Spring 2008
THE SIX ATTRIBUTES OF A WORLD CLASS IR FUNCTION
Nick Helsby of executive search firm Watson Helsby, considers the characteristics and qualities that an IR function has to possess in order to be truly effective.

Given the changing dynamics between companies and the investment community, it is inevitable that the IR function, the key functional interface with the financial markets, will have seen its role grow in significance and importance.

Watson Helsby, an executive search firm, has recently published a study, “A window out, a window in”, designed to explore how the function has evolved in response to these and other pressures and what it now demands of practitioners within it.  With the help of the interviewees (over 30 IR directors of FTSE100s plus brokers and analysts), we endeavoured to identify the principal attributes of today’s world class IR function.

Overall a strong IR function needs to have the capability to win the trust and confidence of key external audiences and key internal audiences, namely the CEO/CFO.  These are interdependent – you can’t achieve one without the other.  But what does it take to engender these high levels of trust.
The first attribute and indeed the core competency of IR is a very detailed and encyclopaedic knowledge of the business, financially, strategically and operationally.  A good IR director, as one interviewee put it, “has to be able to articulate the DNA of the company.”

Another interviewee observed that you need to be able to describe business developments, outlook and strategy in the same way as the CEO or CFO would.

Detailed knowledge of the industry sector is equally crucial, particularly when discussing company performance and prospects in a broader sectoral context.

Because accounting, financial analysis and modelling, and the reporting and explanation of financial performance can now be incredibly complex, exceptionally high levels of financial literacy, numeracy and analytical capability are critical.  This is the second attribute of a world class IR function.  The knowledge required ranges from a technical understanding of accounting issues to the interplay between capital investment and revenue generation, through to an understanding of the financial and commercial implications of strategic business and capital expenditure decisions. 

This topic of financial literacy raised the issue of whether an accountancy qualification is now a mandatory requirement for an IR director.

Do you need to be a qualified accountant?
Yes:  18%
No:    82%

The overriding consensus was that it was not, but that some financial training (and certainly a strong financial background) is important.  It was, however, generally agreed that the IR team now requires a qualified accountant within its ranks.

The best IR teams will not be satisfied with just providing the correct financial data to the markets.  They will complement this with the relevant operational and sectoral data that will help explain and contextualise the performance and the figures.

The third attribute of a world class IR function is that it is extremely well connected and networked within the company, with strong relationships with key internal functions and operational management.  This will ensure that information and data relating to what is going on in the company is readily accessible.  It is about knowing where and to whom to go to get key operational and financial data and building the rapport that ensures that relevant individuals / departments will put themselves out to provide the information that is needed.

This takes time, initiative and self-motivation, but if an IR team is not perceived to have this access, then credibility will be seriously undermined in the eyes of its key external audiences. 
The gravitas and authority to operate at the most senior levels in the company is equally critical.  There will be times, for instance, when the IR director has to persuade a CEO to make a statement to the markets that is different to the one that the CEO feels strongly disposed to making (for instance promising certain levels of growth).  It is crucial that the IR director is able to impact on debates and has the courage to say no to his/her CEO.  As one IR director commented:

 “A key skill that you need is that of upwardly managing your CEO and CFO.  They might be bloody-minded and you need the courage to stand up and fight your corner.”

The fourth defining characteristic of a world class IR function is the ability to communicate effectively. The best IR functions understand how best to ‘market’ and position a stock to capture market interest and differentiate it from its peers.  They do not adopt a numbers-based, compliance-driven approach to communication.  Rather they put a greater emphasis on telling the story behind the numbers, on a more creative approach to communicating the vision, on showcasing intangible assets and linking these to future growth prospects.  While numbers and modelling should always form the basis of valuation, they are only part of the story. Today’s IR director also needs to be able to write well, extracting key messages from the strategy and delivering them with colour.  It is a skill that requires the ability to assimilate and simplify complex information as well as an ability to turn this into a simple and compelling story or investor proposition.

Investors and analysts want colour and granularity and it is possible to provide this and simultaneously stay within the rules governing disclosure.

The fifth attribute is a detailed understanding of how City and global financial markets work and, even more important, an intimate knowledge of the drivers of sell-side and buy-side behaviour and decision-making.  This entails an understanding of how analysts and investors judge and evaluate companies, how they think as well as an understanding of what they are really asking and what motives lie behind a question.

Doing all of the above and ensuring compliance with UKLA disclosure rules, and other statutory requirements, is an increasingly difficult tightrope to walk.  The current regulatory environment here in the UK - driven by UKLA disclosure rules, the Combined Code, IFRS - is very different from what it was.  The IR function now plays a key role in ensuring that a company not only communicates effectively to the City, but also does so within the constraints of this complex and stringent regulatory environment.
An IR team that possesses all of the above attributes will add value to a company in the following ways:

• It will be strong enough to handle many of the investor and sales force meetings on its own and therefore capable of shouldering the burden of the contact programme, thereby freeing up the CEO’s and CFO’s time.  Given that the time of the CEO and CFO is expensive, this is a significant benefit, the value of which should not be underestimated.  Maximising the efficient use of the time that the CEO and CFO devote to IR, as well as the effectiveness of their interaction with investors, is one of the most crucial components of the IR director’s role;

• Assisting the sell-side with their models, and helping the market understand and interpret complex data, the implications of which could otherwise be completely misunderstood or misinterpreted (for instance customer acquisition data or clinical trial data).  If sell-side models are wrong, inaccurate notes will be going out to buy-side, so it is incumbent upon IR to ensure that this risk is minimised;
  
• Thinking through potential issues and developments within the business and making a sound judgement about how to position the information and when to disclose it, thereby ensuring that there are no nasty surprises;

“So that when something negative happens, analysts will say ‘oh yes, we knew that was going to happen’”

• Communicating the ‘story’ in a persuasive, efficient and regular fashion to ensure the market understands the business and its key drivers and has an informed view of the company’s strategy, performance and prospects.  IR plays the key role in steering market expectations and brokers’ numbers.

The sixth and final attribute of a world class IR function is its ability to build and develop strong relationships with investors combined with the antennae and network to pick up on investor mood and sentiment.  An IR director must have an intimate knowledge of the shareholder base and an excellent grasp of what the market is doing and looking for.

Keeping senior management aware of what investors are thinking and saying and providing a continuous loop between company and investors is where IR earns its crust.  A good IR director will go out and proactively solicit that kind of information, so it is absolutely critical that a company employs an IR director who investors like to talk to and who is capable of winning their trust.

This is imperative in a bid situation, when a company needs to know exactly what each of the top ten to twenty shareholders are looking for, what they are thinking, what they would like the company to do.  The advice originating from IR in this area needs to be spot on, since it can have a significant influence on corporate decision-making and certainly on the positioning and presentation of decisions.