Other Views – Investor relations officers: Corporations’ unsung villains?

In the orgy of finger pointing set off by the Enron scandal, many proposals have been floated to discourage further such abuses of trust. A lot of attention has been directed toward cleaning up the most flagrant conflicts of interest involving stock analysts and accountants, and toward taking to task those board members and regulators who were asleep at the switch.

In the midst of all this scrutiny, can we afford to ignore another possible co-conspirator – the investor relations executive? In most corporate structures, the primary interface with the financial community has far too many incentives to corrupt full and fair disclosure.

Investigators are busy piecing together who said what to whom in the investment community during the time Enron Corp.’s shares rose dramatically, mostly on the hype being spewed from the highest levels of the Houston corporation. In the meantime, one of the more depressing bits of collateral damage from Enron’s spectacular implosion is a recent Merrill Lynch survey of fund managers that found only 37% of sophisticated institutions polled believed that the quality of U.S. earnings was second to none, down from 57% a month earlier.

That puts faith in U.S. corporate disclosure right on par with your average emerging-market enterprise with little or no history of shareholder transparency. If we wait for Congress to act, it may be too late to restore faith in corporate reporting. Already the European Commission is urging the United States to scrap the use of generally accepted accounting practices altogether.

Clearly, the Enron fiasco elevates the role of investor relations, which sprang up in the 1960s as a specialized byproduct of public relations in response to the growing interest in stock investing by individual investors. It was a sort of customer service function for shareholders.

As the equity market became dominated by large institutions, the role of the investor relations executive abruptly changed. The focus shifted from writing annual reports and answering niggling questions about lost dividend checks to matters of finance and the managing of the earnings expectations of sophisticated market participants who could influence or invest billions of assets. Today there are far more MBAs handling investor relations than there are ex-journalists or corporate communications specialists. And the most effective practitioners, according to compensation surveys by the National Investor Relations Institute, command hefty salaries and rich option packages.

Today, superior institutional relationships are the hallmark of successful investor relations programs. Nothing is inherently wrong with this, of course. The trouble is that the relationships entrusted to corporate investor relations executives were and are, in many instances, programmed to become “dysfunctional,” to borrow the word of Arthur Levitt Jr., the former Securities and Exchange Commission chairman.

analyst enablers

As analysts have assisted their corporate finance colleagues on the other side of the Chinese wall, investor relations specialists have enabled analysts in countless ways – from reviewing research reports to providing selective hints, unwittingly or not. Protecting analysts from embarrassing themselves with earnings forecasts that are unrealistically high or low became an end in itself. After all, what good to anyone is a discredited ally with the power to amplify the corporate gospel to fund managers and stockholders?

CEOs and CFOs incentivized heavily with stock options – and thus obsessed with hourly stock market performance – bear a great deal of responsibility for the corrosive role played by many investor relations staffs. Not surprisingly, with options creating value only when the market rises, there was a pronounced tendency to share good news rather than bad. Regulation FD aside, body language and intonation are sufficient to guide even the most inept sell-side analyst.

For many investor relations professionals, the gravitational pull was irresistible, and only exacerbated by their own obsession to become more important in the corporate hierarchy. If you ask investor relations practitioners where they would prefer to report within their organizations, most would say to the CEO or CFO – where you can be closer to the center, to strategy-making and to the real story. Knowledge is power. Or is it?

As Goldman Sachs Group Inc. and other investment banks tighten controls on their stock analysts, and big companies such as General Electric Co. and IBM Corp. adjust disclosure practices to post-Enron realities, corporations also need materially to strengthen the role of the investor relations officer. Not in the way many practitioners might have hoped for, however. In fact, what is required is a dramatic repositioning of the role itself – from analyst enabler to champion of shareholder interests, from corporate protagonist to corporate antagonist.

direct accountability

Incremental solutions won’t be enough. For example, a recent NIRI newsletter advocates, quite appropriately, that investor relations officers routinely make reports to the board of directors. Regular briefings to the board about investor concerns as well as perspective about likely market reactions to various strategic initiatives or financing alternatives certainly wouldn’t hurt.

But is this enough? Perhaps the investor relations executive, in addition to making reports, should be accountable directly to the board, rather than to the Jeffrey Skillings and Andrew Fastows of the world.

As far as talking to analysts goes, there need to be more transparent channels of communication with shareholders and investors.

* Companies should immediately undertake top-to-bottom reviews of disclosure practices and solicit the outside perspective of institutional fund managers and their internal analysts on ways to improve.

* Annual and quarterly reports should be made exponentially more informative and readable.

* Board members should become more visible and accessible to the financial community.

* Term limits for investor relations executives might be considered, to discourage overfamiliarity with analysts.

If nothing else, investor relations officers should assume responsibility for promoting corporate candor and credibility, as well as greater realism in the valuation of the companies they serve. Instead of winking and nodding on behalf of overly aggressive CEOs and CFOs, they should spend more time monitoring the quality of what is disclosed. In the new world order, integrity should be power.

Thomas C. Franco is chairman and chief executive of Broadgate Consultants Inc., a corporate and capital markets positioning adviser in New York.