Session 3 - Williams & Ryan - Investor relations

Question 1

Give a definition of the Investor relations (IR) function

Answer 1

It is defined as a strategic marketing responsibility using disciplines of finance, communication and marketing to manage the content and flow of company information to constituencies to maximise relative valuation. The IR function enables managers to signal commitment to investors, to coordinate disclosure of data to investors and rationalise the management of shareholders. Some of the IR policies may be misleading and unethical.

Question 2

Name the characteristics of “information”

Answer 2

• Some information is legally required to be disclosed to public, while other information ca be released voluntarily
• Any type of required information follows the standard of materiality, meaning that, if omitted, the information would have strong likelihood of altering the total mix of information available to investors
• Managers should use their discretion in determining materiality

Question 3

Marcoux (2003) explains that because shareholders are owed certain duties a beneficiaries, they embedded 2 vulnerabilities. Name them

Answer 3

1. Control vulnerability : beneficiaries give control over their assets to other parties
2. Information vulnerability : The fiduciary has access to beneficiary information

Question 4

Managing the flow of information - Name the 3 ethical dilemma

Answer 4

1. Analyst’s equity stakes in the companies they cover
2. Inconsistent and selective research
3. Investor class discrimination

Question 5

Managing the flow of information - Name 3 unethical flow managing

Answer 5

1. Some IR officers provide information access to those who issue favorable reports
2. Some IR officers allow private meeting with certain investors
3. Many IR officers use tools to track institutional investor activity, potentially violating privacy

Question 6

Favorable analyst treatment - Name one technique used to favour analysts

Answer 6

• Companies provided sell-side analysts with important information about their stocks in hopes of gaining favorable recommendations or preferred pricing
• Sell-side analysts began to use unsupported buy-recommendation to gain access to management and their information network. Some managers were complicit
• Those managers may clearly violate fiduciary duties of loyalty, care by choosing what information to disclose and to whom…

Question 7

Give a definition for “private meetings”

Answer 7

Buy-side analysts and large favoured institutional investors by-pass sell-side analysts and meet directly with management. Private meetings can be seen as a new form of governance and shareholders activism. They may also constitute dissemination of public information to private audiences, violating business ethics and securities laws

Question 8

What is “investor surveillance and targeting”

Answer 8

A large number of companies use cookies or stock surveillance vendors that record individual trades to infringe on the anonymity of investors and track their activities. Large institutional investors however placed a premium on the secrecy of their trades. This tracking raises ethical questions about shareholders privacy.

Question 9

Managing the content of information - Give an explanation of “Entanglement”

Answer 9

Companies reviewed or outright edited the content of analysts’ research report but did not reveal their role publicly. After SOX (2002), independent research had begun to grow but entanglement is still rife. Companies pay for analysts research and justify this by disclosing the compensation. Lack of credibility !

Question 10

Managing the content of information - Give an explanation of “Issuing selective disclosure”

Answer 10

The practice involves issuing forward-looking or material information in oral statements or in handouts to analysts, while excluding the same information in press releases. This is a discriminatory investor treatment, which is unethical according to fiduciary standards.

Question 11

Transparency and the right to know - Explain “Transparency” regarding disclosure

Answer 11

Transparency is about more than a company’s willingness to share information, it is also about precise content. Transparency means a firms’ disclosure of relevant, timely and reliable information.

Question 12

Transparency and the right to know - Explain the problems regarding “Transparency”

Answer 12

• Companies have an obligation to share the same content with classes of existing shareholders. The quality of that information is still a murky area. Many have criticised companies’ social disclosures and transparency initiatives as nothing more than selective disclosure made with only positive information and only when firms are hoping to defuse threats to their legitimacy.

Question 13

Transparency and the right to know - Give the problems that can emerge about transparency of irrelevant information

Answer 13

1. Greater public and regulatory scrutiny
2. Less management latitude
3. Focus on short-term results, which is problematic for environment solutions that require long-term investments

Question 14

Transparency and the right to know - Give a pro argument that can emerge when withholding relevant information from shareholders

Answer 14

It can be that withholding relevant information may be in the best interest of shareholders and the firm, provided it is done equally among all classes. Managers and IR officers should abide by the basic moral intuition that one has a prima duty to avoid doing harm and exercise car and to make reasonable efforts to that end.