As I discussed in an earlier post, What? Social Media In The IR Industry, investor relations is the strategic management and dissemination of information to current or potential investors and other stakeholders, where the IR team assembles and integrates information about a company’s business activities, finances, marketing, and securities law compliance, among other things, and then coordinates and implements the communication of that information to relevant stakeholders. From this perspective, it is important to realize that IR is not a passive part of a company’s overall communications plan, but rather is both reactionary and proactive. The IR division of a company must respond to crises when they arise, but must also constantly and consistently work to communicate with all relevant publics so that small issues do not escalate. The objective of investor relations is to enable an effective 2-way conversation between a company and its investors, the financial community, and other constituencies.
Where the investor relations function may run into problems communicating effectively is in the breakdown of a company’s investors. Investors are those people who have a financial stake in a company, and therefore can be thought of as “owners.” However, employees can also have stock in the company for which they work, as can customers. Additionally, employees can also be customers. Both of these publics, employees and customers, become investors when thought of in this sense. From this example, it is easy to see that all the various publics to which an investor relations team must communicate overlap. Thus, the need for consistency in communications is paramount as influence and information crosses stakeholder borders. Mike Steinharter mirrors this insight in his post, Social Media And Financial Institutions, where he highlights the importance of understanding both the workforce’s and the customers’ perspectives.
From a different perspective, the primary objective an investor has is to see stock prices go up. While this may seem consistent with the company’s goals of increasing profits and obtaining a good “bottom line,” this objective is often in conflict with those of other constituencies. For example, employee layoffs are a common solution to investors’ pressure on management to cut spending, but this, of course, directly affects and hurts those affected employees.
Ultimately, it is the IR corporate communicator’s job to contribute to a company’s shares achieving fair valuation. To do so, the IR team must work to provide the information analysts need to recommend stocks, and investors need to have confidence in the reliability of that information. Investor relations avoids slick marketing and promotion, works to be in compliance with all financial industry regulations, and works to target all relevant publics specifically. Relatedly, Social Media Memo posted FINRA Funds Social Media Program, an illustrative piece describing how the industry regulator has just granted $100,000 for the starting of social media education programs. This example demonstrates the need for IR professionals to provide information clearly, as more and more potential investors become increasingly educated.
Social media has, in fact, become indispensable to the work of a competent and successful investor relations team. Traditionally, the IR team distributes information to constituencies through mail, news releases, annual reports, and viewbooks or 10-K forms. Now, with Web 2.0, detailed and interactive corporate websites, podcasts, webcasts, blogs, corporate profiles, and email are available for targeted use to reach stakeholders. As Dan Chambers comments in his post, How Social Media Is Reshaping The Financial World, more than 50% of consumers today use Internet tools to make their financial decisions. This example illustrates the need for IR professionals to meet consumers where they are when accessing information, online.
Even though most companies and investor relations teams may be somewhat afraid of social media because of the opportunities for feedback from constituencies in the 2-way conversation model it creates (especially the vulnerability for negative comments), a prudent IR team recognizes that appropriate use of social media provides substantially more benefits than detriments. Interactive, dynamic, and Web 2.0-based approaches to communication fosters transparency, credibility, and an enhanced company reputation.
Currently, the activist shareholder public is of great significance to the investor relations field. This stakeholder group has gained importance in recent years as corporate bankruptcies and scandals have forced investors to more critically scrutinize Wall Street. Because corporate scandals inherently involve allegations of unethical behavior by individuals acting within or on behalf of a corporation, those in the financial industry have ever more reason to strive for increased transparency for their constituents or else face similar allegations.
A mass of corporate scandals swept the United States in the early 2000s, one of the most notable being the Enron accounting scandal that involved a massive accounting fraud that eventually resulted in the bankruptcy of the company, and losses of millions of dollars by its shareholders. At the same time, the Internet was taking off as a public means of investigating, researching, and communicating corporate financial and other information. That combination of an era of discreditable and fraudulent events and the growth of the Internet created a perfect landscape for activist shareholders on which to act. According to the Consumer Confidence Index, by The Conference Board, currently, consumers continue to be concerned about the business and labor markets.
However, as more stakeholder groups developed (see my previous post Who? Diversifying Stakeholder Groups), it became increasingly apparent that the interests of each group were, and are not, homogeneous, as Iman Anabtawi and Lynn Stout wrote in the post, Fiduciary Duties For Activist Shareholders. According to Anabtawi and Stout, activist shareholders are using their influence to exert pressure on companies to advance their particular agenda, at the expense of the firm and other stakeholders. Such investors are prepared to organize campaigns, launch litigations, and start battles to pressure corporations into conforming to their ideal master plan, that may not actually be in the best interests of all of the relevant stakeholders.
Although this strategy may seem aggressive, and sometimes flawed, it is to the company’s detriment to ignore activist shareholders. Often, their criticisms of a corporation’s management are well founded and stem from uncertainty in the marketplace. Investors who cannot shake the picture of Enron, MCI, HealthSouth and other corporate collapses from their minds, are especially interested in accurate and objective information about their current or prospective investments. According to Paul Argenti and Courtney Barnes again, from Digital Strategies for Powerful Corporate Communications, there are several reasons why it is important to integrate effective communication to activist shareholders into the overall corporate communications plan, lest you incur:
- a drop in stock value
- losses in brand image and corporate reputation
- efforts to govern or control through regulation
- a rise in the time, money and resources necessary to carry on business
- negative attention from the media
- skeptical consumers
- hesitant investors
In response to this rise in shareholder activism, corporate communications practitioners should strive for transparency in their dealings with all stakeholders, especially with all of the new platforms available with the Internet for investors to make their voices heard, through information sharing, public campaigns and the disclosure of letters to company boards.
Who are the publics that an investor relations practitioner should focus on? The IR function’s original target audiences were primarily individual stakeholders and the financial media. Now, however, there are many more investor stakeholder groups that deserve, and need, the attention of the IR folks. This change has largely been the result of a growth in financial and other business information. Such information is now more readily available because of the Internet and Web 2.0, which have, in turn, led to the creation or expansion of investor relations-pertinent stakeholders. For example, institutional investors, credit-rating agencies, activist shareholders, and buy-/sell-side analysts are all groups that have developed as relevant publics, according to Digital Strategies For Powerful Corporate Communications (links to a book review), by Paul Argenti and Courtney Barnes. Similarly, the entire business landscape, across all industries, has experienced a diversification in stakeholder groups, as explained in this post, Stakeholders And How They Affect Your Business, by Jobs/Careers/Video/ApplyandGo.com.
Of course, not every stakeholder group requires the same information, or level of communication. By the same token, not all social media technologies or Web 2.0 applications have the same ability to provide the same information. However, the goal for the IR practitioner remains the same: to provide each particular stakeholder group with the information that they need, in the most accessible and consistent way possible.
Institutional investors, such as managers of mutual or pension funds, have larger stock holdings than do individual portfolios, and thus have a greater effect on the market. Correspondingly, institutional investors can also play a greater and more active role in corporate governance, simply because of their vast size (see also: Corporate Governance And Investor Relations In The Age Of The Internet). As a result, this stakeholder group both requires and deserves access to all relevant information concerning the particular companies in which they choose to invest. Necessary information may include a company’s history, its payment records, its credit ratings, and its earnings reports, in order for this group to completely and confidently make decisions. A companies’ IR staff must pay particular attention to this stakeholder group, because it wields a great amount of power and can often determine which companies stay afloat or go under.
Credit-rating agencies assign estimates of how likely it is that an individual, a corporation, or even a country, will be able to repay its debts. Banks and other lenders rely on these ratings to determine whether a loan should be granted to any person, company, or country, and if so, how much interest should be charged. Investors, banks, broker-dealers, and the government, among others, all use credit ratings to make their business decisions, whether it is to lend money, invest, or recommend investments/loans. They each need the best and most complete credit-rating information available. Investors are less willing to provide capital for companies that have poor credit ratings. The IR personnel of a company, who, for example, utilize interactive reports to foster transparency, can use social media to their advantage in regards to credit-rating agencies by imparting up-to-date and complete information that ultimately benefits the business. In this way, the company will be granted more loans at better interest rates. Credit-rating agencies need to know how well the company has repaid its past loans, how likely it is to repay future loans, and if it will do so in a timely fashion. Thus, credit-rating agencies may need focused information that can only be delivered through interactive reports, perhaps written in XBRL, and outstanding annual reports, rather than a micro-blog or podcast.
Activist shareholders are those stakeholders who, by definition, do not sit back and take a passive role in corporate governance issues, but rather use their stock ownership to advance a particular agenda. If an activist shareholder coalition has enough other shareholders who will vote similarly, on agreed upon issues, this public can exert pressure on a company’s management. The corporation’s IR strategists, therefore, have to pay particular attention to this group, and have to give them as much accurate and complete information as possible. In doing so, activist shareholders cannot claim such things as: they have been kept in the dark, the corporation’s management should change, or that some other transformation should be made. This stakeholder group uses its stock ownership in a corporation to exert pressure on management, and should not be taken lightly because, even with a small ownership stake, this group can successfully enact change. A corporation’s IR team must be especially alert in times of crisis, as this is when activist shareholder groups are the ones most fervently demanding information, as soon as it is available, with threats of negative backlash for the corporation if it doesn’t comply. Like institutional investors, this stakeholder group wants as much information as possible; however, activist stakeholders usually have a specific cause to campaign for, and thus want focused information from CEOs, possibly in blog or podcast form, interactive periodical reports, annual reports, and company updates.
Buy-side analysts and sell-side analysts differ in terms of the people to whom they make recommendations. A buy-side analyst performs research and makes recommendations to financial managers of mutual funds, and sometimes to other investment groups, on when to buy certain stocks and at what price. A sell-side analyst, usually working for an investment firm whose clients own individual stocks, makes recommendations to a firm’s clients on when to sell. These recommendations, either buy- or sell-side, carry great weight and have to be based on the best and most recent, relevant financial and market information. These two stakeholder groups require information regarding how the company’s stock has done in the past, as well as how it is expected to do in the future. A corporation’s interactive reports, a blog about the company by the CEO, and a strong online community are all facets of the Web 2.0 landscape that can assist analysts, help them do their job better, and ultimately, serve their clients better.
To hear Paul Argenti speak more on his book, Digital Strategies For Powerful Corporate Communications, see the video below:
Social media technologies have permeated organization’s business practices far beyond networking intranets and CEO blogs or podcasts. My previous posts on XBRL, How? Part 1: Operating XBRL and How? Part 2: The Benefits Of XBRL, continued to intrigue me, and so I have since explored the topic of interactive financial reports.
Interactive financial reports refers to reports of financial data that are “interactive” for the user, written with a computer markup language, for example now almost exclusively XBRL, so that those accessing such reports can more quickly and easily find and use the financial information they need. XBRLrefers to eXtensible Business Reporting Language, specifically developed for business and financial reporting, and is in use throughout the world. Before the development of XBRL and interactive financial reports, investors and others interested in learning more about various aspects of a company’s or mutual fund’s finances had to manually search through lengthy annual reports or similar mutual fund documents. Even if those documents were available online, they were in a format that made searching for specific information difficult. Moreover, such reports would often have been almost indecipherable by unsophisticated investors, and a goal of social media is to facilitate the dissemination of information to all, necessitating straightforward and accessible language.
However, if financial data is in an interactive format, the reader can immediately and easily pull out the information he or she needs, even from the most lengthy financial disclosure documents. This, too, is a significant point: the action of the user “pulling” information out. The Internet, along with Web 2.0 technologies, has transformed the way information is gathered, and financial reporting should not be an exception. Among other things, interactive reports make it possible to compare one company’s information to similar data from other companies, tosee how that compares with past years, or to see how it compares to industry averages. Overall, according to the United States Securities and Exchange Commission (SEC), information can be accessed more quickly and easily by investors through interactive tools, in an easily used form that can help the preparation of reports and presentations with more accuracy. The availability of mechanisms for interactive financial reporting has also made the job of the corporation’s investor relations personnel easier, both because they can now gather and put the financial information together more easily, and because they can more easily proved that information to the investor (and probably have fewer questions from them).
It is for these reasons that the SEC, according to their Office of Interactive Disclosure, starting with fiscal periods ending on or after June 15, 2009, has required some publicly traded companies (where the corporation’s stock is sold to the public, and unlike a private company that does not sell shares to the public), such as Ford Motor Company, to submit their financial statements in XBRL format. It is foreseen that those SEC requirements will eventually be applied to all public companies that file periodic reports with the SEC. The SEC will also require mutual funds and financial ratings organizations to do the same. The United States is not alone in taking this action, as agencies in many other countries around the world already require that financial reports of companies be in an interactive data format, including Australia, China, Japan, the U.K., and Sweden.
In sum, requiring companies to make their financial reports “interactive” has many benefits both for the investor and also for the company, as it can help improve reporting processes, from gathering to writing reports of data more quickly and reliably. The SEC makes it possible for you to experiment with interactive reporting through their Interactive Financial Report Viewer, a great tool that may very well convince you to alter the way your company reports.
As explained in my earlier post, How? Part 1, XBRL is radically transforming the way business and financial information is managed and reported. This post is to further that discussion, and to highlight how XBRL can benefit a company.
XBRL yields substantial advantages in the preparation, analysis, and communication aspects of reporting information to relevant stakeholders. Interested parties would be those who collect business data, such as government regulators, economic agencies, stock exchanges, as well as financial information companies, accountants, auditors, managers, financial analysts, creditors, and investors.
XBRL International has self-described its software as “intelligent,” meaning that it can interpret tags in an XBRL document, select, analyze, store, and trade the information with other computers. Thus, the information can then be presented automatically in a variety of ways for different users. Correspondingly, the use of the XBRL software will accelerate the data collection, processing, and analyzing aspects of business and financial reporting.
Further, this way of processing information is vastly more cost-efficient than the traditional way of inputting data. Because the process is automated, it relieves the need for manual insertion of data and does not require paper processing, saving money. Also, XBRL does not have any license fees.
But what may be the most important benefit gained by transitioning from manual to automated data processing is the assemblage of more reliable and accurate information. This software has the capability of immediately checking and validating, all data, and if necessary, it can automatically call attention to any errors or gaps that may need swift attention and correction. Additionally, once data is assembled in XBRL, different types of reports can created based on different subsets of the data, with little effort.
All of these benefits, listed above, can lead to better analyses, higher quality of information, and more educated decision-making. For companies that are trying to reach every internal and external public with the greatest amount of openness and transparency, this tool for supplying information will greatly benefit that goal: it will foster accuracy and timely dissemination of all company-related intelligence.
Potentially, a clearer and richer view of your company could be provided faster, and with a more accurate view of overall performance. Companies in the industries related to finance and data management, such as Investor Relations, will play an important role in the adoption of XBRL, and with their praises, other companies will learn of the benefits that abound.
To learn about other, similar viewpoints on the benefits of XBRL, see these blog posts:
XBRL: The Sooner You Start, The Better by Tom Hood and Bill Sheridan
Realizing The Benefits Of XBRL By Focusing On The User by Ted Stavropoulos
Tirelessly inputting data by hand so that companies can create, share, and analyze financial reports and other assessments is old-fashioned. Computer usage to manage similar tasks is the norm, and should be, for reasons such as accuracy and archival. Now, there is XBRL, an XML-based computer software language created for the automation of business information to replace the manual input of data.
Understanding how XBRL operates is key to determining if it could be useful for your company. XBRL is a language for the communication of business and financial data online. Its acronym is short for eXtensible Business Reporting Language. It is designed to ease communication across industries, providing a computer-readable, apples-to-apples analysis of data.
XBRL is a markup language in open data standard, developed by XBRL International. A markup language is a system for annotating a text in such a way that it is distinguishable from that text, a common example being a colleague’s comments or revisions on a rough draft in red ink. The open data portion of XBRL refers to the standardization of information – meaning is created by the agreement of standards of signals. In this blog, open standard is most applicable for financial reporting. Open standards encourage interoperability and data exchange among different products and services intended for widespread use. XBRL International is the not-for-profit union of international agencies and companies that work together to build the standard and promote its adoption.
XBRL works by adding unique tags to information that identify individual components. Computer software is able to read XBRL tags and process information automatically, without manual re-entry and differentiation. This language is specifically designed for flexible transmission of data between computers, and more importantly, between people responsible for dealing with the analysis and distribution of financial information. The interactivity of XBRL’s interface refers to the software’s usability, and can be linked to the growing importance of User Experience (UX) Design. UX Design is a design created for a user, in an attempt to facilitate the best possible experience, such as how a website works. A great example of outstanding UX design is Apple’s iPhone site, a marketing page is so well designed that it creates the desire in consumers to own one almost immediately.
The basic premise of XBRL is to make reporting for companies 100% easier by the ways described above. In doing so, investors, analysts, and relevant government agencies are able to analyze reports that are generated online through the labeling and organization of specific, industry-related information with tags.
But you may be wondering how this is relevant to my discussion of social media? It is XBRL’s open standard form and the interactivity of its interface that launches it into the social media domain. An open standard inherently fosters the public availability of information. Being open is crucial to companies today because a need exists to be “transparent” with regard to the disclosure and distribution of relevant business information to all interested publics in a timely fashion. The Investor Relations industry is just one of many publics that would benefit from the adaptability of this type of information processing. Customers, government regulators, accountants and analysts are all publics that a company would want to consider when divulging business and financial information.
The ease of operation by any user, openness, and adaptability make XBRL the next great innovation for coherently and easily communicating business and financial data online.
Social media applications are quickly taking corporations by storm, and all who have attempted to and successfully integrated these technologies into the larger corporate communications strategy have sung their praises. Some such benefits are: the democratization of media, the creation of more intimate relationships with stakeholders, the sharing and collaboration of information, greater brand awareness, and increased transparency with all publics. However, it is the increased transparency that social media inherently brings to organizations that is giving some publics pause.
It is generally accepted, in this age of Web 2.0 technologies, that one will not enter into the online community anonymously. Rather, authenticity is expected, and sometimes demanded. For example, a corporate blogger is expected to be open and honest about their relationship to a company and to respect the online community enough to disclose all affiliations. Those who do not disclose all information, fudge or distort the information they do publish, or falsify their identity, risk an immediate and very harsh backlash from every possible side. Therefore, openness should be a goal for every industry and client type – nonprofit, corporation, association, etc. But what about trade secrets, competitive information, or financial figures?
There does need to be some discretion applied by every blogger, Twitter-user, and corporate communications strategist who wants to dive into the World Wide Web with social media guns blazing. Unwanted disclosure of sensitive information can adversely affect a company just as acutely as can a negative comment: one unintended disclosure of confidential business information over the Internet can damage a company’s business and reputation in a heartbeat. The release of “inside information” to the global public can also lead to financial crises, such as negatively affecting a company’s stock.
To combat the publication of sensitive inside information outside the company that might both damage the company and unfairly benefit certain investors, the SEC implemented the Regulation Fair Disclosure (“Reg FD”) ruling in 2000. The Internet was increasingly becoming a medium for research and up-to-date information publication, such as stock values. Further, the medium empowered individuals to do their own research and make informed decisions, and investors demanded more access. The Reg FD ruling profoundly changed how companies communicate with their investors, by instilling better transparency. It did so by mandating frequent, timely reports, and that all publicly traded companies must disclose material information to all investors at the same time. However, at the time, the SEC could not have envisioned how the Internet would take off as a platform for the global sharing of information. Recently, FINRA, the Financial Industry Regulatory Authority, issued Regulatory Notice 10-06 to guide those it regulates on the use of social media websites, specifically on blogs and social networking sites. According to the notice, several firms have asked FINRA how rules governing communication with publics apply to social media sites. The notice clarifies the responsibilities of companies to supervise social media use to ensure that publics are not misled. The FINRA notice 10-06 is an industry-wide guideline to help individual companies regulate how their internal publics, such as executives, managers, and employees, use social media.
In order to prevent any disclosures that could prove disastrous, every company or organization should create policies and procedures that make clear the discretion necessary when dealing with private information. This is not to say that transparency should be abandoned for opacity, only that guidelines should be in place that help employees know the difference between being open and over-sharing.
In the financial industry, unguarded openness could very easily turn detrimental. This industry is understandably going to be more hesitant than others when it comes to blogging, tweeting, or podcasting. The way to avoid unnecessary friction between the openness of social media and the requirements of good business, and of the law, not to be “too open,” is to be aware of existing federal regulations, establish and follow company well-thought out guidelines, and plan Web 2.0 use accordingly. Don’t be afraid to use social media – just do so consciously and conscientiously.
To learn about other, similar viewpoints on the possible risks concerning the use of social media without policies or guidelines, see these blog posts:
Social Media Risks – What You Should Know by Themelis Culper
The technologies and practices that people use to share content, opinions, experiences, and insights with one another have evolved in recent years to include much more sophisticated media. However, Web 2.0-based applications are not only limited to product reviews and customer ratings; rather, all major stakeholders can, should, and are using social media to facilitate interactive information sharing.
Stakeholders typically include employees, customers, the media, legislators, regulators, neighbors in the community, activist publics, and investors. I argue that in this new age of individual power on the Internet, everyone is an investor and contributes to an organization’s success.
The National Investor Relations Institute (NIRI) defines IR as,
…a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.
It is important to hone in on the NIRI’s definition of IR because it emphasizes two main points that are particularly relevant to this discussion: an integrated strategy and two-way communication. Strategic management of communications between an organization and one of its principal stakeholders, investors, is dependent upon maintaining a relationship of openness and transparency. This corporate strategy will be successful if the relationship is one of two-way communication, and is consistent with recent trends away from traditional media that only offer the organization’s point of view.
Web 2.0 applications, although very new and still evolving, are most definitely here to stay. Substantiated by the blog Credit, Collections, and Finance, it is time to actively get involved in the new world of social media. In the February 12th post, Leveraging Social Media to Grow Your Business, a 4-step process is outlined to help you break out of the traditional communications mindset: observe, participate, create, integrate. It is these four simple steps that will catapult your role as a liaison between an organization and its investors to one of greater consequence and influence.
Currently, stakeholders are going online more frequently and hold more power individually in determining a company’s bottom line than ever before. The opportunity to create a stronger relationship with those who impact the overall success of an organization is too good to pass up.