author developed a simplified model to explain the dynamics of the Fiduciary Responsibility of Institutional Investors towards Small Investors, see Figure 1.1.
Figure 1.1: The Fiduciary Responsibility of Institutional Investors
In basic terms, retail investors or subscribers invest their money with institutional investors so as the latter manage their money with the aim of maximizing the wealth of small investors. Since Institutional Investors have the required human resources from research analysts to fund managers, and since they have larger pools of funds to invest, they are in a position to force listed companies to disclose more information to them as part of their investment due diligence process to avoid questioning and lawsuits from small investors if investments losses are incurred. A bad example of fiduciary responsibility would be without question is Bernard Madoff who received a 150 years jail sentence for making thousands of his clients lose billions of Dollars using a fraudulent investment scheme (Reuters, 2009).
1.3 Importance of Investor Relations (IR)
IR is an important corporate function (Higgins, 2000) and is an important part of corporate governance (Abdul Hamid, 2005); in fact Dolphin (2004) views it as a strategic tool because companies appreciate the need to be understood by their capital providers. According to one study, 85% of UK-Based companies which responded to a survey believed that the perceived importance of IR has increased over the last ten years (Dolphin, 2004). In another survey, 97.8% of respondents, Top European Companies, perceived IR as very important; the sample was drawn from The Times 1,000 and excluded UK based companies (Marston and Straker, 2001). Australasian Investor Relations Association (2006) describes IR as expanding and growing in importance. Moreover, more and more countries are contemplating establishing National IR Societies to advance their local IR profession. For example, a group of IR professionals are planning to establish Turkey IR Society (Harrison, 2008a) whereas another group of professionals have already established the Middle East Investors Relations Society with the aim of improving IR practices across the Middle East (www.Ameinfo.com, 2008).
IR should not be viewed as function that create a better company image or buzz around the company (Martin, 2003) instead it should be viewed as a tool to create shareholders’ value (Rappaport, 2006). For example, SICOR, a US biotechnology company, increased its Market Capitalization from USD 300 million in 1998 to USD 3.3 billion in 2003 through effective IR activities (Metzker, 2006). This substantial increase represents an 11 folds increase in the company’s shares valuation.
The notion that communication between the company and its shareholder increases the company’s share valuation is very logical. The more information the investors have about the company’s operations, the lower the investment uncertainty associated with the company. This in turn leads to a higher relative share price valuation and the opposite holds true (Brown, 1992).
Several indicators of the importance companies attach to IR were found in the findings of a survey conducted by the Bank of New York Mellon (2007) covering 172 companies around the world. Consider the following findings of this survey:
(a)48% of IR Professionals communicate with their Chief Executives on daily or weekly basis,
(b)75% of IR Professionals communicate with Finance Chiefs on daily or weekly basis,
(c)67% of IR Professionals provide their board members with market intelligence information,
(d)69% of IR Professionals deliver presentations at Board Meetings and,
(e)78% of IR Professionals attend Executive Committee Meetings.
It is very clear from the above review that IR is not only an important activity but also growing in importance. This fact is supported by the survey results conducted by VMA Group (2008) in UK where it was found that 70% of participants reported that the IR Function contributions in companies are viewed positively by other departments.
1.4 Organization of Investor Relations Function
In a research covering 547 large UK listed companies (Marston, 1996), it was found that:
(a)48% of the respondents had no designated Investor Relations Officer (IRO),
(b)32% of respondents had one employee who handled IR as part of his other responsibilities and,
(c)Only 20% of respondents had a dedicated Investor Relations Officer (IRO).
In another survey covering Continental Europe, it was found that 96% of companies surveyed disclosed that they have a dedicated IR Department (Marston and Straker, 2001). The length of time the IR Departments had been established ranges from under one year to 16 years with a mean of 7.3 years. This is another evidence of the perceived importance of IR function in Top European Companies.
In yet another research covering 24 UK Companies (Dolphin, 2004), it was found that:
(a)30% of respondents had established a dedicated IR department,
(b)15% of respondents arranged for IR to be handled either by the Finance or Legal Department and,
(c)55% of respondents arranged for IR to be handled by the communication executive.
The survey of Bank of New York Mellon (2007) highlighted above in Section 1.3 indicates that there has been some development in IR Department organization over the past few years. According to them, on average each participant/company in the survey had four IR staff in the IR Department.
It is evident from the various surveys cited above that companies are realizing how important IR is in maintaining current shareholders, attracting new ones and getting better coverage by investment analysts which ultimately lead to a better valuation for their shares. Hence, these companies have set up exclusive departments for handling IR activities. The question was in 1996 surveys whether companies had an IR Department whereas the question in 2007 became how many staff the company recruited in the IR Department.
Some companies integrate IR with Corporate Communication to achieve several objectives such as gaining efficiencies in planning and use of resources, enhanced coordination of messages and a consistent public appearance (Kariola, 2003).
According to Marston (1996), there are several reasons that affect the organization of IR Department including among other things the size of the company, overseas listings, regulatory requirements and the continuing increase in sophistication of the world’s capital markets.
In addition, shareholders lawsuits, accounting scandals, business media and public calls are all factors that drive the establishment of IR Departments and activities (Silver, 2004). For example, Sarbanes-Oxley Act was enacted on 30 July 2002 in USA in response to major corporate and accounting scandals such as Enron and WorldCom. It requires among other things enhanced disclosures for all U.S. publicly traded companies financials, boards, management, and accounting firms (Wikipedia, 2008a).
1.5 The Role of Investor Relations within Companies
The International Investor Relations Federation (2008) carried a research on IR Activities. The questionnaire it used to gather data on this matter suggests that IR Professionals can engage in any of the following activities:
(a)Organizing
