Purposeful investor relations for a small-cap company

by | Nov 24, 2021 | INSIGHTS

It pays to segment the shareholder base and remember different investors have different communication requirements.

Of the 2,000-ASX-listed companies, only 10 to 15 per cent have a senior executive focusing on investor relations, often a member of the Australasian Investor Relations Association. Others retain consultancies to guide their communication with investors, Most CEOs rely on their own judgement, only seeking external advice when confronted with a transaction or an issue which could threaten their company’s reputation.

A risk for these CEOs is that the way they communicate with the investment market may become ingrained. Their focus is the profitable operation of their business; investor relations are a secondary priority. They may not be aware of changes in investors’ information needs and, accordingly adjust what they say and how they say it. Here are some tips to help avoid common traps.

Most CEOs are articulate, used to communicating regularly with customers and employees as well as key shareholders and analysts who follow their company. They listen to these shareholders’ and analysts’ requests for information – whether on trading performance, corporate developments or achievements – and design their investor communication accordingly.

But, in tailoring their communication to the requirements of those who already are familiar with the company, many small-cap company CEOs are ignoring the different information needs of other investors and brokers who are unfamiliar with the company. Initially, these want high-level information to help them decide whether to delve further and, perhaps, buy shares or recommend investment; they want to understand the company’s business model, the dynamics of its business and its strategy, goals and competitive strengths.

Attracting the interest of investors, analysts and client advisers, and persuading them to find out more, is particularly relevant for small-cap companies which often have to compete for attention. This can be important if a key shareholder sells or a decision is taken to raise additional equity capital through expanding the company’s register.

Another trap for CEOs is to over-estimate investors’ understanding of their company’s ‘story’. Without knowing the factors that influence revenue and earnings, potential investors may have difficulty appreciating the strategic or operational significance of an announcement. They may place the company in the ‘too hard basket’, particularly if it is in a complex sector.

Valuation is a relative measure and often investors will favour a company which demonstrates that it can outperform in both challenging and favourable environments. At this time of uncertainty, when COVID-19 lock-downs remain a threat and share prices have been boosted by government stimulus, it is particularly important to retain the loyalty and trust of existing shareholders through regular communication. It is a mistake to think that, because they have invested in a company’s shares, they understand its business. Companies should reinforce repeatedly to them why their business model and competitive position are sound and that management has the right vision, strategy and skills to capitalise on opportunities.

So communication in ASX announcements, annual reports, investor websites, presentations, newsletters, etc. needs to be at two levels. It should educate potential investors and advisers about what the company does, the dynamics of its business, its growth strategy and competitive strengths, while at the same time providing more detailed information for those who already are familiar with the company.

Effective communication requires an understanding of how people absorb information in this electronic age. It also requires careful structuring of messages, succinct and clear language and often diagrams, illustrations and video to explain key points. Jargon and acronyms should be avoided, even if some shareholders and brokers are familiar with them.

Increasingly, investors tend to favour companies which demonstrate good governance and transparency, rather than pay lip service to them with cookie-cutter statements. There are also a growing number of funds which only invest in companies committed to sustainability throughout their operations. Communication, therefore, should balance financial and operational performance with messages that create perceptions of strong corporate values, active sustainability programs and adherence to high governance, social and environmental standards.

The bottom line is that every CEO should review his or her investor relations activities regularly to ensure that shareholders, other potential investors and their advisers are ‘hearing’ their messages accurately and understand their significance. While maintaining – and ideally expanding – dialogue with shareholders, it is also important to broaden the number of people in the market who are aware of the company’s strengths and potential.