A RECENT Business Week cover story focused on the malaise afflicting America’s blue chips as U.S. investors forsake them in favor of international and small-cap companies.
The article highlighted the fact that companies like General Electric, Home Depot, Walt Disney, Microsoft, Pfizer, Wal-Mart and Intel have seen their share prices languish despite them turning in strong profit performances.
Said the magazine: “What exasperates the leaders of these corporations is that it seems there’s little they can do about it. They’re delivering the earnings growth, but investors aren’t responding. At work are forces largely beyond their control.”
Those forces, the article said, are a shift from large-caps to smaller companies and competition from booming hedge funds and Exchange Traded Funds, which allow big pension funds and individual investors to diversify and seek higher returns abroad in ways that were previously impossible.
The example was provided of Fidelity’s flagship $50 billion Magellan fund, which recently dumped several U.S. blue chips and boosted its foreign holdings to 25%, up from 4% just a few months ago.
North American investors will not easily be lured back
I find the trend by U.S. investors to invest abroad most interesting. The Business Week article says that skeptics point out that “an overseas financial crisis could erupt at any time and send investors fleeing to the relative safety of the U.S. markets.”
It could, but don’t hold your breath. U.S. investors will not soon forget the big corporate scandals like Enron and WorldCom, which demonstrated that you don’t need to go overseas to put your money at risk from corporate fraud.
Furthermore, American institutional and retail investors who have taken their money abroad have probably been pleasantly surprised by what they’ve encountered. While there are undoubtedly countries with weak oversight and governance, many countries outside of the U.S. and Canada have moved to beef up their corporate governance and corporate reporting standards.
Look at a perceived backwater like South Africa, where companies are required not only to meet stringent financial and corporate governance reporting requirements, but also must report their social and environmental performance in accordance with the Global Reporting Initiative (GRI) guidelines.
At the same time, more and more countries from EU members to Australia are moving to adopt International Financial Reporting Standards, making it easier for investors to evaluate and compare companies in different countries outside of the U.S. Canadian companies will also move to the standard.
What’s more, you don’t pay as much for executive talent abroad as you do in North America. Investors continue to complain about excessive executive pay in the U.S., but have so far been powerless to do anything about it. By comparison, investors can get much more bang for their buck from a Swedish or Japanese CEO, for example.
And in many cases, international companies are much more open about their future objectives and strategies, and they are not afraid to benchmark their performance to their peers.
It is really quite easy to get information about foreign companies. Their IR departments are highly responsive and focused on keeping investors informed through effective websites and push technologies.
North American IROs lack mass communication expertise
In September 2004, I reported on the findings of a survey we conducted of investor relations websites around the world. I made the point in an article — a version of which ran in IR Magazine — that North American companies were falling behind in their online IR practices.
That message — which goes against the widely held belief that American companies report and communicate better than companies in other countries — was not well received by North American IROs. At least one other senior industry personality who quoted the study in a presentation to an audience of U.S. IR executives was shot down for daring to suggest that U.S. investor relations isn’t all its cracked up to be.
Fast forward to 2006 and the question now is whether American companies will be able to win back shareholders who have ventured abroad. I think they can, but it will take a concerted effort and companies will have to refocus their efforts on communicating effectively and not just complying with SEC requirements.
Looking at European companies’ online investor relations practices, American and Canadian companies have a lot of catching up to do. I figure that North American firms are behind by about two years, and falling farther behind all the time.
To compete for investors against the likes of European, Japanese and emerging markets companies, North America’s investor relations community will need to change in fundamental ways. They need to do this not just to re-engage investors in their own backyards, but to attract investors globally.
The first step, to my mind, is learning to communicate better, particularly on the Web, which is the most effective tool they have to reach a global investor audience.
There is currently a severe lack of online investor relations communication expertise at many companies. This is in large part because IR departments are focused on keeping a small group of executives and institutional investors happy rather than on communicating with mass audiences.
Furthermore, U.S. investor relations departments have lost out on several years of learning how to use the Web in their communications with investors. The common approach by almost three-quarters of them has been to completely outsource their investor relations websites. Many have not only outsourced the technology behind their sites, but they have offloaded the strategy that goes into an effective Web presence — a critical mistake.
Consequently, there is a dearth of expertise about online communications inside U.S. and many Canadian investor relations departments. And for the most part, North American IROs have shown little interest in learning how to improve or in adopting new technologies, including XBRL.
Vague signs that North American IROs are beginning to get it
I do sense, however, that things are changing. We have noticed, for instance, a sharp rise in interest from U.S. and Canadian companies in our benchmarking and best practices services for IR websites.
And both the National Investor Relations Institute in the United States and the Canadian Investor Relations Institute will feature sessions on online investor relations at their upcoming annual conferences. This comes after both groups had nothing on the topic at last year’s events.
But these are baby steps when what North American companies need are giant leaps.
Perhaps the real catalyst for change will come when CEOs and boards start asking tougher questions about the effectiveness of their companies’ IR function. And judging by the attention the issue is starting to get in the mainstream business media, that is happening already.