IR – Prepare for the Future
NIRI President and CEO Louis M. Thompson Jr. on March 29 treated Cincinnati Tristate NIRI Chapter members and guests to a glimpse of his vision for the future of investor relations.
Lou, who has announced his intention to retire from his post as NIRI CEO, visited the Cincinnati Marriott North as part of his farewell tour. Chapter President Susan Robinson warmly welcomed Lou, noting the profound impact he has had on the profession and its practitioners. For more than 23 years, Lou has provided insight and expertise on the many legislative, regulatory and communications challenges facing public companies. He has consistently encouraged the use of non-financial performance measures to provide investors with a clearer picture of corporate value, and his visibility, credibility and level-headed counsel have advanced the strategic value of investor relations. His leadership has defined the face of the investor relations profession.
In speaking to the group of approximately 30 people in Cincinnati, Lou discussed some of the major changes in the investment community and his vision of where he would like to see the profession be in the future. To summarize:
- Changing role of the sell-side: The regulatory environment has re-erected the wall between investment banking and research. The result is that many of "best and brightest" financial analysts have shifted to the buy side or to hedge funds. Additionally, the money to fund sell-side research is drying up, limiting the number of companies analysts can cover. Other compensation changes have further squeezed research, as has the increasing size of internal research departments in buy-side firms. All of this creates opportunity for buy-side and independent research providers. Lou said that a Business Week story last year quoted several experts discussing the need for brokerage firms to develop a new business model if they are to survive. Lou predicted that the sell-side as we know it will be gone in five to 10 years, with research coming largely from independent research firms and issuer-paid research that carry no recommendations.
- Hedge funds: In discussing the growth of hedge funds - now numbering more than 8,200 with assets of more than $1.2 trillion - Lou predicted growth will continue but so will regulation. He expects that hedge funds also will become more open to investors now below the current threshold for "high net worth" individuals.
- Earnings guidance: Lou discussed NIRI's recent membership survey on guidance practices. Interestingly, 45 percent of respondents provide only annualized guidance, up from 16 percent in December 2003. The survey showed that 13 percent of respondents are considering discontinuing earnings guidance altogether. Some companies - such as Gillette, Coca Cola, McDonald's AT&T, Intel, Safeco, Boeing and others - already have dropped guidance. Instead, they say, they are providing more information on key value drivers of the business, qualitative statements on market conditions, trend information, and qualitative statements on business and performance measures. Lou said NIRI believes there is no "one size fits all" solution to earnings guidance, and that each company must decide what is right for itself. That said, Lou went on to note he is serving on a task force sponsored by the CFA Institute's Center for Financial Market Integrity and the Business Roundtable's Institute for Corporate Ethics. The group's mission is to identify what companies and investors can do to reduce the emphasis on short-term performance. One of their recommendations will be to urge companies to discontinue quarterly earnings guidance. If companies find that guidance is necessary, the task force will urge them to move to annualized guidance. The group also will urge companies to provide more meaningful communications about strategy and long-term vision, to provide more meaningful business reporting models and to develop compensation incentives that are long-term oriented. Additionally, the task force will recommend that heads of IR departments serve on their company's disclosure committees.
- Quarterly reporting: Lou expects the SEC to eliminate quarterly reporting within the next 10 years, replacing it with real-time disclosure beyond the current 8-K requirements. This also will help move the emphasis from short-term performance to the long-term interests of the company and its shareholders. Along those lines, Lou expects that in the years to come, EPS guidance will be virtually non-existent, replaced by quantitative and qualitative guidance based on longer-term performance benchmarks.
- Communications on "intangibles:" Lou cited multiple studies showing the important of non-financial factors when valuing a company's long-term performance. For example, a Rivel Research study last year showed that quality of management and management credibility substantially outweighed EPS growth as factors to consider in making an investment decision. Lou has pushed for better communication on intangibles throughout his tenure at NIRI, and he continues to do so. He noted that the SEC is looking to the Enhanced Business Reporting Consortium (of which NIRI is a partner) to provide an incentive for management to expand the MD&A by commenting on the contribution of non-financial drivers.
- The IR profession: Lou discussed the challenges that IR officers face at many companies, including the fact that many have not yet earned or achieved at seat at the strategic table. Part of the problem, he said, is that most IROs report to the CFO, "many of whom have their foot on the brake with respect to the role of IR." As companies move closer toward developing a more complete valuation model that involves both financial and non-financial performance factors, Lou expects the chain of command to shift as well. He predicts that within 10 years, there will be a significant move toward the investor relations officer reporting directly to the CEO, thereby becoming a full partner in communicating the company's strategic message. He urged IROs to prepared themselves and adjust their skill set to meet the demands of the job, noting that NIRI must also adjust to continue to serve as a valued resource.
After his presentation, Lou took questions from the audience. The discussion focused primarily around the intangible value drivers, how to define them, how to standardize them and how to measure them.
Lou expects to stay at the helm of NIRI until a successor is on board. A national search is under way.