Magazine article Management Review

Why Wall Street Matters

Magazine article Management Review

Why Wall Street Matters

Article excerpt

An investor relations program can provide big benefits for companies

This narrow focus, however, can result in a variety of missed opportunities and undervalued situations. Indeed, studies show a chronic problem: below peer-group price-to-earnings multiples for many companies and financial institutions. Also, price-to-earnings multiples generally run lean, and the stock does not ordinarily enjoy broad coverage by professionals at top Wall Street firms. Management is often underestimated or ignored.

The results can shortchange the shareholders, especially long-term stakeholders, and can raise the cost of capitalization. With few exceptions, many leaders of America's companies and financial institutions are not very visible outside of their sectors and communities.

These executives deserve better, and their stock could fare better, too. The combination of stock neglect and management quasi-anonymity can keep vital parts of the U.S. economy in relative obscurity. The good news is that the remedies-and the incentives to become more visible and active in the investment communities and more highly valued by them-are at hand.

What are the rewards that can be expected from more pronounced investor relations efforts, apart from the attendant greater visibility of management?

* Over the past 15 years, public companies with active, credible investor relations programs generally enjoy higher price-to-earnings multiples, and greater stability.

* A higher stock price makes for a more expensive and troublesome takeover tart.

* A strong investor relations program can help a company through a storm or crisis.

* Price appreciation rewards stockholder loyalty, and can compensate for a poor or absent dividend.

* Options and other management incentives tied to operating profit and stock market performance constitute a means of rewarding vital executives.

The visibility associated with an active investor relations program can lead to greater recognition of managerial caliber. Indeed, there has to be something admirable about executives who succeed when margins contract amid fierce competition. Also, there should be greater awareness on our Main Streets of the investment worth of industrial companies and financial institutions. That untapped reservoir of individual investors can be converted into premium stock prices and stronger loyalties. Also, the stock markets are often on the prowl for undiscovered or "reborn" companies with a good investment story.

Creating and implementing an investor relations program - despite the lack of Wall Street experience among top management - is not any more difficult, and usually less expensive, than mounting a new marketing program. Some of the elements of the investor relations effort resemble techniques employed by lenders, such as financial presentations. While investor relations efforts may require six to 18 months or more of sustained effort before the payoff is obvious, they have a way of lasting for years. And some show a measure of return promptly.

If a company is doing a good job of communicating with investors through analysts or portfolio managers, then its stock should be less volatile, especially during downturns and in the face of non-recurring negative developments. Wall Street may indeed have a highest-bidder mentality and a short attention span, but it also has a keen eye for quality. Credible companies and respected leaders enjoy the Street's favor through the most meager times and the most challenging episodes. Also, the Street prefers a "known" company to the unknown and the unresolved.

To become known, one must communicate, especially under changed circumstances, such as new leadership, turnarounds, stronger balance sheets and improved prospects. Business development programs underway can make a once "me-too" company distinguishable, and turn it into a promising leader. …

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