Institutional investors (existing shareholders, potential shareholders or past shareholders)

The main investors in quoted companies are large institutions such as pension funds, insurance companies and investment banks. When individuals put money into pension funds or insurance policies, it goes into bigger pots of money known as ‘funds’ that are subsequently invested in listed companies. Large institutions are influential investors, as they may hold a significant stake in an individual company, anything between 1 per cent and 20 per cent. A company’s relationship with its institutional investors is actively managed by its investment relations team (in-house and external as well as by broker or investment bank). However, institutions will be greatly influenced by ‘third party’ or independent comments in the media and from analysts, and by the company’s regulatory communications. Within pension funds and major institutions the role of the buy-side analyst team is vital in influencing buying decisions.

New capital sources (hedge funds, private equity, venture capital)

Financial markets have innovated and developed significant new sources of capital and investment over the last 20 years which have become important influences on quoted businesses particularly during times of difficulty such as restructuring or in mergers and acquisitions. Some of these new sources of capital such as hedge funds have become highly controversial particularly as many have short-term trading strategies, making an investment relationship strategy for an organisation difficult. For example Kraft’s takeover of the famous British chocolate business, Cadbury, had a share register at the end with 20 per cent of shares held by hedge funds (Wiggins and Guthrie 2010).

However, the power and influence of these sources of capital, even though controversial, have become key audiences for financial communications teams and are now a regular feature of the investor relations scene. The short-term nature of some of this capital has made the monitoring by the investor relations team of an organisation’s share register a key area of activity to spot share building.

Analysts

Analysts are key opinion formers, identifying trends and anomalies and generating ideas for investment. There are two types of analyst: buy side and sell side. A buy-side analyst works solely to provide information to fund managers working either for these large funds or independently. Sell-side analysts work for the brokers or investment banks who look after listed companies. However, recent trends have enhanced the influence of the buy-side analyst and weakened the influence of the sell-side analyst.

Both types provide independent analysis about the workings and prospects of a company and the market in which it operates. They usually specialise in a particular sector and will make recommendations about whether shares in a particular company should be bought, sold, held or avoided, making them an important audience for listed companies and their financial communications. It is the unique responsibility of financial communications to encourage and manage the relationship between a company and the analysts who follow it. A financial communications person is most likely to be the first point of contact between a company and an analyst and will be the gateway for subsequent information gathering.

Analysts have an important relationship with the press. Journalists can add weight to an article by quoting an analyst. An analyst will also watch key press such as the Financial Times, The Wall Street Journal and key national media, as well as key trade media for new ideas or independent information on companies and sectors. The growth of social media, particularly specialist blogs has also provided new sources of information and ideas for analysts.

The media

With the growth of financial markets particularly into new global markets such as BRIC (Brazil, Russia, India, China), the leading financial media such as the Financial Times and Wall Street Journal have transformed themselves in the range and scope of their coverage. Where once the Financial Times was the house newspaper for the City of London and The Wall Street Journal had a similar function on Wall Street, these have become powerful news organisations in the range and coverage of international news. They have also become increasingly confident and independent of financial markets about setting news agendas with the Financial Times running a famous series in 2009, the ‘Future of Capitalism’. Both have invested heavily in online coverage with innovative use of social media including video and bulletin boards. Both are key outlets for financial communications teams both in reporting key financial information and developments but also in helping set agendas.

A key outlet for financial information is Bloomberg via its terminal and Bloomberg TV. While the terminal will report key financial information, often before other media outlets, Bloomberg TV would be seen as an important outlet for interviews with Chief Executives at the announcement of important financial results such as full-year results. CNBC would also be seen as an important outlet for executive interviews along with Fox News in the USA.

As financial markets have become increasingly influential, coverage in leading national media in most major markets has also increased and produced notable commentators. So for example, Robert Peston (2009) from the BBC became the leading financial commentator, able to move markets and influence political opinion during the financial crisis of 2007–2009. Coverage in the City pages of the national newspapers would be a key target for the financial communications team.

Wire services

Wire services provide the starting point for the announcement of key financial information across financial markets that comply with European and US regulations on disclosure of price-sensitive information. The London Stock Exchange RNS service has become a popular service (London Stock Exchange 2010) feeding into other news wire services and specialist information networks such as Bloomberg. In the USA, Business Wire is a leading provider.

Private investor services

While Bloomberg and Reuters serve the information needs of professional markets in particular, there are a range of online sites serving the information needs of private investors. Many are subscription-only sites and have become a key source of information and trading for retail investors. Examples include Citywire and Morningstar.

Private client brokers

Less important than they used to be, private client brokers are still a feature of some global markets such as the USA. As well as the growing power of institutional investment, the growth of trading online has led to their role being disintermediated further with private clients able to now deal directly. Stockbrokers act for private individuals who have money to invest, buying and selling shares on their behalf. They can offer advice to clients, if asked, about which companies to invest in. A stockbroker’s opinion about a company will be influenced by what information is available, either through what is written in the press or if he/she has access to analysts’ research. Financial communications manages this relationship, through the provision of information and by arranging meetings between the stockbrokers and the company at appropriate times.

The retail investor

The small retail investor has become more sophisticated and more powerful. Website providers such as Morningstar and Citywire allow the retail investor access to levels of information similar to the larger institutional professional investors. Discussion in chat rooms has existed for many years where investors could share ideas and information, but now added to this there are also a growing number of financial blogs.

The aims of financial communications

The main purpose of financial PR is to ensure the share price of a company adequately reflects its value and to help the liquidity of its shares. It does this by using communications to manage the relationship between the listed company and its financial audiences, creating and maintaining awareness and understanding of the company.

Financial PR exists for companies listed on the stock market and for major private companies or institutions that need to communicate with professional financial audiences. A company needs to have ‘liquidity’ in its shares, i.e. sufficient shares traded to create a market. Investors can be discouraged from investing in stocks that are ‘illiquid’ as it may be difficult for them to sell at a later stage. Companies with little liquidity are more likely to have a lower share rating and volatile share-price movements, making buying and selling of their shares extremely difficult.

Communicating what exactly?

The City judges a company by its financial performance and its growth potential. Financial communications can help to communicate this through raising awareness of a company’s activities and business strategy and profiling its management. The communication also involves managing financial market expectations of a company. Investors will use the available information about a company to try and predict how it will perform in the future. For example, if financial markets using information given by a company predict a 20 per cent growth in profits and that company fails to meet the prediction, the result is disappointment. Disappointment may lead to investors selling their shares and may discourage other investors from buying, which would bring the share price down. Analysts rely on companies to provide clear information that allows them to make realistic predictions about a company’s future performance. New regulations have encouraged businesses to be much more careful and cautious about future forecasts.

When to communicate

All listed companies have what is known as the financial calendar, consisting of preliminary results, publication of the annual report, half-yearly results and an annual general meeting (AGM). In the USA quarterly reporting is also standard. These are the times the listed company is legally obliged to disclose its financial performance. These announcements also provide an opportunity to build strong relationships with financial audiences.

Financial reporting

When a company reports full-year figures, the statement is referred to as its preliminary results; it is a shortened version of the annual report. The hard copy of the annual report is produced subsequently, but must reach shareholders not more than four months following the company’s year end. A company is also required to report its half-yearly figures in the same way and a smaller hard copy report is produced for shareholders that must also reach them within four months of the half-year end. From January 2007, companies have also had to make interim management statements that give a description of any material events or transactions that have taken place during the reporting period. These announcements are made to the market via one of the approved regulatory wire services.

Commonly at the preliminary results and the half-yearly results, meetings are held with major investors, usually institutions, and also with analysts and the media. These meetings are webcast ensuring that all information is available to all investors at the same time.

The presentation of results is key to creating understanding. Little notice will be taken of a badly written, uninformative chairman’s statement or presentation. The chairman’s statement must contain everything the company wishes to convey to its financial audiences, as all information for subsequent press releases and presentations must come from this. One of the main roles of financial PR is to assist in the writing of the chairman’s statement and presentation, ensuring that the key messages are communicated effectively. Ahead of the announcement, Q&As should be prepared to ensure the consistency of information given.

A few days following the results, feedback is obtained from analysts who follow the company and who attended the analysts’ briefing. This provides valuable information on how a company is being perceived and can help inform the communications strategy.

The annual report

All listed companies are legally required to produce an annual report for their shareholders within four months of their financial year end and 21 days before the AGM. The UKLA Sourcebook contains a list of items that must be included, which refer in the main to the disclosure of the financial accounts and significant corporate or business activity for the year just ended. The annual report also provides the company with an important communication tool. Shareholders, the media and analysts will refer to it throughout the year. It is a marketing tool and can be used to introduce the business not only to potential investors, but also to potential customers.

The AGM

The AGM is a legally required meeting, held after the financial year end for shareholders. This is the only formal opportunity for smaller investors to meet the company’s management face to face and to ask them direct questions. The AGM’s purpose is to seek approval for the resolutions set out in the annual report, to re-elect the company’s directors and auditors and for the annual report to be formally accepted.

The event varies from company to company. Small companies can have as few as two or three investors attend, while large companies could have hundreds. The AGM is an opportunity to communicate and deepen understanding, but not all companies capitalise on the advantages of meeting their main audiences face to face.

Any price-sensitive information given out at the AGM must either be announced prior to the AGM or be simultaneously announced to the market.

The location varies and is dependent upon the location of the company’s head office and the number of shareholders expected to attend. A company that produces an interesting or clever product could hold its meeting close to the factory and give shareholders the opportunity to visit the site, to bring about a better understanding of its activities.

Flotations

An Initial Public Offering (IPO) or flotation, is when a private company goes public and becomes listed. The process involves finding investors to buy the shares when they are first traded on a named day. In this situation, financial PR and IR work very closely together. The private company will appoint a nominated broker and a corporate financier who are responsible for the technicalities of the float and also for marketing the company to large institutional investors. It is the role of financial PR practitioners to support the IR role by raising awareness and creating understanding in the City about the company. This is achieved through gaining appropriate media exposure and through private client broker and analyst briefings. Typically a major financial PR consultancy will be retained and will play a key role in this process.

Mergers and acquisitions

Globalisation and the search for increasing profits continue to be the key drivers behind mergers and acquisitions. Financial markets expect that most listed companies will at some point complete a merger or acquisition as part of a growth strategy. Financial PR helps manage the City’s expectations about the nature and timing of a likely deal. A company may do this by making reference to its acquisition strategy at the time of its results. However, confidentiality and UKLA rules on shareholder information restrict what can be said outside a formal announcement.

Many large mergers or acquisitions may require money to be raised on the market through the issue of new shares and may also need the permission of shareholders. The company’s broker and other advisers will prepare a legal offer document for shareholders setting out all details of the deal. This will be sent directly to shareholders who are asked to vote either by proxy or by attending an extraordinary general meeting (EGM). In most cases, shareholders must have the ‘offer document’ no fewer than 21 days before the EGM so they have adequate time to analyse and assess the deal.

The role of financial PR in these transactions is twofold: to encourage shareholders to vote in favour of the proposed deal, and to encourage new and existing investors to buy the new shares issued through raised awareness of the deal. Ahead of the document being posted, an announcement (a summary of the legal offer document) is prepared for issue via one of the approved regulatory wire services. On this, the City will base its first opinions. Press and analyst briefings will be arranged on the day of the announcement. Briefing meetings help to create a deeper understanding of a deal, ensuring accurate comment in the financial press and a positive reaction from analysts.

Hostile takeovers

When a listed company tries to take over another one without the agreement of that company’s board, it is a hostile bid. One of the most famous hostile bids was when Granada took over Forte in 1997. The aim of the financial PR and investor relations in this situation was to persuade Forte’s shareholders that they would be better off if the company was bought by Granada. Forte’s board were not prepared to sell the company to Granada and so Granada had to communicate directly, and indirectly through the media, with shareholders to persuade them to vote against the board of Forte, allowing the sale to take place.

The PR programme ahead of Granada’s announcement ran for two years, with financial PR and investor relations working hand in hand. Granada, long before it approached Forte, ensured it had good communications with its own shareholders and with third-party audiences, such as press and analysts, and made clear that its strategy for growth was to be by acquisition. Forte, however, had a record of poor communication with its investors. Granada successfully took over Forte and the deal demonstrated the importance of good communication. Sadly the takeover was not a success and resulted in significant destruction in value for Granada shareholders who continued to hold its shares.

A more recent takeover that was also hostile until the final stages was Kraft’s takeover of Cadbury, a famous British consumer brand. The takeover was controversial for the role of hedge funds in the takeover and also for claims made in the takeover document about saving a Cadbury’s factory near Bristol which were later retracted and the factory closed.

Each hostile bid is unique and complicated. Financial PR and investor relations programmes are tailored accordingly, but as a general guide, if working to fight off a hostile takeover the company’s shareholders must vote to reject the other company’s offer, so the focus of financial PR would be to persuade shareholders to this effect. When working to take over another company via hostile means, financial PR needs to persuade the target company’s shareholders with the argument and rationale to convince them they would be better off voting to agree the takeover. The activities of all parties involved are closely governed by the Takeover Code.

The investor relations section of the company website

The immediacy and depth of investor relations information that is available to all investors has been transformed in recent years by the Investor Relations part of company websites. These are now extensive productions with detailed presentations on all activities of the organisation. A key feature of these sites is that they include a wide range of webcasts and presentations. They also have a range of features allowing investors to be kept up to date with new announcements via RSS feeds and email alerts. The Investor Relations Society and NIRI run competitions each year for the best Investor Relations site on a company website, allowing best practice to be observed.

Evaluation

The main measure of financial communications is share price, particularly in relationship to its peer group. If similar companies in a sector such as IT are on a particular price/earning band, then the share price of the company would be expected to perform to a similar level or better. In the recent financial crisis when share prices for nearly all companies slumped by 20–30 per cent, this approach would allow a sensible evaluation of work undertaken.

Investor relations has developed a wide range of metrics to evaluate performance based on a strong understanding of the share ownership structure. If a company, for example, was making a major long-term move into the Asian market, it might also seek to develop investors from the region to have a better balance of international investment in its shares and debt products.

However, experienced investors will also explore a wider range of metrics to judge the growth of a company not just the share price. For example, companies such as Google highlight the number of PhDs working for it as a sign of its human resource capacity for future development.

Sustainability not profitability?

Professor Michael Porter in the Harvard Business Review (2010), famous for his works on competitive strategy and industrial clusters called for business to reconnect with society and seek ‘shared value’ not short-term profits. His opening lines leave no room for doubt: ‘The capitalist system is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community.’ Along similar lines, the concept of ‘stewardship’ was prominent in the Walker report on corporate governance following the bank crisis (UK Treasury 2009). In the Stockholm Accords, a global mission statement and agenda for the PR industry, launched in 2010, organisational sustainability and stakeholder governance are two key agendas for PR practitioners (Global Alliance 2010).

All these agendas are arguing that an organisation has a wider remit than just shareholders. It could be argued that these are all a development of ideas based round the concept of stakeholders rather than shareholders which have become increasingly current over the last 20 years. However, financial communications and investor relations have fundamentally been about putting the shareholder or capital markets agenda at the top of its priorities. What are the implications for its practice as wider sustainability agendas become more widely adopted – if they are adopted?

Controlling agendas

A number of commentators including senior politicians and media as well as recent research by LSE academic Dr Damian Tambini (2008) highlighted the unhelpful role of financial PR in the 2007–2009 financial crisis. The criticism levelled against financial PR was the attempt to control information and access to senior management by the media. This was not a growing trend but according to earlier research by Davis (2006: 9) was a fact of life for City financial journalists from the 1980s.

Davis draws on this earlier research in his book, The Mediation of Power (2007), where he examines the role of ‘elite power’ groups such as the City of London and its ability to set political and media agendas. His premise would be that financial communications and the role of the key financial communication consultancies such as Brunswick, Financial Dynamics, Finsbury, Maitland and Citigate have played a key role in promoting and defending the ‘elite power’ held by financial markets. In particular he notes, ‘When conducting interviews it became apparent that a substantial proportion of corporate communication time is indeed taken up with blocking journalists and stifling negative coverage.’ (Davis 2007: 61).

Clearly the level of control over information concerned the regulatory authorities and the International Monetary Fund commissioned research on the role of lobbying by sub-prime mortgage companies in the USA (Igan et al. 2009). In its opening remarks it says: ‘anecdotal evidence suggests that political influences of the financial industry contributed to the 2007 mortgage crisis, which in the fall of 2008, generalised in the worst bout of financial instability since the Great Depression.’

The attempted control of communications by organisations using an asymmetrical or one-way messaging approach to communications has been well described by Grunig and Hunt (1984) in the four-part model of communications. However, this is seen by modern PR practitioners as an old-fashioned approach to PR and is not regarded as feasible particularly with the growth of social media. It is worth speculating why in financial communications, the use of one-way communications seems particularly strong compared with other areas of PR activity and whether this is or was a passing phase. Certainly the power and influence of financial markets and the power and influence of the major financial communications consultancies must be a factor.

In contrast to media relations, investor relations has a professional code that has always encouraged a symmetrical approach to communications, a feature that they would contrast with financial media relations. It may be significant that recent research in the USA suggests a symmetrical model of communications adopted by the investor relations function within an organisation (Kelly et al. 2010) is more effective. Certainly modern regulations with strong agendas around transparency and disclosure and dealing with a highly knowledgeable stakeholder community with major shareholders encourages a relationship focus to communications, based around symmetrical communications.

Western financial markets have suffered considerable loss of prestige and influence as a result of the crash, which is being rebuilt, and it will be interesting to see how financial communications responds and develops in a more sceptical and questioning environment, with greater political influence and greater use of social media.

The impact of social media in financial markets

The financial crisis of 2007–2008 also coincided with the growth of social media such as Twitter, Facebook, YouTube, blogs on news sites and forum-type features on main news sites. It was the first financial crash where the voices of many could be heard and sampled, leading to a great outpouring of comment – informed and otherwise – on financial markets for the first time. Certainly social media has enhanced the listening function of financial communications, bringing additional insight and understanding of the market into the organisation.

Communicating with millennials and generation Z

A major new area of opportunity for financial communications is the challenges posed to the financial sector by communicating with millennials and generation Z. Research (PWC 2014; Accenture 2015; Edelman 2015) has shown that young people are particularly affected by a general lack of trust in banking and financial services which has impacted the sector in recent years. However, millennials also have the most confidence in e-commerce and other technological developments impacting the financial sector. So for the banking and financial sector, millennials and generation Z represent a particular challenge as they are most open about the new entrants seeking to enter the industry.

Many of the new entrants into financial services are coming from the tech sector which is currently the most trusted, particularly among millennials and generation Z. The digitisation of banking and financial services, with Apple Pay just the latest development, has highlighted that banking and financial services is at the forefront of consumer services being impacted by technology and opening up the market for new entrants. Peter Neufeld, digital director of financial services at consultancy EY has been quoted (in Banking Technology) as saying that young people would feel comfortable paying their salary into a bank account owned by Google or Apple even if older demographics would resist such change.

The importance of millennial and generation Z customers is resulting in major expansion by the financial sector in communications activity targeted at younger age groups. Use of social media by companies such as Paypal, JP Morgan and UBS has attracted a significant following for the sector but this has been supported by further content developments. ANZ (Australia and New Zealand Banking Group) with its BlueNotes (www.bluenotes.anz.com) content rich site has attracted considerable interest as a new form of corporate website. This offers a very different vision of a traditional financial institution website with a range of content relevant for social media and engagement with customers and stakeholders.

In an interview in Brunswick Review, Paul Edwards, Communications Head at ANZ says:

This approach links in to the growing influence of ‘owned’ channels as part of the communications mix (PESO; paid, earned, social and owned) highlighted by the 2015 European Communication Monitor (2015: 17).

Methodology of investor relations undermined?

A number of commentators including Lord Turner, Head of the FSA (2009) and more recently Anatole Kaletsky (2010: 176) have questioned the role of market efficiency and the concept of the rational market. Both financial PR and in particular investors relations can be seen as a product of the ‘efficient market hypothesis’ which has been the dominant methodology behind the growth of financial markets and financial products over the last 30 years. The ‘efficient market hypothesis’ says that markets are inherently competitive, efficient and rational, and the price of an asset or share price fully reflects the information available. In this context, the role of financial communications in general can be seen as assisting market professionals in the efficient working of markets by providing information, admittedly from the company’s perspective, to enhance market efficiency.

Economists such as Keynes and Hayek, in contrast, took the view that financial markets were inherently unstable and were prey to ‘mood swings, herd instinct, self-reinforcing momentum trading, and other positive feedbacks in financial markets’ (Kaletsky 2010: 176). Works such as The Black Swan by Nicholas Taleb (2007) have also critiqued the use of normal probability distribution in financial markets and the way it became an important foundation for many mathematical models underpinning the ‘efficient market hypothesis’.

The impact of this questioning and loss of confidence in traditional approaches to markets and market making may be short lived as markets settle down. However the primacy and influence of ideas from financial markets has been questioned and disturbed for the first time in a generation and the implications will not likely be settled or apparent except over the medium term.

It is noticeable that this questioning of the shareholder model as currently existing is being questioned more closely and by leading economists. For example, Andy Haldane, Chief Economist of the Bank of England has questioned the level of dividends. He noted that in 1970 only £10 of profits were paid out in dividends, today the figure is nearer £70. This is now seen as having an impact on slowing investment and productivity in many key markets (Arthurs 2015). This same agenda of concern over the power of shareholder capitalism is being picked up by Hilary Clinton in her US Presidential campaign (Luce 2015).

This growing focus on wider stakeholder agendas, however, does fit well with the new focus of the financial communications function which has positioned itself as a key discipline within an overall corporate and strategic communications focus.