Published Date 1/24/19 7:30 AM
The function of Investor Relations (IR)
There are several ways to define the function of Investor Relations, some of which are quite technical, others more accessible; however perhaps the best way to explain IR is to imagine it as a window. A window that investors can look through to more closely examine a company’s economic, financial and strategic directions, but also a window that senior management can look through readily understand market sentiment and expectations, and then translate these into business objectives.
The window metaphor is even more fitting considering that one of the main characteristics of glass is transparency: transparency is a fundamental objective of the work of IR Managers, so as to let investors understand what the true potential of a company is in terms of value creation, consequently maximising its share value on the stock exchange.
It is evident, however, that to achieve this goal the company needs to be visible to the largest possible number of financial market players; this element, visibility, is the area where the new MiFID II directive may have a significant impact.
The MiFID II directive - Objectives
On 3 January 2018, the new MiFID II directive (Markets in financial instruments directive - 2014/65/EU) came into force throughout the European Union; this, together with the MiFIR or Markets in financial instruments regulation (Regulation (EU) no. 600/2014) replaced the previous regulations (the MiFID directive that regulated EU financial markets from January 31, 2007 to January 2, 2018).
The main objective of MiFID II is to regulate an increasingly varied and complex market, characterised by an increase in the types of financial instruments and the spread of high-frequency trading systems, used by significant share of transactions on electronic markets. The objective is the creation of a single market for financial services in Europe, in which transparency and investor protection are guaranteed, so that savers and investment firms can operate across borders (so-called ‘single passport’) more easily and under the same conditions in all EU Member States.
The MiFID II directive - Costs and charges
As those inside the sector know only too well, one of the most significant changes introduced by MiFID II could be that relating to greater transparency in the costs of services/products offered. Specifically, research costs will need to be separated from transaction costs: the former can only be charged if a budget is defined in advance, while until now they have been indirectly included in the management costs (so-called soft-dollar commission).
The MiFID II directive - Effects on operators and brokers
As research costs can no longer be implicitly included in the brokerage fees, it will mean that financial analysis teams will explicitly charge operators for the cost of purchasing research, which will have a dual effect: 1) operators will pay more care to the quality of the financial analysis they purchase, as they need to justify the costs to investors; 2) bank departments dealing with financial analysis will need to justify their existence autonomously, with adequate remuneration for hours/work.
This could lead to a reduction in the number of securities covered by analysts and consequently, in particular for small- and mid-cap companies, to limited visibility on global markets.
The MiFID II directive - Effects on Investor Relations
As described above, “visibility” in a globalised and ultra-competitive market is an extremely important asset for raising capital and is fundamental for the company to fully develop the capability to create value. Faced with a probable reduction in the financial research/analysis provided by sell-side analysts, the role of the IR Manager is bound to change: from a “passive” role involving giving out information and describing the company’s equity story to interested investors, it will entail actively facilitating, streamlining and creating interest, by providing innovative tools to allow the company to be understood quickly and completely.
In particular, there are three levers that IR Managers will have available to maintain high visibility for their company:
- Accessibility - Make the company’s strategic, economic and financial information fully usable to investors, by allowing them to process it with minimal effort
- , Marketing - Create interest in the company by targeting potential investors and making direct contact with them;
- Technology - Using technological platforms, social media and data analysis to build and consolidate relationships with current and potential shareholders.
A new challenge is thus approaching, one that will reward those who will be able stay in front of the changes, responding in an innovative way to the needs of a constantly evolving market.
What's the recipe for building a good product?