Laila, a call centre agent of a telecom company one day solved a rather difficult problem for a subscriber. Later, she realised the problem was prevalent and many other customers were to face the trouble. So she took the initiative to get the company to change the process so that other subscribers do not face the same problem. Thus she created value for the customers, her company and herself.
What Laila did is clearly an act of value creation, a very powerful tool in today's business performance management. In day-to-day business operation, we are creating such varying values with immense benefit for a company and we are at times also performing value-destroying activities or even forgoing value-adding opportunities. Value is created over time when you do things right for the customer. Generally, the cost of doing things right is minimal. But returns are high and the value created is high. In practice, awareness and the mindset about value creation at a broader employee base can maximise the shareholders' value of any company.
Communication is an influential tool that can be used in the value creation process. It is even more effective one for a listed entity by having an effective investor communication platform. The objective of it is to manage various stakeholders' expectations relating to company performance and prospects and bridge the information gap between management and the investment community in order to achieve fair valuation of the company. More popularly known as Investor Relations (IR), it is a well-practised and integral function for every listed company all over the world.
Investor relations started its journey in early 1950s as a public relations function of communicating with retail shareholders. It developed in the United States necessitated by the post-war investment boom largely resulting from retail investors and the public at large seeking return from equity securities. From 1970s the shift from private shareholders to professional investors was the trigger point for the next era of IR. Listed companies around the world at that time were seeking large-scale capital investment. This prompted the growth of international finance and institutional investment which required ensuring investors' understanding of the business direction, strategy and performance. The current era after 2000 is considered to be the synergy era where both communication and finance skill-sets are valued equally high for their contribution to investor relations.
The evolution of this communication platform and widespread global adoption suggests that it holds out immense benefits for a company. Fundamentally, the benefit of investor relations is not only to create awareness and understanding of your company amongst the investment community, it is also to help listed companies gain access to capital, achieve liquidity and fair valuation for their shares. IR function can give a company the ability to raise capital at ease whenever requirement is there. Entering into a dialogue and developing relationships with the investment community over time make them familiar with the company and its probable investment proposition of efficient and cost-effective access to capital. Liquidity, frequency of trading in shares, can be achieved by profiling and explaining the company to the investment community on a continual basis. Most importantly, the main goal of investor relations is for a company to achieve a fair market valuation, ultimately reflected in the share price. This fair valuation is being reflected in the gap minimisation between company management's perspective on the intrinsic value of the company against the market value.
In its simplest explanation, intrinsic value is what it should be whereas market value is what it is at any given point of time. The gap between intrinsic and market value is what necessitates investor communications. If the stock price is materially below its intrinsic value, a company is vulnerable to takeover and also it makes paying for acquisitions with shares an unattractive option. Other way round, if the stock price is more than the intrinsic value, the price will eventually have its correction resulting in unwanted price volatility. Identification of material discrepancy in the value can help design the effective communication modality and thus reduce the gap.
Understanding the existing and potential investor base is another important aspect of effective communication. Deep understanding of the share register composition can help anticipate how different investor segments are likely to react to company announcements of strategic moves and their corresponding effect on the share price. Various methods of classification can be utilised in segmenting the investor base. Segmentation like retail, local institutes and foreign institutes as well as fund-type segmentation like growth, value and income are some popular ones. Geographic region-wise segmentation is also another way of looking at the investor base of a company.
The logical point to concentrate on after gap identification and knowing the base is to communicate with the investors. Effective way of communication can be attained by maintaining transparency, clarity and consistency. Legislation and accounting rules require companies to be transparent but this still falls short of the standard that satisfies active investors. Financial information critical for assessment of value and operational information related to key drivers of value must be communicated without any prejudice of losing the competitive foothold. Clarity of information should be there while communicating so that investors can apply proper judgment while assessing the value to any company development. Finally consistent flow of information is to be ensured throughout the period. It is more crucial for information related to operating data. Overall, candid assessment of strategic business actions are sought after from long-term investors when they decide to bet on a management team.
Bangladesh market saw the 2007-2010 bull run culminating in the correction in the first quarter of 2010 and later continuing with the present sluggishness. Apart from some structural limitations, weak confidence level of the broader investor base is now the dominant headwind of the market. To improve the situation the market needs to attract new institutional fund flows, ranging from life insurance companies, provident funds, mutual funds and international institutional equity funds. Domestic professionally managed portfolio investment accounts also can make significant impact on it. Such investors can only make informed fundamentally-driven investment decisions if they have access to proper and timely information. Investor communication can make a big impact in this context. However, investor communication in Bangladesh's capital market is not widely practised by listed companies.
Integrating value creation into the company culture has a scope of improvement for organisations of the country. Value creation through investor communication is also not that much prevalent. Lack of sound governance structure, awareness and commitment from management are the main reasons for it. However, if the right mindset can be applied, it actually requires very minimal allocation of resources for adopting the basic yet powerful practices of investor communication. Structured quarterly results publication and enrichment of company website with relevant contents for investors can be a big step towards it.
Grameenphone is the lone listed entity in the county which practises active investor communications. It has a dedicated a team for managing the information requirement of investors. After getting listed in later part of 2009, the company established the team in 2010 and is in pursuit of adopting global best practices to help the investment community. Major activities of the team include quarterly results publication, management call conferences, non-deal road shows, annual investor conference, live web-cast, investor field trips, dedicated online portal etc. The practices are widely appreciated by the investor community and company management is highly devoted to their information requirement.
Regulatory endorsement is crucial for any value-adding initiative from the market participants. In this regard, Bangladesh Securities and Exchange Commission (BSEC) has taken a commendable initiative in establishing a framework and licensing for Equity Research providers which would greatly enhance the provision of research for investors. This has paved the way for creating the pull factor from the researchers in disclosing required information for investors. Other way round, the push factor can also be created by encouraging the listed entities in adopting investor communication practices. This can be another laudable step from the regulator in making the market more mature while making investment decisions. Such informed decisions are backed by its inherent confidence level, which is very critical in the present context of the market we are in now.
Investor communication has great potential in value enhancement and to derive benefit out of it all the relevant parties must have the right mindset and commitment to work in unison. Medium and large market capitalisation companies of the country can take the first bold step in this arena. The two major conduits for information, analysts and financial media can get along with this to create a free-flowing information channel for the investors. Analyst coverage can ensure that it is on the radar screen of the major institutional investors. When it comes to reaching the widest audience, the financial media can continue to be an effective one.
Like Laila, the call centre agent, investor communication practices can create substantial value for the shareholders. Commitment from company management, interplay of conduits and regulatory endorsement can make this happen. Above all, my conviction is that it will make a difference.
The writer is CFO, Grameenphone. E-mail: dilip.pal@grameenphone.com
Creating value with investor communication
Dilip Pal | Published: March 04, 2017 00:00:00 | Updated: February 01, 2018 00:00:00
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