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Take It from This CFO: How to Make Investor Relations More Accountable

Bennet P. Tchaikovsky is the chief financial officer of VLOV Inc.

As a CFO, my greatest challenge with investor relations firms is the lack of accountability when it comes to investor outreach. Often, IR firms will busy themselves with press releases, presentations, quarterly conference calls, and websites – all of which can distract them from focusing on why they are hired: to outreach to investors and educate them on a company.

The steps outlined below will enable you to maintain better control of the IR process, save costs, and free up your IR firm to focus more on investor outreach. There is work involved to make this happen: An IR firm must be given the tools to perform the best investor education: executive time, consistent and meaningful messaging, and financial results.

Step 1: Contract directly with a third-party service provider for websites.

A company’s website is one of the most important tools for informing investors and often the first destination where investors go to learn about a company. I strongly recommend to colleagues and clients not to build an investor website from scratch. Rather, enough third-party providers can perform these services at a fraction of the cost.

I’m always amused by the IR firms that take credit for building a website with lots of bells, whistles, and full compliance with all of the Securities and Exchange Commission’s rules and regulations. Did the IR firm do this work? Probably not, unless the IR firm is a division of a larger company. Did it hire a third party that creates such websites for companies or IR firms to resell? Yes.

IR firms bill the costs of websites and related services back to companies. This is not a good idea: If the IR firm is not paying its vendors, the site may be turned off or website access may be used as a weapon against a company when trying to change IR firms. Additionally, IR firms often act as a reseller of investor websites, creating an additional margin for the IR firm.

While I recommend that the website is in the company’s control, IR firms should have access to the website mainly because these sites have tools for tracking conversations with investors. A CFO, investor relations representative, or IR firm can document calls and communications with investors through website portals so that the IR firm and company know which investors have been contacted and what was discussed. This increases the overall accountability of the IR firm for outreach and eliminates the unnecessary duplication of efforts.

Step 2: Hire a consultant to write the press releases, draft conference call scripts, and create corporate presentations and investor summaries.

I’ve found that IR firms generally like to take credit for everything with the exception of the Internet (which has already been claimed by Mr. Gore).

Drafting an initial press release, conference call script, or corporate presentation takes time. Rather than having my IR firm perform these tasks, I have hired outside consultants to make the first draft and then give it to the IR firm to review. The IR firm is now spending a fraction of the hours reviewing the documents, enabling it to spend more time contacting investors to inform them about the company.

Look for a marketing consultant who has prior experience at an IR firm or PR firm to draft these releases and scripts. These people exist; you just need to look. You will be surprised how many freelancers are in the marketplace who have the experience needed without all the overhead costs that an IR firm brings to perform the same work. Prior to hiring any consultant, enter into a nondisclosure agreement, consulting agreement, and complete reference check. A CFO may spend more time up front going this route, but the IR firm will be more focused on what it should be doing: investor outreach and education.

Step 3: Enter into direct agreements with the conference call providers and wire services.

Similar to the websites, IR firms enter into agreements with conference call providers and wire services and then bill back these costs to companies. The risk here is, again, if the IR firm fails to pay their vendors, the company may be getting a call from the service provider. My experience has shown that wire services can be negotiated at better rates if a company is buying a package of releases. I always ask for unlimited words and for distribution that meets my company’s objective (e.g. national, local, etc.). Equally important are ways to draft releases and select distribution networks that provide search engine optimization. Wire service providers are extremely helpful on this front and will be able to assist a company with this process.

You could also contract directly with a conference call provider and avoid the IR firm markup. Remember that companies are generally charged based on the number of people participating in the call. Once the relationship is set up with the conference call provider, the calls can be easily administered by the IR firm or company.

Step 4: Limit the contract duration with the IR firm and hold the IR firm accountable.

Most IR firms require a six month to a year commitment. IR firms will justify the contract length as “we have to build the interest and nothing happens overnight.” Unfortunately, my experience with IR firms has been like owning a boat: The best day is the first day, and the second best day is the last day, when I terminate the agreement (or  pull the boat out of the water). I’m left asking, I just paid for what?

I am for long-term relationships with IR firms, and in some cases they can lead to better relationships with investors. I am not for allowing IR firms to state that they are “making calls, sending e-mails, and mailing investor kits” without providing specific detail about the work they’re doing.

If your company has taken Steps 1 through 3, you’ve built a foundation for the negotiation process, so the IR firm will be judged by its ability to educate investors about your company. It will only have to review the already established IR materials instead of starting from scratch. In the company’s agreement with an IR firm, develop specific metrics to ensure it can be held accountable and dismissed if it fails to perform.

Once the firm is retained, I recommend having meeting with its representatives every other week for the first few months and then monthly reviewing the overall progress of its investor education and outreach. If an IR firm is recording e-mails, calls, and other outreach on the website, your company will know pretty quickly how much work the firm is doing.

Final thoughts: Remember why a company hires an IR firm.

The IR firm’s long-term relationship is not with the clients that come and go. The IR firm’s contact list, which has been developed over the years educating investors and analysts about companies they represent, is its most valuable asset. You want a firm that when it contacts your investors and the individuals who follow your company, those people will pay attention.

Bennet P. Tchaikovsky is the chief financial officer of VLOV Inc. (OTCQB: VLOV). He has served on public and not-for-profit boards as the audit committees’ designated financial expert and as CFO for numerous publicly traded companies, and he has been integral in the uplisting of several companies to the Nasdaq. Tchaikovsky is a licensed CPA and attorney in the state of California and a graduate of Southwestern University School of Law and UC Santa Barbara. He also serves on the board of directors of the Arthritis National Research Foundation and the audit committee of the Long Beach Day Nursery. He can be reached at bennetatwwofficers [dot] com or 310-622-4515.

Comments

Topic Expert
Phyllis Proffer
Title: Owner, Investor Relations Counselor
Company: The Heights Company, LLC
(Owner, Investor Relations Counselor, The Heights Company, LLC) |

There are a few other steps I would add to hold investor relations accountable . . . regardless of whether you are utilizing an external resource such as an IR agency or utilizing corporate staff comprising an internal IR department or utilizing a combination of external and internal resources.

1) Use analytics to quantify what you want to achieve, 2) and monitor the progress of your IR activities on a regular basis 3) so that you can make course corrections when necessary. More details are presented in my January 9 webinar with Proformative titled Analytics – The MVP on your IR team.

Bennet provides sound advice about contracting directly with web site hosts and developers, conference call providers and newswire services as well as holding the IR firms accountable. However, there are many reasons why corporations hire IR agencies, freelance contractors, IR consultants, and IR counselors. It may not be in the corporation’s best interest to rely entirely on the contacts of an IR firm to develop their shareholder base.

A corporation can better manage shareholder expectations by matching the investment styles of their institutional shareholders with the corporation’s investment characteristics. Inaccurate expectations can be a drain on management’s time and cause unnecessary disruptions to normal operations, not to mention the corporation’s public image and reputation.

IR agencies can help coordinate management introductions to appropriate institutional investors, but I have never relied solely on an agency’s contact list or the client list of a sell side brokerage firm to prospect institutional holders. As the internal IRO, I have used database services to monitor existing institutional shareholders and target prospective institutional holders. There are many available and several offer stock surveillance services for an additional fee.

Many full-service IR agencies contract with the database services directly and spread the cost among the clients who utilize the agency for shareholder targeting and monitoring. If you choose to work with an external IR agency to prospect institutional shareholders, you will want to provide parameters about the investment styles you are seeking. Measurement, collaboration and accountability are key to using external resources to help develop a corporation’s shareholder base.

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