Meeting the needs of international investors by ensuring effective financial communication.
FINANCIAL COMMUNICATION STARTS IN THE BOARDROOM
Effective financial communication of a company’s performance can affect its share price performance and cost of capital.
The effectiveness of corporate management is commonly assessed by how a company’s share price performs. However, if share prices do not perform in line with performance and peer companies’ share prices, management should review its financial communications effectiveness and strategy.
Financial communication (often managed by an investor relations (IR) function) is an important link between the company and its investors, especially in challenging global capital markets. So it is no surprise that the top 10 priorities of management and boards include opportunities for effective financial communication with investors.
Excellence in financial communication depends on the external and internal effectiveness of the IR function.
Internal effectiveness Effective communication also relies on clear processes and structures governing which information will be provided and how individual units are acting together through to final disclosure.
External effectiveness Keeping existing shareholders satisfied with the right information, on a timely basis, and attracting new investors, in order to ensure that a company’s share price is fairly valued, while simultaneously maintaining regulatory compliance in the capital markets, are key goals of the IR function.
SEVEN EFFECTIVENESS FACTORS OF THE IR FUNCTION
Which factors determine the effectiveness of the financial communications of listed companies or entrepreneurs preparing to raise capital?
Compliance with all regulatory requirements Are there clear internal processes and communication, and reporting lines and responsibilities, in place to ensure regulatory compliance to help maintain investors’ confidence?Good corporate governance Can the best practices of your peer group be matched in delivering financial communication in response to day-to-day investor requests? Are the structures and organization appropriate?Providing transparency Are all internal departments aware of disclosure obligations and periods, as well as regulatory changes, at all times? Are they supported by the IR calendar? Who monitors the IR function? Compelling equity story Is the equity story both attractive and up to date, reflecting the key performance indicators, segment reporting and business strategy?Delivering on promises Are you meeting the expectations regarding your forecasts based on relevant analyst guidance?Facilitate share liquidity What is the best method for keeping pace in the competition for capital and maintaining share liquidity as a listed company, especially if internal awareness and external attention has waned?Investor communication Does the capital market communication follow international standards, and does it have a presence in all relevant media channels?
WHY ASSESS FINANCIAL COMMUNICATION?
Testing the IR function to mitigate risks
The first external indications that action is needed to examine the IR function and financial communication include falling share prices compared with your peer group, despite good financial results or latent low liquidity in the share or high volatility. Internally there could be uncertainty regarding the reliability or transparency of internal processes and a lack of clearly defined responsibilities; repeated failure to meet budget figures; and a rise in the number of queries from the board of directors regarding aspects of the strategy.
Improving the IR function to realize opportunities
Alternatively, you may see opportunities for enhancing and improving financial communications. In the case of index candidates, this can mean improving the ranking in the index.
You may also seek to more closely align the organization, processes and infrastructures with the growing importance of the IR function, especially in challenging global capital markets, to improve their effectiveness in the future.