May 26, 2021

Characteristic Opportunity

I don’t think Harvard Business Review understands 21st century investor relations.

No offense to the smart folks there.  Authors Dennis Carey, Ram Charan and Bill McNabb are world-renowned and wrote for HBR on the Changing Role of the Investor Relations Officer.  It’s excerpted from a new book by the three.

They argue IR people need to be better communicators with Activists and index funds.

Okay.

They also say the IR job is often seen internally as a dead end. Hm. Never seen that or heard it. I’ve been in this profession for 26 years.

They say, “We know one private company in India, where the CEO has made his son the IRO in preparation for the top job.”

Well, Henry Ford III has been in IR for Ford under the expert tutelage of Lynn Tyson, and he’s on the board of directors. IR is the best gig in the company for developing comprehensive strategic understanding of the business, and it’s no dead end.

But that’s not what I mean. There’s opportunity like springtime (like this photo Monday in Steamboat at the Botanic Park).

These seasoned advisors suppose IR remains about strategic communication, now filtered through governance, Activism, and so on.

I was looking over the educational offerings from IR chapters across the fruited plain.  Where are the programs on advising executives and boards on strategic capital allocation in a market dominated by passive money?

How about improving buyback accountability and capital-allocation efficiency with data?  The effect of spinoffs on capital-formation?  Maximizing your characteristics for passive money? The role of derivatives in the US equity market?

What of raising equity when you can rather than when you need it?  Efficiently matching secondary offerings for controlling holders to market trends? What is liquidity and can we improve ours?  What motivates ETF market-makers?  How does retail order flow affect our stock? Can we be Gamestopped?

These topics are every bit as relevant as managing your IR career, running an investor day, targeting investors, ESG, or pick your thing pervading the program docket.

Maybe more so.  I’ll give you three examples.

Mark Bendza at Honeywell (market cap $155 billion) is a sterling example of your contemporary investor-relations officer.  He realized that by shifting his stock-listing to the Nasdaq, HON would be in the Big Three indices – S&P 500 (SPX), Dow Jones Industrials (DJIA), Nasdaq 100 (QQQ).

He expertly pitched the Board of Directors (we armed him with data and facts) and they agreed.  That’s positioning your company in front of the money.  No amount of telling the story could come close to so canny a move to maximize HON’s characteristics.

That’s a word that should be right in the heart of the IR lexicon.  Characteristics.

Another example.  A homebuilder decided to begin paying a dividend.  That’s a mad GROWTH industry in Post-pandemic America. Pretty soon you’ll need gold bullion to buy lumber. We had to table a remodel project ourselves because the cost of things has become tulip-bulb crazy.

And straight into those teeth, this homebuilder decides to make its strategic capital allocation plan a dividend.  Genius. Accidental or not!  Why? Because it opens access to hundreds of billions of potential passive dollars that want YIELD.

Without telling the story at all.

That’s massively efficient. And anyone can do it.

Finally, a small-cap growth company recognized that growth could not come on story alone.  About 95% of US market capitalization is in the top thousand stocks, and the entry bar is about $5 billion.  How do you get over that bar and in front of all that money?

IR has an opportunity to shape that plan.  This is a great company. They could file a shelf registration for several billion dollars of stock and commit to an aggressive M&A plan – and place that stock as needed with the very investors they now have.

And it’s entirely possible to go from $500 million to $5 billion in a couple years.  Money wants SIZE.

And traders, returns using market structure are better with size too, because size leads to predictable Sentiment.

This is where IR should be playing in the 21st century, without neglecting the traditional things. But you cannot rely on tradition in modern markets where characteristics are more significant and impactful than telling the story.

It’s an opportunity.

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