Effective IR: how much is “art”, how much is “science” and does it matter?

Recently I’ve been spending a lot of time in Asia. I participated in IR conferences in Sydney, Singapore and Hong Kong and other events across the region. During my travels I was struck by how often I heard people refer to “the art of investor relations” and how infrequently - in fact never – I heard anyone speak about investor relations as a science.

This might seem like an argument over semantics but the distinction matters. I think the perception of IR as an “art” may be holding back the professional development of IR executives and having particularly adverse consequences for newly listed companies and firms with inexperienced investor relations teams.

The unintended consequences of “the art of investor relations” attitude

I googled “art of investor relations” and wasn’t surprised to find that back in 2005 the National Investor Relations Institute (NIRI) touted their annual conference in just such terms. They advertised:

“Please join us for the 2005 NIRI Annual Conference. Look to NIRI for IR leadership. Learn important developments in regulation, finance and the “art” of investor relations at this year’s largest gathering of IR professionals. It could revolutionize how you do your job.”

Incidentally I found that in Belgium investor relations is not just an “art” it’s a “fine art” at least according to the home page of The Belgian Investor Relations Association.

Given these and other references I think it’s safe to say that some people see investor relations in terms of an “art”. This raises the question: what is the artistry they are referring too?

An Australian IR consultancy, Bourse Communications, ventures a definition of the “art” of investor relations on their website:

“The art of investor relations is to craft and communicate a company’s story to the investment community, and in doing so help ensure that its share price correctly reflects its underlying value.”

Antti Räikkönen, the former Director of Investor Relations at Nokia, is one of a hand full of IR executives that have been described in the press as a “master of the art” of investor relations. He says it is his openness and fairness with information that has won him his many investor relations awards. This suggests that the “art” of investor relations also has a disclosure management dimension.

In interviews and articles other press-anointed “masters” have talked of responsiveness, accessibility and transparency as their secrets to IR success.

My best guess is that the so-called “art” of investor relations combines effective listening, effective communication (written and spoken) and the talent to anticipate and meet the needs of a diverse constituency of analysts, investors, journalists and of course regulators.

So, the concept of IR as “art” is somewhat vague, but the “art” attitude does help explain the model of professional development foisted on most new entrants to the industry and reflected in the structure of IR training sessions run by most investor relations associations.

Just like a young Michelangelo new entrants to the investor relations profession, let’s call them IR novices, are encouraged to develop their skills by watching, listening and copying the styles and techniques of the industry’s leading practitioners, the perceived masters of the “art”.

Michelangelo had Domenico Ghirlandaio as his master for painting and Bertoldo di Giovanni as his master for sculpture. In IR we have our own modern day equivalents, the seasoned veterans of IR, who lecture about their experiences and tell colourful anecdotes to eager and attentive audiences at lunches and IR training events. The IR novices in the audience hope to be guided by the speakers’ insights towards a higher level of performance but the odds are stacked against them.

Firstly, it takes a very long time to assemble a valuable body of knowledge from anecdotes and observations alone.

Secondly, the outcome depends a great deal on the aptitude of the novice and their ability to draw the right conclusions and absorb the most meaningful insights.

The apprenticeship method works. It did produce Michelangelo. However, not many of us are so fortunate to be apprenticed to a Ghirlandaio or Bertoldo of IR. Also, whereas Michelangelo labored 24/7 at the feet of his masters the typical IR novice has only a week of intense training on investor relations at best.

In the United States NIRI members have the luxury of being able to choose from three university run IR training programs the best of which is probably the 175 hour course run by the University of California, Irvine.

Elsewhere in the world most IR novices don’t have access to an in-depth professional development program. If you look at the curriculums of most IR training courses you see that the focus tends to be on regulations, on how markets function with usually some basic accounting training thrown in for good measure. The rest of the training time is spent listening to experienced IR managers who in many cases bring a knowledgeable though usually narrow perspective to the course. There are also usually contributions from experienced analysts and fund managers, but, despite their careful selection as participants by the associations, this can be a bit hit or miss.

Throughout the year, the novice who is a member of a good IR association will get a chance to attend breakfasts, lunches or dinners and hear experienced IR professionals or IR service providers talk on various topics from the perspective of their personal experience. Generally there is little or no structure to IR professional development, few associations have clearly stated objectives for professional development and rarely are the outcomes measured in a meaningful way. Most IR novices face the difficult task of learning their profession on the job.

The issue is not whether investor relations associations add value, they definitely do, but maybe, if they look beyond the simplistic IR as “art” thesis, they can find more value to add. Pity the new IR manager of a company in a country that doesn’t even have an association or where the IR association functions like a social club. This is the unfortunate case that exists in much of the world.

Even if the IR novice has the good fortune to belong to a good association like the NIRI or IRS and sits through the many hours of events held each year listening to the best of the best in his profession he or she probably only picks up a handful of good ideas just a few of which will be implemented. On this basis it could take a decade to achieve a high level of proficiency.

One consequence is that listed companies compete to hire experienced IR managers but there are too few to go around. The lack of supply has driven the healthy rises in compensation packages for experienced IR executives in recent years. However, it also explains the large number of positions advertised on industry websites and the many that remain unfilled. Of course companies and the capital markets in general suffer as a consequence.

When companies have to hire a novice as IR manager they typically look for someone outside the IR industry but in a related field such as public relations or equities analysis. These new entrants come with baggage which in some cases can be quite counterproductive. They may for example place too much emphasis on spin or style over substance. Alternatively they may structure corporate communication in a way that’s great for analysts but makes a company unfathomable for the typical individual investor or time deprived fund manager. Companies that take this path need to realize that research shows that the great majority of listed companies aren’t being followed by even a single analyst.

Some companies take the path of hiring an IR consultant to bridge the experience and knowledge gap. Companies that do this often discover that the consultant doesn’t share his knowledge but operates much like a black box and perpetuates the idea of IR as “art” and he or she as the best artist for hire. A consequence of this can be that the senior executives at the company that should be actively involved in corporate communications end up delegating all or most of the thinking to outsiders. This has always been a recipe for bad IR.

Another draw back of the IR as “art” philosophy is that it is product centric and tends to neglect processes.

We admire Michelangelo’s paintings but few of us know how he painted them or have any hope of recreating them. We can’t, just by looking closely, deconstruct one of his masterpieces and have much chance of creating something approximating the original.

That, however, is the task that lies ahead for most IR novices, to deconstruct and then by trial and error reproduce good IR products. They are encouraged by award ceremonies and other events to admire the finished IR products of the masters – the award winning annual reports, the best IR presentations and IR websites – but rarely are they given a chance to learn the processes behind the production of these important products.

The thinking, the procedures and the priorities of even simple things like a good IR Plan, an effective IR Internal Report for management or a well conducted fund manager meeting remain a mystery that most IR novices must solve for themselves.

At least Michelangelo started with a good grounding in the techniques to produce great art, few IR novices are so lucky. A fortunate few begin their IR career working as a junior with a successful team at a leading company and then, having served a long apprenticeship, become the next generation of masters.

Could the idea of IR as “science” be beneficial?

I was taught that good science always starts with good questions. Fortunately many people in the IR industry are asking good questions and the answers they are finding make a good foundation for the emergence of IR as “science”.

The perspectives studies of the Rivel Research Group tell us much about Buy-side and Sell-side thinking and provide a way of tracking how investor communications has evolved over time and continues to evolve.

The work by the Nielsen Norman Group on how analysts, fund managers, journalists and individual investors use IR websites is very valuable. It surprises me that so many companies still have such woeful IR web pages. The only explanation I can think of is that most of the sites are outsourced to IT companies that have little or no knowledge of investor relations and no desire to learn.

NIRI has also undertaken surveys and sponsored analysis that stands head and shoulders above the half-hearted efforts of most other associations. Access to this information alone justifies NIRI membership. Companies in countries with bad associations might want to consider switching their membership to NIRI. That should send a message.

There are also valuable contributions from Bank of New York Mellon, Citigate Dewe Rogerson, Ernst & Young plus research available through the Social Science Research Network. Of course I am also proud of the work done by our team of IR analysts on the B2I Brand, on IR planning, internal reporting and product process development and management.

The problem is that little of this expanding pool of knowledge is feeding through to IR association training around the world. Some associations seem to go out of their way to make it difficult for their members. They exclude IR research from their training curriculums and researchers from training events. This is probably a manifestation of the “association as social club” mentality which in many countries stands in the way of true professional development. I’m happy to report that, at least in Asia, this mentality appears to be headed the same way as the dinosaurs.

To succeed at investor relations today the IR novice probably has to be as much scientist as artist but most importantly he or she must be passionate about investor relations. Individuals with passion will always find ways to overcome the inadequacies of the weakest local IR association and passion maybe even reduces the debate of “art” versus “science” to pure semantics after all. As Dr Keith Black a hero of modern medicine famously observed: “Art is discipline practiced with great passion, science is passion practiced with great discipline.”

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