by Michel Robert, published 2002

Chapter Twelve: How Comparative Supremacy Enhances Shareholder Value

The following is a view of this phenomenon by Deborah K. Pawlowski, President and CEO of Kei Advisors, a Buffalo, New York consulting firm. Kei specializes in assisting CEOs in communicating effectively with the financial community to bridge the value gap.

Closing The Value Gap
Investor relations is a value creation process. The content, quality, depth, and consistency of the information provided by companies to investors and potential investors promote market efficiency and manage expectations for future potential. The value that investor relations can generate may be `missing value,' or value that is left unrecognized because the market does not understand the future prospects for a company. Additionally, IR can generate `premium value,' or the incremental value a company creates by reducing its risk premium when it provides markets with a greater understanding of its potential relative to alternative investments. The following are some practical methods you can implement that will enable you to move your company up the premium value curve.

Are You Missing A Value Creation Opportunity?
A value gap exists when the market must rely on insufficient information in its efforts to determine a company's future cash flow potential, its risk, and its return opportunities. Without a clear understanding of a company's strategy or without a sense of the capability of the organization to deploy that strategy, the market's assessment of value will very likely be less than the true intrinsic value that may exist.

Value is the product of a financial equation that is developed with many assumptions and interpretations. The market's perceptions of a company's strategy, management capability, capacity, and creativeness play into those assumptions, as do the prevailing perceptions of the competitive landscape, the strategic opportunities, and where your company fits in the picture. If you do not clearly articulate your strategy and it cannot be translated into financial outcome, or if what you do and say are not consistent, then the market by default has to use short-term proof points, such as quarterly earnings, to determine whether or not you are on track with the market's resulting expectations for your future. This leads to the destructive quarter-to-quarter `earnings versus estimates' cycle, which forces executive management into short-term decision making, ultimately undermining a company's true performance potential.

Addressing The Value Gap Is A Value Creation Proposition
A Strategic Investor Relations program will effectively capture the components and magnitude of the value gap in order to close it. Resources - with executive management time being a major component - can be directed in a more efficient manner. Two objectives are therefore accomplished: intrinsic value is recognized and it is achieved in an efficient manner.

By establishing four clearly identified goals, CEOs can define the intent and direction of their IR program and ensure integration with their public relations, marketing, and general corporate communications efforts. Value is achieved by effectively creating an integrated communications plan that goes much deeper than is commonly practiced.

First, achieving fair valuation should be a goal in itself. In order to achieve this, you need to understand where you stand relative to similar investments. Then you must determine how effective your strategy is at deriving value and how consistent your performance is at achieving expected returns on invested capital. The value drivers - financial and non-financial - must be understood and communicated. Qualitative comments combined with quantitative responses will tell you if market participants see you as being fairly valued or not, and what the components of the value gap are. A peer investment analysis and shareholder analysis are also useful in understanding your relative value and potential. Premium value relative to similar investments is achieved when risk is reduced through a clear understanding of future potential. This can only be accomplished through timely and accurate information, consistently supported through decision patterns and performance.

Second, CEOs and their IR teams should cultivate a proactive and positive relationship with the investment community. This means understanding their information needs, their decision making processes, their audience.. It entails outreach and conditioning - highly iterative activities. Importantly, conversation with this constituency means a two-way flow of information. Regular feedback interviews conducted by a third party after major communications events will help you to know what is not being understood, and what you need to emphasize or clarify in your presentations and comments. Reviewing your shareholder analysis, defining the shareholder profile that is best suited for the type of investment you are, and targeting the right audience with which to spend your time will generate greater results and make the use of your time more efficient.

Third, foster a communication environment open to change and progress. Responsiveness, depth of understanding, clarity and frequency - all of which comprise IR competency - contribute to this open environment. This character or trait of a company should be found in all areas, whether dealing with institutional investors, individual investors, customers, suppliers, or employees. The market needs to have the sense and understanding of how a business will behave with changing currents and shifting winds. Do you have a process for responding to inquiries in a timely fashion? Can your designated spokespersons clearly address your strategy, products, and markets, and translate that into financial outcomes? Are you all telling the same story? Before you started talking did you ask the interests of the investor or analyst?

Finally, and most importantly, your goal should be to establish and maintain solid credibility in the marketplace. Clearly, this is easier said than done. Financial results and opportunities are what value is created from, that is, the ability to earn an expected return on invested capital. The understanding of the opportunities is the intent of IR. Without credibility, interpretations of your company's opportunities are left to the crystal ball of the market and discounted with a higher risk premium.

All in all, value is about a business's performance and prospects. However, the outlook can only be valued if communicated clearly, consistently, and to the right audience. Content, form, frequency, and, most importantly, credibility all contribute to providing the market with the information it needs to derive value through first understanding and then closing the value gap.