As a company is preparing for an IPO—and especially after an IPO—the Investor Relations team, or IR for short, will play a prominent role in keeping the company highly valued and legally safe. If a company doesn’t already have a dedicated investor relations team, then building one should be a priority whether the company is pre or post IPO. This article gives a high-level overview of investor relations by answering the following questions:
- What is Investor Relations?
- How large is an IR team?
- When should companies build an IR team?
- How does an IR team fit within the company?
- What tools and systems does an IR team need?
- How does IR create value for the company?
- What makes an effective IR team?
What Is Investor Relations?
Similar to public relations teams, investor relations teams generally have the responsibility of communicating and creating a favorable impression with individuals and groups outside the company. In contrast to public relations, investor relations focuses on keeping current and potential investors informed about the past performance and the projected future of the company. Also, IR teams are not communicating with the general public as a public relations team does. Rather, they are normally communicating with those that have some level of financial experience.
Secondly, a variety of laws surround the communication of information from public companies to any outside party, so IR departments must be equipped and experienced in navigating legal requirements. One of the most famous regulations is referred to as Regulation FD.
Another, important aspect of investor relations is being on-call to respond to all investor questions and feedback. Even when questions can’t be directly answered because of confidentiality concerns, investors and analysts are more likely to invest in a company they feel is responsive. A good outward-facing IR department creates confidence in management and the company overall.
Lastly, IR teams provide the investor perspective to the company in order to inform them of the investor sentiment regarding the strategic direction of the company.
How Large Is an IR Team?
An IR department can range in size from a single individual to a team of people within the company. The average for small-cap companies is usually between one and two individuals. In 2020, IR Magazine reported that the global average for an IR team was 2.8 members.1 Large companies often employ larger teams in this area, typically averaging between six and eight members.
When Do Companies Build an IR Team?
The short answer is that it is strongly recommended that companies have a functional IR program in place before the IPO. Having a team in place ahead of the IPO facilitates early interaction with the investment community to generate investor interest in the IPO, while also providing support in producing the required regulatory filings, communicating with underwriters, and setting up the appropriate processes to be ready for the pressures and heightened requirements associated with being a public company. Leading up to the IPO, a company will need to file a variety of documents and begin communicating with an underwriter and potential investors. Most companies begin attending roadshows and other events to develop an interest in the market. All these activities will be easier with an IR team being involved and safer because of their legal expertise in communication.
An IR team should know how to communicate with the public in a way that is legal and keeps the company on track to achieve the best possible valuation at the time of the IPO. In this way, an IR team helps the company avoid some communication pitfalls or legal problems that could hurt their IPO prospects.
Building an IR team also takes time, and proper integration of it takes even longer. It’s important to start that process as early as possible. As described in the section below, the IR team is involved with a variety of other departments and individuals in the company, and the team will be in a better position to provide timely responses to incoming questions and requests from investors, analysts, and senior management if the team is already well integrated before the IPO.
How Does the IR Team Fit Within the Company?
The IR team has a multifaceted job and thus will be involved in communications with a variety of departments and individuals within the company. Figure 1 below shows the lines of communication the IR team might have in a company. This image illustrates how the IR team is involved with various departments, such as public relations and treasury, as well as individuals in management such as the CEO and CFO. In addition to the departments depicted in this image, other departments that may be involved with the IR team include finance, legal, and the executive team and board.
IR teams are occasionally invited to be present at board meetings in order to stay knowledgeable about the company’s current and future actions. In this way, the IR team can become a two-way conduit between executives and investors. More commonly, however, the team is only invited to board meetings to present to the board on some specific topic, such as investor perceptions, surveys, recent stock price movements, activist activity in the stock, or other relevant topics.
As displayed, the IR team needs to have direct communication with the public relations department. This is because the IR team must be well versed in what legally can and cannot be disclosed. The IR team is a technical resource to provide legal guidance to the public relations department. For example, “quiet periods” are when companies can’t legally state their opinions or share forecasts about their company before the IPO. Violation of this could be considered insider trading and get you and your company in serious legal trouble.
What Tools and Systems are Needed Before the IPO?
There are several important tools and systems that a company and an IR team need to have in place before going public to remain compliant and to keep things running smoothly within the company.
- Investor relations website – An IR team needs to have a polished website to keep important documents such as annual reports, SEC filings, other relevant financials, news on companies’ current events, and more. One example of this is the IR website for Walmart. Along with a website, some companies have other transparent media outlets through social media, emails, or other communication platforms.
- Disclosure Policy – The IR team needs a disclosure policy that states which communications will be released on an ongoing basis. This policy should also state who the spokesperson is for the company.
- Shareholder and Board Engagement Policy – Implement a shareholder and board engagement policy that delegates questions to the right level of management. This is explained very well by a communications consulting company in the following statement:
Shareholders are increasingly bypassing management and communicating directly with company directors. Proactive companies will have a policy in place that determines which investor inquiries should rise to the director level and what type of proactive dialogue the board should be having with its shareholders. Your directors should be well trained and understand the types of questions that are appropriate for them to answer, such as those related to corporate governance, and those that are more appropriate for management, including day-to-day operational issues.2
- Training Sessions – Before the IPO, IR teams should be conducting training sessions with company employees on “public company responsibility.” These training sessions will help teach what things the employees can and cannot say to the public about the company. In almost all cases, this means not talking to the public at all but instead deferring to the company’s public spokespeople. Holding these simple training sessions not only saves your company from getting into legal trouble but also provides security for your employees.
- Executive Training – Similar to employee training, the IR team needs to have explicit sessions planned so they can train executives on how to best communicate with investors, given their position in the company. This training will help remind executives of the legal dos and don’ts when speaking to the public. Keeping these rules in mind will help executives avoid costly legal slip-ups in their public communications.
How Does a Good IR Team Build Value for the Company?
The way in which an IR team is integrated with so many parties—such as the various departments and individuals internally and externally—gives the IR team the potential to add tremendous value to the company. Most of the value created will be through establishing effective lines of communication, especially with those outsides of the company. Likewise, an effective IR team can have a direct impact on the company’s valuation. As one expert put it: “It’s the job of management and IR to shape investors’ expectations of the company’s future performance and gain their confidence. How well that’s done can significantly impact the stock’s valuation during the IPO and over time.”3
An IR team can keep shareholders, potential investors, and the general public well informed about the company’s past performance, future strategy, and projected results. Effectively communicating a realistic and positive future can keep investors satisfied when temporary setbacks might otherwise convince investors to reduce or exit their positions. In many cases, investors are even willing to invest in unprofitable companies because of their faith in the business plan. For more information see our article on unprofitable companies going public. Increased confidence and trust from investors can have several potential benefits including less volatile stock prices and better opportunities for future equity offerings.
In addition to the direct impact on valuation, an effective IR team can also help the company clarify objectives and align goals internally. The IR team has a unique position in the company to help several different departments communicate effectively with each other. For example, the IR team can help executives understand the legal implications of the decisions and communications with the public. It can also facilitate communication between executives and activist investors who may attempt to force changes within the company.4 Additionally, IR teams work with the PR department on legal communication practices as well as aligning messaging across the company.
What Makes an Effective IR Team?
Many of the aspects of an effective IR team have been highlighted earlier in this article. Investor relations teams need to build good relationships and have the proper tools, networks, and systems within the company to handle the various aspects of their multifaceted job. However, beyond these basic principles, there are several best practices that IR teams should follow.
- Knowing Your Investors
This means knowing how to communicate to both a general financial audience, as well as a specific group of investors. IR teams need to remember that they are not communicating with the general public like a public relations team. Rather, they are normally communicating with those that have some level of financial experience. Communicating with Wall Street is not the same as communicating with a news station. The same goes for investors in specific industries. Investors in specific areas will have specific informational wants and needs. A well-researched, responsive IR department can learn to cater to these investors. IR teams also need to make sure they do not over-communicate. Providing too much information can be detrimental—or in some cases, illegal.
- Managing Expectations Properly
In most cases, an IR team is primarily responsible for managing the expectations, and thus the valuations and projections, of analysts and private investors. Expectations are key to investors, who are usually investing because of their belief in a specific future. Not managing these expectations well will lead to poor valuations, or overly optimistic valuations, which will later lead to unmet expectations and damaged credibility. In each of these cases, an IR team needs to give information in such a way that it doesn’t raise or lower expectations inappropriately. This can be very difficult considering certain statements meant to decrease overly optimistic expectations might actually lower expectations too far, decreasing investor confidence in the future. Thus, it is important for companies to have a high degree of awareness about exactly the type of expectations they are creating with every public statement.
- Building Credibility Through Transparency
In addition to creating value by managing expectations correctly, IR teams need to develop good long-term relationships with analysts and investors. This is done by giving information promptly, by staying available to answer questions and concerns, and by behaving properly when analysts or investors give poor valuations. An IR team’s job is not to change the future, or cover up past mistakes; rather, the job of the IR team is to keep investors satisfied through the bad times, and realistic during the good times. By doing so, long-term relationships of trust can be built, which will hopefully lead to higher and more stable share prices over time.
Summary and Conclusion
Before going public, every company needs to develop an IR team. Doing so will prepare it for the many requirements and pressures that will be placed on it as a public company. An effective IR team will interact with a variety of parties both inside and outside the company, putting the IR team in a position to have a substantial impact on the company and to provide tremendous value. While perhaps smaller than many other departments, IR is an important piece of the company. Creating an effective IR team contributes to the company’s overall chances of success both during the IPO and for the duration of its existence as a public company. If, by chance, you are already public and do not have an IR team, then perhaps looking into establishing one is your next step as a company. The bigger you get, the more it is going to matter.
- Market Climber: “The Seven Deadly Sins of IR.” Accessed 1 Jun 2021.
- Passmore, Jonathan. CFO.com: “How to Mess Up Investors Relations.” 23 Feb 2017.
- Klausner, Mark. Westwicke: “The Eight Biggest IR Mistakes.” 16 Jul 2014.
- Bryan Dunn: Senior Director of Investor Relations at Pfizer
- IR Magazine: “Global Investor Relations Practice Report 2020.” Accessed 15 Jun 2021.
- For more information about activist investors, see our article about shareholder activism