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DownloadApple's Steve Jobs, WeWork's Adam Neumann, Uber's Travis Kalanick. What do all these business leaders have in common? They're all CEOs who were fired from their own companies. It turns out that no one is invincible in front of investors and board members, and keeping these stakeholders happy can call for quite a bit of finessing. There's a reason why Berkshire Hathaway's shareholder meeting is referred to as the "Woodstock for Capitalists". To keep investors happy, the company goes as far as providing discounted shopping and exclusive celebratory events at these meetings. At the end of the day, even someone as revered as Warren Buffett works for his investors.
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Simply put, investor relations hold the key to a company's future. While business management is often associated with a whole lot of number-crunching, its human-facing side is more of an art form. This article delves into the landscape of Investor Relations (IR), how it came to be important, how it operates, and what investors like to hear in this day and age. We will also present contrasting case studies, from Exxon to NVIDIA, to show how good and bad IR practices can impact a company's fate.
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At its core, the goal of IR is to convey a company's financial results and operational strategy effectively to its financial stakeholders. Healthy investor relations operates as a two-way communication channel: not only does it disseminate information to stakeholders, but it also relays stakeholder feedback to upper management.
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DownloadSo what kind of communication is expected from the company to keep its investors happy? Companies usually use a combination of press releases, financial reports, conferences, and presentations to keep investors informed. Since there needs to be consistency in those updates, most companies opt for a quarterly and annual Investor Report. These reports are often presented in front of board members, but can also be accessed online publicly.
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Broadly speaking, investor reports present two types of information: the numbers and the story behind the numbers. Certain components are always expected, namely the financial statements. But investor confidence and satisfaction have to do with more than just financial performance. As Warren Buffett put it, there should be an intent behind the report. One should be able to paint a picture of the company's priorities beyond just the cold, hard accounting numbers.
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This is where MD&A, or Management's Discussion and Analysis, comes in. MD&A reviews the company's business operations, trends, risks, and future prospects. This enables management to provide its view of the business, explaining the "story behind the numbers." So what are some reporting tips that companies employ to tell a favorable story and make investors happy? We'll start with the ones that are tried and true, then move on to ones that have become increasingly popular in recent years:
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This is the most fool-proof way to investors' hearts. When companies consistently meet or exceed financial targets, investors get to happily harvest steady, predictable returns on their investments. Microsoft might be past its heyday, but its successful transition to a cloud-based business model continues to drive a steadily rising share price.
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Investors look for companies that are well-managed, with strong governance practices, ethical conduct, and a culture of transparency and accountability. Changes in the management team or board of directors can sometimes signal big shifts in corporate strategy. Since Warren Buffett has read so many investor reports in his lifetime, here's another quote from him: "I like to know as much as I can about the person that's running and how they think about the business." It's no surprise that Adam Neumann was ousted from WeWork because of his excessive spending and indiscreet lifestyle.
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Warren Buffett has just one more thing to say about "outside information": "I can't understand how my company is doing unless I understand what the other eight are doing." A good understanding of the company's industry and its main competitors demonstrates the company's awareness of market dynamics, its ability to adapt to changes, and its competitive advantage. It instills investor confidence by showcasing a clear understanding of the company's positioning and its strategies to navigate challenges and capitalize on opportunities.
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As technology is autocatalytic and progresses faster over time, it's especially crucial for companies to be at the forefront of early adoption. Of course, the caveat is growth initiatives need to be assessed first to ensure worthwhile returns.
Google's parent company is known for investing in a wide range of new technologies and markets, from self-driving cars to healthcare. While not all have been successful, they represent potential new sources of growth and revenue streams.
Though risk management is not a new topic in business, its become more important in recent years as the world underwent public health and political upheavals. When the COVID-19 pandemic hit, Intel quickly implemented measures to protect its employees and ensure the continuity of its operations, allowing it to continue delivering products to customers without significant hiccups. On the other hand, many more companies suffered from major supply chain disruptions.
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Environmental, social, and governance factors are increasingly important to investors. Companies that demonstrate a commitment to sustainability, social responsibility, and cultural inclusivity are more likely to have a favorable reputation among consumers, which translates into better business and higher investor confidence.
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In May 2021, the oil and gas giant ExxonMobil faced a significant challenge from a small activist hedge fund, Engine No.1, which owned a tiny fraction of Exxon's stock. Despite its small size, Engine No.1 was able to gain the support of larger institutional investors, including some of the biggest pension funds in the U.S. Investors were upset over Exxon's insufficient response to climate change and the transition to clean energy. They argued that this puts the company at risk of long-term financial decline. In a significant victory for Engine No.1, three of its four nominated candidates were elected to Exxon's board at the company's annual shareholder meeting in May 2021. This outcome was seen as a major rebuke to Exxon's leadership and a sign of growing investor concern about ESG, which poses long-term strategic issues rather than concerns over short-term financial performance.
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The concept of stakeholder capitalism emphasizes the interests of all stakeholders – including employees, customers, and communities – and not just shareholders, is gaining traction. This could influence investor relations by broadening the range of issues that companies need to address in their communications with investors.
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Investors are increasingly focused on executive compensation, particularly the link between pay and performance. Companies will need to be more transparent about their compensation policies and how they align with company performance and shareholder interests.
In 2020, the CEO of Norwegian Cruise Line Holdings was awarded $36.4 million in compensation, an increase of over 20% from the previous year, even as the company reported a net loss of $4 billion for the year due to the pandemic and had furloughed a significant number of employees. This led to backlash from shareholders, and the company's executive pay plan was rejected at the annual meeting in May 2021 as a strong message of disapproval from shareholders. It later became part of a broader trend of "say on pay" votes against executive compensation packages at several companies in 2021.
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Despite the examples of bad investor relations we've mentioned so far, some companies have demonstrated notable success in that arena. Let's take a look at NVIDIA, a major player in the ongoing chip war. Known for its graphics processing units, NVIDIA found a new market opportunity in artificial intelligence and data centers due to the applicability of its technology in these fields. This marked a significant strategic shift from primarily focusing on gaming hardware.
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CEO Jensen Huang and his executive team actively communicated this strategic shift to investors and analysts. More importantly, Huang, known for his in-depth keynote presentations, has a knack for breaking down complex technology subjects to make them accessible to stakeholders. As NVIDIA won buy-ins from investors, it was able to successfully execute its growth strategy to become a major player in data centers and AI, which has since started to contribute significantly to its revenue and stock price. The company's market cap is now among the highest in the semiconductor industry.
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Throughout its history, the field of investor relations has evolved in response to changes in technology, regulatory requirements, and market conditions. What began as simple communication with investors has grown into a complex discipline that plays a crucial role in modern capital markets. While strategies may vary, the fundamental principles of transparency, regular communication, and demonstrable commitment to shareholders' interests remain the same. And if you're an investor yourself, it's worth understanding companies' IR playbook to realize how the information they choose to present shapes your perspectives and decision-making.
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To craft a well-rounded report for investors and board members, download and customize our Investor Report template, available in Google Slides, Apple Keynote, and Microsoft Powerpoint.
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