saying the negotiation had been extended 3
and a third announcing that a deal had been struck with the banks. 4
We also prepared a variety of other documents, each aimed at one 5
of the company’s particular audiences: its investors, employees, cus- 6
tomers, creditors, vendors, and regulators. Why so many? Because if 7
any of these groups were sufficiently angry or panicky, they could 8
upset the apple cart, and nothing is more likely to anger or panic a 9
constituency in a crisis situation than feeling they have been left out 10
of the loop. 11
As it turned out, the recalcitrant bank finally came to its senses. 12
But because we were prepared, the company used this “good news 13
event” as an opportunity to communicate to shareholders—as well as 14
to all the other key audiences—the steps management was taking to 15
implement a long-term plan to restructure and strengthen the com- 16
pany and its balance sheet. 17
The stock rallied, despite a tough market. Often, when properly 18
executed, crisis IR is about taking lemons and making lemonade. 19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

10 The Art of 2
3
4
Winning Proxy Wars 5
6
7
Based on interviews with 8
JOHN C. WILCOX 9
10
Georgeson Shareholder Communications Inc.
11
12
13
14
15

W ITH THE RISE in the number of institutional investors and the

increasing willingness of professional investors to pursue cor-
porate agendas of their own, today’s investor relations (IR) profes-
16
17
18
sionals must have a fundamental understanding of proxy contests. In 19
addition to explaining strategies for winning proxy contests, this 20
chapter is designed to help corporate executives and IR professionals 21
assess their own vulnerability to dissidents, activists, and takeovers, 22
and the role IR can play in addressing those vulnerabilities. 23
Good, long-term IR is an important ongoing defense against 24
proxy fights. After reading this chapter, you’ll gain a “behind the 25
scenes” perspective of the factors driving prominent proxy fights in 26
the media—and how you can prepare for similar actions involving 27
your own company. 28
29
30
Readiness for a Proxy Fight 31
Is your company ready for a proxy fight? It may all depend on how 32
well your ongoing investor relations efforts defend your company’s 33
image as seen by shareholders and the financial media. 34
If your company is perceived by the public and by shareholders as 35
being open, honest, and reliable, its reputation is less likely to be vul- 36
nerable to negative events or rumors. As a result, shareholders may 37

149
 150 THE NEW INVESTOR RELATIONS

1 be more likely to back management positions on a wide variety of

2 corporate issues—making your company less vulnerable to a proxy
3 contest. Good corporate governance and accountability to share-
4 holders are essential to effective IR and will serve well in proxy wars.
5 Being targeted with a proxy challenge can have a broad destabi-
6 lizing impact on a company. After all, the objective of any publicly
7 traded company is to post earnings that reflect growth and demon-
8 strate success to its shareholders. Any disturbance in a company is a
9 catalyst for investor uncertainty—prompting volatility in stock prices
10 and raising questions about a company’s worth. This situation can
11 result in short-selling activities.
12 Proxy fights are usually “last resort” options that are pursued only
13 when all other avenues have been exhausted by unhappy share-
14 holders. Proxy fights are expensive—in large tussles costs can run into
15 the millions of dollars—time-consuming and draining on corporate
16 resources and public image. In particular, valuable executive time is
17 spent unproductively, while issues such as management compensation
18 and “using the shareholders’ money to fight shareholders” are raised.
19 That’s why the best response to the threat of a proxy fight may
20 not always be to fight back. It may make better business sense to
21 take countermeasures and offer compromises to avoid a potentially
22 long and costly legal fight—in both the courts and the media.
23 Proxy fights have a high level of unpredictability: even if you do
24 strategizing and legwork to court the votes needed to win, share-
25 holders can change their minds and switch allegiances right up until
26 the annual or special meeting when the vote takes place.
27 You want to enter a proxy fight only when you can accurately
28 predict a good chance of success, but you should always consider
29 the very real possibility you may not win—even if you have a strong
30 position. You may do your best to persuade shareholders to vote for
31 your position, but there’s always the risk of losing—sometimes due
32 to factors beyond your control.
33 Proxy fights are rare occurrences within the universe of publicly
34 held companies. In the 2002 proxy season, there were only 38 proxy
35 fights out of nearly 10,000 annual meetings of U.S. publicly traded
36 companies, two fewer than in 2001. Since Georgeson Shareholder
37 started keeping records more than twenty years ago, the record num-
THE ART OF WINNING PROXY WARS 151

ber of contests was 41 (1989), and the lowest was just three (1993). 1
The spike in the late 1980s was a reflection of the junk bond era 2
when ample financing was available for takeovers. Today, proxy fights 3
seem more ad hoc in nature, reflecting specific problems of gover- 4
nance or performance at the companies where they occur. 5
The challenges of initiating a proxy fight are daunting. Dissatisfied 6
investors often express reluctance to take their case to shareholders 7
because they believe proxy fights are impossible to win, expensive, 8
time consuming, risky, unpredictable, or that “the cards are stacked 9
in favor of management.” Indeed, even the simplest proxy war 10
against management, staffed by volunteer labor, costs at least 11
$250,000 to mount. 12
In today’s environment, most of these concerns can be overcome, 13
and proxy fights are expected to increase in the future, reflecting 14
greater focus on good corporate governance and increased activism 15
by frustrated investors. 16
17
What Is a Proxy Contest? 18
How do you define a proxy fight? In keeping with the standards of 19
the New York Stock Exchange (NYSE), a proxy fight is usually 20
defined as a contested solicitation campaign where a dissident mails 21
separate proxy materials and proxy cards. The most common type of 22
proxy fight is an election contest between two competing slates of 23
directors. Votes are solicited by two independent groups: manage- 24
ment and dissidents. However, as discussed below, hybrid proxy 25
fights can occur in many situations other than director elections. 26
Companies may have to deal with what are termed Trojan horse 27
proxy fights. For example, shareholders or dissident groups may 28
solicit votes against management initiatives. Or dissidents may solicit 29
support for a shareholder resolution under the shareholder proposal 30
rule—such as a proposal to rescind a company’s “poison pill.” In 31
response, the company would need to seek the support of sharehold- 32
ers with an aggressive countersolicitation. These are examples of 33
“hybrid” contests that do not involve a change of control and that 34
may not trigger special SEC and stock exchange rules governing 35
proxy fights. 36
Dissident activity is really not officially a proxy fight until some- 37
 152 THE NEW INVESTOR RELATIONS

1 thing gets mailed directly to shareholders. However, even if a corpo-

2 rate action undertaken by a dissident group is not considered a proxy
3 fight per se, there can still be a negative impact on the company if the
4 opponent action is not dealt with correctly.
5
6 What Triggers a Proxy Contest?
7 There are many reasons why proxy contests are likely to increase in
8 the future. Shareholder activism tops the list. Investor frustration
9 with management and performance failures, combined with growth
10 in institutional voting power and in shareholder dissatisfaction during
11 a bear market, are important trends that have stimulated interest in
12 proxy contests.
13 The classic reason for a proxy fight is to change control. Dis-
14 sidents compete with management for a slate of directors to control
15 or influence a company’s board of directors. Or dissident factions
16 may support a hostile takeover bid or election contest, or oppose a
17 merger or acquisition.
18 Proxy fights are waged for many other reasons as well—and
19 each reason encompasses its own set of scenarios. Among common
20 triggering situations are the following:
21 Performance problems. A company could experience declining
22 stock prices and lower earnings due to market conditions, man-
23 agement miscues, poor sales relative to the competition, and other
24 factors. A dissident shareholder group may challenge management
25 to remedy the situation with a corporate action. For example,
26 shareholders may pressure management to break up the company’s
27 business to improve performance.
28 Asset distribution disputes. A company may be operating prof-
29 itably but still be perceived as “sitting on” undervalued assets that
30 could be liquidated or distributed to shareholders. This value may be
31 locked up due to a disagreement over business strategy. Dissidents
32 may seek to unlock these hidden or underutilized assets through a
33 variety of initiatives that can form the basis of a proxy solicitation.
34 Personnel issues. Every day there seem to be more news headlines
35 revealing company scandals, nepotism, or excessive management
36 compensation. Negative news events are a catalyst for change in a
37 company’s board and management.
THE ART OF WINNING PROXY WARS 153

Corporate governance. A company may have major governance 1

failures, or shareholders may want to impose better governance prac- 2
tices. For example, shareholders can object to the way that a com- 3
pany’s board of directors is configured, the independence of board 4
members, committee structure and policies, compensation practices, 5
and antitakeover provisions. Shareholders may want to aggressively 6
overturn a “poison pill” defense against hostile takeovers, for exam- 7
ple, or change a board’s committee structure, or influence executive 8
compensation practices such as “golden parachutes.” 9
As noted previously, the most common type of proxy contest 10
involves an election contest, governed by SEC Rule 14a-11. In a typ- 11
ical scenario, a dissident slate of directors seeks to unseat either the 12
entire incumbent board of directors or some portion of it. This type 13
of proxy contest most resembles a political election. Both manage- 14
ment and dissidents compete to persuade shareholders that their 15
nominees will do the most to maximize the value of the company— 16
while attacking the credibility of the opposing faction. This form of 17
“popularity contest” may be won or lost largely based on the cre- 18
dentials of the board nominees, as well as the business strategy they 19
endorse. 20
Contests in support of takeover bids constitute another common 21
type of proxy fight. The removal of various obstacles to a cash tender 22
offer may lead to a proxy contest (or a series of contests). This process 23
may involve the solicitation of proxies to rescind a poison pill, for 24
example, or the solicitation of consents to call a special meeting to 25
elect new directors or to eliminate charter provisions that block the 26
completion of a tender offer. 27
Hybrid contests in support of shareholder proposals are becoming 28
increasingly common due to the willingness of institutional investors 29
to take their case to other shareholders and to be public. The liberal- 30
ization of SEC rules governing shareholder communications in 1992 31
opened the door to more aggressive solicitation by shareholders. 32
Hybrid proxy contests in opposition to management initiatives may 33
develop spontaneously and are on the rise for all the same reasons. 34
Another class of hybrid proxy fights involves competing plans of 35
reorganization for companies in bankruptcy. Such companies may 36
present opportunities for investors who seek control by acquiring 37
 154 THE NEW INVESTOR RELATIONS

1 debt to block management’s reorganization plan and present a com-

2 peting plan of reorganization. Additionally, some investor groups
3 seek control of public companies by buying convertible bonds (which
4 convert into equity). Indeed, there are convertible bonds known as
5 “toxic convertibles” that allow bondholders to convert their holdings
6 into an increasing number of shares as share prices fall (and thus into
7 a greater fraction of voting shares). Some buyers of so-called toxics
8 are not beyond staging campaigns of short selling to drive down
9 share prices prior to converting their bonds into stock. In such bat-
10 tles, IR is critical to counter efforts by short sellers.
11
12 How Vulnerable Are You to a Proxy Fight?
13 Understanding the causes of proxy contests can help your company
14 analyze its own vulnerabilities. If you can answer yes to one or more
15 of the following questions, you may have to worry about the prospect
16 of a proxy fight:
17 ❏ Does your company have hidden or undervalued assets?
18 ❏ Does your company have unhappy shareholders who are really
19 dissatisfied with your performance or governance?
20 ❏ Has your company’s stock underperformed peers and the market?
21 ❏ Has recent bad publicity attracted negative attention to your
22 company?
23
24 Your company is especially vulnerable any time a scandal occurs.
25 This could involve fraud, lack of internal controls, executive com-
26 pensation (such as exorbitant options or bonuses or generous sever-
27 ance agreements when performance has been poor).
28 Here’s another issue to consider: Is your company planning a con-
29 troversial strategic change that could face opposition from vested
30 interests? For instance, if your company is planning a major acquisi-
31 tion or merger, dissident shareholders may contest this action because
32 they feel the risks for the company outweigh the potential benefits.
33 These shareholders can be very adamant, especially if they have emo-
34 tional ties to the acquiring company, or have strong beliefs about or
35 connection to that company’s “core” business; their position is
36 strengthened by the argument that, in general, mergers rarely pro-
37 duce the promised return.
THE ART OF WINNING PROXY WARS 155

1
Preparing a Battle Plan 2
Before responding to the threat of a proxy fight, it’s critical to begin 3
early-stage activities. You should prepare a “battle plan” based on a 4
situation analysis—whether you represent management or dissident 5
interests. 6
First, you need to do an overall objective assessment of the situa- 7
tion—from both communication and tactical analysis standpoints. 8
You should know exactly: 9

Who are your shareholders? How is ownership shifting during 10
the period leading up to the “record date” (the date the com- 11
pany closes its books to determine which shareholders have 12
voting rights)? 13

What vote outcome is likely? Based on an analysis of the owner- 14
ship and the issues being contested, you and your advisers can 15
accurately forecast the vote outcome. A combination of surveys 16
and interviews can develop information on shareholder attitudes 17
toward the issues that will control the outcome of the contest. 18

What kind of campaign is required to achieve victory? This 19
strategic analysis will help determine whether you can muster 20
the resources to win. 21
22
The strategic analysis needed to formulate a battle plan is best 23
prepared by professional advisers in conjunction with on-staff IR 24
professionals. It will entail gaining a thorough understanding of the 25
following factors: 26
Shareholder profile. Who are you trying to reach and influence? 27
This is a critical starting point in any proxy contest. Since the out- 28
come of a proxy fight is often extremely close, this initial analysis is 29
crucial. 30
To prepare a shareholder profile, you should consult such infor- 31
mation sources as the most recent 13F and 13D filings, the deposi- 32
tory listings, the list of registered holders; the proxy statement, 33
records of management and insider holdings, and employee plans. In 34
addition, a detailed shareholder identification report can be prepared 35
by a professional proxy solicitor to cover accounts not normally 36
accessible through public records and filings. These accounts include 37
 156 THE NEW INVESTOR RELATIONS

1 shares held in “street” name, that is, shares actually owned by indi-
2 viduals but held in the name of a brokerage; beneficial owners whose
3 holdings are not publicly disclosed (along with their custodial rela-
4 tionships and their voting and investment contacts); foreign
5 accounts; arbitrage positions; and hedge funds.
6 Some of this work can be done using readily available, “fast and
7 dirty” sources, at least in early stages of the analysis. For example, if
8 one looks at a company profile through the Yahoo! Web service, the
9 largest institutional shareholders and mutual fund holders are listed,
10 based on quarterly updates. Proxy statements, 13D, and 13F filings
11 are also available online, at www.sec.gov. Of course, a company’s IR
12 department should always know its largest shareholders. Should
13 questions arise, usually a few hours of work will be enough to get a
14 solid picture of who owns a public company. Of course, if a lot of
15 stock is trading hands, public sources will not capture the needed
16 updates on a timely enough basis.
17 Vote projection. To project the vote outcome, you need to know
18 the voting policies and practices of your institutional investors and the
19 other groups of shareholders that make up your ownership profile.
20 Institutional investors typically base their votes on economics, but
21 their decision may be influenced by other factors as well. Individual
22 registered holders are usually loyal to incumbent management. But
23 there is a long list of exceptions, such as instances in which a
24 company’s dividend has been cut, its stock price has plunged, scandal
25 has discredited management, compensation has been excessive, or a
26 takeover premium has been “lost.” Rockville, Maryland–based
27 Institutional Shareholder Services (ISS) reviews corporate proxy state-
28 ments and advises institutional investors on proxy voting decisions.
29 ISS’s voting recommendations should be carefully analyzed in the vote
30 projection. A proxy solicitation firm can provide insight into ISS’s
31 likely vote recommendations.
32 Stock watch/ownership tracking. Many companies monitor their
33 stock’s market activity continuously to track and determine the causes
34 of unusual trading. They also analyze ownership changes by carefully
35 reviewing depository listings and transfer sheets. Proxy solicitors
36 and professional stock watch firms have additional resources and
37 “tricks of the trade,” for tracking ownership changes. These activi-
THE ART OF WINNING PROXY WARS 157

ties can provide an early warning to a company whose stock is being 1

accumulated by a potential raider or dissident. During the course of 2
a proxy solicitation, stock watch can help determine how shares 3
bought and sold after the record date will affect the quorum and vote 4
results. 5
Access to the shareholder list. State laws control access by a dissi- 6
dent to a company’s shareholder list. Communication with share- 7
holders on proxy matters is generally deemed a “proper purpose” 8
under state law, enabling a dissident to obtain the records needed to 9
conduct a proxy fight. Companies are usually not successful in block- 10
ing a bona fide dissident’s access to share records (including deposi- 11
tory listings and the NOBO [non-objecting beneficial owner] list), 12
although the process may delay the dissident’s campaign. 13
Employee stock ownership plans (ESOPs). ESOPs can be an 14
important factor in contests for control. Shares in these plans are sub- 15
ject to a variety of voting arrangements. Employees have pass- 16
through voting rights, but response is often low. Instructed shares 17
may be voted by trustees at their discretion or through mirror voting. 18
These arrangements can make a big difference in a close contest— 19
enough so that ESOPs should usually be considered as the focus of 20
good shareholder relations in their own right. Analysis of ESOP 21
voting is an important factor in vote projections. 22
Other regulatory agencies. The Securities and Exchange 23
Commission and individual states are the primary regulators of proxy 24
contests. However, companies in regulated industries may turn to 25
administrative agencies for assistance in defending against threatened 26
changes of control. Analysis of the relevant regulatory players must 27
be done before the contest begins. The results often will determine 28
whether the contest should take place at all—or whether the company 29
has to look for other ways out of a potentially losing scenario. 30
31
32
Proxy Alternatives: What to Do If the Odds 33
Are Strongly Against You 34
Once you have prepared a comprehensive situation analysis and battle 35
plan, you should be in a position to predict your chances of victory 36
in a proxy fight. As has been noted, it’s critical to take an objective 37
 158 THE NEW INVESTOR RELATIONS

1 approach to determining whether or not to fight. Your decision

2 should be based on a neutral analysis of the factors affecting your posi-
3 tion rather than on emotional or personal issues. If your analysis
4 reveals your chances for victory are slim, it is usually not worth engag-
5 ing in a costly proxy contest if other options are available. Alternate
6 strategies include the following:
7 Agreeing to a settlement with the dissident. You could change
8 the structure of your board of directors, add outside directors,
9 restructure the business, or take other actions designed to accom-
10 modate dissident concerns. Governance adjustments are far less
11 disruptive than a disruptive contest or a change of control.
12 Finding a “white knight.” You could sell the company to a
13 company or group that offers greater potential to maximize
14 shareholder value. If the board and management are persuaded
15 that a change of control should occur, then they have a fiduciary
16 responsibility to hire investment bankers to solicit a bid that will
17 maximize shareholder value.
18 Involving a strategic investor. You could place additional shares
19 with a third-party investor, in this way introducing additional capital
20 and a strategic voting block. Issuance of additional shares may require
21 shareholder approval, but this can sometimes be avoided through a
22 financing structure known as a public investment in private equity
23 (PIPE). Indeed, a PIPE can be used as a preemptive strike, placing a
24 large block of stock with an ally, quickly, and before the makings of a
25 proxy fight jell. News of pending PIPEs is confidential, but IR is
26 necessary afterwards to effectively “sell” the story of a PIPE to Wall
27 Street and your institutional ownership base.
28 Adopting additional defenses. You could introduce poison-pill
29 shareholder rights plans or certain other antitakeover charter
30 amendments without shareholder approval. However, introducing
31 defensive provisions in the face of a proxy fight creates the risk of a
32 shareholder backlash—and raises a new issue for dissidents to lever-
33 age. The availability of antitakeover protection involves questions of
34 state law that should be thoroughly reviewed with legal counsel.
35 State law may provide takeover defenses that remove the need for
36 additional protection. In general, takeover defenses increase investor
37 relations problems.
THE ART OF WINNING PROXY WARS 159

Making recapitalization moves. You could recapitalize your com- 1

pany by putting authorized shares in the hands of new investors by 2
issuing new debt or by issuing preferred instruments—some of which 3
can include voting rights. However, there may not be time for such 4
moves if a proxy fight is imminent and shareholder approval would 5
be required. Furthermore, it’s important to note that clever corpo- 6
rate maneuvers may work in the short run but fail in the long run. 7
Institutional investors will remember managements who appear to 8
put themselves before shareholders, therefore it is important to con- 9
vince shareholders that takeover defenses protect their interests. 10
Initiating aggressive litigation. With the advice and support of 11
legal counsel, companies often bring court actions to prevent or delay 12
proxy fights. This, of course, is often regarded as an extreme measure 13
and if it fails, a company’s vulnerability may be substantially increased. 14
Again, the reasoning behind such actions must be bullet proof and not 15
be perceived as harming shareholder economic interests. 16
17
18
A Strategy for Success 19
20
Putting Together a Winning Team 21
An important early step in the proxy campaign is determining which 22
outside players need to get involved. Regardless of your in-house 23
resources and capabilities, it’s important to remember that you can’t 24
do it all on your own. It’s critical to enlist the assistance of proven 25
professionals who can help you ensure that the proxy fight is con- 26
ducted correctly. 27
Consider the following members for your proxy team—and the 28
roles they will play in the process: 29
Lawyers. Legal counsel is essential because everything in a proxy 30
fight must be done in compliance with SEC regulations and state 31
law. Filing, disclosure, and procedural requirements are detailed and 32
burdensome, and they can’t be neglected. Lawyers also play a key 33
strategic role. 34
Financial advisers. You’ll need professional help to address valua- 35
tion issues, to critique the dissident’s economic platform, to locate a 36
“white knight” or outside investors, to provide entrée to institutional 37
 160 THE NEW INVESTOR RELATIONS

1 shareholders, and to make other network connections. Depending on

2 the circumstances, management very likely may be approached by
3 several teams of investment bankers vying for business. There is no
4 harm in meeting with bankers and garnering valuable information and
5 ideas or even holding a “beauty contest,” by requiring bankers to
6 submit plans as part of their bid for your business.
7 Proxy solicitor. The professional proxy solicitor takes responsibility
8 for planning, organizing, and implementing the solicitation campaign.
9 The solicitor’s job encompasses tactics, timing, analysis, communi-
10 cations, street name contacts, telephone campaigns, and back-office
11 mechanics. The solicitor also advises on the conduct of the meetings,
12 tabulation questions, and the final review of voting results.
13 Public relations counsel. Positive public perception sways votes in
14 a contentious proxy fight. A public relations professional deals with
15 the media to ensure a favorable spin for your position, arranges inter-
16 views with the media, and helps you craft the content of fight letters.
17 Experienced PR shops with specialized talent in these areas can be
18 rare, so select carefully.
19 Once your team is assembled, leadership is the critical factor. The
20 leadership of the company’s chief executive officer is essential for suc-
21 cess. The CEO is commander-in-chief in a proxy fight, coordinating all
22 participants and handling relations with key outside constituencies such
23 as customers, employees, and suppliers. Personifying the company in
24 a proxy fight, the CEO should be both the source and symbol of the
25 company’s strength.
26
27 Identifying and Targeting Shareholders
28 The prime audience in a proxy fight is shareholders, especially the
29 largest shareholders. Securing their votes—and keeping those votes in
30 your camp until after the shareholders meeting—is the point of the
31 entire process. That’s why all proxy materials need to be geared to the
32 needs and concerns of shareholders.
33 However, shareholders are not a homogeneous group. A common
34 mistake is to think about shareholders collectively, as though they all
35 have the same goals and act the same way. In fact, shareholders are
36 diverse both in their investment strategies and their decision-making
37 characteristics. You need to identify the specific investment objectives
THE ART OF WINNING PROXY WARS 161

of different shareholder groups and address them in your strategy. 1

That’s the point of conducting a thorough audience analysis, as dis- 2
cussed earlier. It’s important to know who your audience is because 3
it affects the arguments you want to make and the issues you want to 4
develop during the contest. Some IR firms, well before a proxy fight 5
looms, conduct routine surveys of the largest shareholders and their 6
views of the stock. This is certainly a prudent way to avoid being 7
blindsided by a sudden groundswell of support for a dissident share- 8
holder group. 9
Once a proxy battle is on or is brewing, consider the following: 10

What does the proxy fight mean to your primary audience from 11
a tactical and strategic viewpoint? Explain to shareholders how 12
the outcome of the proxy fight will affect their investments, 13
rather than just trying to score points in the debate. What’s 14
really at stake for them? Why should they care about your posi- 15
tion? How will you maximize value for them? How will you 16
address the problems that concern them? 17

How are your shareholders divided into groups? Typically, the 18
ownership profile will present a combination of individual retail 19
shareholders, institutional shareholders, insiders, employee 20
shareholders, foreign owners, and arbitrageurs. Each group of 21
shareholders has different priorities that influence the way they 22
vote. Which key messages will appeal to and resonate with each 23
shareholder group? 24
25
You may find that individual retail shareholders are driven prima- 26
rily by their desire for stability and continuity and by their long-term 27
focus. Institutional shareholders are usually more interested in the 28
financial bottom line. They are also often strongly influenced by the 29
recommendation of Institutional Shareholder Services (ISS). 30
Geography also matters; local investors and pension funds may, 31
though not publicly stating as much, be more likely to back manage- 32
ments located in their home state. Employee shareholders are usually 33
more concerned about keeping their jobs than with financial issues, 34
and thus usually are management’s best allies in any proxy tussle. 35
Professional investors, including hedge funds and arbitrageurs, are 36
more short term in their focus. 37
 162 THE NEW INVESTOR RELATIONS

1
2 Leveraging Your Investor Relations
3 Often IR executives are more familiar with investment analysts at
4 institutions than with the analysts’ counterparts who make voting
5 decisions. IR during a proxy contest is different from the traditional
6 crisis communications. It must be addressed to the audience of vot-
7 ing decision makers and deal with the specific contest issues. At the
8 same time, proxy IR involves many of the same considerations as
9 those coming into play during any other corporate crisis, including
10 the following:
11
maintaining ongoing business disclosure
12
maintaining ongoing IR activities
13
coordinating contest communications and advertising with
14 ongoing business PR activities and the media
15
dealing with the concerns of suppliers, customers, and employ-
16 ees whose confidence in the company may be shaken
17
18 Consider the following five questions. The degree to which you
19 can answer each in the affirmative may spell the difference between
20 success and failure in mounting an effective proxy fight.
21 1. Can you attract media coverage? A well-positioned, favorable
22 news story or feature can have a significant impact on public
23 opinion and the views of analysts and shareholders, especially
24 if carried in one of the major national financial papers.
25 However, favorable media coverage is a double-edged sword—
26 it can also lead to overconfidence. Don’t expect your positive
27 press clippings to do the work of an effective proxy solicitation.
28 Indeed, many professional investors regard financial journalists
29 as amateurs.
30 2. Can you write effective “fight letters”? These are the primary
31 “documents of persuasion” in a proxy contest. Writing fight
32 letters is a delicate balancing act that requires sensitivity to
33 shareholder views. On the one hand, you want to give dramatic
34 gravity to your position. On the other hand, you need to be wary
35 of using scare tactics to rebut opposing arguments. You don’t
36 want to win the contest and end up with a mortally wounded
37 company. The most important aspect of the letters is to sum-
THE ART OF WINNING PROXY WARS 163

marize your position and the key issues in a clear, succinct, and 1
meaningful way. Offer shareholders tangible benefits for your 2
position—and gain their confidence in your ability to execute 3
your strategy and deliver results. Imagine you are selling a 4
product or service, and “brand” your viewpoint with catchy 5
slogans or memorable headlines. 6
3. Can you tap into the power of advertising? You can leverage 7
the messages of your fight letters in ads in national and local 8
publications to reach both your shareholder audience and the 9
broader investment community. Proxy ads help you demon- 10
strate your commitment and determination to shareholders, 11
which is important in maintaining momentum in a solicitation 12
campaign. Look at some examples of clutter-breaking, effective 13
advertisements from well-known proxy contests. Bold headlines 14
grab shareholder attention. “DROP DEAD!” (RJR Nabisco); 15
“Show Us the Money” (ITT); “Don’t Be Conned By Kahn” 16
(ICN Pharmaceuticals), and perhaps the most famous of all, 17
“The Directors of Sears, Roebuck & Co.—NON-PERFORM- 18
ING ASSETS” (Sears/Robert Monks)—all are examples of 19
effective, high-impact headlines used in proxy fights. 20
4. Can you conduct effective face-to-face meetings with key 21
shareholders? There’s no substitute for meeting one on one 22
with voting decision makers at institutions that hold large 23
blocks of stock. Your proxy solicitor will prepare institutional 24
contact lists and arrange “road show” tours to reach key deci- 25
sion makers. This approach can also be effective with groups of 26
retail shareholders. For example, in the proxy contest for the 27
merger of Wachovia Corporation and First Union Corporation 28
in 2001, face-to-face meetings helped win the approval of 29
Wachovia’s regional shareholders. Reluctant shareholders need- 30
ed to be personally convinced that the merger was in their best 31
interests and that the hostile takeover attempt of Wachovia by 32
SunTrust was not. In that instance, Georgeson Shareholder 33
Communications set up a series of local town meetings in 34
strategic locations during which company officials presented 35
the merger proposal in person to shareholders and answered 36
their questions. 37
 164 THE NEW INVESTOR RELATIONS

1 5. Can you “keep up appearances” during proxy contests? It’s

2 important to maintain your underlying business without inter-
3 ruption during the contest. This demonstrates your ability to
4 execute your business strategy and maximize value for share-
5 holders.
6
7 Remember that proxy fights affect everyone involved with your
8 company—both directly and indirectly:
9
Employees worry about their job security
10
Customers worry about the stability of your company in sup-
11 porting your products and services over the long term
12
Suppliers and vendors worry about your ability to pay their bills
13 and your long-term viability
14
Investors worry about the short- and long-term value of their
15 shares
16
17 Maintaining the health of your company is paramount—no mat-
18 ter how bloody the proxy fight may become between warring fac-
19 tions.
20
21
22 Clearly Defining the Issues
23
24 Management Versus Dissident Positioning
25 Whether you represent management or dissidents, you must address
26 both sides of the key issues that are in contention in a proxy contest.
27 In a nutshell, these boil down to the following components:
28 1. How you will strengthen the business and build value for
29 shareholders
30 2. How the opposition will be unable to do so
31
32 When a proxy contest degenerates into a personal struggle with
33 smash-mouth tactics, backbiting, and dirty tricks, it undermines
34 shareholder confidence. Even if you manage to win support for your
35 position with a “scorched-earth” strategy, your company’s public
36 image can suffer irreparable damage. Each side in a proxy contest has
37 strengths and weaknesses. Management is typically more familiar with
THE ART OF WINNING PROXY WARS 165

shareholders and has developed relationships with them, especially if 1

good ongoing IR has been in place over the years. But management’s 2
position is essentially defensive. This can make it difficult to persuade 3
shareholders that the status quo will improve if, for example, the 4
company is mired in a long downward slide of poor performance and 5
sinking stock prices. The bear market that began in 2000 could result 6
in many managements facing proxy challenges, especially as institu- 7
tional investors become more assertive. 8
When a company has been performing poorly, dissidents have the 9
advantage of offering new ideas and a new team. In addition, proxy 10
rules have been liberalized in the past ten years to give shareholders 11
flexibility, whereas corporations still face strict disclosure and filing 12
requirements. This means dissidents can, in effect, wage “guerrilla 13
warfare,” while management has to maintain “redcoat formation.” In 14
particular, shareholder groups can meet and discuss strategy, and talk 15
to financial media without many of the regulatory constraints faced 16
by management. Management has to honor SEC rules, and must, of 17
course, file and disclose any material information through established 18
channels. 19
However, dissidents bear the burden of proof that they have a 20
plan to make things better—rather than just different. They also have 21
the disadvantage of being “outsiders.” They’re typically unfamiliar 22
with the company’s inner workings and are often deprived of specific 23
information about budgets, strategic plans and projections, and other 24
matters essential for constructing a persuasive business plan. If the 25
dissidents’ credentials are weak and their past business accomplish- 26
ments unimpressive, they may also be put on the defensive. 27
28
Going on the Offensive (Without Being Offensive) 29
Each side in a proxy fight will try to be the first to publicly state an 30
issue and frame it advantageously for their position. If you can force 31
your opponent to defensively answer difficult or embarrassing ques- 32
tions, it can have a powerful effect on the course of the campaign. 33
Sometimes each side tries to avoid becoming defensive by ignor- 34
ing the other side’s arguments and issues. This can lead to “apples 35
versus oranges” fights and rebuttals where one fight letter makes a 36
statement and the other side responds with a countercharge—rather 37
 166 THE NEW INVESTOR RELATIONS

1 than addressing the issues that were raised. The dissident will argue
2 that the most important issue is management’s poor past perform-
3 ance, while management will argue that the most important issue is
4 the dissidents’ lack of qualifications. In such a situation, shareholders
5 are frustrated because neither side demonstrates how they will
6 improve performance. In the end, if neither management nor dissi-
7 dents convince shareholders why their position is better—only that it
8 is different from the opposition—the contest can become an exercise
9 in futility that undermines investor confidence and damages the com-
10 pany’s long-term prospects.
11 Ideally, instead of engaging in a war of words, both sides should
12 stake out the high ground and emphasize business over personal
13 issues. Unfortunately, in the heat of battle it is difficult to resist the
14 temptation to get personal and avoid responding to innuendo and
15 personal assaults. In this respect, a proxy war is no different from pol-
16 itics—people with good intentions end up slinging mud and thereby
17 alienating those whose votes they are trying to attract.
18
19 Every Shareholder Vote Is Critical
20 Even with millions of shares voting at an annual meeting or special
21 meeting, the difference between winning and losing may come down
22 to less than a single percentage point. The lesson: Every vote counts;
23 no investor should be overlooked in the search for votes.
24 One good strategy to avoid losing votes through revocations is to
25 make sure you throw the last punch. Send out a “fight letter” to
26 shareholders shortly before the shareholder meeting, depriving your
27 opposition of time for a rebuttal.
28 In close votes, don’t overlook chat rooms on the Internet. If
29 rumors are rife online, try to dispel them by making official news
30 releases. If serious issues are raised, address the issues seriously and
31 quickly in the same manner.
32
33 The Cost of Proxies
34 The out-of-pocket costs, regulatory requirements, and potential
35 liabilities of a large proxy solicitation deter all but the richest, best-
36 organized, and most committed dissidents. Investors relations
37 professionals generally do not need to concern themselves with gadflies
THE ART OF WINNING PROXY WARS 167

and special interest groups who show up regularly at annual meetings 1

or haunt chat rooms. 2
There are basic inequities in the financing of solicitation cam- 3
paigns. Company managers can use corporate (that is, shareholder) 4
money and insurance, while dissidents are denied access to corporate 5
resources. Regardless of whether or not the company spends exces- 6
sively during a proxy battle, the charge of “using the shareholders’ 7
money to fight shareholders” will undoubtedly be lodged by the dis- 8
sidents. This charge should not be discussed as mere “sour grapes.” 9
Governance reformers are looking seriously at the inequities of proxy 10
financing. An ongoing IR effort that stresses efficient and low-cost 11
management practices serves well should an actual proxy war break 12
out. It bears repeating that in recent years dissident groups have 13
become more powerful and institutional shareholders have become 14
less timorous about taking on management. The recent rash of sto- 15
ries about executive mismanagement and malfeasance tends to under- 16
mine the credibility of all management to some extent, increasing the 17
defensiveness of all managers in the face of shareholder criticism. 18
19
20
The Winning Combination: Value, Power, and Ideas 21
To properly develop and execute a winning strategy, remember the 22
importance of proxy mechanics and don’t lose sight of what you are 23
trying to accomplish—maximizing a favorable vote response from 24
your shareholders. Consider the viability of alternatives to proxy 25
fights, particularly when an analysis of the odds indicates that you 26
may not win. Nothing is a sure thing in a proxy contest until the final 27
votes are cast and tabulated. For management, your burden is to 28
explain and defend your position, while questioning the credentials 29
and strategy of the dissidents, and demonstrate convincingly how you 30
will maximize shareholder value. 31
Keep in mind that a proxy fight is not a popularity contest; it’s 32
about economic value, power, and ideas. You must be able to prove 33
that you’re going to do a better job managing the assets and deliver- 34
ing value. 35
36
37
 1

11 The Hewlett-Packard 2
3
4
Merger: A Case Study 5
6
7
KENNETH R. CONE 8
DANIEL R. FISCHEL 9
10
GREGORY J. PELNAR 11
DAVID J. ROSS 12
Lexecon Inc. 13
14
15

T HE NEXT FEW YEARS may witness a surge in proxy fights, given

the bear market of the recent past. Mutual fund managers and
money managers know they must perform or risk losing assets. They
16
17
18
in turn will be less deferential to managements who do not deliver for 19
shareholders. In addition, certain Securities and Exchange 20
Commission (SEC) rule changes make it easier for large shareholders 21
to talk to one another without violating securities laws. 22
Given this likelihood of increased shareholder activism, it is 23
worthwhile for investor relations professionals to review some of the 24
specifics of the contested merger between Hewlett-Packard and 25
Compaq. When the deal was first announced by the two companies’ 26
management teams, on the evening of September 3, 2001, it trig- 27
gered a legal, investor, and public relations firefight between propo- 28
nents of the merger, led by Carly Fiorina, HP’s chairman and chief 29
executive officer, and its opponents, led by Walter Hewlett, son of 30
HP’s cofounder and member of the board. In what was generally 31
regarded as the hardest-fought, best-financed, and most closely con- 32
tested proxy war in years, perhaps ever, both sides presented their 33
positions vigorously to HP shareholders, the broader investment 34
community, and the public. It thus makes for an excellent case study, 35
despite the hard feelings the deal left behind for many of those 36
involved. 37

169
 170 THE NEW INVESTOR RELATIONS

1
2 The Opposing Positions
3 Fiorina and other proponents of the merger contended that the
4 deal was beneficial because it provided HP with a more balanced
5 product and revenue mix and would not pose insuperable integra-
6 tion problems, although the track record of comparable mergers in
7 American industry is very mixed. Hewlett, by contrast, strenuously
8 argued that the deal would worsen HP’s product mix, making it less
9 profitable, and posed substantial integration risk. It is fair to say
10 that investors’ initial reaction to the deal was consistently negative.
11 On September 4, the first trading day after it was announced, HP’s
12 stock price plunged nearly 19 percent, from $23.21 to $18.87. A
13 day later, Moody’s Investors Service lowered HP’s credit rating two
14 notches, to A2. By November 5, HP’s stock price had fallen to
15 $16.89, more than 27 percent below its level before the merger
16 announcement. This decline represented a pretty clear thumbs-
17 down by Wall Street.
18 On November 6, the Hewlett family announced that it would
19 vote its stake against the merger, thus making the deal less likely to
20 be completed. HP’s stock price soared in response, rising more than
21 17 percent to close at $19.81. This was the pattern throughout:
22 Events that made the merger more likely to be completed were gen-
23 erally associated with stock price decreases while the opposite was
24 true for events that increased the probability that it wouldn’t go for-
25 ward. For Compaq shareholders, the reverse pattern was observed,
26 because the market perceived Compaq and its shareholders as the big
27 winners in the deal.
28 For the merger to be consummated, both HP and Compaq share-
29 holders had to vote in favor. Based on the market’s assessment of the
30 transaction, there was never any issue whether Compaq shareholders
31 would approve the deal. They did, and did so enthusiastically. But
32 HP shareholders were a different matter, particularly since Hewlett
33 and his associates owned approximately 18 percent of the stock,
34 which he pledged to vote against the merger. Thus, nearly one-fifth
35 of the shareholder vote was dead-set against the deal from day one.
36 To nix it, Hewlett had to convince just a little less than one-third of
37 other shareholders to vote with him. Nevertheless, HP shareholders
THE HEWLETT-PACKARD MERGER: A CASE STUDY 171

did eventually approve the merger by a vote of 837.9 million (51.4 1

percent) in favor to 792.6 million (48.6 percent) against. 2
In sharp contrast, Compaq shareholders subsequently approved the 3
merger by a nine-to-one margin. The votes came after Institutional 4
Shareholder Services—a consulting firm whose clients, institutional 5
money managers, owned 23 percent of HP’s shares—endorsed the 6
transaction as in the best interest of HP and its shareholders, an item 7
of key importance to IR professionals. The Rockville, Maryland–based 8
ISS often weighs in on corporate governance matters and proxy fights 9
and is regarded by many financial market participants as independent 10
and authoritative. 11
In any proxy tussle involving large public companies, the IR team 12
must make sure to open up a line of communication to ISS and use 13
it to make compelling arguments. In this case, ISS sided with 14
Fiorina, a stand that, along with other factors, possibly tilted the 15
vote on the deal in her favor. In any event, a subsequent court chal- 16
lenge to the shareholder vote by Hewlett failed, and the merger was 17
consummated. 18
19
20
But Why? 21
Despite the ISS position, the outcome of the HP proxy fight creates 22
a paradox. Why would shareholders approve a transaction that 23
decreased their wealth? We explore several possible non-mutually 24
exclusive explanations for this paradox below. 25
26
Rational Ignorance and the Free Rider Problem 27
Shareholders rarely have the incentive to expend significant resources 28
when deciding how to vote, or whether to vote at all. Why should 29
they? No single shareholder in the overwhelming majority of cases 30
can expect to affect the outcome of a vote. And even if the outcome 31
could be affected, rewards from superior voting decisions accrue to 32
shareholders based on the size of their holdings, not on their efforts 33
in influencing the outcome. Shareholders, therefore, have strong 34
incentives to take a free ride on the efforts of other voters or simply 35
to follow management recommendations, rather than to make inde- 36
pendent efforts to study the issues and vote accordingly. 37
 172 THE NEW INVESTOR RELATIONS

1 Additionally, it should be remembered that institutional share-

2 holders usually own portfolios of stocks whose holdings range from
3 dozens to hundreds of issues. Money managers can ill afford the time
4 to get enmeshed in every proxy battle involving one of their holdings
5 or even to study up on them. The roughly seven thousand stocks
6 listed on the NYSE, Nasdaq, and AMEX generate more than eight
7 thousand proxy issues per year.
8 Corporate democracy exacerbates this problem. Unlike the interests
9 of voters in political contests, the interests of corporate shareholders are
10 closely aligned–everyone wants the company to make profits. This gen-
11 eral agreement on goals, and the ease with which shareholders may sell
12 at low cost if dissatisfied, reduces their incentive to safeguard their
13 interests against other voters by investing in independent research.
14 Furthermore, these stocks are held by at least eight thousand
15 mutual funds, thousands of pension funds, and millions of individual
16 shareholders. It would be costly and duplicative for all these investors
17 to spend time and money analyzing each proxy fight involving each
18 security they own. As a practical matter, few individual or institutional
19 shareholders have an incentive to make that investment.
20 The marketplace has provided a partial solution for this prob-
21 lem. Institutional investors can reduce their research costs by hiring
22 advisory services that specialize in researching proxy contests and
23 providing vote recommendations. Such services arguably allow
24 institutional shareholders to vote their shares responsibly without
25 studying every proxy issue.
26 As noted above, one consulting firm, ISS, has achieved exceptional
27 importance in the U.S. market for proxy advice, and its endorsement
28 of the merger may have played an important role in the HP contest.
29 The ISS’s 750 clients were estimated to hold about a quarter of HP’s
30 outstanding shares. The margin of victory for the merger was only
31 3 percent, so it can be argued that ISS made a difference in the out-
32 come, particularly since several large institutions announced they were
33 supporting the deal because of ISS’s recommendation.
34 So why did ISS endorse the deal? We considered the explanation
35 that the firm suffered from conflicts of interest, a possibility since
36 it offers some services to corporations as well as institutions.
37 However, a closer review showed that ISS has consistently opposed
THE HEWLETT-PACKARD MERGER: A CASE STUDY 173

management-sponsored propositions to increase takeover defenses, 1

a position unlikely to endear it to corporate management. Further- 2
more, ISS expressed concern in its proxy analysis about claims by 3
Hewlett that HP’s board had promised Fiorina a large incentive 4
package for completing the deal. ISS predicated its endorsement of 5
the merger on the fact that HP’s board had “thoroughly repudi- 6
ated” the proposed compensation deal. 7
Although the review of ISS and its possible conflicts of interest 8
proved fruitless in most regards, it remains a lesson for IR profes- 9
sionals engaged in proxy wars: When fighting for shareholder votes, 10
something more than cogent reasoning and well-drafted arguments 11
are warranted. It is appropriate to research the opposition and look 12
for self-interest in its arguments. Shareholders should definitely be 13
made aware of parties with conflicts of interest in proxy battles, and 14
that is part of what an IR team should do. 15
In any event, ISS’s historical conduct suggests a strategy that gen- 16
erally focuses on keeping management incentives aligned with share- 17
holder interests and opposing propositions where management 18
appears excessively self-interested, rather than on second-guessing 19
the pure business judgment of the insiders. Such a strategy makes 20
sense for ISS, because the firm does not claim that any of its staff 21
members have ever run a major corporation or have particular expert- 22
ise in either of HP’s major businesses: computers and printers. 23
Furthermore, ISS attributed no significance to the stock market eval- 24
uation of the merger and was not deterred by the fact that the ISS 25
endorsement itself caused a further decline in the stock price. 26
There remains the hard question—indeed, the mystery—of why 27
ISS’s clients, or anyone else for that matter, paid any attention to its 28
recommendations. Neither ISS nor the institutional investors who 29
were influenced by it provided any explanation of why the judgment 30
of a firm that admittedly lacked expertise on the business merits or 31
drawbacks of the HP-Compaq merger should have mattered more 32
than the consensus judgment of the most sophisticated investors in 33
the world, who in fact had such expertise. Observers might conclude 34
that, for better or worse, ISS’s opinion has achieved something of the 35
status of a Good Housekeeping Seal of Approval. IR professionals 36
need to be mindful of that possibility when wading into proxy battles. 37
 174 THE NEW INVESTOR RELATIONS

1
2 Optimistic and Pessimistic Shareholders
3 The existence of a market price for a stock does not necessarily mean
4 that all shareholders agree on the stock’s value. In theory, the stock
5 price could reflect the assessment of only the most pessimistic share-
6 holder and not the beliefs of the more optimistic voting majority.
7 Under this view, a majority of HP shareholders voted in favor of the
8 merger because they believed the deal would increase HP’s value,
9 while those who did not favor the deal determined the company’s
10 stock price by being active sellers.
11 The difficulty with this hypothesis is that it cannot fully explain
12 why the assumed optimistic majority who supported the merger
13 didn’t buy HP shares from the pessimistic shareholders, causing HP’s
14 stock price to rise. For those optimistic shareholders, HP’s $4.34
15 stock price decline when the deal was announced, and the further
16 declines when other events increased the probability that the deal
17 would be completed, created major profit opportunities. No reason
18 exists to assume that the institutional investors who supported the
19 deal were constrained by lack of capital or otherwise prevented from
20 betting on their beliefs. Apparently, there was no “silent majority” of
21 investors who strongly supported the deal because they believed HP’s
22 value would increase as a result.
23 For investor relations professionals, the lesson is that some share-
24 holders will need to be convinced to take a greater interest in the
25 unfolding events of a proxy tussle, and this may require strenuous
26 rounds of phone calls, faxes, e-mails, newspaper ads, and other solic-
27 itations. In addition, expert analysis probably should be presented to
28 shareholders. In the case of the HP-Compaq deal, it can be argued
29 that the silent majority sat on its hands or let management lead the
30 way. Moreover, as has already been stated, many institutional share-
31 holders have limited attention spans, because of their pressing com-
32 mitments to keeping abreast of entire portfolios of stocks, not just
33 particular issues within them.
34
35 Long-Run Versus Short-Run Investors
36 A related explanation for the favorable shareholder vote is that
37 sophisticated investors dismissed the negative stock price reaction to
THE HEWLETT-PACKARD MERGER: A CASE STUDY 175

the deal as the product of short-term speculation and not reflective 1

of the merger’s long-term impact on the company. But this explana- 2
tion, although frequently expressed, fails, like the one offered above, 3
to explain the refusal of bullish investors to buy sufficient quantities 4
of the stock to cause its price to rise. Belief in the long-term prospects 5
of the merger necessarily implies a belief that the stock price will 6
increase in the future. This creates an incentive to buy today, an 7
incentive all the greater because of the market’s negative reaction to 8
the merger. The fact that bullish investors didn’t nullify the stock 9
price decrease suggests that the investors’ short-term consensus judg- 10
ment that the merger was value-busting for HP represented 11
investors’ long-term beliefs as well. 12
13
Conflicts of Interest 14
Institutional investors held approximately 60 percent of HP shares, 15
and many of them also did business with HP. If these institutions 16
cared more about keeping Fiorina and HP management happy and 17
protecting these business relationships than about the interests of the 18
outside investors whose shares they controlled, they might have 19
voted in favor of the merger, even if it was wealth-reducing. 20
This argument, which can explain otherwise illogical behavior by 21
institutional shareholders, is precisely the claim that Walter Hewlett 22
made in his court challenge to the shareholder vote. He alleged that 23
Deutsche Bank, which had initially announced an intention to vote 24
against the merger, changed its vote after Fiorina threatened to ter- 25
minate HP’s business relationships with the bank. It was revealed that 26
Fiorina had indeed had conversations with Deutsche Bank officials, 27
and not just those officials charged with determining how the bank 28
would vote its shares. Although the Delaware court rejected 29
Hewlett’s claim, we decided to analyze the conflict-of-interest expla- 30
nation more generally. 31
To do so, we compared the announced voting behavior of banks 32
and investment advisers (institutional investors that might have had 33
conflicts of interest because of their potential business relationships 34
with HP) with the votes of pension funds (institutional investors 35
that were unlikely to have such conflicts of interest). The results, 36
shown in Figure 11-1, provide some slight support for the conflict- 37
 176 THE NEW INVESTOR RELATIONS

1 of-interest hypothesis. Of the 34 institutions that publicly announ-

2 ced their positions, 43 percent, or 9 of 21, of the banks and invest-
3 ment advisers voted in favor of the merger, while about 31 percent,
4 or 4 of 13, of the pension funds voted yes. If all institutional
5 investors had voted against the merger to the same extent as did the
6 unconflicted pension funds had, there may have been no HP-
7 Compaq merger.
8 Moreover, Figure 11-1 may be less significant for what it includes
9 than for what it leaves out: at least 750 institutions that held a total
10 of 38 percent of HP stock were excluded because they did not
11 announce how they were voting the shares they controlled. A cynic
12 might argue, “Yes, of course, conflicted parties would not draw atten-
13 tion to themselves and announce their vote plans.”
14 These missing data highlight a peculiar fact about corporate proxy
15 contests: Institutional ballots are secret from the investors who actu-
16 ally own the shares. (The SEC is currently attempting to change this
17 rule.) This odd definition of a secret ballot can only increase the like-
18 lihood of conflicts of interest.
19 Analyst coverage of the merger also provides some evidence about
20 the likelihood that conflicts of interest influenced institutional behav-
21 ior. Figure 11-2 summarizes the (largely negative) views expressed by
22 stock analysts concerning the merger. Since most of these analysts
23 worked for investment banking firms that were potential vendors to
24 HP, the negative analyst commentary runs contrary to the conflicts-
25 of-interest hypothesis. On the other hand, and perhaps more
26 tellingly, it is worth noting that three of the five analysts who sup-
27 ported the merger worked for investment banks that were paid to
28 assist in the merger or the proxy fight.
29 The lesson for IR professionals is that one must enter a proxy
30 fight knowing who has business relationships that will be affected by
31 the results and thus who may be vulnerable to threats to withhold
32 financial carrots in exchange for votes. Be on the lookout for such
33 tactics, and if they are found, bring them to the attention of the pub-
34 lic, shareholders, and regulatory agencies in as quick and loud a way
35 as possible.
36
37
THE HEWLETT-PACKARD MERGER: A CASE STUDY 177

1
2
FIGURE 11-1 Institutional Votes in the HP/Compaq 3
Merger 4
5
For Merger Against Merger
6
Money Managers / Banks 7
1 Alliance Capital (AXA Financial) 1 Bank of America Capital 8
Management
9
2 Banc One Investment Advisors 2 Brandes Investment Partners 10
3 Barclays Global Investors 3 Chicago Asset Management 11
4 Capital Research & Management 4 Davis Selected Advisers 12
5 Federated Investors 5 Dreman Value Management 13
6 General Motors Asset Management 6 Fifth Third Investment Advisors 14
7 L. Roy Papp & Associates 7 Matrix Asset Advisors 15
8 Putnam Investment Management 8 Parnassus Investments 16
9 State Street Corporation 9 Torray Companies 17
10 Victory Capital Management 18
11 Wachovia’s Evergreen Investment 19
12 Wells Fargo (Norwest Corporation) 20
Pension Funds 21
1 Florida State Board of Administration 1 CalPERS 22
2 PA Public School Employees 2 CA State Teachers’ Retirement 23
Retirement System System 24
3 State of WI Investment Board 3 CO Public Employees’ Retirement 25
Association 26
4 State Teachers Retirement System 4 New York Common Retirement 27
of Ohio Fund 28
5 NY State Teachers’ Retirement 29
System 30
6 Ontario Teachers’ Pension Plan Board 31
7 Public Employees Retirement 32
System of Ohio 33
8 State of Michigan Retirement 34
System 35
9 Teacher Retirement System of 36
Texas 37
 178 THE NEW INVESTOR RELATIONS

1
2
3 FIGURE 11-2 Analyst Recommendations
4 in the HP-Compaq Merger
5
Analyst Support Merger?
6
7 Banc of America Yes
8 Deutsche Bank Alex. Brown Yes
9 Goldman Sachs Yes
10 Merrill Lynch Yes
11 Salomon Smith Barney Yes
12 A.G. Edwards No
13 ABN AMRO No
14 Bear Stearns No
15 Bernstein Research No
16 C.E. Unterberg, Towbin No
17 Credit Suisse First Boston No
18 Lehman Brothers N/A
19 Morgan Stanley Dean Witter No
20 Robertson Stephens No
21 UBS Warburg No
22

Source: Analyst Reports

Notes: Goldman Sachs acted as a financial adviser to HP in connection with the merger, and
23 Deutsche Bank received a fee from HP. Salomon acted as a financial adviser to Compaq in connec-
24 tion with the merger.

25
26
27
28 T HE FAILURE OF HP’ S SHAREHOLDERS to vote for what we con-
29 tend was their common interest in HP’s proxy fight is especially dis-
30 couraging because they had several unique advantages in this contest.
31 First, unlike in most proxy votes, where management represents the
32 only organized faction, the HP opposition was led by a highly moti-
33 vated shareholder whose name was on the company logo, who was a
34 member of the board, and who controlled or strongly influenced 20
35 percent of the vote, counting both family foundations. Walter
36 Hewlett waged a determined and expensive campaign in which he
37 hired top investment banking, legal, and public relations experts and
THE HEWLETT-PACKARD MERGER: A CASE STUDY 179

made extensive presentations to shareholders and investment advis- 1

ers. His defeat does not augur well for any shareholders standing up 2
to management in proxy wars. Indeed, one might argue, that it does 3
not augur well for good corporate governance. 4
Second, the stock market evidence concerning the value of the 5
merger was very clear: HP’s stock lost $8.4 billion when the merger 6
plan was announced and regained $5.7 billion when Hewlett 7
announced his opposition. Finally, the intense glare of media atten- 8
tion should have reduced the temptations created by conflicts of 9
interest and also reduced the costs to shareholders of becoming 10
informed about the issues. The outcome of this contest paints a bleak 11
prospect for normal corporate votes, where the issues are subtle, the 12
media uninterested, and the opposition far less informed and vocal. 13
IR professionals engaged in lower-profile proxy wars, if not work- 14
ing for management, should recognize that they will be swimming 15
upstream, maybe even upriver. They must prepare valid arguments 16
and be willing to fight hard to get their views before a skeptical insti- 17
tutional investing community. They should search keenly for conflicts 18
of interest in management and among institutional shareholders and 19
make those conflicts public. They should develop relationships with 20
the financial media, prefacing their comments with concerns about 21
proper corporate governance. 22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 a1
2
P A R T 4 3
4
5
6
7
8
9
10
11

Special Case 12
13
14

Perspectives 15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

12 IR for Non-U.S. Issuers 2

3
4
Accessing the 5
6

U.S. Capital Markets 7

8
9
10
SIDLEY AUSTIN BROWN & WOOD LLP
11
As edited by 12
THOMAS E. M C LAIN, ESQ. 13
14
YOSHIKI SHIMADA, ESQ.
15
16
17

A LTHOUGH THE RUSH TO U.S. exchanges has slowed in the

past few years along with the cooling stock market, many for-
eign companies still wish to list their shares stateside to achieve the
18
19
20
greatest liquidity possible for their shareholders. It is possible that 21
tightened U.S. securities regulations, and the protections and trans- 22
parency they offer to shareholders, may ultimately result in a second 23
wave of companies listing on U.S. exchanges in pursuit of perceived 24
legitimacy. 25
An issuer that has decided to offer securities in the U.S. capital 26
markets must prepare its team for the legal, regulatory, and market- 27
practice issues that lie ahead, some of which may require the non- 28
U.S. issuer to take corporate actions in anticipation of its securities 29
offering. Described in this chapter are some preliminary matters that 30
should be addressed by a non-U.S. issuer to ensure that it is prepared 31
for its first U.S. securities offering. 32
Of course, not only legal and regulatory challenges must be met. 33
The vast U.S. investment community must be made aware of a new 34
investment vehicle, which itself must meet the most current and 35
exacting U.S. standards for disclosure. That is a job requiring inten- 36
sive investor relations. 37

183
 184 THE NEW INVESTOR RELATIONS

1
2 Preparing to Offer Securities in the United States
3 The market-driven pricing and disclosure-based liabilities that are, to
4 varying degrees, part of every international securities offering may be
5 a surprise to a novice issuer. Non-U.S. issuers seeking to access the
6 U.S. capital markets for the first time may have borrowed money pre-
7 viously only from banks, governments, and supranational organiza-
8 tions or, in the case of businesses, may have raised equity capital only
9 from private investors.
10
11 The Team
12 First-time issuers likely are accustomed to negotiated transactions and
13 not to the investor protections afforded by U.S. securities laws and
14 regulations. To succeed in such an offering, which may entail new
15 and unfamiliar business practices and requirements, all parties need to
16 be flexible. The relationships among them must be largely coopera-
17 tive, not adversarial.
18 Officers of a non-U.S. issuer who are accustomed to establishing
19 the terms of a financing in a privately negotiated transaction or with
20 the benefit of an exemption from domestic securities laws will need
21 professional assistance to understand the regulatory requirements
22 and market practices designed to protect investors. IR professionals
23 must stress that shareholders sit at the apex of the U.S. public com-
24 pany pyramid, and insist that the IR team have access to all material
25 information, and play a role in when and how to disclose that infor-
26 mation in consultation with their advisers.
27 Foreign companies entering U.S. public capital markets also need
28 to be prepared for the amount of work required for their first U.S.
29 securities offering and the importance of adhering to the agreed
30 timetable. IR professionals may wish to point out that proper com-
31 pliance and the experience they gain from their first U.S. securities
32 offering will make succeeding U.S. securities offerings much easier.
33
34 The Business Profile
35 A non-U.S. issuer may be advised by securities firms and IR profes-
36 sionals to refine its business profile and clarify its business strategy to
37 facilitate its U.S. securities offering. The IR team needs a succinct
IR FOR NON-U.S. I SSUERS ACCESSING THE U.S. CAPITAL MARKETS 185

“story” or definite image it can project to potential U.S. investors. 1

Like some U.S. companies, foreign enterprises may decide that 2
restructuring, even serious restructuring, is necessary to meet the 3
desires of U.S. investors. Recent examples of businesses that have had 4
to be thoroughly restructured to meet U.S. standards include some 5
in the People’s Republic of China (PRC). Many PRC businesses have 6
traditionally operated like old-fashioned U.S. company towns, pro- 7
viding their employees not only with work but also with housing, 8
education, medical facilities, and other social services and infrastruc- 9
ture. Although it is a sensitive cultural issue, investment bankers have 10
advised these PRC companies that the social services and infrastruc- 11
ture aspects of their businesses detract from their profitability and will 12
result in a reduced valuation by investors. 13
As a result, before these PRC companies go public on the U.S. 14
markets, they generally separate their social services and infrastructure 15
from their core businesses. This allows a simple and more compelling 16
story to be told to investors who rightfully expect (for U.S.-listed 17
stocks) that management’s first fiduciary responsibility will be to 18
shareholders. 19
Prospective issuers also may be advised to consider disposing of 20
certain business segments, to provide a more focused investment for 21
investors or to eliminate perceived risks that are not integral to the 22
core business. An example of this sort of perceived-risk reduction is 23
the reorganization of certain non-U.S. cement companies to exclude 24
asbestos-related business segments, since asbestos carries the percep- 25
tion of large legal and financial liabilities. IR professionals must be 26
careful to apprise foreign companies who wish to list on U.S. 27
exchanges of these risks. 28
In general, American institutional investors, and even retail 29
investors, want to see a company with a strong core business and not 30
a collection of companies operating under an umbrella with parental 31
financing. Although some conglomerates have done well, there is a 32
growing sense on Wall Street that predicting their earnings is nearly 33
impossible; predicting earnings for a simple company is treacherous 34
enough. Foreign companies will need advice from IR professionals 35
on how to restructure with U.S. investors in mind. 36
37
 186 THE NEW INVESTOR RELATIONS

1
2 The Jurisdiction of Incorporation
3 In some cases, non-U.S. businesses establish a holding company or a
4 subsidiary to issue securities in the U.S. capital markets. Sometimes
5 this is because of legal, tax, or other issues in the home jurisdiction
6 that make it more desirable to obtain financing through an offshore
7 vehicle. In other cases, the requirements of the investors’ jurisdiction
8 drive the decision. IR professionals will need to understand these
9 reasons. Examples of the use of such vehicles follow.
10
Several non-U.S. issuers have raised equity through holding
11 companies established in the British Virgin Islands, Bermuda,
12 the Channel Islands, or the Cayman Islands. Some have done
13 so to obtain a corporate form in a jurisdiction with defined
14 shareholder rights that is better known to international securi-
15 ties investors than that of their home country. Others are seek-
16 ing to avoid having to comply with the requirements that their
17 own country’s legal system imposes on securities issued by a
18 domestic company. Still others have substantial international
19 business and set up holding companies in low-tax offshore
20 jurisdictions to minimize their corporate tax liability through
21 deconsolidation or other restructuring. In the case of an initial
22 public offering by a closely held non-U.S. issuer, the move off-
23 shore may be made to minimize the tax liability of the group of
24 shareholders that will control the issuer after the offering. Of
25 course, it is the job of IR professionals to clarify to the U.S.
26 investing public these legitimate reasons for seeking certain
27 jurisdictions.
28
For certain types of financing in the U.S. capital markets, such as
29 commercial paper programs and other investment-grade debt
30 offerings, debt issued by a Delaware finance subsidiary and guar-
31 anteed by the non-U.S. parent company increases the market of
32 eligible investors, even if the parent company is based offshore.
33 The reason is that many large U.S. institutional investors are lim-
34 ited by asset allocation models, corporate policy, or investment
35 charters in the amount of non-U.S. securities they may hold.
36
An offshore finance subsidiary may provide a convenient way to
37 enhance the credit rating of securities through overcollateral-
IR FOR NON-U.S. I SSUERS ACCESSING THE U.S. CAPITAL MARKETS 187

ization, guarantees, insurance, or bank letters of credit. The 1

securities issued by these vehicles have generally been limited to 2
debt securities and preferred stock. This approach has been 3
used by non-U.S. businesses for many reasons, such as to min- 4
imize the disclosure about the non-U.S. business, to obtain a 5
lower cost of funds through the credit enhancement, to securi- 6
tize financial assets, to deconsolidate substantial assets, and to 7
implement other types of tax-planning. Finance subsidiaries 8
used for these purposes have been incorporated in Delaware, if 9
the offering is primarily in the U.S. capital markets, or in tax 10
havens such as the Cayman Islands or the Netherlands Antilles, 11
if the primary markets are elsewhere. An offshore finance sub- 12
sidiary also can be used to circumvent or minimize withhold- 13
ing, transfer, or similar taxes or restrictions on the ability of a 14
non-U.S. business to issue securities. 15
16
Corporate Governance and Disclosure 17
Non-U.S. issuers, particularly those complying with U.S. securities 18
laws for the first time, may need to modify their legal documentation 19
and accounting procedures to meet the standards required in the 20
U.S. capital markets. Indeed, the job of IR professionals will be to 21
advise issuers how best to comply not only with the letter of the law 22
but also with the spirit of the laws—especially since the passage of the 23
Sarbanes-Oxley Act of 2002. To trade for the best price on U.S. mar- 24
kets, a company must earn a reputation for being accessible and 25
transparent. If company management is so inclined, it should meet 26
with key investors to explain the importance it places on compliance 27
with the federal securities laws and its respect for the integrity of the 28
international capital markets. Certainly, such sentiments must be 29
expressed in corporate literature and websites. 30
Additional contracts or other documentation of business or gov- 31
ernment arrangements may be required to protect the issuer or to 32
provide more comfort to investors. Examples of circumstances when 33
such documentation is necessary follow. 34

Existing informal agreements and understandings material to 35
an issuer’s business may need to be documented in situations 36
such as corporatizations and privatizations. In these situations, 37
 188 THE NEW INVESTOR RELATIONS

1 documentation has commonly been required to cover such

2 things as property rights, water rights, energy rights, and pur-
3 chase and sale arrangements that had previously been repre-
4 sented by unwritten understandings between the issuer and
5 other businesses or government officials. IR professionals,
6 working in conjunction with legal professionals, must first
7 ascertain whether such documents exist and advise the issuer
8 accordingly.
9
Existing documentation may need to be revised or supple-
10 mented to provide the degree of specificity and certainty
11 required by the U.S. capital markets. For example, if a key pur-
12 chase or supply contract contains material uncertainties, the
13 issuer may be asked by the securities firms or advised by its
14 lawyers to restate or supplement the contract and thereby avoid
15 the marketing or legal risks associated with those uncertainties.
16 With the assistance of IR professionals, issuers should be pre-
17 pared to answer questions from U.S. investors about these
18 types of agreements and related matters. Indeed, recent scan-
19 dals have put the onus on issuers to show that they are serious
20 about full and fair disclosure and about adhering strictly to
21 conservative accounting and auditing standards.
22
Existing financing covenants may need to be revised to accom-
23 modate the securities offering, or the issuer may wish to use its
24 ability to access the U.S. capital markets as a basis for renegoti-
25 ating more favorable terms with its existing lenders.
26
An issuer may have to alter its corporate governance policies or
27 take other action in order to list its securities on a U.S. securi-
28 ties exchange or to improve the marketability of its securities.
29 For example, many non-U.S. businesses offering securities for
30 the first time are managed by a board of directors that includes
31 no independent, or nonmanagement, directors. In cases in
32 which the issuer is listing its securities on a U.S. securities
33 exchange, the issuer will need to consider the appointment of
34 independent directors now required by securities exchanges in
35 the United States.
36
It may be desirable for a business to enter into employment
37 contracts with personnel that are crucial to the continued suc-
IR FOR NON-U.S. I SSUERS ACCESSING THE U.S. CAPITAL MARKETS 189

cess of the business, could become significant competitors to 1

the company, or both. It is common for securities firms to 2
request such agreements to enable them to better market the 3
securities of a business that was started and is currently being 4
managed by one or more private entrepreneurs. 5
6
Because executive officers, directors, and the company itself 7
potentially are liable when securities are offered in the United States, 8
the company should take steps to protect its executive officers and 9
directors from this liability to the extent permitted by the law of the 10
issuer’s jurisdiction. Possible sources of protection include an 11
indemnity issued by the company and the purchase of directors’ and 12
officers’ liability insurance. 13
14
Accounting Matters 15
A non-U.S. issuer that makes a registered public offering of its secu- 16
rities in the U.S. capital markets must provide investors with audit- 17
ed annual financial statements and interim financial statements that 18
are appropriate to the type of offering involved. The SEC requires 19
that financial statements of a non-U.S. issuer be prepared in accor- 20
dance with, or be reconciled to, U.S. generally accepted accounting 21
principles (GAAP). Most non-U.S. issuers choose the reconciliation 22
alternative. 23
Although reconciliation seems a straightforward, if time- 24
consuming, effort, deals have foundered after financial figures have 25
been reconciled to U.S. standards. On a number of occasions, 26
brokerage houses have been unable to market securities successfully 27
in the U.S. capital markets or were forced to lower offering share 28
prices because the non-U.S. issuer’s financial condition and results 29
of operation under its local GAAP and under U.S. GAAP differed 30
so markedly. 31
For example, gains on the sale of real property are sometimes 32
treated as ordinary income under non-U.S. GAAP but only as 33
extraordinary income under U.S. GAAP. This difference has resulted 34
in some non-U.S. issuers reporting substantially lower ordinary 35
income under U.S. GAAP. Moreover, in many cases, revaluation of 36
assets allowed under non-U.S. GAAP is not permitted under U.S. 37
 190 THE NEW INVESTOR RELATIONS

1 GAAP. This has sometimes resulted in non-U.S. issuers having sig-

2 nificantly lower, and sometimes negative, net worths when they pre-
3 pare their financial statements in accordance with (or reconcile them
4 to) U.S. GAAP.
5 Some non-U.S. issuers’ accounts require substantial auditing and
6 other work to meet U.S. market standards. In such cases, it is impor-
7 tant that the securities firms and the accountants working on the
8 transaction provide the non-U.S. issuer, and IR professionals, with a
9 clear understanding of the financial statements that are necessary to
10 market the equity or debt and comply with applicable accounting
11 requirements.
12
13
14 Communications With Investors and the Public
15 In addition to the specific compliance requirements described above,
16 the antifraud provisions of the U.S. federal securities laws and report-
17 ing requirements of the relevant U.S. securities exchanges give rise to
18 a general obligation to report material events promptly to investors.
19 In practice, issuers will need to establish adequate internal compli-
20 ance procedures and, in particular, internal disclosure and financial
21 reporting procedures to ensure compliance with applicable laws and
22 exchange requirements.
23
24 Press Releases
25 Typically, the obligation to report material events to shareholders is
26 satisfied through a press release. Press releases are generally distrib-
27 uted to the business wire services and other financial information
28 channels and posted on company websites. Certain developments
29 may be appropriate for public disclosure but not critical enough to
30 require an immediate press release. These may be communicated in
31 the issuer’s interim reports.
32 Press releases must avoid material misstatements and omissions.
33 They should be accurate, complete, and balanced between positive
34 and negative factors. There is no room in financial disclosures for the
35 degree of “puffing” that would be acceptable in general commercial
36 advertising or other areas of commercial communication, and IR pro-
37 fessionals must advise issuers accordingly.
IR FOR NON-U.S. I SSUERS ACCESSING THE U.S. CAPITAL MARKETS 191

1
Materiality Standards 2
Although there is no standard that can be applied with mechanical 3
certainty, a fact will be considered “material” if there is a substantial 4
likelihood that reasonable investors would consider it important, as 5
part of the total mix of available information, in reaching their invest- 6
ment decisions. That is, information is material if investors would 7
attach actual significance to it in making their deliberations. It is 8
impossible to make a complete catalog of all material information, 9
but typical examples include significant mergers or acquisitions, stock 10
splits, adoption of a dividend policy or changes in dividends, major 11
increases or decreases in revenues or profits, important new contracts 12
or projects, and changes in senior corporate management or in basic 13
corporate business policies. 14
In this connection, courts have treated the confirmation of a gen- 15
eral market expectation as material information in some circum- 16
stances. For example, if an issuer confirms to one analyst the accuracy 17
of its projection that it will achieve a specific level of earnings, this may 18
trigger the obligation to make a general public announcement, even if 19
outside analysts are arriving at the same projection based on their own 20
analyses of published data. 21
22
Duty to Disclose 23
Good corporate practice generally calls for prompt public disclosure 24
of material events. There has been some discussion among legal 25
practitioners, however, concerning the extent to which the law 26
requires such disclosure. Under the 1934 Act, a non-U.S. private 27
issuer is required to report promptly on Form 6-K any information 28
not contained in its latest Form 20-F that the non-U.S. private 29
issuer (1) makes or is required to make public in its home country, 30
or (2) files or is required to file with a non-U.S. stock exchange on 31
which its securities are traded and that was made public by that 32
exchange, or (3) distributes or is required to distribute to its secu- 33
rity holders. The antifraud rules, such as Rule 10b-5 under the 34
1934 Act, prohibit material misstatements and omissions of facts 35
that need to be known to prevent the statements that are issued 36
from being misleading, given the circumstances under which they 37
 192 THE NEW INVESTOR RELATIONS

1 were made. The rules do not, however, deal directly with total
2 silence.
3 An issuer with securities listed on a U.S. exchange is subject to an
4 additional affirmative obligation to make timely public disclosure of
5 material information.
6 Arguably, an issuer does not violate any legal requirements if, for
7 good business reasons, it delays an announcement of important
8 developments, absent special circumstances creating an affirmative
9 duty to disclose. An affirmative duty to disclose may exist when there
10 has been a leak of news or selective disclosure, when insider trading
11 has occurred, when the issuer is acquiring its own equity securities, or
12 when there is a rumor or a market report circulating for which the
13 issuer had some responsibility.
14 Notwithstanding the foregoing, the SEC’s enforcement policies,
15 as well as the trend of the law as interpreted by the courts, favor full
16 and fair disclosure. Accordingly, withholding material information is
17 not recommended unless there is a countervailing bona fide and
18 important business reason for doing so. In general, issuers subject to
19 the U.S. federal securities laws should adopt a policy of disclosing
20 material events on a timely basis. IR professionals can hardly overem-
21 phasize the importance of this policy.
22
23 Selective Disclosure
24 In 2000 the SEC adopted Regulation FD, which creates a reporting
25 obligation for all public reporting companies (other than non-U.S.
26 governmental issuers and non-U.S. private issuers), including closed-
27 end investment companies but not other investment companies. In
28 general, issuers subject to the new regulation must ensure that any
29 material nonpublic information intentionally disclosed to specified
30 persons outside the company is simultaneously disclosed to the pub-
31 lic at large (in the case of a “non-intentional” disclosure, public dis-
32 closure must be made “promptly”).
33 Although Regulation FD does not currently apply to non-U.S.
34 governmental and non-U.S. private issuers, the SEC stated in the
35 release adopting the new regulation that it intends to undertake a
36 “comprehensive review of the reporting obligations of foreign private
37 issuers” and, in the interim, reminded non-U.S. private issuers of
IR FOR NON-U.S. I SSUERS ACCESSING THE U.S. CAPITAL MARKETS 193

their obligations to make timely disclosure of material information 1

pursuant to applicable self-regulatory organization (SRO) rules and 2
policies. It is possible that the SEC may in the future require non- 3
U.S. governmental and non-U.S. private issuers to comply with the 4
requirements of Regulation FD. 5
6
Antifraud Rules Under the 1934 Act 7
Section 10(b) of the 1934 Act and, within this section, Rule 10b-5 8
impose liability for fraud committed in connection with the purchase 9
or sale of any security. Rule 10b-5 states that it is unlawful in con- 10
nection with the purchase or sale of any security for any person to (1) 11
employ any device, scheme, or artifice to defraud; (2) make any 12
untrue statement of a material fact or omit to state a material fact nec- 13
essary to prevent the statements made from being misleading, given 14
the circumstances under which they were made; or (3) engage in any 15
act, practice, or course of business that operates or would operate as 16
a fraud or deceit upon any person. Rule 10b-5 has been construed to 17
prohibit insiders from engaging in a purchase or sale while in posses- 18
sion of inside information. 19
20
Internal Controls 21
To effect a policy of timely disclosure, an issuer should, if it has not 22
already done so, adopt internal procedures regarding disclosures to 23
the financial community. The issuer should be certain that material 24
information is disclosed on a timely basis when appropriate and that 25
no leaks or inadvertent disclosures occur when the release of infor- 26
mation is inappropriate. Usually, consultation with U.S. lawyers and 27
IR professionals is needed to achieve this standard. 28
The issuer should establish clear internal lines of authority and 29
responsibility and authorize a limited number of persons to deal with 30
the financial community. These internal procedures should incorpo- 31
rate procedures for obtaining back-up certificates from various offi- 32
cers, managers, and personnel in positions of authority and responsi- 33
bility to support officer certificates now required to be executed by 34
chief executive officers and chief financial officers of issuers, confirm- 35
ing full and fair disclosure by the issuer of material information and 36
adequacy of the issuer’s internal disclosure controls. All employees 37
 194 THE NEW INVESTOR RELATIONS

1 should be alerted to the basic principles of disclosure, including the

2 obligations to maintain the confidentiality of undisclosed material
3 information and to refrain from trading while privy to such informa-
4 tion. The person or persons authorized to deal with the financial
5 community should be kept informed about material developments or
6 should be instructed not to make comments until the accuracy of
7 information regarding such developments is verified with more sen-
8 ior officials.
9 As a corollary to the foregoing, it is essential that all persons with-
10 in the issuer, regardless of their title or position, strictly maintain the
11 confidentiality of material information to which they have access. An
12 issuer normally has some degree of discretion in determining when
13 an event is ripe for public disclosure, assuming no leaks have
14 occurred. A reasonable standard, consistently applied for affirmative
15 as well as negative information, usually will avoid difficulties. Good
16 practice, however, may require that an issuer disclose in certain cir-
17 cumstances—when there’s been a leak of information, for example,
18 or when rumors are circulating in the financial community. Care
19 should be taken to prevent these circumstances from occurring.
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

13 Investor Relations 2
3
4
and Microcap Companies 5
6
7
RALPH A. RIEVES 8
Emerging Companies Research Institute 9
10
JOHN R. LEFEBVRE, JR. 11
Shareholder Relations 12
13
14
15

T HE TERM MICROCAP refers to a public company with market

capitalization of less than $250 million. The median market cap
for microcap firms is about $70 million. The focus of this chapter is
16
17
18
on only those microcap companies that are listed on Nasdaq or the 19
American Stock Exchange (AMEX). Microcap companies seldom 20
meet the listing requirements for the New York Stock Exchange 21
(NYSE). Omitted from this discussion are over-the-counter bulletin 22
board stocks (OTCBB). Also omitted are stocks of companies that 23
inadvertently drop to microcap status; such entities can be character- 24
ized as reemerging companies. This chapter deals only with strategies 25
for emerging companies, companies that are eight or fewer years out 26
from their initial public offerings. 27
28
29
Attracting the Individual Investor 30
When conducting investor relations activities aimed at attracting indi- 31
vidual investors, emerging companies need to stay aware of their com- 32
pany’s inherent characteristics. Key among these are the following: 33
1. Microcap companies have small stock floats. That condition 34
always impacts share value. 35
2. Typical risk/return characteristics make microcap stocks inap- 36
propriate for most individual investors. 37

195
 196 THE NEW INVESTOR RELATIONS

1 3. Quantitative research indicates that returns from microcap

2 stocks are proportionate to the risk incurred in owning them.
3 4. Research also indicates that returns from microcap stocks do
4 co-vary (i.e., move in the opposite direction) with the returns
5 of the largest capitalized stocks.
6
7 As a general rule, an emerging company’s investor relations pro-
8 gram directed to individuals should focus on investment advisers to
9 high-net-worth individuals. What follows is a summary of research to
10 support this recommendation.
11
12 What Do We Really Know About Microcap Risk and Return?
13 CEOs and directors of emerging growth companies need to consider
14 their company’s stock within the context of the capital markets. They
15 must understand their company’s appeal relative to other invest-
16 ments. There are many investment advisers who view emerging
17 growth stocks as investment alternatives to higher capitalized stocks
18 and high-grade bonds. Most investment advisers assign microcaps to
19 the same high risk/return category as high-yield bonds and some
20 types of hedge funds.
21 It bears repeating that this generally accepted characterization
22 must always be considered when developing an IR strategy for an
23 emerging growth corporation. Not every individual is an appropriate
24 target for microcap IR programs. In fact, considerable research exists
25 to support the case that the only viable, individual investor target for
26 a microcap company is the high-net-worth individual (HNWI).
27 The Emerging Companies Research Institute (ECRI), using data
28 from the Chicago research and consulting firm Ibbotson Associates
29 and various websites, constructed the graph in Figure 13-1, which
30 plots risk against return over the fourteen-year period ending
31 December 31, 2000, for the four most common capitalization
32 weights. The returns are annualized and expressed in percentages.
33 The horizontal axis is risk measured by the commonly accepted
34 computation of the standard deviation of returns. The apparent val-
35 ues in the graph clearly suggest that there is the likelihood of return
36 proportionate to the risk incurred when investing in microcap
37 stocks.
 INVESTOR RELATIONS AND MICROCAP COMPANIES 197

1
2
FIGURE 13-1 Risk and Return Over 14 Years 3
(Period ending December 31, 2000) 4
5
14
6
Annual return (expressed as a percentage)

7
13
8
Source: Ibbotson Associates/The Emerging Companies Research

9
12 10
11
11 Large Cap 12
Mid Cap
13
Small Cap
10 14
Micro Cap
15
9 16
15 20 25 30 35 40
17
Risk measured by standard deviation
18
19
Does this mean that microcap stocks aren’t risky? On the contrary, 20
the graph shows that they are more than three times as risky as large- 21
cap stocks. Thus, these stocks are not for widows and orphans or for 22
persons at or nearing retirement age. Again, however, the point is 23
that listed microcaps are relatively risky, but not speculative. They are 24
an appropriate and reasonable asset class for people with discretionary 25
investment dollars. Focus your IR activities on their advisers. 26
Microcap enthusiasts also argue that microcap stocks are appeal- 27
ing as so-called alternative investments‚ because they are inefficiently 28
priced. Thus, they reason that this prevailing inefficiency provides 29
real diversification in a strategy employing stocks of differing market 30
capitalization. This presupposes some significant difference in market 31
performance from the larger-cap stocks. Is there any evidence in sup- 32
port of this? If so, how valid is the evidence over several market cycles 33
and macroeconomic cycles? And, in the spirit of prudent practice, 34
does past performance guarantee the validity of projecting these 35
attributes to this asset class? 36
37
 198 THE NEW INVESTOR RELATIONS

1
2 Are Microcaps Diversification Plays?
3 The fact that almost no microcap company pays dividends simplifies
4 the consideration of whether microcap stock returns co-vary with the
5 returns of the largest cap stocks. What does not simplify this discus-
6 sion is that transaction costs associated with microcap investing are
7 very high.
8 Transaction costs and the related issue of small-float liquidity
9 aggravate and complicate every microcap IR challenge. Those issues
10 are there 24/7. If emerging growth companies ignore these omni-
11 present bugaboos in formulating share-price enhancing strategies,
12 they may not survive as public companies. Let’s review some research
13 on how these issues affect portfolio returns relative to other equities.
14 In 1998 the Plexus Group, a Los Angeles consulting firm, com-
15 pleted an extensive study confirming that transaction costs involving
16 the smallest cap stocks are much higher than the costs associated with
17 trading the larger-cap stocks. The study also confirmed that invest-
18 ment style would influence transaction costs. Other than brokerage
19 fees, what other transaction costs are there?
20
Market impact cost, which is measured by taking the difference
21 in the quoted price of the stock when the manager placed an
22 order and when the order was executed.
23
Delay cost, which occurs when the investor tries to wait for the
24 “best price” to make a trade with someone who is monitoring
25 the stock closely. The odds are about equal, even in engaging
26 in a waiting game, that an experienced investor or trader will
27 not get a better price. In the worst case, the order gets can-
28 celled.
29
Opportunity cost, which is a type of delay cost carried to its
30 extreme. This is the cost of missing out on or only partially fill-
31 ing the order.
32
33 These costs, as they relate to market cap and style strategies, are
34 summarized in Figure 13-2 with the cost components expressed in
35 basis points (0.01 percent).
36 Note the range of average transaction costs across investment
37 styles. Not surprisingly, large-cap value managers (who, by definition,
 INVESTOR RELATIONS AND MICROCAP COMPANIES 199

1
2
FIGURE 13-2 Cost Patterns by Manager Style 3
Cost Components (in Basis Points) 4
5
Delay Delay Opportunity 6
(Manager (Trader Market (Missed
Style Timing) Timing) Impact Commission Traders) Total 7
Large cap value 1 13 8 15 28 65 8
Large cap growth 82 32 21 10 14 159 9
Index/passive 31 61 25 9 12 138 10
Source: Plexus Group

Small cap value 5 63 40 20 32 160 11

Small cap growth 136 72 57 18 29 312 12
13
14
are shoppers) enjoy a large trading-cost advantage. Investors in small- 15
cap growth companies encounter higher transaction costs than other 16
investors, and microcap growth investors face the highest cost of any 17
investor. (Plexus Group has developed an inclusive transaction costs 18
database and some benchmarks. Readers who desire extensive and 19
refined data should visit www. plexusgroup.com to find out how this 20
data can be obtained.) 21
22
The Size Effect 23
Relative-returns studies use the data compiled by the Center for 24
Research in Securities Prices (CRSP) when making relative compar- 25
isons among stocks of different market caps. CRSP market-cap data 26
are organized into deciles. Taking all of the New York Stock 27
Exchange (NYSE) stocks (excluding REITs, ADRs, and closed-end 28
funds) and dividing them into deciles by market capitalization create 29
CRSP deciles. The Nasdaq and AMEX stocks are then added to the 30
appropriate deciles. The largest cap stocks are in deciles 1 and 2. 31
Microcaps are in deciles 9 and 10. 32
In the late 1970s, Rolf W. Banz at the University of Chicago 33
began studying the returns of stocks based on their market capital- 34
ization. His research suggested that, even after adjusting for risk, 35
small company stocks seemed to do better than the stocks of large 36
companies. Banz and his colleague Marc R. Reinganum subsequently 37
 200 THE NEW INVESTOR RELATIONS

1 published papers arguing that stock in the smallest cap CRSP deciles
2 generated returns more than 5 percent higher than the returns of the
3 larger-cap stocks over the same periods. They construed this excess
4 return as the risk premium for holding the smaller-capitalized stocks.
5 This observation was discussed among academics in the context of
6 the Capital Asset Pricing Model (CAPM) and became known as the
7 size effect.
8 Enthusiasts for investing in smaller-cap companies (including
9 microcaps) always cite these studies. Their critics have countered
10 that transaction costs made the differences between absolute returns
11 negligible.
12
13 What Risk Premium?
14 The debates over risk/return aspects of the size effect thus have
15 focused on the actual costs of buying or selling the microcap stocks.
16 Critics have argued that these inherent transaction costs cancel out
17 much of the supposed risk premium. The subsequent Plexus research
18 indicates that with respect to small-cap growth stocks, the risk premi-
19 um is less than 2 percent (the Banz-Reinganum size effect of 5 percent
20 minus the Plexus small-cap growth costs composite of 3.1 percent).
21 So, the net risk premium is low for microcap companies. As to rel-
22 ative cyclical performance, are there times when microcap returns
23 vary significantly from the returns of the largest-cap stocks, deciles
24 1 and 2? Have there been periods when microcap stocks significantly
25 outperformed the blue chips over and above any so-called risk
26 premiums?
27 The answer is yes. The bad news is that risk and transaction costs,
28 of course, remain intrinsic characteristics of microcap stocks. Yet the
29 good news is that the returns have been proportionate to the risks
30 and co-vary with the larger-cap stocks. Look at Figure 13-3.
31 When returns comparisons are broken down into manageable
32 time segments, the argument in favor of cap size diversification holds
33 up. True enough, the relative performance periods illustrated in
34 Figure 13-3 are of unequal length. This reflects the smoothing out of
35 those periodic “bursts” and “busts” that occurred in the overall U.S.
36 market from 1969 to 2000. Subsequent periods likewise would be
37 configured for the systemic shocks sustained during the early years of
 INVESTOR RELATIONS AND MICROCAP COMPANIES 201

1
2
FIGURE 13-3 Comparison of Returns Between CRSP 3
Source: The Emerging Companies Research Institute using data from

Deciles 1/2 and 9/10 Over Market Cycles 4

From 1969–1999 5
6
Time Returns from Returns from The Better Deciles 7
The Center for Research in Securities Prices

Period 1/2 Return by Deciles 9/10 Percentage Points

8
1969–1974 -17% -70% Deciles 1/2 by 53%
9
1975–1983 +247.5% +1,197.5% Deciles 9/10 by 950%
10
1984–1990 +159% -15% Deciles 1/2 by 174%
11
1991–1994 +52% +127.5% Deciles 9/10 by 75.5%
12
1995–1999 +201% +80% Deciles 1/2 by 121%
13
14
this century. Nevertheless, the evidence illustrated in Figure 13-3 is 15
clear: Returns have co-varied. 16
Why? The nature of microcap stocks performance helps to explain 17
the patterns. They are the last stocks to rally, because investors turn 18
to microcaps when they suspect that the large caps are overvalued. 19
They are the last stocks to be sold in a downturn, because investors 20
are loath to sell their less liquid stocks in the face of a buyer’s market. 21
With this capsule picture affirming the appropriateness of micro- 22
cap stocks for a certain type of investor—namely, the high-net-worth 23
individual—the next step is to outline the most effective means to 24
reach that targeted class of individuals. 25
26
27
Targeting Advisers to High-Net-Worth Investors 28
A base of high-net-worth investors (HNWIs) is the needed ingredi- 29
ent to provide a microcap company’s stocks with liquidity and a 30
stable trading range. The time involved to cultivate and recruit the 31
financial advisers of this investor group is a necessary investment. 32
These stockbrokers or financial planners can be one of a company’s best 33
lines of defense when economic events or a poor quarter depresses 34
stock prices. They provide a leveraged communications system, since 35
they can provide interpretation of macro and microeconomics events 36
for their customers. 37
 202 THE NEW INVESTOR RELATIONS

1
2 The Retail Broker
3 Institutions drive the markets, but never discount the role of those
4 brokers whose trade are individual investors. They provide the most
5 cost-efficient way to tell your story to the high-net-worth individual
6 market once, and then have it repeated scores of times. Moreover, a
7 broker is a compliance shield. Brokers know securities law. They
8 know what they can and cannot say. Brokers can insulate a company
9 from disclosure problems.
10 Institutions make purchases in large share lots, but not with a high
11 degree of frequency. Even though individuals trade stocks in smaller
12 lots, they tend to be long-term holders. They are less likely to sell in
13 the face of a small quarterly earnings decrease. If a stockbroker is con-
14 vinced that a stock’s price represents value, that broker will be
15 encouraging its purchase every trading day. Retail brokers and their
16 customers create daily volume for microcap stocks. Without this
17 activity, the company is less likely to attract the attention of institu-
18 tional investors.
19 Finding brokers who cater to high-net-worth individuals, essen-
20 tially a task of elimination, is less daunting than most IR profession-
21 als think. One reason is the manner in which brokers from the major
22 firms now conduct their business. Thirty-five percent of the brokers
23 dealing with HNWIs don’t earn commissions on stock transactions.
24 Their compensation is based on fees earned on the amount of their
25 clients‚ assets that they direct to investment managers and hedge
26 funds. These professionals are commonly known as fee-based con-
27 sultants or wrap-account brokers. This group is easily identified as
28 candidates for your first cut.
29 You also can eliminate brokers who have had less than five years’
30 experience working as a broker. At any given time, this is about 25
31 percent of the broker pool. They will not have earned the autonomy
32 to make their own recommendations. Another 25 percent that
33 should be eliminated are those brokers whose customers have low
34 tolerance for risk, such as those nearing retirement. Customers over
35 age sixty likely carry the overriding concern of capital preservation.
36 This suggested winnowing leaves about 15 percent of the broker
37 pool that represent stocks (not portfolios) to accredited or qualified
INVESTOR RELATIONS AND MICROCAP COMPANIES 203

investors. These are discretionary investors with annual incomes of 1

more than $250,000 and liquid assets exceeding $1,000,000. 2
You can begin building your target broker list by asking the 3
HNWIs you know for the names of their investment advisers. We 4
also suggest perusing magazines that appeal to HNWIs. Town and 5
Country, Architectural Digest, Gourmet, and Medical Economics 6
are some of the periodicals that have run articles featuring stock- 7
brokers. Registered Representative, the broker trade magazine, fre- 8
quently features profiles of successful brokers with high-net-worth 9
clients. 10
11
Brokers to Avoid 12
Microcap investor relations programs must dictate the shunning of 13
brokers who cater to speculators and gamblers, those who flip stocks, 14
and those who chase the hot money. This clientele represents impa- 15
tient money and is gone within weeks. 16
The SEC explicitly prohibits any broker from accepting payment 17
from a company in exchange for promoting a stock. In addition to 18
this practice being illegal, there is another reason to decline any 19
such arrangement. The risks of working with a broker with such 20
bad judgment and questionable ethics as to make such a proposal 21
are self-evident. 22
23
24
T O SUMMARIZE THE BENEFITS of individual investor-directed IR: 25
Note that attracting a solid cadre of HNWIs will be evidence that a 26
microcap company is a viable investment. These experienced individ- 27
ual investors are critical to enhancing shareholder value. They tend to 28
hold shares for a longer time than institutions; therefore, they create 29
the most stable portion of the stockholder base. They will be the first 30
to buy more stock in the company, if it demonstrates its ability to 31
grow shareholder value. 32
The most efficient way to attract HNWIs is through stockbrokers 33
with years of experience in working with them. It can be time-con- 34
suming to build a target list of appropriate retail brokers. To facilitate 35
this process, one approach may be to retain an IR consultant who has 36
already compiled such a list. 37
 204 THE NEW INVESTOR RELATIONS

1
2 Attracting Institutional Investors
3 The recent concerns of large mutual funds and investment manage-
4 ment firms about operating with economies of scale have resulted in
5 a number of corporate mergers. The resulting behemoths may be
6 enjoying economies of scale, but their trading decisions have become
7 more bureaucratic. They are not nimble.
8 Few of the mergers have involved microcap investment managers
9 or microcap-focused mutual funds, however. Microcap investment
10 managers remain a nimble group of competitors for large pools of
11 money. They are ready buyers of emerging company stocks that meet
12 their criteria.
13 The institutional microcap universe contains approximately sixty-
14 five target portfolios, of which about forty are emerging growth
15 mutual funds. The remaining fund pools are run by independent
16 managers with core strategies reliant on the microcap component and
17 by sector-style managers who hold some microcap companies.
18
19 Understanding the Microcap Investment Manager
20 All microcap managers seek superior returns, but their selection crite-
21 ria and search patterns will differ. They all want a high rate of annual
22 earnings growth (typically 20 percent plus), but they look at the earn-
23 ings in the context of another operating measure. Some favor high
24 rates of revenue growth, some will look for annual increases in free
25 cash flow, and still others want a pattern of increasing operating mar-
26 gins. A company should never approach a portfolio manager until the
27 company understands that manager’s selection criteria. Read the man-
28 ager’s prospectus and sales literature. Search the Web for transcripts of
29 interviews the media has conducted with the target manager.
30 About 15 percent of the microcap investment funds we follow use
31 computer-based screening models to select stocks. Generally, the
32 managers of these portfolios won’t welcome contact with anyone
33 from a company.
34
35 The Profit Challenge for Microcap Investment Managers
36 As has been noted, microcap investment managers bear high trans-
37 action costs, in fact, higher than those borne by any other type of
INVESTOR RELATIONS AND MICROCAP COMPANIES 205

specialist portfolio manager. What is the common factor that gov- 1

erns these costs? The size of the float. Name the three features of a 2
stock that appeal to a portfolio manager? The answer is liquidity, 3
liquidity, and liquidity. 4
Since institutional investors interested in microcap companies 5
don’t typically have a lot of liquidity, they have to outperform those 6
using other styles of investing just to recover their costs. (See Figure 7
13-2). Since they cannot avoid incurring relatively high transaction 8
costs, they work to attain other economic efficiencies. For instance, 9
they do not delegate research. 10
It is therefore key that microcap IR practices be structured to 11
make it easy for investment managers to get the information they 12
need about the company (within the bounds of Regulation FD). The 13
company needs to organize the IR team in a manner that permits the 14
investment managers to reach someone in the company directly. If 15
the investment manager’s call is forwarded to voice mail, for exam- 16
ple, make sure someone returns the call within the hour. These 17
investors have huge demands on their time. There are only two 18
staffing models for the microcap investor office: very lean and none. 19
It is a truism that no public company can have a credible share- 20
holder constituency without some institutional investors. Attracting 21
microcap growth portfolio managers requires understanding their 22
risk management practices, as well as their selection criteria. 23
Understanding the conditions under which they operate is critical to 24
attracting their investments. Thin floats are the major impediments 25
for an institutional investor taking a position in a microcap. 26
Increasing the float is paramount, and a concern for stock dilution is 27
unwarranted among directors of an emerging growth company. 28
Availability of the stock is far more important than earnings per share. 29
It’s the quality of earnings that’s important. 30
31
32
Benchmarking 33
Benchmarking is an important part of evaluating the effectiveness of 34
an IR program. Investors will want to measure stock values against 35
market cap peers, as well as against industry and sector peers. Recent 36
research suggests that institutional investors prefer to benchmark 37
 206 THE NEW INVESTOR RELATIONS

1 microcaps against the S&P 600 rather than against the Russell 2000.
2 New research also exists suggesting that any negative impact from
3 being dropped from an index is short lived.
4 In connection with the float issue discussed previously, there is a
5 sunny side to the fact that a microcap stock is almost always in rela-
6 tively short supply. This fact, coupled with the rules governing micro-
7 cap margin accounts, makes it unlikely that microcap companies will
8 ever be targets of a short-selling bear raid. The shorts can get killed
9 trying to cover on a run-up.
10
11
12 Where Are the Market Makers?
13 Another issue, the structure of the market for microcaps, compounds
14 the transaction-cost challenge. The SEC issued a revised set of rules
15 in 1997 that changed the way orders were handled by the Nasdaq
16 system. The rules were intended to correct some practices that had
17 been allegedly increasing investor’s trading costs. Soon after those
18 rules were in effect, decimal trading was introduced. The combined
19 impact of the revised rules and the penny trades made it largely
20 impossible to make any money trading the smallest-cap stocks.
21 Microcap securities dealers subsequently shut down their trading
22 operations and ceased making retail markets in the Nasdaq Small Cap
23 Issues system.
24 A few large-capitalized dealer firms had been functioning as ware-
25 housing wholesalers to the smaller dealers. When the small dealers
26 stopped making markets, these wholesalers became the only game in
27 town. The new rules didn’t permit those few large dealers to make
28 any money on trades, either. They did, however, find a better way to
29 make money from their well-capitalized advantage. They began to
30 glean information from the flow of all those buy and sell orders that
31 now came to them.
32 There is now an oligopoly structure standing astride the Nasdaq
33 Small Cap Issues system that is not providing adequate liquidity for
34 that system’s listed stocks. Investment bankers who underwrite the
35 small-cap issues are now arranging to have some of those stocks listed
36 on the American Stock Exchange (AMEX). In some instances, com-
37 panies have left the Small Cap System for the AMEX.
INVESTOR RELATIONS AND MICROCAP COMPANIES 207

Conventional wisdom has held that the exchanges existed for 1

the seasoned issues, and the negotiated markets accommodated the 2
emerging companies. Such arrangements are no longer the case. 3
Will the move toward trading qualified microcaps on the AMEX 4
enhance their liquidity, and reduce transaction costs? How will the 5
role of the Electronic Communications Networks (ECNs) evolve? 6
Will another exchange decide to challenge the AMEX? In formu- 7
lating microcap IR strategies, these questions are relevant, perti- 8
nent, and crucial. 9
10
11
The Cyberspace Aggravation 12
The Web offers unlimited creativity for renegade brokers and their 13
associates. The problems associated with questionable activity are 14
extensive. Internet insurgents may not always be investors or brokers 15
out to profit from unfounded rumors. There have been hundreds of 16
cases of malicious intent from former employees and the disgruntled 17
still on the payroll. Another aggravating group might be composed 18
of dissatisfied customers who have slipped through the company’s 19
customer-relations nets or its product warranty programs. Com- 20
panies even may, heaven help them, be the target of some activist 21
group. 22
IR professionals in microcap companies need to be especially 23
vigilant. Emerging companies are the most susceptible to cyber- 24
space scams, schemes, and rumors that do lasting harm. Constant 25
vigilance and a well-reasoned countering plan are crucial aspects of 26
an IR program. Sound internal policies and rapid responses are nec- 27
essary preventive and countering tactics. 28
The SEC continues to become more adept at earlier identification 29
and intervention in Internet fraud. However, bear in mind that the 30
SEC’s role is to protect investors, not companies. Instances exist in 31
which investors who were victims of investment frauds have had some 32
of their losses returned to them. However, there are no such instances 33
when the courts or any agency has mandated the restoration of the 34
market value of a stock diminished by fraudulent activity—or by the 35
madness of crowds. IR professionals, beware. 36
37
 208 THE NEW INVESTOR RELATIONS

1 Authors’ Note
2
This article is based in part on ideas contained in our book, Investor Relations
3 for the Emerging Company, published by John Wiley & Sons, Inc. Information
4 for ordering that inclusive work on this subject can be found at www.wiley
5 finance.com. Readers who want more information on the research discussed in
6 this chapter can contact us at www.shareholder-relations.net.
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1

14 IR and the 2
3
4
Credit-Ratings Process 5
6
7
CLIFFORD M. GRIEP 8
Standard & Poor’s 9
10
11
12
13
14
15

C REDIT RATINGS ARE the common language of bonds and debt,

both on Wall Street and in world financial markets. As global
benchmarks of a company’s relative capacity to meet its financial
16
17
18
commitments, ratings can influence access to and pricing of capital. 19
Moreover, more and more investors are turning to the recognized 20
credit-rating agencies to serve as investment beacons. 21
Traditionally serving fixed-income markets, ratings have also 22
gained utility in other risk-sensitive transaction markets, such as 23
refinancings and mergers and acquisitions. In addition, vendors, 24
financial journalists, equity analysts, and even potential employees 25
might look at credit ratings in gauging a company’s status. 26
Consequently, ratings can influence the decisions of trade creditors, 27
suppliers, rivals, and other business partners, especially in periods of 28
economic stress when credit risk exposure receives greater atten- 29
tion. Because of the important role ratings play in financial markets, 30
many businesses, especially those contemplating public debt 31
issuance, will request a rating from one of the large, well-known, 32
ratings agencies. It is the responsibility of investor relations profes- 33
sionals to make this request and to provide the information 34
required to satisfy this request as skillfully as possible. Credit rat- 35
ings, and especially “downgrades”—lowering of credit ratings—are 36
now more closely watched than ever. 37

209
 210 THE NEW INVESTOR RELATIONS

1
2 Role of Ratings Agencies
3 Ratings agencies play a unique role in the capital markets, both by
4 tradition and, in some countries, because of regulation. In the United
5 States, for example, some four ratings agencies are sanctioned as
6 Nationally Recognized Statistical Rating Organizations (NRSROs)
7 by the Securities Exchange Commission (SEC). This recognition was
8 initiated in 1975 when ratings were first incorporated into the SEC’s
9 Net Capital Rule for broker dealers, and at the time simply reflected
10 that the ratings of certain firms, Standard & Poor’s, Moody’s, and
11 Fitch, were used nationally. Over the past thirty years however, the
12 SEC and other regulators have increasingly used credit ratings to help
13 monitor the risk of investments held by regulated entities.
14 In addition, many institutional and other bond investors hold
15 portfolios limited by credit rating, such as “BBB– or better,” in the
16 case of funds which hold only investment-grade bonds. Other funds
17 prefer the higher yield associated with bonds that are rated lower on
18 the totem pole.
19 The unique role of credit-rating agencies was highlighted by the
20 adoption in 2000 of SEC Regulation Fair Disclosure (Regulation
21 FD). Although not widely noticed in the financial media, Regulation
22 FD specifically exempts NRSROs, which routinely use nonpublic
23 information in their analysis. This access to otherwise nonpublic
24 information is one reason why credit-rating agency ratings are often
25 taken more seriously than “buy” or “sell” recommendations from
26 brokerage analysts. It is also worth noting that bond-rating analysts
27 are free of the conflicts of interest which so infamously plague bro-
28 kerage analysts.
29 A principal goal of IR professionals should be to establish an
30 ongoing dialogue with one or more of the NRSROs and thus to
31 build management creditability. A few warnings for IR professionals:
32
The credit-rating agencies keep files and records, and what has
33 been called “institutional memory” is elephantine.
34
The rating process is iterative, providing a large platform to
35 judge management’s ability and a company’s creditworthiness.
36 For example, credit-rating agencies will evaluate manage-
37 ment’s ability to anticipate and respond to competitive devel-
IR AND THE CREDIT-RATINGS PROCESS 211

opments, achieve budgeting goals, and measure and manage 1

risk. They will also measure management’s ability tell the 2
truth, warts and all. 3

IR professionals and management should not consider presen- 4
tations to a credit-rating agency to be mere marketing. Hubris 5
and deception will eventually be uncovered. 6
7
What is called for is open and timely communication between 8
management and rating analysts. Given the importance that many 9
market participants attach to ratings and rating changes, management 10
needs to know the key factors and assumptions supporting the agen- 11
cies’ rating opinions and, more importantly, the factors that would 12
cause that rating to be changed in a southerly direction. 13
14
15
Composition of the Ratings Analysis 16
Ratings are primarily based on publicly available information— 17
although, as mentioned, NRSROs do have access to otherwise confi- 18
dential information. They also require ongoing dialogue with man- 19
agement and IR professionals of rated companies. Public companies 20
routinely disclose information to ratings agencies, such as budgets 21
and related financial projections, internal reports on business unit 22
performance, risk measurement and management, operational risks, 23
liquidity and funding risks, and financial and operating policies. This 24
information enhances the rating process, generally providing the rat- 25
ings agency analytical team with a deeper understanding of the com- 26
pany. The greater the understanding, the greater the comfort. And, 27
with each corporate meltdown, analysts are learning to ask more 28
trenchant questions. 29
30
Quantitative and Qualitative Components 31
Ratings are based on fundamental credit analysis, including both 32
quantitative and qualitative components. Company performance and 33
balance sheet structure are evaluated relative to both peer companies 34
within the same industry and absolute benchmarks. Ratio analysis 35
encompasses comparative assessment of earnings, profitability, cash 36
flow, financial leverage, liquidity, and funding profile. 37
 212 THE NEW INVESTOR RELATIONS

1 Comparative financial analysis is, of course, reliant upon interpre-

2 tation of financial statements. This interpretation process includes an
3 effort to understand and evaluate the critical accounting policies that
4 influence reported results.
5 It must be conceded that ratings agencies are not auditors and
6 most rely on audited financial statements. Similar to investors and ana-
7 lysts, ratings agencies are held hostage to accurate audits. Still, adjust-
8 ments are routinely made to the reported financial results to reflect the
9 ratings agency’s interpretation of the risks and the economic substance
10 of the related business activities, or to facilitate comparison across
11 countries with divergent accounting requirements. In the case of
12 Standard & Poor’s, these adjustments are transparent, covered in its
13 published criteria. Partly in response to the increasing complexity of
14 the accounting framework for some business activity such as deriva-
15 tives and risk transfer activities and partly due to the increasing evi-
16 dence of accounting abuse, Standard & Poor’s has intensified its focus
17 on accounting policies and their implications, as have other ratings
18 agencies. Consistent with public disclosure requirements, Standard &
19 Poor’s expects management to fully disclose and discuss critical
20 accounting issues, especially when the choice of accounting treatment
21 can materially impact reported financial results. It is the job of the IR
22 team of any public company to make sure that information flows eas-
23 ily and smoothly to the credit-rating agency. Detectives, news
24 reporters, investors, and credit-rating agencies become suspicious
25 when information is withheld, even unintentionally.
26 Supplementing the comparative financial statement analysis,
27 qualitative assessment is also an important part of the process. This
28 measure comprises review of the economic environment, including
29 competitive dynamics and their implications; company-specific com-
30 petitive position; competitive strategy, practices, and policies including
31 financial and risk management practices; and—increasingly—aspects
32 of corporate governance. Transparency counts for much, especially
33 in recent years.
34 In addition to the relative performance of the company, dialogue
35 and meetings between the IR team and the credit-rating agencies
36 provide an incremental basis for judging management and are an
37 integral part of the credit-rating process. The purpose of these meet-
IR AND THE CREDIT-RATINGS PROCESS 213

ings is to review in detail the company’s key operating and financial 1

plans, management policies, and other credit factors that have an 2
impact on the rating. 3
4
Rating Assignment 5
The primary goal of the rating process is to assign a concrete rating— 6
such as BB—that evaluates the operating and financial strategies and 7
policies of the firm for the financial markets. A rating that anticipates 8
and incorporates these strategies is likely to be relatively stable. 9
Consequently, full and accurate disclosure during the rating process 10
is key. Moreover, to the extent creditworthiness can be managed, 11
company officers must determine the relative role and importance of 12
creditworthiness in the context of their overall strategy. In other 13
words, management must decide if it can live with, say, a noninvest- 14
ment grade rating below “BBB,” or if it behooves them—and more 15
importantly, the board of directors—to take steps to upgrade the 16
rating. Figure 14-1 presents the range of credit quality assignments 17
used by the three major ratings agencies. 18
If management decides to shoot for a higher rating, that fact 19
should be telegraphed to the markets, investors, and ratings agencies, 20
along with the plans to achieve the higher rating. Here the IR team 21
has a vital role to play, perhaps in assuring certain debt holders that 22
upgrades could be in the offing, and why. 23
On the other hand, sometimes in an overzealous quest for a 24
better rating, too much growth capital is siphoned off into debt 25
payments, or too many assets are sold. Without considering credit- 26
worthiness in a strategic context, management could mistakenly pursue 27
a higher rating than necessary, imposing unrealistic operating or 28
financial constraints. This situation requires especially astute IR. If 29
the long-term risks from trying to achieve a higher rating seem to be 30
too high, the IR team must relay to financial market participants why 31
management is comfortable with a lower rating. 32
33
Request for a Rating 34
In response to a rating request, credit-rating agencies assign a team, 35
usually of two to four members, which includes an industry analyst, 36
who will handle day-to-day contact with the issuer and others familiar 37
 214 THE NEW INVESTOR RELATIONS

1
2 FIGURE 14-1 Credit Rating Assignments
3
4 Credit Quality S&P Moody’s Fitch
5 Solid as a rock AAA Aaa AAA
6
7 Very fine quality AA+ Aa1 AA+
8 AA Aa2 AA
9 AA- Aa3 AA-
10
Strong capacity to pay A+ A1 A+
11
A A2 A
12
A- A3 A-
13 A A A
14
15 Adequate ability to pay; BBB+ Baa1 BBB+
16 lowest investment grade BBB Baa2 BBB
17 for banks BBB- Baa3 BBB-
18
Somewhat speculative; BB+ Ba1 BB+
19
risk exposure BB Ba2 BB
20
BB- Ba3 BB-
21
22 More speculative; B+ B1 B+
23 risk exposure B B2 B
24 B- B3 B-
25
26 Major risk exposure; CCC+ Caa1 CCC+
on verge of default CCC Caa2 CCC
27
CCC- Caa3 CCC-
28
29 Crucial risk exposure; CC+ Ca1 CC+
30 may have defaulted CC Ca2 CC
31 on interest payments CC- Ca3 CC-
32
33 Default or Imminent Default C C C
34
General default D D D
35
36 No rating requested NR NR NR
37
IR AND THE CREDIT-RATINGS PROCESS 215

with the industry. Functional specialists may assist industry analysts. 1

The company typically is represented by its chief financial officer. The 2
chief executive officer usually participates when strategic issues are 3
reviewed. Operating executives often present detailed information 4
regarding business segments. 5
In general, IR professionals should anticipate the following: 6
Scheduling. Management meetings should be scheduled at least 7
several weeks in advance, to ensure mutual availability of the appro- 8
priate participants and to allow adequate preparation time for the rat- 9
ings analysts. In addition, if an initial rating is being sought for a 10
pending issuance, it is to the issuer’s advantage to allow at least three 11
to four weeks following the meeting for the rating agency to com- 12
plete its review process. More time may be needed in certain cases— 13
if, for example, extensive review of documentation is necessary. 14
However, where special circumstances exist and a quick turnaround 15
is needed, credit-rating agencies will endeavor to meet the require- 16
ments of the marketplace. 17
Facility tours. Touring major facilities can be very helpful for a 18
credit-rating agency in gaining an understanding of a company’s 19
business. However, this is generally not critical. Given the time con- 20
straints that typically arise in the initial rating exercise, arranging facil- 21
ity tours may not be feasible. However, as discussed below, such tours 22
may well be a useful part of the subsequent surveillance process. 23
Preparing for meetings. Corporate management or IR profes- 24
sionals are usually well advised to contact their designated analysts for 25
guidance in advance of the meeting. Standard & Poor’s and other 26
credit-rating agencies provide a rating methodology profile, also 27
called a RAMP, which covers in detail the areas that should be dis- 28
cussed in management meetings. Credit-rating analysts are not shy or 29
tricky; they will tell you what they want to see, and in what form. The 30
details will vary from industry to industry and from company to com- 31
pany. Corporate Ratings Criteria as well as industry comments and 32
articles on peer companies from CreditWeek may be helpful to man- 33
agement for understanding and appreciating the analytic perspective. 34
Well in advance of the meeting, the company should submit back- 35
ground materials (ideally, several sets), including 36

five years of audited annual financial statements 37
 216 THE NEW INVESTOR RELATIONS

1
the last two years of interim financial statements, and key regu-
2 latory filings
3
narrative descriptions of operations and products
4
a draft registration statement or offering memorandum, or
5 equivalent information (if available)
6
7 Written presentations by management, while not mandatory,
8 often provide a valuable framework for the discussion. Such presen-
9 tations typically mirror the format of the meeting discussions, as out-
10 lined below. When a written presentation is prepared, it is particularly
11 useful for a credit-rating agency’s analytical team to be afforded the
12 opportunity to review this before the meeting.
13 If additional information to clarify points discussed in the meet-
14 ing is not immediately available, it can be provided afterwards. In
15 any case, credit-rating agency analysts generally will have follow-up
16 questions that arise as the information covered at the management
17 meeting is further analyzed.
18 Confidentiality. A substantial portion of the information in com-
19 pany presentations is highly sensitive and is provided by the issuer to
20 the credit-rating agency solely for the purpose of arriving at a rating.
21 Such information is kept confidential by the ratings group. Even if
22 the assigned rating is subsequently made public, any rationales or
23 other information that NRSROs publish about the company will only
24 refer to publicly available corporate information. Confidential infor-
25 mation is not used for any other purpose or by any third party.
26
27
28 Conduct of the Management Meeting
29 Management meetings with companies new to the rating process typ-
30 ically last two to four hours, although sometimes longer if the com-
31 pany’s operations are particularly complex or if management and the
32 IR team try to substitute flash for substance. Short, formal presenta-
33 tions by management may be useful to introduce areas for discussion.
34 Standard & Poor’s preference is for meetings to be largely informal,
35 with ample time allowed for questions and responses. At management
36 meetings, as well as at all other times, Standard & Poor’s welcomes
37 questions regarding its procedures, methodology, and analytic criteria.
IR AND THE CREDIT-RATINGS PROCESS 217

1
Typical Agenda 2
The following is an outline of the topics that credit-rating agencies 3
typically expect issuers to address in a management meeting: 4

The industry environment and prospects 5

An overview of major business segments with reference to key 6
operating statistics, including comparisons with competitors 7
and industry norms 8

Management’s financial policies and financial performance goals 9

Distinctive accounting practices 10
A careful review of accounting methods has become more 11
important in recent years. Obviously, much greater scrutiny will 12
be given to unusual accounting procedures, and clarity, not 13
opacity, will be rewarded. IR professionals should ask them- 14
selves, and pose the question also for management: If a team of 15
credit-rating agency analysts finds itself puzzled trying to 16
understand our business, then who else is going to understand 17
our business? After all, very few money managers, and even 18
brokerage industry analysts, can afford to spend the time deci- 19
phering a company’s accounting, and no one else can get access 20
to otherwise privileged information. 21

Management’s projections, including income and cash flow 22
statements and balance sheets, together with the underlying 23
market and operating assumptions 24
In regard to management’s projections, it should be under- 25
stood that Standard & Poor’s (and other credit-rating agen- 26
cies’) ratings are not based on the issuer’s financial projections 27
or its view of what the future may hold. Rather, ratings are based 28
on Standard & Poor’s own assessment of the firm’s prospects. 29
But management’s financial projections are a valuable tool in the 30
rating process, as they indicate management’s plans, how man- 31
agement assesses the company’s challenges, and how they intend 32
to deal with problems. Projections also depict the company’s 33
financial strategy in terms of anticipated reliance on internal cash 34
flow or outside funds, and they help articulate management’s 35
financial objectives and policies, capital spending plans, and 36
financing alternatives and contingency plans. 37
 218 THE NEW INVESTOR RELATIONS

1 The emphasis given to various risk factors may change over time,
2 reflecting changes in the competitive or economic environment or
3 changes in the business profile of the company. Occasionally, new risk
4 factors emerge. For example, the rating analysis of U.S. banks empha-
5 sized asset liability management in the late 1970s and early 1980s as
6 interest rates soared, while in subsequent recessions loan quality and
7 capital received more attention.
8
9 When Capital Markets Tighten
10 IR professionals should note that whenever capital markets are tight,
11 there is a heightened focus on liquidity for the corporate sector.
12 Consequently, company presentations to a credit-rating agency need
13 to provide detail on the company’s management of liquidity and
14 funding risks—including contingent commitments in debt, counter-
15 party or operating agreements that would be triggered by changes in
16 ratings, equity prices, or violation of financial covenants. IR profes-
17 sionals and company officials can expect credit agency analysts to ask
18 about how the company will fare, in terms of liquidity, if sales should
19 contract due to recessionary trends. Demonstrating adequate contin-
20 gency plans for dealing with a challenging business environment,
21 adverse or inhospitable markets, or conditional commitments serves
22 to underscore management’s preparedness and is supportive of sound
23 financial policies and creditworthiness.
24 Debt holders and credit-rating agencies may have a different take
25 on additional debt than shareholders. Tolerances for increasing debt
26 leverage may be acceptable to, or even welcomed by, equity holders,
27 whose upside—possible hefty returns—justifies the incremental risk.
28 For debt holders or other creditors who hold only a fixed claim on
29 company resources, incremental financial leverage may impair cash
30 flow coverages. The ratings process recognizes that management
31 must balance the needs of multiple constituencies and expects as
32 much in the data management provides. IR professionals should not
33 show one face to creditors and another to shareholders. Management
34 builds credibility through the consistency of presentations on strategy
35 and financial policy to all constituents; word tends to get around.
36 Decide on a prudent course and sell that course to both creditors and
37 shareholders.
 1

15 The Information 2
3
4
Investment Managers Want 5
6

From Public Companies 7

8
9
10
CHRISTOPHER N. ORNDORFF, CFA
11
Payden & Rygel Investment Co. 12
13
14
15

W HY DO COMPANIES need to work on their relations with

investors? In theory, if capital markets are efficient and if a
company’s information is quickly disseminated and understood by
16
17
18
investors, investor relations should have little value. If we accept the 19
efficient-market theory, a company could operate in isolation, and as 20
long as its earnings were rising (and the price/earnings ratio is held 21
constant), its stock price would follow the upward trajectory. 22
As any experienced Wall Streeter knows, however, that scenario is 23
a fairy tale. The flow of information is not perfect. Nearly every real- 24
world investment manager would say that the market for corporate 25
securities—both stocks and bonds—is not perfectly efficient. 26
Imagine a grocery store aisle filled with more than ten thousand 27
types of breakfast cereal. That would be a pretty daunting shopping 28
experience, even for some children. To attract the consumer’s atten- 29
tion, cereal manufacturers would launch different strategies to get 30
shelf-space advantage. They would probably advertise, run promo- 31
tions, and design competing, eye-catching cereal boxes—as they do 32
anyway, even without ten thousand brands on the market. 33
There are some parallels with the stock market. On all U.S. stock 34
exchanges combined, more than ten thousand securities are traded. 35
This creates a difficult shopping experience for an investment man- 36
ager. The old adage “time is money” rings especially true for money 37

221
 222 THE NEW INVESTOR RELATIONS

1 managers who must maintain portfolios of stocks and who have a

2 fiduciary responsibility to keep abreast of their investments. In this
3 context, investor relations is about how a company advertises itself to
4 institutional investors, who are usually savvy but pressed for time.
5 Companies often pride themselves on how well they know the
6 users of their product, thanks to extensive consumer surveys and
7 anecdotal field information from salespeople. Senior managers are
8 generally well versed in the preferences and needs of key clients. But
9 those same managers often know little about the investors who pur-
10 chase their companies’ stock. These investors should also be consid-
11 ered customers.
12 Job One for IR is to enhance investor confidence in the company.
13 Greater investor confidence in a company often increases the demand
14 for the stock. The benefit is the potential for a higher P/E ratio and
15 higher stock price.
16 Who are these institutional investors, why are they so important,
17 and what do they want? And how does the recent jumble of regula-
18 tions influence communications with institutional investors? The
19 following pages provide guidance to IR professionals and senior
20 management alike on the most effective ways to deal with an impor-
21 tant customer, the institutional investor.
22
23
24 Institutional Investor Universe
25 Institutional investors—whether pension funds, mutual funds,
26 insurance companies, or investment management firms generally
27 comprise three functional categories: analysts, portfolio managers,
28 and research departments. With some institutional investors, these
29 functions overlap; with others, they are distinct and separate.
30
31 Functional Categories
32 A publicly traded company seeking to raise its profile with the insti-
33 tutional investment community will most often come into contact
34 with the analyst. Analysts are usually charged with covering a specific
35 industry and are responsible for tracking between ten and sixty com-
36 panies. They are expected to have in-depth knowledge of their
37 industry and of each of the most significant companies within it.
THE INFORMATION INVESTMENT MANAGERS WANT 223

Consequently, analysts will typically ask very specific financial or busi- 1

ness strategy questions. In some organizations, they play a significant 2
role in the selection of a stock or its weighting in a portfolio. In other 3
organizations, the analyst prepares a list of recommended stocks 4
within an industry from which a portfolio manager makes the ulti- 5
mate selections. 6
Portfolio managers are frequently in charge of selecting individual 7
securities for inclusion in a portfolio and determining their weight in 8
that portfolio. Some began their careers as analysts and may have in- 9
depth knowledge of certain industries. The nature of the portfolio 10
managers’ jobs, however, requires that they be generalists. Conse- 11
quently, they are likely not to ask specific questions but rather to seek 12
to gain an intuitive feel for a company and its position in its industry. 13
Their attention to financial statements will usually be limited to more 14
significant items, such as revenue growth, operating margins, free cash 15
flow, growth, and earnings per share. Portfolio managers frequently 16
rely on analysts or their research departments to give opinions or to 17
gather additional information. 18
Research departments typically focus on either general economic 19
research or specific industry research. They are frequently training 20
grounds for analysts. This does not imply, however, that an IR team 21
should change its presentation if the audience is composed of research 22
analysts. Poor presentations create lasting impressions, because today’s 23
junior analyst or researcher may be tomorrow’s portfolio manager, 24
able to influence the investment management company’s decision to 25
purchase a stock. 26
27
Strategy Orientation and Size 28
IR professionals should, of course, keep in mind that not all institu- 29
tional investors are the same. Some investment managers follow a 30
passive strategy, whose objective is to match the makeup of an index, 31
such as the Standard & Poor’s (S&P) 500 Index. Passive investors 32
tend to hold a stock for as long as the issuing company is a member 33
of the relevant index. A passive investor’s purchases and sales of 34
stock are usually driven by the purchases and redemptions of the 35
investment manager’s clients. Although every investment manager 36
should certainly be taken seriously, index managers are obviously not 37
 224 THE NEW INVESTOR RELATIONS

1 the ones on which IR professionals should concentrate their efforts.

2 Most investment managers follow an active strategy. Actively
3 managed portfolios usually do not mirror an index, so the managers
4 have more discretion in what they purchase and how positions are
5 weighted in the portfolio.
6 There are many different ways to categorize active managers, but
7 for the purpose of this chapter, they are divided into “real money”
8 investors and “momentum players” (see Figure 15-1). Real money
9 investors tend to make decisions based on fundamental data and can
10 be further subcategorized into long-term and medium-term
11 investors. Long-term investors will hold a stock for two or more
12 years. Medium-term investors will hold a stock for six months to two
13 years. Real money investors typically do not employ leverage to
14 purchase a company’s stock. As “buy-and-hold” investors, they are a
15 very important investing audience.
16 Momentum players are less interested in the fundamentals of a
17 company. They are motivated by anticipated events that could affect
18 a company’s stock—for example, a future earnings announcement,
19 a new business contract, a litigation outcome, a merger, or a man-
20 agement change. Some momentum investors rely on technical
21 indicators based on the stock price movement. Momentum players
22 typically have very short-term holding periods, which may range
23 from several hours to six months. Some also employ leverage in
24 their strategies, which can magnify the impact their actions have on
25 a company’s stock price. When a stock price suddenly declines 10
26 to 20 percent and no news has been released by the company or by
27 any brokerage analyst that covers it, a reasonable conclusion is that
28 the sudden decline is the result of the actions of one or more
29 momentum players.
30 Another category of momentum players includes short sellers.
31 Most short sellers are also event-driven, capitalizing on negative
32 events and the resulting decline in a security’s price. The exceptions
33 are those investors who are selling short to hedge their purchases of
34 a company’s convertible debt.
35 Some publicly traded companies pay attention only to the largest
36 institutional investors or to their largest shareholders. They may go
37 so far as to allow only large institutional investors access to senior
THE INFORMATION INVESTMENT MANAGERS WANT 225

1
2
FIGURE 15-1 Institutional Investors 3
From an IR Perspective 4
5
Institutional Investors 6
7
8
Real Money Investors Momentum Players 9
10
F OCUS
11
12
Passive Active Long Buyers Short Sellers
13
14
15
Long-Term Medium-Term
Holding Period Holding Period 16
(2+ years) (6 months–2 years) 17
18
19
management. Some companies even screen out smaller institutional 20
investors from asking questions on quarterly-earnings conference 21
calls. This is a mistake for obvious reasons, many of which are detailed 22
below, but the practice nevertheless continues. 23
The first reason for not ignoring smaller institutions is that they 24
are still investors and can decide to sell. In soft markets, even mod- 25
est selling can drive prices down. We may have entered a sustained 26
period in which large institutions will not have more and more 27
money each year to throw around. Think about the net outflows 28
that the mutual fund industry has been experiencing month after 29
month. If small institutions decide to sell, the big investors may not 30
be there to sop up the shares. Indeed, they may be forced to be net 31
sellers, too. 32
Second, analysts and portfolio managers tend to move from large 33
firms to small ones, and vice versa. Large institutional investors may 34
shrink, particularly if their investment performance is poor, and small 35
institutional investors may grow. Hence it is important to treat all 36
institutional investors equally. 37
 226 THE NEW INVESTOR RELATIONS

1 Additionally, many companies mistakenly ignore fixed-income

2 investors in favor of equity investors. In many institutional invest-
3 ment firms, the fixed-income analysts and equity analysts regularly
4 discuss the companies they follow. The discussions may influence the
5 investment firm’s decision to purchase a stock and the weighting
6 assigned to it in the portfolio. Moreover, should the company decide
7 to access the public debt markets in the future, it will already by
8 familiar to the investment community. This may pay off in the form
9 of a well-subscribed debt offering at a commensurately lower interest
10 rate cost.
11
12
13 Institutional Investor Information Needs
14 Institutional investors want access to information to help them make
15 better decisions about the eventual purchase of a company’s stock.
16 Several years ago, companies spent a lot of money on slick, glossy
17 investor relations kits that contained highly produced annual reports
18 and supplementary documentation. Most institutional investors,
19 however, are inundated with paper and, with the advent of broad-
20 band connections on the Internet, would prefer to receive company
21 information in an electronic format.
22
23 Electronic Communication
24 Publicly traded companies interested in attracting and retaining
25 investors should have well-designed websites that provide basic com-
26 pany information, access to SEC filings, press releases, and the most
27 recent annual and quarterly reports in an easily readable format—for
28 example, Adobe Acrobat. A company’s website should also contain
29 information about its products and strategy, attitude and culture, and
30 professional biographies of key senior managers. In addition, it should
31 include recent presentations that the company has made to institu-
32 tional investors and at conferences or in one-on-one contexts. A
33 good model is the website for Millipore Corp. (www.millipore.com),
34 a Big Board–listed company that provides “separations technology”
35 for the life science industry. Some companies are justifiably concerned
36 about releasing information that could end up in competitors’ hands.
37 One solution is to require visitors to a website to register. In this way,
THE INFORMATION INVESTMENT MANAGERS WANT 227

the company can discern whether the person making an inquiry is a 1

bona fide institutional investor. 2
The fact that information is released in electronic format is not a 3
license to be oblique. Institutional investors want transparent finan- 4
cial disclosure. They want straightforward footnotes to financial 5
statements and disclosure of items that may impact earnings in future 6
reporting periods. Institutional investors generally prefer that com- 7
panies adopt FASB (Financial Accounting Standards Board) rules 8
earlier than the prescribed deadline. Early adoption reduces uncer- 9
tainty about the effects of rule changes and demonstrates that the 10
company is making a good-faith effort to fairly represent its opera- 11
tions in the financial statements. 12
Companies that earn a significant amount of revenue from licens- 13
ing should perform additional disclosure. An excellent example of 14
this practice is provided by Qualcomm. (www.qualcomm.com), a 15
digital and wireless communications company that provides very 16
good disclosure regarding its intellectual property and licensing rev- 17
enue. Institutional investors appreciate companies that exhibit a spir- 18
it of transparency. It doesn’t take long for most veteran investors to 19
sense that a company is sitting on information. 20
Institutional investors like to receive e-mailed updates. Most 21
company websites offer investors the opportunity to register for reg- 22
ular e-mail communications, which may disclose financial informa- 23
tion as well as significant company announcements. Investment 24
managers prefer portable e-mailed updates to paper updates sent via 25
regular mail or fax. Such electronic information is more convenient. 26
It can be received on mobile hand-held devices, categorized, and 27
easily filed based on rules that are easily programmed into e-mail 28
software. E-mail is also timelier than an announcement sent by 29
regular mail. 30
31
Conference Calls 32
Institutional investors generally prefer at least quarterly conference 33
calls with company management. Since the introduction of Regula- 34
tion Fair Disclosure (FD), most conference calls have become highly 35
scripted affairs, probably too much so, from the investor’s perspec- 36
tive. Often, corporate legal counsel, fearful of inadvertently violating 37
 228 THE NEW INVESTOR RELATIONS

1 a regulation or being sued by a shareholder, guides senior manage-

2 ment to a sometimes “Dragnet-like” recitation of the facts. How-
3 ever, such calls are still valuable. Most companies allow questions at
4 the end of the company announcement, and the answers to these are
5 often more important than the scripted part of the call. It is worth
6 noting that the most interesting questions usually come from other
7 institutional investors, not from brokerage analysts.
8 Despite that, some publicly traded companies allow only broker-
9 age analysts or large shareholders to pass through the filter to ask
10 questions on a conference call. This is a mistake. If a company has
11 nothing to hide, why shouldn’t it take on all comers? Investors can
12 easily identify the planted questions and scripted answers, and this
13 action merely serves to hurt the company’s credibility.
14 Since many companies hold conference calls on the same days
15 (and sometimes at the same time of day) during the earnings season,
16 it is wise to have replays of the conference calls available online or at
17 a toll-free number for at least one or two weeks following the origi-
18 nal date of the call.
19
20 Face-to-Face Meetings
21 Institutional investors also value face-to-face meetings with senior
22 management. These meetings, which may take the form of confer-
23 ences, meetings in investment manager offices, analyst days, or even
24 tours of company facilities, are important because they enable
25 investors to personally assess senior managers rather than just read
26 about them or hear them talk over the telephone. It’s entirely possi-
27 ble that, on occasion, charisma carries more weight than facts: Surely,
28 some managements have won the confidence of Wall Street without
29 comprehensible business models but with a lot of attitude. Enron
30 comes to mind. But clarity and earnestness are just as impressive, and
31 more durable, to institutional investors.
32 Venues. Both analysts and portfolio managers will travel to visit a
33 company. Usually, the institutional investor will want to speak with
34 not one but various members of senior management. When arrang-
35 ing on-site face-to-face meetings a company should try to include a
36 tour of the facility, the grounds, or the factory, if it is a manufacturer.
37 A facility tour provides an opportunity to observe how work actually
THE INFORMATION INVESTMENT MANAGERS WANT 229

gets done and can create a lasting impression that may help the 1
investor make a more informed decision. 2
Often, a company has a chance to make a presentation at a con- 3
ference hosted by a brokerage house. These conferences may include 4
hundreds or thousands of investors and several dozen companies. 5
Company presentations typically are made to groups of 50 to 100 6
investors and often follow a strict format. A breakout session with a 7
smaller group follows the presentation. The advantage of a confer- 8
ence is that a company can reach a relatively large number of investors 9
in one or two hours. The disadvantage is that the company’s message 10
can get lost in the crowd, since investors are listening to up to six or 11
more presentations in one day. In such sessions, it must be conceded 12
that a little razzmatazz is in order, since it is necessary to stand out 13
somehow in the crowd. 14
A common venue for face-to-face meetings is the investment man- 15
ager’s office. An investor relations firm or a brokerage firm often 16
escorts client companies across the country to visit numerous institu- 17
tional investors. These meetings are usually very efficient, because the 18
investment manager typically has done some homework on the 19
company before the visit. There is debate in the industry as to whether 20
it is better to have an investor relations firm or a brokerage firm set up 21
the meetings with institutional investors on a company’s behalf. 22
Although there are positives to both approaches, it can be argued that 23
an introduction made by an IR firm provides the appearance of greater 24
independence on the part of the company and may translate to a 25
presentation that is more candid and free from conflict of interest. 26
Institutional investors prefer to keep a copy of the company presenta- 27
tions in their files and refer to them on a regular basis. 28
Analyst days are much like exclusive conferences held at the 29
company’s site. These are often well worth attending if the 30
investors are able to dedicate the time and make travel plans. The 31
downside to analyst days is that they generally attract only analysts 32
rather than portfolio managers or other investment professionals. 33
Although this is not necessarily a negative, it means that the company 34
has a limited audience. There is also the concern that most brokerage 35
analysts are Trojan horses, in search of investment banking work. 36
There may be a price to be paid for a “buy” recommendation. 37
 230 THE NEW INVESTOR RELATIONS

1 Content. The content of face-to-face meetings should focus on

2 the big picture, such as the firm’s strategic direction, its efforts to cut
3 costs, or its plans for a sustained share buyback program. It is better
4 to tell a few big stories well than to delve into minutia that will be
5 forgotten by the next day. A sensible business plan, which does not
6 assume ideal circumstances or ninth-inning home runs, should be
7 presented. Most investors will be familiar with a company’s earnings
8 growth and other financial numbers.
9 However, personal meetings need not be painted wholly in broad
10 brush strokes. Such meetings are good opportunities for company
11 management to explain important items that may be coming up in
12 the next proxy vote or to review accounting policies that may be dif-
13 ferent from those found in other industries. Institutional investors
14 like companies to make candid comments on their competitors. This
15 reveals a depth of knowledge about the industry and a willingness to
16 be frank. A victory over competitors or winning a market is a coup
17 that warrants being brought up, as is “stealing away” a key employee
18 or salesperson. When a smart individual who has spent much or all of
19 his or her professional life in an industry places a bet on a company
20 by moving there, it is bound to have an influence on investors.
21 Institutional investors use meetings with companies to gather the
22 information they believe to be important. Unfortunately for IR teams
23 at public companies, there are as many different investment styles as
24 there are investors. Some institutional investors focus on qualitative
25 factors, such as brand management and human resources. Others
26 look at measures of financial performance. Still others try to get a
27 sense of the leadership qualities of senior management. They may be
28 asking themselves what it would be like to work for the person with
29 whom they are meeting. Obviously, this is a personal judgment and
30 hardly the determining factor in a decision to buy or sell a stock.
31 Nevertheless, if they wouldn’t like to work for this management, who
32 would? Will the company have trouble retaining talented employees?
33 One question investors may ask managers is how they sell their
34 company to potential hires. For example, if a company is in the
35 biotechnology industry, how would they recruit a new doctorate-
36 level research scientist? The motivation in asking the question is that
37 happy employees are usually productive as well. Investors will get a
THE INFORMATION INVESTMENT MANAGERS WANT 231

sense of corporate culture during a personal visit. Again, company 1

management and IR teams need not worry excessively that this is a 2
matter of suave presentations, natty attire, or charisma. Investors will 3
also want to find out if management regards itself as working for 4
shareholders, rather than regarding shareholders as a group that must 5
be tolerated, appeased, or handled. If the board, particularly the inde- 6
pendent directors, are all a little too cozy, investors will want a good 7
explanation why. 8
9
10
Know Your Stock and Its Place in the Universe 11
Stock is a product much like the product or service the company sells, 12
except that, unlike consumers, shareholders own the company. 13
Companies should understand their stock as well as they do their 14
products or services. They should also learn something about the con- 15
sumers who buy their stock. Knowing the indexes in which a stock is 16
represented is a good place to start. The stock may be included in 17
broad indices such as the S&P 500 or the Russell 2000 index of 18
small-cap stocks. It may also be incorporated into a style index, 19
such as the S&P/Barra Growth index or the Russell 2000 Growth 20
index. The weighting a stock has in these indices is also important 21
information. 22
There are more than six thousand investment advisers registered 23
with the SEC. To help a publicly traded company narrow this uni- 24
verse, its investor relations staff should research the one hundred 25
largest investment managers in the specific asset class in which its 26
stock is represented. This may differ significantly from the one hun- 27
dred largest investment managers overall. The IR staff should then 28
ascertain the amount of money managed, both actively and passively, 29
against the benchmark index of which the stock is a member. This 30
will give the company a sense of the potential market for its stock. 31
Obviously, if the stock is large-cap and included in the S&P 500 32
index, seeing a manager who specializes in small-cap stocks is not a 33
good use of time. 34
The next step is to determine what would make particular man- 35
agers purchase the stock or add to existing positions in it. This again 36
depends on the type of investment strategy the managers follow. For 37
 232 THE NEW INVESTOR RELATIONS

1 some, the decision to purchase a new stock or beef up a position in an

2 old one will depend on fundamental variables. Stable or increasing
3 operating margins, increasing or stable revenues, and similar measures
4 will entice these investors to buy a stock. If the company shows an
5 ability to generate enough free cash flow to sustain a stock buyback
6 program, this too creates an attraction among more fundamentals-
7 oriented managers.
8 Managers who are more event-oriented will not purchase until,
9 for example, a new product is released or a new senior executive is
10 hired. Others focus mostly on technical indicators and will not buy
11 until, say, the 50-day moving average of closing prices for a stock
12 crosses above the 200-day moving average.
13 IR executives should also understand what would cause investors
14 to sell a stock. Generally, the reasons are the inverse of those for pur-
15 chasing it. But there may be other reasons, as well. Stock indices are
16 rebalanced at different intervals. For example, the Russell stock
17 indices are reconstituted once each year, in June. If a company’s
18 stock migrates from the Russell 2000 to the Russell 1000, the uni-
19 verse of buyers for that stock will change. This may cause selling
20 from both passive and active investment managers. A logical infer-
21 ence is that the selling by small-cap investors should equal the pur-
22 chases by large-cap investors. Recall, however, that stock indexes are
23 capitalization-weighted: The larger the market capitalization, the
24 greater the weight in the index. So, a stock will have a greater weight
25 in the Russell 2000 small-cap stock than in the Russell 1000 large-
26 cap stock index. Ironically, a company could be growing, migrating
27 up to the Russell 1000 from the Russell 2000, and yet experience
28 some selling pressure. A clever IR team might try to reach appropri-
29 ate institutional shareholders and advise them of a pending potential
30 buying opportunity.
31
32
33 I N THE FINAL ANALYSIS , a company’s IR team, along with senior
34 management, needs to focus on factors that can be controlled. There
35 are also factors beyond their control that they must accept. Some
36 investment managers are going to “rent” their stock and have high
37 turnover. Some will sell the stock in a sloppy manner, causing the
THE INFORMATION INVESTMENT MANAGERS WANT 233

price to fall inexplicably. Some will short the stock. Others will buy 1
or sell based solely on technical indicators, while others will buy or 2
sell as the stock moves from one index to another. And some invest- 3
ment managers will never buy your stock, because it is a type they 4
simply do not hold. Blue-chip managers, for example, generally 5
eschew small cap stocks. 6
The IR team must accept these realities and concentrate its 7
resources on those institutional investors who are making practical 8
judgments about buying and selling stocks that are similar to the 9
company’s. The team should develop a rapport with institutional 10
investors who are likely to buy and hold the company’s stock. And 11
remember, every such investor is important, not just those from large 12
funds. The corporate culture should impress money managers in per- 13
sonal meetings. That almost always means showing respect for good 14
corporate governance and shareholders. 15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
IR AND THE CREDIT-RATINGS PROCESS 219

1
Surveillance and Ongoing Maintenance Coverage 2
Credit ratings on publicly distributed issues are monitored for at least 3
three years. Companies that have requested the rating have the 4
option of surveillance, or being reviewed by the agency on what is 5
termed a “point-in-time” basis. Surveillance is performed by the 6
same credit analysts who work on the original rating assignment. To 7
facilitate surveillance, companies are requested to put the primary 8
analyst on mailing lists to receive interim and annual financial state- 9
ments and press releases. 10
The primary analyst then remains in regular telephone contact 11
with the company to discuss ongoing performance and develop- 12
ments. When these vary significantly from expectations, or when a 13
major, new financing transaction is planned, scheduling of an update 14
management meeting is appropriate. Also, Standard & Poor’s encour- 15
ages companies to discuss hypothetically—again, in strict confidence— 16
transactions that are perhaps only being contemplated (e.g., acquisi- 17
tions, new financings). Standard & Poor’s, and the other credit- 18
rating agencies, are generally frank about the potential ratings impli- 19
cations of such transactions. 20
In any event, management meetings are routinely scheduled at 21
least annually. These meetings enable ratings agency analysts to keep 22
abreast of management’s view of current developments, to discuss 23
businesses that have performed differently from original expectations, 24
and to be apprised of changes in plans. As with initial management 25
meetings, Standard & Poor’s willingly provides guidance in advance 26
regarding areas it believes warrant emphasis at the meeting. Typically, 27
there is no need for management to dwell on the sort of basic infor- 28
mation covered at the initial meeting. Apart from discussing revised 29
projections, it is often helpful to revisit the prior projections and dis- 30
cuss how actual performance varied, and the reasons for this variance. 31
A significant proportion of the meetings with company officials 32
take place on their own premises. This allows the credit-rating ana- 33
lysts to see members of management in their own environment, espe- 34
cially at the operating level. While no false fronts should be erected 35
by IR professionals or anyone else, company officers should be well 36
informed about the pending visit and be prepared. There have been 37
 220 THE NEW INVESTOR RELATIONS

1 unfortunate episodes in which well-run companies—perhaps because

2 operating people were working hard—made terrible impressions on
3 analysts. Key people have been “out in the field” leaving less-quali-
4 fied underlings to handle questions or make presentations. One boss
5 having a bad day on display can make a whole company suspect. IR
6 professionals should be aware of any such pitfalls that can be avoided
7 honestly.
8 Ratings agencies provide a recognized guide for a broad spectrum
9 of participants in the financial markets. In reviewing and making pro-
10 nouncements on an issuer’s financial strength, they have become
11 powerful players with whom IR professionals need to interact effec-
12 tively to safeguard the interests of their constituency.
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
 1
2
Index 3
4
5
6
7
8
9
10
accounting issues, non-U.S. issuers disclosures, 32 11
and, 189–190 marketing investment thesis, 29, 12
Adelphia Communications, 42 32–33 13
advertising, proxy fights and, 163 pro forma reporting, 30–31 14
Aetna, 28 public presence, 36–39 15
aiding and abetting provisions, 50–51 transformation in, 25–26 16
Allen, Donald, 3–21 Blunn & Co., 36 17
Allen, James, 79 bonuses, forfeiture of, 49 18
Allen Group, 3 Boston Manufacturing Co., 5 19
Alston & Bird LLP, 41 brokers, retail, 202–203 20
American Stock Exchange (AMEX), Buffett, Warren, 17, 52, 107 21
206, 207 business combinations, 91 22
American Tobacco Co., 69 business profile, non-U.S. issuers and, 23
analysts, 222–223 184–185 24
Arthur Andersen, 51 Business Week, 71 25
antifraud provisions, 96, 193 buybacks 26
AT&T, 61 as an alternative to mergers, 79–81 27
appeal of, 16 28
balance sheets, review of, 27 countering arguments against, 29
bankruptcy discharge, 50 85–87 30
Banz, Rolf W., 199–200 float issues, 87–88 31
benchmarking, 205–206 reasons for not using, 81–82 32
Berkman, Neil G., 77–88 repurchasing programs, advantages 33
Neil Berkman Associates, 77 of permanent, 82–84 34
Berkshire Hathaway, 17 role of, 78 35
Bernays, Edward, 68–69 sustainability, 78 36
blue-chip companies buyer’s market, 26–28 37
buyer’s market and, 26–28 38
corporate governance communica- California Public Employees’ Retire- 39
tions, 29–30, 33–36 ment System (CalPERS), 34 40
defensive strategies, need for, Capital Asset Pricing Model (CAPM), 41
27–28 200 42
defined, 24 Capital Research & Management, 87 43

235
 236 INDEX

Cappello, Alexander L., 105–117 defined, 33–34

Cappello Capital Corp., 105 non-U.S. issuers and, 187–189
Carlyle, Thomas, 73 proxy fights and, 153–154
cash tender offers, 92, 94 costs
CBS, 69 microcap, 198–199
CBSMarketwatch.com, 59 proxy fight, 166–167
ccbn.com, 127 credit-rating agencies, role of,
Cendant Corp., 46 210–211
Center for Financial Research and credit ratings
0 Management, 80 assignment, 213, 214
1 Center for Integrated influence of, 209
2 Communication, 62 liquidity and funding risks, 218
3 Center for Research in Securities management meetings, 216–218
4 Prices (CRSP), 199, 200 monitoring, 219–220
5 Central Bank of Denver, N.A. v. quantitative and qualitative com-
6 First Interstate Bank of ponents, 211–213
7 Denver, 50 request for, 213–216
8 Cisco Systems, Inc., 45 CreditWeek, 215
9 CIT Group, 27 crisis investor relations
0 CNBC, 59, 141 basics of, 144–146
1 CNN, 59 traditional versus, 142–144
2 Coca-Cola Inc., 61, 129 crisis situations
3 communication media, role of, 140–141
4 corporate governance and, 29–30, preparation for, 130–132,
5 33–36 139–140
6 electronic, 226–227 telling your side of the story, 140
7 methods of, 18–20, 226–231 Crystallizing Public Opinion
8 non-U.S. issuers and, 190–194 (Bernays), 69
9 Regulation M-A, 90–94
0 company image, 4–5 D’Amato, Alfonse, 43
1 Compaq Computer, 169–179 Deutsche Bank, 175
2 Computer Associates, 35 disclosure
3 Cone, Kenneth R., 169–179 confidence and, 41–42
4 Conference Board Commission on evolution of, 5
5 Public Trust and Private initial public offerings and,
6 Enterprise, 53 128–132
7 conference calls, 18, 227–228 material information, 6–7
8 Coolidge, Calvin, 69 non-U.S. issuers and, 187–189,
9 Corporate Communications 191–193
0 Broadcast Network, 127 policy, creating and maintaining,
1 corporate governance 7–9
2 blue-chip companies and role of, qualitative, 32
3 29–30, 33–36 real-time, 47–48
INDEX 237

Regulation Fair Disclosure (Reg and Fraud in Financial 1

FD), 9–10, 11, 18, 47, 65–66, Reports (Schilit), 80 2
97–103, 192–193 Fiorina, Carly, 169, 170, 171, 175 3
Regulation G, 66–67 First Union Corp., 163 4
Regulation M-A, 90–94 Fischel, Daniel R., 169–179 5
responsibilities of investor relations Fitch, 210, 214 6
officers, 29, 32 Five Minute Rule, 7 7
selective, 93, 99–100, 192–193 float issues, 87–88 8
structured versus unstructured, 6 Forbes, 71, 110, 111 9
Disney, 28 Form 6-K, 191 10
dividends, 77 Form 8-K, 6, 10, 100–101 11
Dodge Motors, 69 Form 10-K, 6 12
Druckenmiller, Stanley, 26 Form 10-Q, 6 13
Form 20-F, 191 14
Ebbers, Bernard, 52 forward-looking statements, 43, 44 15
Edelman Financial Communications, Fourth Estate, 73 16
23 Fox Entertainment Group, 59 17
Strategy One, 34, 36 18
EDGAR, 95, 96 Gallagher, Terrance, 33, 34–35 19
Emerging Companies Research General Electric Corp., 26, 52, 69 20
Institute (ECRI), 195, 196 generally accepted accounting princi- 21
employee stock ownership plans ples (GAAP), 31, 47, 189–190 22
(ESOPs), 157 Georgeson Shareholder 23
Enron Corp., 25, 42, 45, 48, 52 Communications Inc., 149, 24
EVC Group, 119, 124, 128 150, 163 25
executives and board members Gillette Co., 129 26
bonuses, forfeiture of, 49 Goodwin, Bryce, 23–40 27
liability and personal assets of, Great Depression, 5 28
51–52 Griep, Clifford M., 209–220 29
reforms in compensation, 52–53 growth investors, 16 30
31
Fidelity, 87 Harper, Heather, 23–40 32
Financial Accounting Standards Hartigan, John F., 89–103 33
Board (FASB), 3, 227 Hewlett, Walter, 169, 170, 175, 34
Financial Executives International 178–179 35
(FEI), 31 Hewlett-Packard, 169–179 36
financial reporting, 10–12, 29 high-net-worth investors (HNWIs), 37
corporate responsibility for, 49 201–203 38
internal control, 48 Hilsen, Scott P., 41–57 39
pro forma, 30–31, 48 History of the Standard Oil 40
restatement, 46 Company (Tarbell), 68 41
Financial Shenanigans: How to holding companies, 186 42
Detect Accounting Gimmicks Home Depot, 78 43
 238 INDEX

Ibbotson Associates, 196 (ISS), 156, 161, 171, 172–173

IBM, 6–7, 78 intangibles, 60–61
ICN Pharmaceuticals, 163 Intel Corp., 45
ImClone, 7 internal control reports, 48
initial public offerings (IPOs) Internet
case example, 119–121 microcaps and, 207
crisis situations, preparation for, use of, 18–19, 71, 226–227
130–132 investor relations (IR)
disclosures, 128–132 See also crisis investor relations
0 getting started, 121–123 communication, methods of,
1 infrastructure, 133–135 18–20
2 motivations for, 121–122 defined, 3, 28
3 operating metrics, analysis of, development of, 70–71
4 124–125 disclosure, 5–10
5 operating metrics, comparison of, elements of, 3–4
6 125 flexibility and adaptability, need
7 operating metrics, identifying, for, 21
8 123–124 message development, 12–15
9 operating metrics, monitoring, purpose of, 4–5, 28–29
0 126 reporting, 10–12
1 peer group identification, 123 targeting the right investors,
2 presentation, 132–133 15–18
3 realism versus optimism, 121 investor relations officers (IROs)
4 revenue forecast reality check, purpose of, 28–29
5 127–128 responsibilities of, 29–30
6 insider trading, 6–7, 49 investors
7 institutional investors See also institutional investors
8 access to information, methods of, categories of, 15–16
9 226–231 targeting the right, 15–18
0 analysts, 222–223 Investor’s Business Daily, 71–72
1 long-term, 224 ITT, 163
2 medium-term, 224
3 momentum players, 16, 224 Ladies Home Journal, 67
4 passive, 223–224 Lay, Kenneth, 52
5 portfolio managers, 223 Lee, Ivy, 68
6 real money, 224 Lefebvre, John R., Jr., 195–208
7 research departments, 223 legal advice, protection of, 69–70
8 short sellers, 224 Levitt, Arthur, 50
9 small, reasons for not ignoring, Lexecon Inc., 169
0 225 licensing revenue, 227
1 strategies depending on size of, litigation
2 223–226 aiding and abetting provisions,
3 Institutional Shareholder Services 50–51
INDEX 239

class action, to deter corporate face-to-face, 228–231 1

fraud, 51 mergers and acquisitions (M&A) 2
forward-looking statements, 43, antifraud provisions, 96 3
44 business combinations, 91 4
personal assets of executives and cash tender offers, 92, 94 5
board members, 51–52 Hewlett-Packard example, 6
to prevent proxy fights, 159 169–179 7
Private Securities Litigation plain English requirement, 97 8
Reform Act (1995), 43–45, problems with, 79–81 9
51 proxy solicitations, 91–92 10
reforms in executive compensa- Regulation Fair Disclosure (Reg 11
tion, need for, 52–53 FD), 97–103 12
restatement, 46 Regulation M-A, 90–97, 13
Sarbanes-Oxley Act (2002), 20, 102–103 14
47–50 message development, 12–15 15
scandals and the resulting need to microcap companies 16
reform securities, 42–43 attracting individual investors, 17
statistics, 44, 45 195–201 18
strike suits, 43 attracting institutional investors, 19
Lotus Development Corp., 6–7 204–205 20
benchmarking, 205–206 21
management assessment of internal comparisons, making, 199–200 22
controls, 48 costs, 198–199 23
management discussion and analysis defined, 195 24
(MD&A), 11, 19 diversification and, 198–199 25
management meetings, credit ratings Internet, role of, 207 26
and, 216–218 managers of, 204–205 27
marketing investment thesis, 29, market structure for, 206–207 28
32–33 risk and return, 196–197 29
market research, 5 risk premium, 200–201 30
material information, 6–7, 99–100, size effect, 199–200 31
191 targeting advisers to high-net- 32
McDonald’s, 78 worth investors, 201–203 33
McLain, Thomas E., 183–194 Microsoft Corp., 25 34
McLuhan, Marshall, 59, 71 Millipore Corp., 226 35
media MiniScribe Corp., 46 36
crisis situations and role of, momentum investors, 16, 224 37
140–141 Moneyline, 59 38
protocols for working with, 73–74 Monks, Robert, 163 39
role of, 59, 67, 70–72 Moody’s, 210, 214 40
meetings Morgan, Lewis & Bockius, 89 41
credit ratings and management, muckraking journalists, 67 42
216–218 43
 240
RJR Nabisco, 163
Nasdaq Small Cap Issues system,
206
National Association of Investors
Corp. (NAIC), 17
National Investor Relations Institute
(NIRI), 7–9, 19, 28, 30–31,
54, 62, 66, 100, 134
Nationally Recognized Statistical
0 Rating Organizations
1 (NRSROs), 210, 211
2 news releases, 18
3 New York Stock Exchange, 151
4 New York Times, 72
5 1995 Reform Act. See Private
6 Securities Litigation Reform
7 Act (1995)
8 non-U.S. issuers
9 accounting issues, 189–190
0 antifraud rules, 193
1 business profile, 184–185
2 communications with investors
3 and the public, 190–194
4 corporate governance and disclo-
5 sure, 187–189, 191–193
6 internal controls, 193–194
7 jurisdiction of incorporation,
8 186–187
9 preparing to offer securities in the
0 U.S., 184–190
1 Procter & Gamble, 69
2 off-balance-sheet transactions, 48
3 offshore finance subsidiaries,
4 186–187
5 operating metrics
6 analysis of, 124–125
7 comparison of, 125
8 identifying, 123–124
9 monitoring, 126
0 Orndorff, Christopher N., 221–233
1 162–164
2 Payden & Rygel Investment Co., 221
3 Pelnar, Gregory J., 169–179
INDEX
People’s Republic of China (PRC),
185
PepsiCo, 61
Pfizer, 33, 34–35
Pillmore, Eric, 35
PIPEs (private investment in public
equities)
advisers, hiring, 114–115
being prepared for unexpected,
109
defined, 105
don’t be arrogant, 111–112
goodwill, generating, 116–117
honesty and reputations, 112–114
importance of being discreet,
107–117
overselling and leaks, 107–109
proxy fights and, 158
relations with public relations,
110–111
role of investor relations team,
105–107
plain English requirement, 97
Plexus Group, 198, 200
portfolio managers, 223
Power Lunch, 141
press releases, 68, 101, 190
printed materials, standards on, 19
Private Securities Litigation Reform
Act (1995), 7, 42, 43–45, 51
Profit From the Core (Zook and
Allen), 79
pro forma reporting, 30–31, 48
proxy fights
alternatives, 157–159
battle plan preparation, 155–157
cost of, 166–167
defined, 151–152
leveraging investor relations,
management versus dissident posi-
tioning, 164–165
INDEX 241

offensive, going on the, 165–166 Regulation G, 66–67 1

readiness for, 149–151 Regulation M-A (Regulation of 2
shareholders, identifying and tar- Takeovers and Security Holder 3
geting, 155–156, 157, Communications), 90–97, 4
160–161, 166 102–103 5
statistics on, 150–151 Reinganum, Marc R., 199–200 6
Trojan horse, 151 reporting. See financial reporting 7
vote projection, 156 repurchasing programs, advantages of 8
vulnerability for, 154 permanent, 82–84 9
what triggers, 152–154 reputation, 24, 62–63 10
winning team, creating a, 159–160 research departments, 223 11
proxy solicitations, 91–92, 160 restatement, 46 12
public presence, 30, 36–39 returns, 24 13
public relations revenue forecast reality check, 14
convergence with investor rela- 127–128 15
tions, 60–62, 71–74, 111 Rieves, Ralph A., 195–208 16
development of, 67–70 risk, 24 17
media, role of, 59 microcaps and risk and return, 18
reputation, 62–63 196–197 19
responsibilities, key, 63–65 microcaps and risk premium, 20
200–201 21
Qualcomm, 227 Robertson, Julian, 26 22
Rockefeller, John D., Jr., 68 23
Rafkin-Sax, Hollis, 23–40 Roosevelt, Theodore, 68 24
RAMP, 215 Ross, David J., 169–179 25
ratings agencies. See credit-rating Rule 10b-5, 96, 191–192 26
agencies Rule 14a-9, 92 27
recapitalization, 159 Rule 14a-11, 153 28
Reform Act. See Private Securities Rule 14e-8, 96 29
Litigation Reform Act (1995) Rule 165, 91 30
Regulation Fair Disclosure (Reg FD), Russell 1000 index, 232 31
11 Russell 2000 Growth index, 231 32
communicating to all investors Russell 2000 index, 231, 232 33
and, 47 34
conference calls and, 18 safe harbor, 7, 91 35
credit-rating agencies and, 210 Safe Harbor Act, 8 36
materiality and, 99–100 Sarbanes-Oxley Act (2002), 20, 37
non-U.S. issuers and, 192–193 47–50, 81, 187 38
in practice, 100–102 Sawicki, Theodore J., 41–57 39
purpose of, 9–10, 65–66 Schilit, Howard, 80 40
reasons why SEC adopted, 97–98 Sears, Roebuck & Co., 163 41
Regulation M-A and, 102–103 Securities Act (1933), 5, 6, 41, 90 42
scope of, 98–99 Securities Exchange Act (1934), 5, 6, 43
 242
41, 90, 96, 191–192, 193
Securities and Exchange Commission
(SEC), 3
creation of, 5
disclosure statements, 6
Net Capital Rule, 210
printed materials, standards on, 19
pro forma reporting, 31
proxy fights and, 157
0 Regulation Fair Disclosure, 9–10,
1 11, 18, 47, 65–66, 97–103,
2 192–193, 210
3 Regulation G, 66–67
4 Regulation M-A, 90–97, 102–103
5 reporting requirements, 10–12
6 Sarbanes-Oxley Act (2002), 20,
7 47–50
8 Self-Regulatory Organization (SRO)
9 rules, 101
0 Shareholder Relations, 195
1 shareholders
2 activists, 28
3 list, 157
4 profiles, 155–156
5 proxy fights and identifying and
6 targeting, 155–156, 157,
7 160–161, 166
8 proxy fights and meeting with key,
9 163
0 Sherk, Douglas M., 119–135
1 Shimada, Yoshiki, 183–194
2 short sellers, 224
3 Sidley Austin Brown & Wood LLP,
4 183
5 Silver, David, 59–74
6 Silver Public Relations, 59
7 Sinclair, Upton, 67
8 Sitrick, Michael S., 139–147
9 Sitrick and Company, Inc., 139, 143,
0 146
1 size effect, 199–200
2 Soros Fund Management, 26
3 Squawk Box, 59
INDEX
Standard & Poor’s, 209, 210, 212,
214, 215, 216–217, 219
Barra Growth index, 231
500 index, 231
Standards of Practice Handbook for
Investor Relations (NIRI), 7–9
statute of limitations, 49
Steffens, Lincoln, 67
Stewart, Martha, 7, 69
stock ownership, first idea of, 5
structured disclosure, 6
SunTrust, 163
Tarbell, Ida, 67, 68
targeting the right investors, 15–18
tender offers, 92, 94
TheStreet.com, 59
13D and 13F filings, 155–156
Thompson, Louis, 7, 54, 62
Thomson Financial, 34
TIAA-CREF, 35
Tiger Management, 26
Trojan horse, 151
TSC Industries, Inc. v. Northway,
Inc., 99
Tyco International Ltd., 35, 42
Understanding Media: The
Extensions of Man (McLuhan),
59
unstructured disclosure, 6
value investors, 16
Value Investors’ Club, 17
Vinik, Jeffrey, 26
Vinik Asset Management, 26
Wachovia Corp., 163
Wall Street Journal, 71
Waste Management Inc., 46
webcasts, 101–102
websites, use of, 226–227
Welch, Jack, 52
INDEX 243

white knights, 158 1

Wilcox, John C., 149–167 2
WorldCom, Inc., 25, 42, 52 3
World Federation of Investors, 17 4
Wyly, Sam, 35 5
6
Your World with Neil Cavuto, 59 7
8
Zook, Chris, 79 9
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 About Bloomberg

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 About the Editor 1
2
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4
Benjamin Mark Cole has been a financial journalist for more than two 5
decades, starting as a researcher-reporter with U.S. News & World 6
Report in Washington, D.C., in 1980. After four years with U.S. News, 7
covering federal budget issues, securities, and the economy, Cole 8
returned to his native Los Angeles to help launch Investor’s Daily (now 9
10
Investor’s Business Daily), the financial newspaper. Cole then joined the
11
staff of The Los Angeles Herald Examiner as a reporter on the daily 12
paper’s “Money” section. In 1986, his investigation of insurance indus- 13
try practices was cited by the Heart newspaper group as “the best busi- 14
ness story of the year” for the entire, nationwide chain. Later that year 15
Cole joined the Los Angeles Business Journal, covering the securities 16
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industry and general economic news. In 1997, Cole won the Best
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Feature Story of the Year from the Association of Area Business Journals 19
in a national competition of more than fifty regional business publica- 20
tions. Cole also authored the popular “Wall Street West” column for the 21
Business Journal, from 1997 through 2003. In addition, Cole has writ- 22
ten weekly national columns on the securities industry for Knight- 23
24
Ridder and for Bridge Information Systems. In 2001, Bloomberg Press
25
published Cole’s book, The Pied Pipers of Wall Street: How Analysts 26
Sell You Down the River. Cole testified before Congressional hearings 27
on brokerage industry analyst abuse that same year. Cole is a graduate of 28
the University of California at Berkeley and obtained a master’s degree 29
from the University of Texas at Austin’s Lyndon B. Johnson School of 30
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