What role can treasury play in Investor Relations (IR), and what value can be added? TMI talks to Dino Nicolaides, Managing Director, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory, and new President of the Association of Corporate Treasurers, about the demands of fulfilling the IR role.
Generally, what is the purpose and primary goal of IR activity, and when would an IR team be required?
Treasury is the nexus of vital corporate financial data. It also has the skills and knowledge needed to translate this data into usable information for a range of internal and external stakeholders. This makes treasury the ideal partner for IR activities. And given that the world is in such a volatile state, being able to quickly provide usable financial information is increasingly important if those stakeholders are to remain well-informed and happy.
The IR aim is to remove as many barriers to investing as possible, whether on the debt side, where instruments such as bonds are issued, or on the equity side, where shares are issued. An IR function may be divided into two, splitting debt and equity, with very different approaches, but the process of keeping investors happy from an IR perspective is similar.
A joined-up approach is preferred, where sharing is the watchword. If a robust framework is built around the IR process, then it ensures nothing is missed and engagement with investors is optimised. Indeed, where equity IR builds a story for investors to push into the public domain, so the debt team can quite easily leverage this story to use with its potential funding providers.
Of course, whatever funding mechanism is selected, the proceeds will have a multitude of potential uses. If needed to fund a major capex, for example building a new production facility, the IR team has a role to play in engaging with stakeholders as early as possible to form a view and then begin explaining that story.
The first principles of IR are based on the bridging of a gap, says Nicolaides. In many organisations, especially (but not exclusively) those that are listed, there is often a degree of divorce between management and ownership, he notes. “This means investors and key stakeholders often have asymmetric information about the financial affairs and future prospects of that organisation.”
IR is tasked with managing communications between the executive leadership of the organisation and the financial community. By doing do, it should provide an accurate account of company affairs – its business, governance, financial performance and prospects – to those stakeholders. This is focused on managing expectations and helping them make informed decisions regarding their stake in the business. Such decisions are ultimately reflected in the company’s market valuation and share price.
Publicly listed firms have a greater compulsion to provide such information. Indeed, those listed on a regulated market in the UK, for example, are subject to the Disclosure and Transparency rules of the UK Listing Authority. These require the reporting of financial and strategic matters to shareholders in the form of interim and annual reports. Furthermore, their press statements are also required to be issued via the Regulatory News Service (owned in the UK by the London Stock Exchange) to ensure compliance with market transparency legislation.
What are the main IR activities?
As well as publishing regular reports for shareholders, IR is also tasked with managing expectations among the wider stakeholder community, especially concerning any business or sector turbulence where the rapid provision of accurate information is essential to ensure fair market valuation is maintained. This may include the timely and sensitive release of profit warnings.
The extended community includes research analysts, banks, brokers and potential investors. The IR role will necessarily be engaged in co-ordinating shareholder meetings, roadshows and press conferences, releasing financial data and preparing financial analyst Q&As.
A corporate IR team would also regularly report to its board on financially material events, such as significant shifts in ownership in the share register, share price movements, major sector or industry news, and swings in analyst sentiment.
With both debt and equity finance programmes, investors can be categorised broadly as either individual or institutional investors, notes Nicolaides. Each will hold a different investment priority and thus present variable needs in terms of risk and return, liquidity, and time horizon. To be able to satisfy the needs of each requires a different approach to the communication of financial information. “A good IR team is one that understands its investor clientele and can provide the right clarity to each group to support its specific needs.”
Who would be involved in an IR team?
Experience will count when assessing the needs of each demographic. Most organisations might retain a single permanent IR professional but create a flexible support team. “IR is usually led by an individual with considerable corporate finance experience, simply because they understand the process fundamentals,” notes Nicolaides. To be able to take on an IR role, it also requires the individual to have or be able to quickly build a sound internal network that will help them build a detailed understanding of the organisation, its financial affairs and future prospects.
“This is not a role for anyone who prefers to work in isolation,” cautions Nicolaides. “The individual must have the ability to communicate complicated technical treasury and finance issues in a non-technical language, and be able to appreciate the diverse needs of each investor type to be able to provide the relevant level of information.”
Which stakeholders (internal and external) does IR typically need to communicate with?
While the external stakeholder group is formed largely of institutional investors and individuals, Nicolaides says that the final list will also require active dialogue with relationship banks (which provide capital, market access, investor feedback and credit research), rating agencies, key financial media, independent research analysts and credit rating agencies, and increasingly regulators.
There is a key need to see investors face-to-face too – often at roadshows – as that is often the best way to gauge investor sentiment. This is particularly useful if the story to be told is complex or unusual.
The core internal stakeholder group obviously includes the board and the C-suite, with the wider finance and treasury functions also important IR information recipients. “The contact list must also include marketing because IR and marketing messages must align.”
For this reason , it is usually desirable for an organisation to limit the number of people getting involved so that all can stay on-message. Of course, a small IR team (or one that is a single-person operation) may still find it challenging to find the time to move between the various external and internal stakeholders. For this reason it will be prudent to define essential regular contacts, and those deemed to be best served on an ‘as required’ basis.
What are the main deliverables of IR – and what would treasury’s role be?
As far as treasury involvement in IR is concerned, it will be taking some key decisions around funding strategies, selecting the most appropriate sources and maturity profiles, says Nicolaides. “These will impact the operating leverage of the organisation which will have a direct impact on whether or not an investor chooses to invest in that organisation.”
At the same time, treasury will be managing multiple risk elements such as FX, interest rate and counterparty risk. The risk profile is embedded within the organisation and will be a factor considered by an investor weighing up the extent to which the organisation’s risk/return profile fits their own risk appetite. “We’ve also seen treasury in collaboration with finance, deciding upon dividend policy. Again, this has a direct impact on the liquidity profile of the specific instrument,” he notes. “The combination of needs places treasury as a key partner in the IR communication process, which is why we are also seeing more treasurers taking on an IR role.”
Is there anything in particular that has driven the need for treasury’s involvement?
Before the 2007/08 financial crisis, CFOs were able to operate effectively without necessarily having to understand too much of what treasury was doing, says Nicolaides. “Now treasury is more important, often sitting at the heart of the organisation, I feel most CFOs recognise that they need a sound understanding of treasury to be able to fulfil their role successfully.”
It’s this understanding, he continues, that has started to attract a lot of investor attention. “Treasury deals with a small number of high-value transactions and manages the critical financial risks impacting the organisational profile. To me it makes sense that any IR communication that does not include treasury’s input is far from satisfactory.”
What are the key skills needed for a treasurer to be involved in IR?
Aside from the technical understanding of finance and the ability to translate this into terms that all stakeholders can fully comprehend, treasurers also need to have a keen interest in the organisation and bring suitable soft skills to the IR table to be able to form the most effective internal network. “It’s useful to have a measured and professional curiosity to be able to understand the range of investor needs and be able to match those with the appropriate information delivery,” says Nicolaides.
This means treasurers need to be rounded individuals, able to converse as comfortably with investors as they are with professional colleagues. Investors can be particularly challenging in their questioning, which demands that the treasurer is an effective listener. Failure to answer their questions fully, or worse, resorting to stock answers, is likely to detract from a positive outcome.
To what extent is IR driven by technology?
As with most facets of corporate life, digitalisation is an important enabler. In treasury, the ability to deliver the right data in a timely manner is an essential component. Investors and analysts are leveraging technology such as AI, ML and data analytics to keep themselves up to speed with market trends, sentiment and performance at both micro and macro levels, and even inform their decision-making. This demands that the treasury IR practitioner must stay well-informed, not least when it comes to investor targeting and being able to hone the right messaging for potential and existing stakeholders.
Indeed, in terms of investor and other stakeholder engagement, technology has a key role. Where once conference calls and face-to-face meetings were the limit of most interactions, now online events, webinars, podcasts and social media messaging are the norm. Intelligent use of technology can increase the speed and frequency of communication. Arguably the ubiquity of such technology has led to a greater expectation by investors and other stakeholders for IR to take a proactive stance on engagement. This is where even a tool such as a CRM system has value for IR as it enables a better understanding of who the key investors and stakeholders are.
To what extent can the success of IR generally, and treasury’s role in particular, be measured?
The core role of IR is to project the most appealing, timely and accurate messaging to stakeholders at every stage of the process. To a degree, the success of the IR function can be measured by stock price and volatility, and stakeholder composition and diversity, says Nicolaides. “A fair stock price is subjective, but in general, if management feels that the price is a reasonable reflection of the current financial position and future prospects of the organisation, and a broad scope of investor is participating, then it is a fair way of appraising the efficacy of IR function.”
The real crunch time for IR comes when a business is facing a serious challenge. A financial threat, such as a rating downgrade or a profits warning, for example, will provoke stakeholders into seeking immediate clarification. At the point of asking, IR must have answers.
How can treasury become involved in IR?
For the treasurer who is looking to expand their outlook and seize the IR responsibilities the main advice from Nicolaides is to reach out to those who have already done the job. “It’s good also to maintain close communication and the exchange of views with their CFO or head of finance.”
An IR role for a treasurer is a great opportunity to diversify their experience. “What we find is that treasurers who have moved into an IR role can take on a wider range of responsibilities including sustainability. It’s a key stepping stone in broadening horizons because it opens up a far better understanding of the organisation and what’s important for it its key stakeholders, making them more demonstrably capable of taking on other disciplines.” And with stock price often the leading KPI for the board and C-suite, a treasurer taking on IR responsibilities is ideally placed to raise the profile of the function.