FINCON: CHAPTER 8

Controller

An information resource or source for any financial data, for those officers and executives who need it for IR purposes

Controller

Financial statements reflecting actual results and/or condition of the entity and/or any segments, such as

(i) Statement of income and expense

(ii) Statement of cash flows

(iii) Statement of financial condition

Controller

Relevant financial analyses of actual data and trends of these statements, as required for IR purposes, such as

(i) Inventories

(ii) Accounts receivable

(iii) Long-term debt, by category of debt

(iv) Plant and equipment, by location

(v) Relevant ratios, including comparisons with industry and competitors

(vi) Detail and type of revenue and expenses by appropriate segment

Controller

Financial statements and analyses of planned/forecasted results (annual and long-range plans) for the company and segments—available but often not disclosed to analysts.

Controller

Graphs and tables showing financial trends (actual and projected). All financial data, whether external or internal, must be prepared under the controller’s supervision, with CFO/CEO oversight.

Controller

Interprets financial data for IR audiences (analysts, investors, financial sources, bank loan officers) when requested by executives.

Controller

Communicates financial information to entitled individuals/groups under IR rules—includes presentations and Q&A.

Controller

Prepares or reviews financial commentary in reports (annual, quarterly, 10-K, 10-Q, etc.) for accuracy and completeness.

Controller

Reviews financial/accounting content in news releases, special announcements, and IR publications.

Provides recommendations to CFO or makes final decisions if authorized.

CFO

Principal communicator of financial policy, status, and trends to major groups (security analysts, brokerage houses, large investors).

CFO

Principal spokesperson/negotiator for raising capital (equity or debt), working with investment bankers, commercial banks, and institutions, with CEO/Board approval.

CFO

Reviews major financial publications (annual/quarterly reports, news releases) with input from the controller for accuracy, completeness, and disclosure.

CFO

If IR is part of finance, directs its activities, sets disclosure policies, and builds a professional IR team for functions not handled by the CEO, controller, or himself.

CEO

Preside over major meetings with security analysts, large investors, and the like and present the background and related information on such important matters as:

(a) Company mission, purpose, goals and objectives, and so forth

(b) Competitive position of the company

(c) Major operating accomplishments in recent periods

(d) Direction company is headed

(e) Any forthcoming major events that can be announced (management changes, acquisitions, divestments, etc.)

CEO

Meet, on a one-to-one basis or with a few individuals only, any major investor, opinion maker, banker, and so on, who wishes to see her. Discuss major points as in item 1 above.

CEO

As appropriate in IR meetings, refer financial questions to the vice president of finance or controller, and certain operating questions to the operating executive present.

CEO

As to important financing matters, meet with other major players, as deemed proper: commercial bankers, investment bankers, rating agencies, institutional investors, and so on. She should lend support to the proposed transactions, provide relevant background about the company, and answer questions directed to her.

CEO

Ascertain that the messages in any important public statements (e.g., the annual report, quarterly financial reports, financial-type news releases) are as she thinks they should be, or understand why not.

CEO

Address important company matters and the annual meeting of shareholders.

Objectives of the Investor Relations Function

The principal purpose of the IR function, regardless of who performs it, is the enhancement of shareholder value

Objectives of the Investor Relations Function

The stated purpose of hostile takeovers is “to enhance shareholder value”; the defense against such actions, as voiced by some chief financial officers (CFOs) of the targets, is an effort “to enhance shareholder values by increasing the price of the common stock.

Objectives of the Investor Relations Function

One purpose of sound financial policy is to enable the company to raise funds on an acceptable basis to meet its needs, enhancing the long-term interests of shareholders and ensuring an acceptable price/earnings ratio.

Objectives of the Investor Relations Function

Some chief executive officers (CEOs) might still regard the IR function as a simple financial reporting activity, with no intent to affect the stock price.

Objectives of the Investor Relations Function

Many CFOs will bluntly state that the objective is to maximize the market price so as to minimize the cost of equity capital.

Objectives of the Investor Relations Function

Executives of brokerage houses will acknowledge that a continuing IR program helps prepare the market for a public offering, and influences the credit ratings of fixed-income securities.

shareholders

Annual report to ______

shareholders (and the financial community)

Quarterly reports to

shareholders

Annual meeting with

Reports to the Securities and Exchange Commission (SEC):

Annual Report Form 10-K

● Quarterly Report Form 10-Q

● Current Report Form 8-K

security analysts, institutional investors, brokers, and large individual investors

Regular or special meetings with ____________________—often arranged in cooperation with one of the several associations or societies for analysts

■ Corporate announcements of special interest to investors or potential investors:

New products or services

● Management changes

● Acquisitions and/or divestments

● Reorganization attempts, such as restructuring, unfriendly takeover

Investor Relations Message Recipients

● Broadly and technically speaking, the IR function must service an unusually complex and diverse audience. For example, here is a typical listing (with some overlapping) of the vast number of potential “customers”:

● Investors and potential stock investors (small)

● Large institutional stock investors and potential investors ● Security analysts

● Credit-rating agencies

● Financial advisory services

● Brokerage firms

● Bond-rating agencies

● Bank loan officers

● Bondholders

● Financial press

● Portfolio managers

Three broad groups at which the IR activity is primarily and continuously directed are:

1. Security analysts, 2. Stock brokers, and 3. Large institutional investors

security analyst.

While communication with all segments of the IR audience on this matter is important, perhaps the key person is the financial analyst, also called the _____—

To give a sense of an experienced, in-depth, and well-qualified management:

(a) The CEO should be present and give the principal talk—about prospects, style of management, management development programs, market position, and so on.

(b) The key executives should be introduced, and usually should make some short comments about their areas of responsibility.

(c) Perhaps the organizational structure and incentive system and the like should be discussed.

To provide an insight into the long-term prospects of the entity

(a) The system or method of strategic planning

(b) The short-term or annual plan process, and the related control system

(c) Some examples of long-range objectives that have been achieved (and perhaps some that were not)

(d) The long-range outlook for the industry or selected products or markets

(e) The status of market penetration or dominance for some key product

(f)Important research and development programs underway (whether specific quantified projections or plans should be divulged may depend on the individual circumstances)

To provide a broad financial picture, including the financial strength of the company

(a) Status of orders on hand

(b) Trend of sales, by product line

(c) Margins by product line, or organizational units, and trends thereof

d) Financial position through comments about a condensed balance sheet, with emphasis on key ratios or relationships

(e) The trend of long-term indebtedness, times debt service is covered, debt capacity, and so on

(f) The trend of cash flow by important segments: from operations, investing activities, and financing activities, and perhaps cash flow per share from operations

(g) Trends on equity and earnings: Growth in equity Equity relationships (ROE) Earnings per share Return on assets

(h) By simple explanation and illustration, any aspect of the financial statements that often causes confusion (inventory, valuation method, tax accruals, reserves, etc.)

(i) Perhaps some comparative ratios with industry or selected competitors

(j) Company post

chief marketing executive

probably should make a presentation that would describe and illustrate major new products, or major revenue procedures, and the sales prospects for the next year or two

Other executives, as appropriate, might discuss any timely topics, such as:

(a) Employee relations

b) Cost reduction programs

(c) Process improvements, including use of computers

(d) Information resource management

(e) Quality control changes

(f) Any major troublesome contracts or publicity items and the like.