2.1 Themes and Equity Story
What content does Investor Relations have to focus on? This question can be answered in a variety of ways.
An initial answer is that the content for Investor Relations corresponds to the criteria that determine the value of a listed company. These include:
- Subjective factors, such as the psychology of the stock market, global expectations, and personal preferences for securities
- Objective, company-specific factors such as strategy, quality of the management, market position, products, and financing
- Objective, industry or market-specific factors such as interest rates, economic activity, regulations, political and social events
- Controlling interests such as ownership structure or «takeover speculation»
- Marketability of the security, such as liquidity and potential investor base
The sum of these factors determines the enterprise value. Although they cannot be broken down individually in the sense of a direct cause-and-effect relationship, empirical studies nevertheless suggest that, from this wide variety of factors that determine value, the following four are crucial over the long term:
- The dominant drivers in their market
- The corporate strategy
- The business performance in general and the growth in turnover and profit or the return on capital specifically – as proof of whether and how the strategy adds up or how effectively and efficiently it is implemented
- The quality and communication strength of the management
The Scale of Influence of CEOs on Their Companies
(Abridged version of an article from the Neue Zürcher Zeitung from January 2018)
Various studies have attempted to measure the influence of the big boss at large firms. The best-paid top managers at listed companies in Switzerland receive over 10 million Swiss francs a year; the average compensation of CEOs at the 50th- to 70th-largest listed Swiss companies is around 3 to 4 million Swiss francs. With their need to personalize articles, the media contribute to the perception that top managers exert an enormous influence on the fate of their companies.
But is this influence really so large? There are in principle two schools of thought among academics. One emphasizes that, through the company’s strategy, the selection of their trusted management personnel, and the communication of an image both in-house and to the outside world, top managers have a major influence on the fortunes of a company. The other school of thought, in contrast, refers to the massive limitations on the influence of the individual CEO at major companies. In this reading, factors such as general economic climate, the industry, the quality of the workforce, the corporate culture, the competition, and luck are key drivers and cannot be influenced or can only be influenced to a limited degree in the shorter term by an individual.
The «truth» probably lies typically somewhere in-between. Attempts to measure the influence of top managers can be found repeatedly in research literature, which is heavily marked by American studies. The standard study concept is based on a statistical procedure that uses data from hundreds of companies and several decades to assess the factors determining a company’s success (generally measured by its profitability) and that also endeavors to identify how large the measurable influence of the «boss» factor is.
10 to 20 Percent Influence
A review of surveys, of the literature and individual studies from the past 20 years reveals a large range of estimates – with the impact of the No. 1 ranging from statistically insignificant to very large. If the extremes are filtered out, what is left as a trend statement is that the «boss» factor based on typical estimates may explain perhaps around 10 to 20% of the fluctuations in corporate success (upward as well as downward) on average. That would not be the be-all and end-all; factors that cannot be influenced by management may well be significantly more important. Yet the estimated CEO effect is not inconsiderable. Based on typical estimates, the effect would be comparable in magnitude to the influence of the «industry» factor. Given the uncertainties in the methods of estimation, the figures cannot be taken as the gold standard but have to be seen only as a possible order of magnitude based on the current state of superficial knowledge.
At major corporations with annual profits running into the billions, fluctuations of a few percent will already produce amounts in the tens of millions. With such orders of magnitude, it may initially be of relatively little consequence in the view of boards of directors and shareholders whether the group’s chief executive officer earns 2 million or 10 million francs. But decision-makers also have to ask them- selves what signals the compensation packages for top managers send to their own workforce, the customers, and other stakeholders.
What investors want
A second way of determining content is driven by needs. What content do investors ask for?
It has to be noted here first of all that there are many different types of investors. Private investors typically invest according to different criteria than institutional investors. And the latter in turn invest according to different concepts, for example in line with the value or growth approach (see ➔ Chapter 4 for more on this).
The similarities, however, are greater than the differences when we consider the question of what information investors are interested in. All investors ask, to begin with, for statistical and historical data, which they examine for affirmative signals as well as for inconsistencies. The way that all types of investors think is based on cause and effect. It must be noted here:
- The fewer statistical series there are, the more questions will be raised
- The better investors know the long-term drivers of the success of a company, the easier they find it to accept that details are not published
- It is not the «news» that moves the share price but the reaction of investors
The company-specific information that investors typically require for an assessment is presented in the illustration below.
What Active Institutional Investors Are Looking For
Quality | Responsibility TowardsStakeholders | Valuation by means of |
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Relevant aspects for an investment, Source: Schroders
A look at the market
A third way: Investigate and define IR topics with a view to market trends and competitors. Which IR contents are other companies in the relevant industry communicating? Where is your own company relatively better positioned? Where does it have unique selling points from the investor’s perspective?
The communication with investors, and especially the IR presentation, which summarizes the equity story (for more on this, see ➔ Chapter 6.4), should take the above-mentioned points into due consideration. In addition to a comprehensive description of the relevant topics in the IR presentation, it can be helpful to publish these on the website or in other IR documents in a short and concise form. The most important elements are listed in the sidebar below.
The Equity Story – the Heart of Investor Relations
How does the company make money? | In Which markets does the company operate? | Where Does the Company Stand in Relation to the Competition? | Where Does the Company Intend to Be in Five Years? |
| The company's business model | The market prospects | Peer comparison and unique selling points (USP) | The vision |
Strategic Corporate Goals | How Does the BusinessModel Work in Detail? | Opportunities and Risks in Figures | |
| Business targets, earnings targets, financial targets, sustainability/ESG criteria | The success and risk factors in the value chain | The company’s key performance indicators: historical performance, current business figures, and forecasts |
Source: Prof. Dr. Olaf Streueri
i | Streuer, Olaf: IR Basics – Grundlagen der Investor Relations, Presentation at DIRK Konferenz, Frankfurt a.M., 2016 ➔ dirk.org/wp-content/ uploads/2020/11/170612_IR-Basics_Streuer_Grundlagen_IR.pdf |