When companies are surprised by activist shareholders it’s often because management and the board don’t have a good idea of what investors are thinking and what their hot-buttons issues are. Today’s CEOs need a new breed of skilled investor relations officer (IRO) to bridge the gap. This person must be a proactive leader, building constructive relationships throughout the shareholder base to help the company mitigate various risks. CEOs need to give the IRO a clear mandate to quarterback investor dialogue and get buy-in around all of the elements of management’s long-term strategy. The IRO must be part of a unified board and C-suite investor planning group, and their responsibilities should include building and sustaining credibility with long-term investors, and providing useful information on a timely basis.
A monumental shift in today’s equity markets has redefined the relationship between companies and their investors. Today’s CEOs are navigating a new world in which activist shareholders; index funds like BlackRock, State Street, and Vanguard; and long-only investors are increasingly willing to weigh in on company strategy, ESG, executive pay, and board composition.
With investor activism increasing and world markets gripped by uncertainty, CEOs need a new breed of skilled investor relations officer (IRO) to bridge the gap. CEOs must empower the IRO to be a proactive leader, building constructive relationships throughout the shareholder base to help the company mitigate various risks. They need to give the IRO a clear mandate to quarterback investor dialogue and get buy-in around all of the elements of management’s long-term strategy. The IRO must be part of a unified board and C-suite investor planning group, and their responsibilities should include building and sustaining credibility with long-term investors, and providing useful information on a timely basis.
More specifically, the IRO job needs to change in four major ways:
1. Articulating strategy: Just as the CFO’s role over the last decade has shifted heavily to questions of business strategy and how it is aligned with capital allocation, today’s IRO must crisply articulate this alignment to investors with a clear and cogent rationale for long-term value creation. The new IRO role needs to shift from simply explaining corporate strategy and practices to laying out why the strategy is best positioned to unlock shareholder value and therefore attract and keep long-term investors. In other words, the role has to add more value to the corporation.
2. Intelligence gathering: At the same time, the role needs to shift away from one where the IRO merely keeps track of what investors are saying. Instead, the new IRO must become an intelligence agent who has identified the hot-button issues investors care about. The IRO should understand how investors utilize their technologies and data-gathering activities to impact a company’s strategy, capital allocation, incentive systems, and other issues that investors think are important to the functioning of the board.
3. Cultivating the right investors: In a world where every company has to work hard to raise investor capital, the new IRO must master how these competitive forces work and take the offensive, foretelling the decision-making trends among the buy-side analysts. The best IROs will know how to find the right investors for the company and proactively cultivate them and try to get them on board. Because CEOs today need to spend an increasing amount of their time with their external stakeholders, a good IRO can take some of the pressure off of a CEO by finding and cultivating the right investors.
4. Sounding the alarm: The new role will require not only financial savvy, but also the ability to truly understand how today’s sophisticated investors operate. IROs must be able to master analytical models as well as white papers written by activists that argue for an alternative business portfolio scenario for the company. In changing capital markets, it’s critical that the IRO stays on top of capital and talent allocation and how it meshes with the company’s long-term strategy. The role should function as an early warning radar system when trouble is brewing.
Which skills define a successful IRO?
Today’s breed of IRO should have a deep understanding of their company’s strategy, compensation policies, board composition and diversity and environmental goals. At the same time, they have to be a relationship builder, orchestrating the creation of teams, and bringing the right decision-makers together to provide a consistent message, whether dealing with a passive investor who has questions about the board’s process or an activist who is mining for data. This person must be a high-EQ team leader with ready access to the C-suite and even to the board. Think of the IRO as someone who knows your investor base, can skillfully coordinate how the board and the C-suite interacts with different investor classes while keeping everyone on message.
The type of super IRO we’ve described here is not easy to find, because many young, up-and-coming managers look at it as a dead-end job. Traditionally the role had been filled by people with media relations skills, but over the past five or 10 years the job has become more financially demanding. Because today’s IROs spend a lot of time on investor calls answering complex financial modeling questions, that position now tends to be filled by people who have worked as Wall Street analysts. But that’s just table stakes.
The New vs. Traditional IRO
In a new world of activist investors are increasingly willing to weigh in on company strategy, today’s IRO must be a more proactive leader, building constructive relationships throughout the shareholder base to help the company mitigate various risks.
| Traditional IRO | New IRO |
| Manages sell-side analysts and helps shape their opinions about company strategy | Takes an active role in articulating company strategy and purpose to all classes of investors |
| Communicates company results and documents to investors | Communicates company strategy and why it is best suited to enhance long-term value creation and competitive advantage |
| Has limited interaction with the board | Articulates investor landscape and what will drive value over the long term to the board |
| Reacts to activist inquiries by preparing financials, proxy materials, etc. | Takes initiative to think like an activist, acting as an early warning system before an activist arrives |
| Reports to CFO and focuses mostly on financials | Has dotted-line reporting to all C-suite members and is educated on various topics, including operations, compensation, ESG, capital allocation, and talent |
| © HBR.org |
The most forward-looking companies work hard to make sure the IRO job provides an attractive career path by exposing the person in it to different functions in the organization. One idea is to have line managers rotate into the job every two or three years. Not only would the line manager learn about the company from an investing and risk prospective, their business experience would bring value to the role.
In the long run, the hope is that IROs will not only be better at their jobs, but one day they might have the skills to jump from the IRO position to become the head of a business unit or even the company’s CFO. “The key is to provide a career path to keep the IRO engaged and to look at the job as a steppingstone as opposed to a tombstone,” one Fortune 100 CFO told us. “If you make the IRO role one where there is opportunity to advance to other great jobs in the organization, you’ll make the seat more valuable and more interesting to the best talent out there.” This is already starting to happen. We know one private company in India, where the CEO has made his son the IRO in preparation for the top job.
Just as the relationship between companies and investors has changed, the role of the IRO must, by necessity, change with it. IROs are becoming indispensable assets for the executive team and for the board. Those who continue to find ways to add value — particularly in an uncertain world — will blaze their own path toward achieving success for their companies and themselves.