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Fair value vs high value

General Electric (GE) in the 20th century was known for the implementation of many successful business and management practices, including the lesser-known origination of the modern day investor relations (IR) function. It was apparently pioneered by a guy called Ralph Cordiner, who was GE's CEO and Chairman from 1958 to 1963.

The roots of IR were evolved in the early days due to the need for companies to compete for capital in a systematic and strategic way, beyond the customary one-directional promotional advertisements. Money markets back then were a lot less developed with far fewer investors, and the large part of' IR work was subsumed under public relations, which was primarily focused on getting word out into the market and letting investors decide for themselves whether they wanted to buy the stock of a company.

Over time, the tactics for investor targeting have grown increasingly sophisticated, characterised not only by demonstrating financial competency, but also the need for bi-directional communication and interaction. The fierce competition for capital also required companies to 'up' their game with the goal of optimising cost of funds to deliver higher shareholder returns while adapting to the changing tides of the capital markets.

There is obviously a lot of art and science in IR today, from analyzing changes in shareholding patterns, proactive capital markets management, to dancing the tango between the company's management team and investors brokered by securities firms and investment banks.

Because share price is often taken to be the holy grail of a company's success, IR functions are often expected to be part of corporate decision-making process, with investor engagement being an extremely core part of that consideration.

Rightfully speaking, this dialogue with investors should guide towards a true and accurate reflection of a company's fair value, but the world is more complicated than that.

As many business units within the firm including C-suite functions tend to be graded based on share price performance, there is almost always a natural incentive to curate and design the short-term narrative towards a high value, which sometimes comes at a cost.

Beyond the obvious moral hazard, this ultimately results in share price and trading volume volatility. In the textbook context, these attributes are conventionally perceived as risk, which in today's market can be capitalised and profiteered by creative investment managers seeking to take advantage of the wild swing in prices. And the swing in share price can sometimes put a lot of pressure on those in IR roles.

I recently "counselled" a couple of colleagues on the above, hoping to help them put things in perspective, and perhaps more importantly, not to beat up themselves too much if things don't go according to plan.

There are things that you can change and there are those that you can't. The world is that complex a place.

"When something that previously didn’t work suddenly does, it doesn’t necessarily mean the people who tried it first were wrong. It usually means other parts of the system have evolved in a way that allows what was once impossible to now become practical." - Morgan Housel

Because of all these moving parts, any success or failure in an IR function becomes incredibly difficult to measure.

Take for instance, should IR be judged based on a decline in the share price of a public listed company? Even though inherently we know that share price is correlated to fundamental performance such as net profit.

Conversely, how much credit should be given if there is a two or three fold increase in share price over the same period of time?

Underlying all this: Should a company's share price performance be a key performance indicator for an IR team?

These are sometimes the result of fundamental reasons ranging from revenue and profit (which are partly driven by the business and macro environment), to irrational and unpredictable events such as someone firing a missile from a certain peninsula in Asia. Both of which are not within the direct influence of the IR function.

The reality is that changes in share price are subject to multi-dimensional catalysts. And if these are mis-read, can unwittingly lead the company down the wrong path of decision-making.


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