How technological developments have shaped the world of investors, analysts and IROs
A time-travelling IRO from just 25 years ago would barely recognize today’s online, networked world of webcasts, tweets, blogs, apps, instant Edgar filings and XBRL tags where immediacy, accessibility and global reach are taken for granted.
Veteran practitioners recall with a chuckle the image of bicycle messengers fanning out across Manhattan to hand-deliver press releases printed on embossed company stationery while the mailroom stamped and stuffed envelopes for the wider world.
In a quarterly release ritual charitably described as ‘arcane’, the most technologically advanced IR departments would reserve the fax machine for the day.
But early fax machines were capable of sending to only one recipient at a time so IROs would have to choose, transmitting to the Dow Wire ahead of Reuters one quarter and reversing the order the next while steeling themselves for a profanity-laden tongue-lashing from the bested editor.
The wire services would then retype the earnings, shooting a headline EPS, followed by revenue and on down the P&L in a slow reveal that could take several minutes.
Meanwhile, the fax would hum and buzz all day as portfolio managers waited to get a glimpse of the results. ‘IR used to be a game of days and weeks,’ observes Bill Haney, global head of IR business at Thomson Reuters. ‘Now it’s a game of minutes.’
Nor would our calendar-hopping IRO recognize today’s market environment, increasingly dominated by exchange-traded funds, dark pools, hedge funds and high-frequency trading (HFT). ‘Previously, people weren’t looking at screens, blogs or CNBC,’ recalls Tiffany IRO Mark Aaron.
‘They had the opportunity to think about the results.’ Aaron readily embraces the advantages of today’s technology but notes that ‘this incredibly fast flow of information’ creates a climate where analysts compete to see who can be first with a comment or a note and investors feel compelled to react to both news and noise.
Aaron’s observations highlight a great irony: as today’s communications technologies have made company-specific information more widely available and transparent, markets increasingly value liquidity and speed above all, and are becoming arguably less attuned to the increased information flow from firms.
On any given day, more than half the volume of a company’s stock is traded across multiple markets or dark pools in baskets of securities, while options are countertraded in baskets of derivatives.
This frenzy of trading, driven by arcane algorithmic formulas, is increasingly divorced from any information the IRO is sending out. It’s designed to harvest fractions of pennies of profit in thousandths of a second, repeated over and over. Individual company tickers simply become chits, necessary for keeping score.
The wizards who program the gigaflopping supercomputers that drive HFT seem a different species from the green eye-shaded clerks tapping price quotes over telegraph wires 150 years ago. But the evolutionary lineage from ticker tape to HFT is clear: Wall Street’s been ‘plugged in’ for a long, long time.
The Big Bang creation of modern IR can be traced to two events. In 1965 PR Newswire launched the Investors Research Wire, which sent corporate news releases directly to brokerage firms and financial analysts, thus starting us down the path of immediate and ubiquitous information flow from companies to institutional investors.
Then, in 1967, Wall Street experienced the ‘Back Office Crisis’, when major exchanges, drowning in paper, were shut down mid-week so brokers could catch up on processing delays. That crisis opened Wall Street’s eyes and wallets, bringing computers into the trading environment.
The rest has been mere evolution on the twin themes of increasing information flow and increasing efficiency of trading, influencing and being influenced by parallel changes in regulation and market structure.
For example, First Call was launched in 1983 (see timeline, below). In addition to broadcasting news to the Street, the institutional information network also raised the visibility of ‘consensus’ earnings, in particular in the eyes of the business press and regulators.
By the late 1980s earnings teleconferences had become widespread, most open only to institutional investors.
At the same time, this increased visibility of the IR process pulled back the veil on a common practice at the time of talking the numbers down. While perhaps necessary in a world of bicycle messengers and mailrooms, it was unacceptable in the increasingly networked world.
It took 14 years, but in the fall of 2000 the SEC implemented Regulation Fair Disclosure, arguably the single largest change on the IR landscape in a generation.
The big changes
When asked to name the biggest changes in investor relations brought about by technology, IROs mention corporate websites and open teleconferences that have ‘leveled the playing field’ between retail and institutional investors.
‘That’s a huge positive for the market,’ observes Jane McCahon, who chaired NIRI when Reg FD was rolled out by the SEC. McCahon, now IRO at Chicago-based Telephone and Data Systems, also lauds RSS feeds and Google alerts that let investors self-select what information they want to be fed. ‘That’s how disclosure should happen,’ she says.
Teleconferences have also increased the visibility of IR within the C-suite, observes FedEx IRO Mickey Foster. He describes how, prior to the advent of conference calls, on the day of earnings management would present to analysts in New York before Foster hit the road to other cities for face-to-face meetings.
Today, the chairman and those who report directly to him/her all gather in a conference room for the quarterly conference call, with IR front and center orchestrating the entire event. ‘You can engage a lot more people, and it makes for a richer conversation,’ Foster says.
The proliferation of corporate IR websites and the democratization of information have armed investors with an unprecedented level of knowledge before they place that first call to the company. This has upped the ante for IROs, says Chris Taylor, managing director of global IR at Ipreo.
In the past, an introductory conversation between the IRO and an investor or analyst would cover the basics. Now, the buy side and sell side come already educated and expect to talk to an IRO who is connected and can take a deep dive into the strategy and nuances of the business.
Both Haney and Taylor see an increasing premium being placed on market intelligence to restore some balance of power. No longer willing to settle for obvious ownership data, Haney says IROs are looking for insights into ownership patterns, explicit or implied relationships among hedge funds that ‘move in packs’, investors’ hot button issues and history of activism.
Taylor also says CEOs and CFOs expect the IRO to know enough to ‘put them in front of people they should be in front of, not waste their time.’
In a market where IROs can neither influence nor truly understand what’s driving the majority of volume in their stock, Haney has heard some experienced mega-cap IROs ask themselves for the first time: ‘What does my role look like in the future?’ Perhaps XBRL tagging or crowd-sourced financings will have as large an impact on future IROs as webcasts and HFT have had on today’s. No one knows for sure.
Mobile apps and tablets will become commonplace in IROs’ briefcases and may eventually replace the desktop, Haney predicts. It’s already happening in emerging markets where wireless internet is more ubiquitous and reliable than wired. McCahon sees technology potentially enabling a continuous flow of financial information to the markets.
When business is tough, it would be like ‘letting the air out of the balloon a little at a time,’ she says. Taylor sees a future where technology enables ‘a more efficient collaboration’ between the buy side, sell side and public firms that today engage in serial, two-way conversations.
Haney predicts that IR will become ‘less hand-to-hand combat’ and sees parallels in the path the buy side has traveled over the past two decades. Initially, analysts resisted macro modeling and formula-driven investing, arguing that their labor-intensive research to get to know a company could not be replaced by machines.
Today ‘the quantification of the buy side is complete,’ he argues, as it embraces algorithms and models ‘to inform a largely human process.’
A new, more quantitative IRO will emerge as companies ‘reverse engineer’ buy-side algorithms to predict how their ownership base will change as the company evolves, Haney continues, noting that the transformation is already under way, accelerated by the influx of former sell-side analysts into the IR role.
Tim Quast, founder of ModernIR, describes a ‘great disconnect’ between the technology advances on the IR desktop and in the markets. As IR has been speeding up communication, increasing transparency and broadening its reach to put information in front of investors, the markets are moving ‘away from the authority of rational investment principles to relative value,’ he argues.
He also sees increasing quantification in the IR suite, hoping more than predicting that IR will move beyond ‘obsession with one piece of the pie’, the 15 percent-20 percent of volume attributed to its traditional audience of active investors.
Quast, who advises companies on how market structure affects their stock, urges IROs to adopt a ‘behavioral approach’ that looks at multiple data points to better understand the majority of any individual stock’s daily volume. ‘That’s what institutions are doing,’ he says, and IR will have to adopt a similar approach.
Finally, Aaron warns that tech-obsessed colleagues who measure their success by how quickly they can get information out ‘are missing the point’ of good investor relations. The future of IR will be built on the same fundamentals of building long-term relationships with investors and analysts, he argues. And for that, there is simply no substitute for face-to-face communication.