MasterCard stands as one of the great success stories of Wall Street, in terms of total investment return to its shareholders. A savvy investor who plunked down $1,000 for MasterCard shares at the company’s initial public offering (IPO) in May 2006 would find those same shares worth more than $67,000 by October 2019. MasterCard’s performance beats the historic investment returns over the same period for many other investor darlings, including Amazon and Apple.

But MasterCard’s success was not its predestiny. In fact, the company had a difficult time gaining investor favor at first. MasterCard, founded in 1966 and held as a private company by a consortium of U.S. commercial banks, passed its first 40 years as a nonprofit appendage to its owners. Its work was to provide the worldwide electronic “switch” behind bank credit card operations, but not the credit cards themselves, which each of the owner-banks issued.

MasterCard’s investor relations team faced three daunting challenges at the IPO: (1) the idea that MasterCard’s core switch was an undistinguished commodity business under significant pricing challenge from the company’s actual customers; (2) the vision that MasterCard believed itself to be a financial institution, although it was not (it was owned by financial institutions but MasterCard itself is a technology company of global reach); and (3) the lack of a clear, compelling narrative that distinguished MasterCard to its potential investors as a state-of-the-art technology company.

MasterCard’s senior management hired the best investor relations (IR) professionals it could find. The new IR team completed three tasks simultaneously prior to and after the IPO. First, it gathered and integrated information potential investors needed and wanted to hear, both in a wholly accurate way and in accord with disclosure law and regulation. Second, it communicated this information through a valid, convincing narrative that made clear the MasterCard investment story. Third, along with other groups within the company, it helped install a significant cultural shift within MasterCard, so that all employees understood new regulatory requirements and, as important, understood, accepted and spoke the MasterCard story.

The work paid off. The tangible results of investor relations are seen in MasterCard’s increased stock price, its continued growth and its sterling reputation. The way a public company engages Wall Street is not particularly esoteric or difficult. But it is intentional. A company’s investor relations program employs many of the traditional tools of the trade, including investor targeting, presentations at conferences, road shows, analyst and investor meetings, facility tours, and day-to-day contact with the Street. It also works hand-in-hand with public relations, government relations and human resources within the company to ensure consistent, cogent communication.

8.1 What Is Investor Relations?

Investor relations (IR) is the subset of public relations and corporate communication that deals with a company’s relationship with the investment community. Both current investors (who own a corporation’s stocks and bonds) and potential investors (who might be persuaded to own these stocks and bonds) make up the primary audiences for investor relations.

IR is most often employed by companies whose shares are held and traded by the public. Privately owned companies may also use IR in circumstances such as when they have bonds trading on the public markets or when they are owned by a dispersed group of private shareholders.

IR is the most heavily regulated of communication disciplines.

IR is unique among communications disciplines in that real people make or lose real money every day, based on information, utterances or omissions from a corporate IR department. Since IR mistakes can cost real people real money, IR is the most heavily regulated of communication disciplines. Laws, government regulations and stock exchange regulations each dictate how IR is conducted and when. As a result, IR has exacting procedures and deadlines. In the United States, IR practitioners are subject to significant civil and criminal liability if they violate certain principles.

As a result, IR has exacting procedures and deadlines. In the United States, IR practitioners are subject to significant civil and criminal liability if they violate certain principles.

IR requires knowledge of communication, finance, law, accounting and marketing.

The demands of investors and regulators make investor relations among the most stimulating and academically rigorous of all communication disciplines. IR requires knowledge of communication, finance, law, accounting and marketing. In general, IR practitioners are well compensated compared to other communications professionals with similar experience and responsibility. IR practitioners may become trusted advisers within corporations and participate at the highest levels of corporate strategy. Corporate leadership has only recently come to acknowledge the strategic importance of IR. From its establishment as a distinct discipline in the 1960s until the mid-1990s, IR was seen as tactical, peripheral to strategic corporate decision-making. Since the mid-1990s, IR has matured into a strategic element of business operation. The reasons are many. For instance, the demand for reliable data about corporations grew as individuals increasingly held stocks, mutual funds and retirement funds. The Internet erased barriers to information flow, giving Main Street investors access to financial information reserved previously for Wall Street. Further, chief executive officers (CEOs) are now often judged by how well their companies’ stock performs. So CEOs are now much more keen on what IR can do. And key to the evolution of IR as a strategic discipline is the many corporate scandals that have compelled more complete, integrated, timely and thoughtful corporate financial disclosure. Without robust financial disclosure, transparency and dialogue, a corporation now risks severe damage to its reputation and ability to do business.

Today, especially in the United States and Canada, IR is viewed as a stand-alone financial corporate function with essential overlays of finance and communication practice and theory. It is now more common for the head of IR to report directly to the CEO and make presentations to the board of directors. IR generally takes part in the corporation’s strategic processes to a greater degree than corporate communication professionals without IR responsibilities.

8.2 The Goals and Roles of Investor Relations

The first goal of investor relations is to ensure that a company’s securities, that is, its stocks and bonds, are fairly and fully valued in the marketplace.

The first goal of investor relations is to ensure that a company’s securities, that is, its stocks and bonds, are fairly and fully valued in the marketplace. “Fairly and fully valued” means that the price of a company’s securities closely reflects both the present value and the potential value of the company. Given that a stock’s price is set by the market based on demand for that stock, investor relations involves maintaining demand. IR does this by ensuring investors have access to accurate, timely information about the company so they can appraise the attractiveness of the company’s stock relative to other investment opportunities.

IR’s second goal is to help fulfill corporations’ affirmative disclosure obligations under securities law and government regulation.

IR’s second goal is to help fulfill corporations’ affirmative disclosure obligations under securities law and government regulation. These are described in detail later in this chapter. Stock exchanges also have their own disclosure requirements, and IR is responsible for helping companies fulfill these disclosure requirements too.

A third goal of IR is to create competitive advantage. Just as a company tries to create competitive advantage for its products and services in the consumer marketplace, IR works to create competitive advantage for a company’s securities in the investment marketplace. To do this, IR uses the same communication tools as other corporate communication functions and often coordinates closely with those functions, including media relations, internal communications (especially when employees, either directly, or through unions or pension plans, own stock) and sometimes advertising.

8.3 A Brief Introduction to the Financial Markets and Investment

IR is primarily concerned with communication to the financial markets.

IR is primarily concerned with communication to the financial markets. Financial markets are physical or virtual places where those who have surplus money (capital) come together with those who need money. In theory, financial markets operate so that capital flows to its most beneficial and lucrative use, defined as where surplus money earns the greatest return relative to risk. In practice, inefficiencies of human actions and communication almost guarantee that capital may not reach its best use. IR supports the goal that capital always reaches its best use by working to eliminate inefficiencies in information and data among market participants and observers.

Those who have surplus money are investors. Financial markets move money from investors to borrowers, in exchange for a promise to repay the money under specified future conditions. A business generally needs money for two purposes: To fund operations or to fund growth opportunities, such as building new factories. When a business needs money, it can turn to several sources. For instance, it can generate cash from internal operations by increasing productivity (and thus earnings) or by closing inefficient operations. A business also can borrow money from a bank. Sometimes a business prefers to ask the general public to become investors and to provide the necessary money. A business does this through the financial markets by issuing bonds (“debt securities”), which in essence are tiny, discrete simultaneous loans from large numbers of investors; or by issuing stocks (“equity securities”), which in essence are tiny, discrete portions of ownership, that is, “shares” of ownership in the company itself, to many investors simultaneously. These bonds or stocks collectively are called “securities” because the supplier of capital (the investor) has secured legal standing and claim on the corporation’s assets in certain circumstances.

8.3.1 Debt Securities

Financial news outlets often imply stocks are where the action is, but in the United States the debt securities markets are significantly larger, both in dollar terms and in number of issuers. A debt security is a promise. In exchange for borrowing the investors’ money (the “principal”), corporations (the “issuers”) promise to pay a previously determined return (“interest”), at a stated frequency, for a certain time period. Thus when investors receive debt securities, they gain an income stream for a certain period. Gaining this steady income is why investors invest. Investors in debt securities generally know what their income stream will be, so debt securities are also known as fixed-income securities. When a debt security matures, issuers give back the principal. From the issuer’s perspective, the issuer is “renting” the principal.

Debt securities are classified by the time to maturity from its initial offering, that is, the time until the principal has to be paid back. Corporate debt that matures in five years or more from its initial offering is called a “bond,” corporate “notes” mature in one to five years, and “commercial paper” matures in less than one year. Each of these types of debt has its advantages to a corporation. For instance, commercial paper often funds a corporation’s working capital needs to keep operations flowing smoothly.

8.3.2 Equity Securities

Whereas debt securities are essentially loans, equity securities represent actual ownership in a corporation.

Whereas debt securities are essentially loans, equity securities represent actual ownership in a corporation. Equity securities differ from debt in that the money provided by an investor is provided permanently to the corporation, that is, the money never has to be paid back. But for this permanent money, investors get a permanent share of ownership in the corporation. Equity securities are commonly referred to as shares, or stocks, for this reason. If the corporation does very well, the investors stand to do very well too. Shareholders gain both from the appreciation in value of a company’s stock as set by the stock market and, sometimes, from dividend payments, which are profits paid to shareholders from time to time from excess corporate cash. But shareholders also run substantial risks, too, and are the first to lose their money if a corporation goes bankrupt. Dividends are distributed on a pro rata basis, that is, each share is entitled to an equal portion of the profits. In the United States, dividends are customarily paid quarterly, in the United Kingdom, semiannually.

The stock exchanges exist, in part, to allow investors to find other investors who are willing to buy their shares of ownership.

Even though shares in themselves are permanent at-risk capital, sometimes investors want out, understandably. The stock exchanges exist, in part, to allow investors to find other investors who are willing to buy their shares of ownership. These transactions often occur on well-established, well-regulated stock exchanges, such as the New York Stock Exchange (NYSE). New York, Tokyo, Shanghai and London are home to the world’s most important stock exchanges. Hong Kong, Shenzhen, Toronto, Frankfurt, Zurich, Seoul, Taipei, Sydney and Mumbai also host important markets. Most stock exchanges today exist only electronically and have no physical location or trading floor. The NASDAQ stock exchange in New York is an example. Even the NYSE has rapidly moved away from its trading floor operations, which now is operated more as a marketing showcase than as a trading venue.

8.4 What Does “Public Company” Mean?

Some words used in IR have specialized, specific meanings that are nonintuitive and even contrary to usage in everyday English. For example, in the securities markets “public” and “private” carry meanings that derive from the description of whether a company’s stock is generally available to any buyer or whether ownership is restricted to a few. A public company is a business whose stock is available for sale to any member of the general public. A private company is a business whose ownership is restricted by law to present owners and those who may buy its stock by invitation only, directly from the company or from one of its private owners. There is no public market in a private company’s stock.

What differences do such distinctions make? By definition, since private companies have no stocks or bonds publicly available for sale, they are not subject to the disclosure obligations required of public companies by law. Privately held companies are not required to disclose their finances, profits, strategies, successes or failures, and generally they do not. Conversely, public companies are required to make full, timely and accurate disclosures of information that a reasonable observer might believe reflects on the value of that company’s securities. Investor relations is the communications skill set that companies use to meet these disclosure requirements and to relay material corporate information to all reasonable public observers so they can make reasonable investment decisions concerning the company.

8.5 Why Do Corporations Exist?

The corporation is the dominant form of economic organization in the world today.

The corporation is the dominant form of economic organization in the world today. While forms of government, for instance, may vary widely, the basic structure of the corporation can be found functioning in nearly every corner of the Earth. In part, corporations exist as a way to accommodate the explosive need for capital to invest and grow a business. Other forms of business organization include sole proprietorships and partnerships. Each form has its benefits and drawbacks. But only a corporation allows the raising of large pools of capital from diverse and widely dispersed shareholders, within a legal structure that is permanent. Corporations also can enter into contracts, own property, make use of tax advantages and have established ways of governance that provide certain protections for all involved.

Many corporations first were the brainchild of entrepreneurs, who founded them as a way to profit from a major idea or innovation. From J.P. Morgan, Henry Ford, Andrew Carnegie and Thomas Edison to today’s Bill Gates, Larry Page and Mark Zuckerberg, corporations proved a reliable way to take an idea and build an organization around it, and to create and distribute wealth for the greater benefit of society.

But as corporations raise capital and expand their ownership structure, the owners become too numerous, or too distant, from the corporation to run its business effectively day to day. Thus owners (shareholders) hire managers as their agents to run the corporation. For this very good reason, ownership becomes separated from management. But this also can cause a significant problem, as owners and managers often have differing outlooks on what goals and risks the corporation should take. For example, owners want to maximize profits, while managers may want to maximize their salaries and perquisites. In fact, this problem caused by the separation of ownership and management—called the “agency problem”—was at the heart of the financial crisis on Wall Street that began in 2007. Managers there were willing to take on incredible risks, because if things went right, managers gain tremendously. But if things went wrong, as they did, it was the shareholders, and in this case ultimately the taxpayers, who bore all the downside risk.

To solve the agency problem, yet keep all the benefits of the corporation form of economic organization, shareholders needed a way to monitor and direct the goals and risks of the corporation, in other words, a way to govern the corporation.

8.6 The Role of Shareholders in a Public Company

Shareholder-owners manage a corporation’s goals and risk through the system of corporate governance. Under this system, shareholders have two rights: The right to select individuals to represent their interests who, in turn, direct the CEO and other senior managers on what to do, and the right to have access to a steady, accurate stream of information about the company and its actions. In other words, shareholders elect directors, who assemble as the Board of Directors, whose only duty in the United States is to represent shareholders’ interests, in accordance with the law. Directors have a fiduciary duty, or duty of good faith, to serve shareholder interests.

Shareholders elect directors, who assemble as the Board of Directors, whose only duty in the United States is to represent shareholders’ interests, in accordance with the law. Directors have a fiduciary duty, or duty of good faith, to serve shareholder interests.

As owners, shareholders are entitled to participate in important corporate decisions. To do this, shareholders are entitled to vote their shares on a one share, one vote basis for the election of directors, under the concept of shareholder democracy. Shareholders vote at meetings which generally take place once per year (annual meetings), but special-purpose meetings can be called any time under procedures set out in the corporation’s bylaws. At annual meetings, shareholders decide issues including appointment of the company’s independent auditors, election of directors and other issues properly brought before the meeting.

Shareholders have the right to access certain information about the company

Also as owners, shareholders have the right to access certain information about the company. Some information is available from the company’s proxy statement and formal filings with regulators, described later. A key job for IR is providing the rest of the information that current or prospective investors need to make informed governance and investment decisions. The concept of the level playing field means that all investors and potential investors must have access to all available pertinent information at the same time. Ensuring that this happens is one of the cornerstones of IR practice. Regardless of how many shares a holder owns, all shareholders and the entire investment market are entitled to equal and simultaneous access to information about the company, which brings up the two key concepts of investor relations and corporate communications: Disclosure and materiality.

8.7 Disclosure and Materiality

The cornerstone of a successful IR practice is the provision simultaneously of all available pertinent information to current and potential investors.

The cornerstone of a successful IR practice is the provision simultaneously of all available pertinent information to current and potential investors. This begs the questions: Is all information pertinent? If not, how does one decide whether information is pertinent? And if it is, when and how must that information be disclosed?

Public companies have an affirmative obligation under the law to keep all investor and potential investors informed on matters that they might deem important. First, note the audience: All investors and all potential investors. A fundamental principle of investor relations is that no issuer gives one market participant an informational advantage over others, as noted earlier. Since nearly every person can and does participate in the market (through ownership of mutual funds or retirement accounts, for instance), IR is much broader than just a conversation with Wall Street. A variety of initiatives over the last 20 years reinforced this mandate for information parity—sometimes in the jargon called a level playing field—aided significantly by the ease, speed and ubiquity of Internet-based communications. Selective disclosure—telling only some investors important corporate news before other investors—is a violation of U.S. securities law and regulation.

Two related concepts—disclosure and materiality—determine information flow to current and potential investors.

Disclosure is the distribution of information, positive and negative, by a company, voluntarily, or to be in compliance with laws and regulations.

Disclosure is the distribution of information, positive and negative, by a company, voluntarily, or to be in compliance with laws and regulations. Disclosure concerns whether and when pertinent information should be released. A series of discrete rules and procedures spells out the scope, content, format, timing, certification, signatories and other items on communication of this information.

There are two types of disclosure: Formal and informal.

8.7.1 Formal Disclosure

Formal disclosure requires that specific financial and business information be filed in a highly structured way with government regulators on a regular basis.

Formal disclosure requires that specific financial and business information be filed in a highly structured way with government regulators on a regular basis. The Securities and Exchange Commission (SEC), the U.S. government’s main market regulator, provides standardized forms for formal disclosure. The three key forms that communication professionals should know are Form 10-K, Form 10-Q and Form 8-K.

Form 10-K is a detailed report filed annually on the corporation’s (“issuer’s”) financial results, business, management and prospects. An outside accounting firm audits the 10-K prior to its release and the SEC then reviews the 10-K in detail.

Form 10-Q is released by an issuer after the ends of the first, second and third fiscal quarters and is a scaled-down version of the 10-K. The SEC reviews the 10-Q but the document is not audited by outside firms.

Form 8-K is a filed by the issuer on an as-needed basis, when the issuer needs to announce certain significant changes in the company, such as new management, change of auditors or any other critical information the issuer thinks the public should know.

Formal disclosure includes two other documents for which there are not SEC forms. These are the proxy materials for the shareholders’ annual meeting and the company’s annual report to shareholders.

The proxy statement is material made available or distributed to each shareholder in advance of a company’s annual meeting, the required yearly gathering of a company’s shareholders to review performance and make major decisions through a one share, one vote election. Large corporations may have hundreds of millions of shares outstanding (and thus hundreds of millions of potential votes) held by tens of thousands of shareholders. Because it is unlikely every shareholder can attend the meeting, a proxy method was developed so all shareholders can vote regardless of whether they attend in person.

A proxy is an authorization to vote a shareholder’s securities. Typically, a company’s senior managers ask permission to be the substitute elector and shareholders generally grant permission routinely. Thus management often enters the meeting with enough votes in hand to control all decisions; the annual meeting becomes a pro forma. But increasingly, shareholders are withholding their proxies from management or giving them to dissident shareholders who challenge management on key decisions. Such a situation falls into the category of shareholder activism in which shareholders, as owners of the company, force decisions contrary to those of company management, who are the owners’ agents. Recent proxy fights have occurred over issues including limiting executive compensation and directing a company’s public policy initiatives on human rights and the environment. Proxy materials are usually made available to shareholders 30 to 45 days before a scheduled meeting. The SEC reviews and approves all proxy material before distribution.

Finally, formal disclosure includes the annual report to shareholders. Unlike Form 10-K filed with the SEC, the annual report to shareholders is a “free writing,” which does not need preclearance by the SEC. Nonetheless, there is significant legal liability for material omission or misstatement in the annual report. Commonly, corporations may use the annual report as a corporate marketing brochure and include the technical financial and operating information in the back; the front becomes a high-quality stylized brochure with essays, pictures and art. The IR department or the corporate communication department is charged with writing and designing the overall annual report to shareholders.

8.7.2 Informal Disclosure

Informal disclosure involves communication directly to the market that is free form and distributed through a variety of channels. It is not mediated by regulators.

Informal disclosure involves communication directly to the market that is free form and distributed through a variety of channels. It is not mediated by regulators. Informal disclosure can include press releases, meeting presentations, speeches, tours of manufacturing plants, blogs and podcasts. Much, but not all, communication by an IR practitioner is considered to be informal disclosure.

It is vital to note that a corporation is not obligated to distribute any and all information about itself.

It is vital to note that a corporation is not obligated to distribute any and all information about itself. At one extreme, a voluminous dump of unstructured data from a corporation would be virtually useless for the market. At the other extreme, corporations have a right to keep much proprietary information private. For instance, Coca-Cola can keep its beverage formulas secret, no matter how important it is to the company’s profits, and thus its stock price. A corporation is obligated to release only pertinent information that is material, and then only under certain circumstances.

A corporation is obligated to release only pertinent information that is material, and then only under certain circumstances.

It can be said all corporation information is divided into two types: Material information and non-material information. According to the U.S. Supreme Court:

A fact will be considered “material” if there is a substantial likelihood that a reasonable investor would consider it important in reaching his investment decision—that is, the investor would attach actual significance to the information in making his deliberations.

A corporation has a free hand to deal with non-material information as it sees fit. Business-as-usual information such as internal memos, advertisements, day-to-day media relations and marketing materials are generally not considered material and therefore not subject to restrictions on dissemination. But what “actual significance” makes information material? Congress, the SEC and the courts have deliberately left this definition vague, allowing each issuer to make this determination based on the situation at hand. Issues of disclosure and materiality are exceptionally nuanced in day-to-day practice. IR and public relations professionals often must seek and defer to the specific advice of their legal counsel.

8.7.3 The Issue of Fraud

The fraud-on-the-market theory.

Says that misleading statements affect the price of securities in the market as a whole and defraud purchasers or sellers, even if they did not rely directly on the misstatements.

The U.S. Supreme Court also has affirmed what is known as the fraud-on-the-market theory, which says that misleading statements affect the price of securities in the market as a whole and defraud purchasers or sellers, even if they did not rely directly on the misstatements. Material omissions of information or materially misleading statements distort the price of a company’s stock. If performed deliberately, such material omission or misstatement could be considered fraud.

The significance of the fraud-on-the-market theory is that a company’s disclosure obligations apply to a much larger universe than its investors.

The significance of the fraud-on-the-market theory is that a company’s disclosure obligations apply to a much larger universe than its investors, as noted earlier. The company has a duty to the market as a whole and can be sued for improper disclosure even by people who never heard or saw the disclosure, because improper disclosure would have had an impact on the market as a whole. In the United States, a company and its officers, directors, and IR professionals are governed by the anti-fraud provisions of the SEC. In its entirety, SEC Rule 10b-5 reads:

The rule does not specify particular content of communication that constitutes fraud. When a person or company commits a material omission or discloses something materially misleading, that action operates as a deceit in the securities market.

In the United States, the SEC has ruled that IR professionals can be subject to civil or criminal liability if they knew or should have known that the information transmitted was materially misleading or a material omission.

Although the [SEC] does not regard public relations firms to be the guarantors of the information they gather for distribution, such firms should not view themselves as mere publicists or communicators of information with no attendant responsibility whatsoever for the content of such information. Indeed, these firms must be aware of their obligation not to disseminate information concerning their clients which they know or have reason to know is materially false or misleading. The obligation is particularly crucial with respect to corporate financial statements, which are one of the primary sources of information available to guide the decisions of investors. In distributing financial information, public relations firms must take special care to ensure that the information which they have received is presented fairly, accurately, and completely. Public relations firms’ dissemination of information concerning their clients which they know or should have reason to know is materially false or misleading, in connection with the purchase or sale of securities of such clients, may render them liable for violations of the federal securities laws.³

8.7.4 Regulation

Disclosure is related to whether and when information must be disclosed, and materiality is related to what information must be disclosed.

To review, disclosure is related to whether and when information must be disclosed, and materiality is related to what information must be disclosed. The final question becomes, who is in charge to see this happens?

Securities markets are regulated by an overlapping set of state, provincial, federal and transnational governmental agencies. In addition, with several exceptions, each stock exchange worldwide has a layer of private regulation pertaining to any security trading on the particular exchange. Such private regulators are termed self-regulatory organizations (SROs) and carry considerable clout in determining standards and methods listing and trading a stock.

The SEC in Washington, D.C., is the chief governmental regulator in the United States. In Canada, responsibility is held at provincial level with the Ontario Securities Commission taking a lead. The Financial Conduct Authority is the U.K.’s regulator that regulates financial firms and mandates corporate disclosure. The principal SRO in the United States is the Financial Industry Regulatory Authority (FINRA), which oversees most activities on the NYSE and all on NASDAQ.

Over the last two decades technology has enabled capital to move virtually anywhere on the globe instantaneously. Such capabilities led to calls from investors, listed companies and various national governments for greater regulatory harmonization and creation of a common, precise, legal framework for securities regulation and accounting standards. As it currently stands, a company listing its stock in London and New York needs to follow different sets of regulations and different accounting standards that are at times contradictory. The current situation adds expense for public companies and is said to cause unnecessary rigidity in global capital flows.

The Financial Accounting Standards Board (FASB) sets accounting standards in the United States. These accounting standards collectively are called Generally Accepted Accounting Principles, or more simply GAAP. Most of the rest of the world has its general accounting standards called International Financial Reporting Standards, or IFRS for short. There has been a longstanding effort to harmonize GAAP and IFRS, but much work remains.

8.7.5 Recent Disclosure Regulation

Over the last 20 years in the United States, a variety of initiatives have gone into effect designed to enhance transparency, level the informational playing field, speed up the availability of corporate data and improve corporate governance.

The Regulation Fair Disclosure (or Reg. FD) generally prohibits disclosure of material information selectively by a corporation to analysts or others.

One key initiative to understand is the SEC Regulation Fair Disclosure, which became effective in October 2000. The Regulation Fair Disclosure (or Reg. FD) generally prohibits disclosure of material information selectively by a corporation to analysts or others. Prior to Reg. FD, it was common IR practice to hold special closed-door meetings for selected investors and analysts, and to limit or forbid general investors’ participation in management conference calls, and so forth. Even though stock prices could gyrate wildly during these sessions as the privileged few took advantage of insider status to make a few bucks, the principle was that “sophisticated” information discussed in these venues exceeded that needed by the average market participant. The potential for abuse was obvious.

Under Reg. FD, corporate officers are permitted to conduct closed meetings with certain analysts or investors, but material information may not be disclosed unless it is also made available to the entire market simultaneously through other channels. If new information is blurted out by accident—for instance, by a carelessly speaking CEO—the corporation has an affirmative duty to notify the entire market of that information “promptly.” The SEC has interpreted the regulation to mean in no event more than 24 hours later or by the beginning of the next day’s trading session, whichever comes first.

8.8 Information Intermediaries: Securities Analysts

When making investment decisions, investors frequently depend on the advice of specialized investment professionals known as analysts.

When making investment decisions, investors frequently depend on the advice of specialized investment professionals known as analysts. Analysts are experts in specific industries, market sectors or trends. They are trained in specific academic disciplines, have had intensive financial training, and many are certified as Chartered Financial Analysts or its equivalent.

Securities analysts typically advise investors on issues ranging from asset allocation to promising industry sector opportunities, to recommendations on specific companies. Analysts can cover entire markets, specific geographic regions, entire sectors of the economy, or particular industries or companies. Some cover stocks, some bonds. But analysts all help investors to make informed investment decisions.

Analysts can cover entire markets, specific geographic regions, entire sectors of the economy, or particular industries or companies. Some cover stocks, some bonds. But analysts all help investors to make informed investment decisions.

Securities analysts can be divided into two classes, depending on the analysts’ goals: sell-side analysts and buy-side analysts.

Sell-side analysts are employed by investment banks and brokerage firms, and make recommendations to the firms’ customers.

Sell-side analysts are employed by investment banks and brokerage firms, and make recommendations to the firms’ customers. They are called “sell-side” analysts because their advice is intended to result in a sale of shares by the brokerage firm to its customers. The research is provided to customers free of charge; the firm is compensated by the commissions it generates from the sale or from profits from holding, lending, or other ways of managing the share inventory.

The primary work of sell-side analysts is predicting a company’s financial performance and therefore the likely profits it will generate. Based on this educated guess, analysts advise investors to buy, hold or sell their shares. Much quantitative work goes into an analyst’s projection of earnings, stock price and buy/hold/sell recommendations. Analysts work to find any opportunity to better understand companies they cover. They meet with management, call the company’s IR professionals, interview customers or suppliers, and review publicly available company information, including those disclosures managed by IR.

Sell-side analysts’ work is published in the form of reports on individual companies and industries. It is distributed to clients of their brokerage firms and is sometimes available on the Internet or other sources. Analysts also brief brokers at their firms about their recommendations so brokers can share those recommendations with their customers.

Buy-side analysts also make predictions about stock performance. But they are employed directly by large investors, known as institutional investors, which include mutual funds, insurance companies, trust companies, pension funds and other organizations. They are called “buy-side” analysts because their firms buy and hold securities for long-term gain. Buy-side analysts make “in house” recommendations only to their own company’s portfolio managers. Buy-side analysts review much of the same information and also the recommendations of sell-side analysts before making their own recommendations.

Buy-side analysts make “in house” recommendations only to their own company’s portfolio managers.

Much disclosure is directed to buy-side and sell-side analysts because they have significant influence over the investment process. Much time of IR and company management is spent working with, meeting with and attempting to positively influence analysts. Conference calls held after release of material information are intended to give these analysts timely access to company management’s perspective on this news and to provide them the opportunity to ask questions. IR professionals also spend considerable time on the phone and in email with analysts answering technical questions, arranging meetings and otherwise helping analysts understand the company

8.9 Information Intermediaries: The Financial Media

Analysts, the markets, investors and potential investors rely on the financial news media, both traditional and digital, for additional key information about a company or industry. Traditional media has been augmented, and in many ways replaced, by the growing role of digital media. The financial media as a whole has great freedom of action, greater legal protections and sometimes more resources to pursue corporate information than do investors. Journalists frequently are among the first to discern trends and discover change within a corporation or industry, and it is therefore important for investors making investment decisions to pay attention to the press. Given the leading role media plays in investment decision-making, investor relations and corporate media relations naturally focus considerable time and energy attempting to inform and generate accurate and positive commentary for a corporation, its management, and its prospects.

8.9.1 Traditional Financial Media

Because of the breaking-news nature of their reporting, wire services play an integral part in the system of corporate disclosure. Key among these services for financial news are Reuters, Bloomberg News and Dow Jones Newswires, each of which run various real-time web-based newsfeeds, desktop analytics, and coded feeds into automated trading systems. Each service also maintains extensive archives of news and market data for subscribers.

Daily newspapers with global significance in financial news include the Wall Street Journal, the New York Times and the Financial Times. In addition, local news outlets, especially those writing from a company’s headquarters city, can be exceptionally influential on a company’s reputation and stock price.

Broadcast media remains important for the financial markets. Bloomberg News and Reuters each run audio and video news divisions separate from their wire services. CNBC, Bloomberg TV and Fox Business hold leading places in the United States for cablecast business news.

Other classes of media hold sway over financial markets and investment. Periodic business and investment magazines such as Bloomberg Businessweek and Barron’s still maintain important readership. Trade publications—for example, American Banker in finance, AMM (American Metal Market) for the metals industry, Hollywood Reporter for entertainment and WWD (Women’s Wear Daily) in apparel—specialize in single-industry coverage that can surpass investment insight and expertise in the general media.

8.9.2 Digital Financial Media

Finally, online newsrooms, digital newsletters and blogs originating from traditional media outlets increasingly drive financial news and stock market activity. Subscriber-based and no-charge online news services, such as Business Insider, increasingly are gaining readership. News aggregators have a large following, especially among smaller investors.

Financial blogs are a powerful force in investment markets. These specialized media can tout sometimes seemingly esoteric investment theories, obscure happenings, or shadowy market prognostications. Some aggregators and blogs have devoted readerships and can move markets and specific stocks with amazing speed.

The New York Times’s DealBook⁴ and the Financial Times’s FT Alphaville⁵ each are read globally for market commentary news and insight. The Wall Street Journal competes with its MoneyBeat⁶ blog, but its main digital workhorse is MarketWatch.⁷ Reuters’s entry is Breakingviews.⁸

8.10 Best Practices

It is important to note the system of corporate disclosure currently in place is a floor, not a ceiling. It is what is required as a necessary fact of doing business as a public company in the United States. But such disclosure is generally not sufficient to establish and maintain long-term investor appetite for company securities. Corporations are permitted to engage in far more disclosure than the minimum requirements, and many do.

For example, there is no requirement that companies speak to individual securities analysts or to groups of analysts. But most companies do. Except for the annual meeting in most states, there is no requirement for companies to meet with or speak directly with their own shareholders. But most companies stay in constant touch with their shareholders and with the analysts who influence them.

In conclusion, companies that disclose more information more frequently than required often establish a competitive advantage for their securities and simultaneously ensure investors are sufficiently comfortable to buy or hold their shares.

Effective management of investor relations can help enhance a company’s reputation among its investors and other key constituencies. Among the best practices are:

1. Ground all IR activities in the corporate and financial goals of the company. IR is an integral, not incidental, part of corporate strategy and management.
2. Coordinate closely with the CFO, media relations, and, if employees own significant shares, with employee relations.
3. Coordinate closely with the accountants and lawyers on all formal disclosure, especially regulatory filings.
4. Do more than what is required. Make it easy for investors to access information that has been disclosed, including via the company’s website.

8.11 Questions for Further Discussion

1. Is it more important to be an expert in finance or to be an expert in your company’s business (e.g., an engineer in a technology company) to be an effective IR practitioner?
2. What is the optimal relationship between the IR function and the media relations function?
3. Why is an IR person subject to different legal standards (e.g., subject to civil and possibly criminal action if he or she conveys false information) than other communication professionals?
4. How should an IR person balance the desire to position the company as positively as possible with the requirements regarding formal and informal disclosure of material information?
5. When employees own a significant percentage of a company’s stock, how should an IR person optimally coordinate with employee communications?

8.12 Resources for Further Study

Organizations

National Investor Relations Institute—The National Investor Relations Institute (NIRI) is the professional society for investor relations professionals in the United States. It offers a number of publications, seminars and programs to enhance IR professionals’ practice. www.niri.org.

Publications

Berman, Karen and Joe Knight . (2013). Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean. Boston: Harvard Business Review Press.
Bowen, William G. (2008). The Board: An Insider’s Guide for Directors and Trustees. New York: W.W. Norton & Co.
Bragg, Steven M. (2017). The Investor Relations Guidebook, 3rd edition. Centennial CO: Accounting Tools.
Cohan, William D. (2017). Why Wall Street Matters. New York: Random House.
Gramm, Jeff. (2015). Dear Chairman: Boardroom Battles and Shareholder Activism. New York: Harper Business.
IR Magazine. www.irmagazine.com .
Laskin, Alexander V., ed. (2018). The Handbook of Financial Communication and Investor Relations. Hoboken, NJ: Wiley & Sons.
Malkiel, Burton Gordon. (2019). A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, revised edition. New York: W.W. Norton.

Table of Contents for 8 Investor Relations

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