It’s Showtime! Putting The Best Face on for Investors
BY JACK MILLIGAN
Following rules changed by disclosure requirements and aided by technology, investor relations focuses on telling a story to remember.
New federal disclosure regulations and heightened use of Internet technology have altered financial institutions’ approach to investor relations. Webcasts are used to disseminate information to the broadest possible audience. Stories of unique strategies fight against investors’ tendency to think of banking as a “me-too” business.
Jerry Grundhofer understands the importance of investor relations (IR). As president and CEO of Minneapolis-based U.S. Bancorp, he knows that he has a unique responsibility to present his company to the financial markets. “It’s a fundamental part of the job of CEO,” Grundhofer says. “You are your company’s representative to this important constituency.”
The initial incidents are bad enough: banks that fail to adequately protect the privacy of their customers face lawsuits and heightened regulatory scrutiny. But the cost goes far beyond that. By not sufficiently protecting data, banks are putting their reputations on the line.
The expectations of IR— and of senior management — have become much more complex in the last five-plus years since the Securities and Exchange Commission imposed a new rule that changed how material financial information is disclosed to investors. Under Regulation FD (as in “fair disclosure”), companies are required to communicate material information to all investors at the same time — a mandate that has dramatically changed how the IR process is approached by publicly held financial institutions.
“Reg FD focuses investors on the long-term view of management,” Grundhofer says. “Strategy has become more important than the next quarter’s earnings. Reg FD is fine; it sets the limits.”
One result of the mandate for consistent disclosure is heightened use of Internet technology to get the message out. At U.S. Bancorp, for example, quarterly earnings updates are available to all via Webcasts of quarterly conference calls. No longer do company executives discuss earnings with only a select group of analysts.
Grundhofer says the change enables him to use investor conferences, the annual shareholder meeting and other venues to talk up the company’s long-term strategy. Grundhofer and other top executives must then make sure that the long-term message is compelling and attractive to the right kinds of shareholders.
Vernon Hill, chairman and CEO of Cherry Hill, N.J.-based Commerce Bancorp, says he gets it. “I can’t emphasize enough that differentiation is the key,” he says. “You have to have a very clear idea of your business model and how you’re different. You have to understand what you are.”
But not every institution is doing a good job, according to some analysts (see “What Investors Want to Hear,” pg. 48) who say that U.S. banks fall short of highlighting how they stand out from the pack. When investors understand the story and direction, the analysts add, investors are more likely to remain confident through the inevitable ups and downs.
Broadened Disclosure
Broadly, the role of IR at U.S. public companies is to disseminate financial information to sell-side analysts working at national and regional securities firms, and also to buy-side analysts and portfolio managers working at the large institutional funds. Many banks have professionals dedicated to that task, with the job of serving as a contact point for analysts and investors when they have questions about the company. IR provides a conduit through which outsiders can access the company’s senior management.
Greg Ketron, senior vice president and director of investor relations at Atlanta-based SunTrust Banks Inc., says that institutional investors want to understand a company’s strategy, its depth of management and how well it executes. “Our job is to make that transparent to the investor community,” he says.
Although the direct benefits are not easily quantified, a good IR program can help a company’s stock valuation vis-à-vis industry and broad market indices — and even more important, against selected peers.
Hulus Alpay, senior vice president and head of investor relations at New York-based consulting firm Makovsky & Co., says that through focused and persuasive communication “you can build confidence in your company’s growth plan. The golden pot at the end of the rainbow is credibility.” And when a company has established communication, confidence and credibility on Wall Street, it reduces its cost of capital because investors are willing to pay a premium for its shares. “That can means millions or even billions depending on what kind of company you’re talking about,” Alpay says.
Investor relations became more complex, however, after Regulation FD took effect in October 2000. The regulation was designed to place institutional and retail investors on an equal footing by eliminating selective disclosure, which had become a pervasive practice on Wall Street. Previously, institutional investors with significant ownership stakes would sometimes have access to “material information” — information that is important enough to have a financial impact on a company’s short- or long-term performance and could benefit an investment decision.
Regulation FD requires that all public companies release all material financial information simultaneously so that the smallest investors can learn of material events at the same time as institutional shareholders. “I think it has in large measure accomplished what the SEC set out to do, which was level the playing field,” says Louis M. Thompson Jr., president and chief executive officer of the National Investor Relations Institute in Washington, D.C.
Critics of Regulation FD feared that it would prevent company executives from having any one-on-one conversations with analysts and portfolio managers. But such meetings are still permissible as long as they don’t involve material information. Fred Cannon, a sell-side analyst at New York-based Keefe Bruyette & Woods Inc., believes that Regulation FD has significantly improved the quality of IR throughout the industry by forcing banks to state their case in the court of market opinion rather than relying on private conversations with favored investors.
“In some ways it has improved best practices,” he says. “The good companies never had whispered earnings.”
Grundhofer says Regulation FD also helps companies by encouraging investors to take a more long-term perspective of stock ownership, since the kinds of selective disclosures that occurred previously were generally focused on short-term issues, such as quarterly earnings. This enables Grundhofer to focus on attracting long-term shareholders who understand the company’s strategy. “Those are the kinds of shareholders I want. I want a shareholder who’ll buy into the strategy. I don’t want a ‘renter’ of U.S. Bancorp stock.”
At Commerce, Hill takes a similar approach. Hill wants investors who don’t see Commerce as a banking company. Commerce is known for its superior deposit growth and Hill wants it to be perceived as a “growth retailer.” Such a perception, Hill reasons, should yield a higher price/earnings ratio than “just another financial services company.” So Commerce’s investor relations effort is tailored to attract investors who understand that.
“One of the things you have to determine is who you want your shareholders to be,” Hill says. “If you do it right, you get the shareholders you deserve.”
Hill points to Capital Research & Management Co., a Los Angeles-based investment management firm, which last year bought 12 million shares of Commerce stock. As of Dec. 31, 2005, Capital owned 6.93% of the company, making it the second largest holder of Commerce stock after Boston-based Putnam Investment Management LLC, which owned 9.88%. “We had been working on them for five or six years,” Hill says.
Webcasting Outreach
The effort of CEOs to get their long-term message out has been aided by technology, which improves IR’s efficiency. Most banks now discuss their quarterly financial results in one large conference call, instead of many separate communications with individual institutional investors, and they webcast those discussions. They also routinely webcast their in-house investor conferences, where they bring in analysts and portfolio managers to hear senior executives talk about their companies.
Webcasting has been tremendously helpful to public companies in their Reg FD compliance efforts because it makes material information available to all investors at the same time. And it gets the word out faster, too. “The logistics are so much better now because investors get the information quicker,” says Kevin R. Stitt, senior investor relations executive with Charlotte, N.C.-based Bank of America Corp.
When BofA’s executives speak at conferences hosted by securities firms, BofA strongly prefers that those be webcast as well. Stitt notes that the larger Street firms are reluctant to provide webcasting because it makes the event available to their competitors’ buy-side clients. In those cases, BofA will pay for the Webcasting. “We’ll either pay for it or the conference organizer will pay for it,” Stitt says.
One venue that Stitt does not find helpful from an IR point of view is the annual meeting, which he describes as more of a business meeting for shareholders than an investor’s conference per se. BofA CEO Kenneth Lewis uses the annual meeting as an opportunity to talk about the company’s strategy, but Stitt adds: “I would argue that most of our major institutions won’t listen to the shareholder meeting.”
Wachovia Corp., which is also based in Charlotte, insists that any investor conferences at which its executives appear be delivered via the Web, according to Alice Lehman, a senior vice president and head of the company’s IR department. Lehman believes this policy makes it less likely that Wachovia will run afoul of Reg FD, since the content will be made available to all investors equally.
Cleveland-based National City Corp.’s policy isn’t quite as restrictive, although Jennifer Hammerlund, vice president and manager of investor relations, says that Webcasting is the preferred method of information dissemination. She says the bank also makes an audio/video recording of the analyst conference it hosts every year at its Cleveland headquarters and distributes DVDs to invited parties not able to attend.
Regulation FD has proven to be a huge boon to companies like New York-based PR Newswire, which provides Webcasting services. “When [Regulation FD] hit, we saw a huge increase in the number of companies Webcasting conference calls,” says Michelle Savage, the company’s vice president of investor relations services. “Virtually every company sees them as a way of providing added security around disclosure [requirements].”
Some companies are beginning to podcast their earnings calls and investor presentations so they can be downloaded and listened to on MP3 players that have become increasingly popular. “They want to make the event available in every way possible,” Savage explains. One way of doing that is making it portable, so that an analyst or portfolio manager can hear it waiting in an airport or riding in a taxi, she adds.
Access to the Top
Even though companies are prohibited from making private disclosures of material information, analysts and investors nonetheless continue to clamor to spend time with senior management — particularly the CEO. “I don’t think any institutional investor is going to buy a lot of stock without meeting the management team,” says Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LLP in New York.
Bank IR staff tries to provide this access because institutional investors carry clout. “We can spend an hour with Fidelity Investments and sell 100,000 shares,” says BofA’s Stitt. By contrast, retail “never pays for itself.” Stitt adds his doubts that Webcasting, and the Internet in general, helps BofA increase its percentage of retail investors.
Although a bank’s senior IR executive provides an important point of contact for analysts and investors, and is responsible for managing the overall process, the investment community ultimately looks to the CEO for an explanation of the company’s strategy. “Investor relations can explain things and help people understand a business, but an IR person can’t commit or be held accountable,” says KBW’s Cannon. “Institutional investors need to meet the people who are accountable.”
This contact can occur at investor conferences, during private meetings at the bank’s headquarters or during the periodic road trips that executives of many banks make to visit institutional investors across the United States and in both Europe and Asia. Regulation FD does not prohibit the dissemination of what might be described as non-public and non-material information. Such discussions, in which a company’s executives are merely amplifying public statements that have already been made and do not entail material disclosures, can help an analyst or portfolio manager understand a company better. They also give investors an opportunity to see how the CEO or members of his or her management team respond when they are put on the spot.
“I think they like to see the way management responds to an insightful question,” says Lehman. “It’s not new information, but it goes to the quality of leadership.” And while it may be difficult to prove quantitatively, most Wall Street professionals believe that making the CEO and other senior executives accessible to investors pays off. “The companies that have people who can spend time with investors tend to have a higher stock valuation,” Fitzgibbon says.
But just spending time with investors isn’t enough. Companies must also have a growth story to tell. James MacGregor, vice chairman at New York-based public relations and investor relations firm Abernathy MacGregor, estimates that approximately one-half of a company’s valuation is determined by Wall Street’s perception of its growth prospects. “How are you going to grow?” he asks. “What is your growth story?”
“Part of the IR process is to ferret out what you think is unique to your company and is deserving of a premium [in comparison] to your peers,” says Alpay at Makovsky & Co. “Every enterprise is unique.”
Grundhofer says a company just needs to keep pounding away on its message. In 2001, when he put together the merger with Firststar Corp. that produced the current U.S. Bancorp, Wall Street reacted negatively. Investors believed the company had grown too fast, too quickly. Grundhofer has spent the years since hammering away on a message about the company’s strategic focus, which was to use the company’s balance sheet to grow its loan portfolio and then sell fee-based products to that same customer base.
“We stayed on message,” Grundhofer says. “Some believed us, some didn’t. But in the long run, if you stay on message, people will believe you.”
Questions or comments about this article? Post them at the Banking Strategies blog.
Mr. Milligan is a freelance writer based in Charlottesville, Va.