Advancing the Role of

Investor Relations

William F. Mahoney
Bovespa Stock Exchange
November 28, 2007
 2 Basic Functions of IR

• Service
• Key Contributor to Intrinsic Value
Most Companies Focus on
Service Function
• Makes it Similar to HR, PR, Accounting.
• Enlightened Managements Understand
Role of Investor Relations in Growing
Shareholder Value.
• Ideal: Combines Service Function and
Role in Contributing to Intrinsic Value.
 Main Elements of Service
Function
• Combines Required Disclosure with
Proactive Communications.
• Required Disclosure: Filings,
Disclosure of Material
Developments.
• What is “Material?”
 Major Activities of IR Service
Function
• Participate in Preparing Disclosure
Materials and Filings.
• Prepare News Releases: Material and
Non-material.
• Participate in Preparing Annual Report,
Fact Books and other materials.
• Answer Requests for Information.
• Provide Market Information to
Management and Board.
• Maintain IR Website.
Proactive IR Within the Service
Function
• Arrange Meetings with Analysts and
Investors.
• Issue Releases/other Communications
• Upgrade Website.
• Prepare Presentations for Management.
• Give the Presentations/Do the Meetings
Yourself.
• Advise Management/Board on
Analyst/Investor Attitudes.
 Key IR Roles in Value
Creation
• (Leading the Value Creation Team.)
• Premise: An Effective Investor
Relations Program Contributes __% to
the Company’s Intrinsic Value.
• The Percentage Varies by Company.
• Determining Factors
Commitment to IR by Management.
Effectiveness of IR Department.
Nature and Size of Opportunity.
Vital IR Roles in Value Creation
Process
• 1. To Help Management Understand
the Investment Process and Investor
Behavior.
• Be The Resident Expert in the
Company on the Equity Market.
--Macro Factors Driving the Market.
--Industry Factors.
--Company Factors.
 What This Requires

• Deep Understanding of the

Investment Process.
• Expertise in the Investing Style of
Each Shareholder, Prospect and
Analyst.
• Getting Right Down to the Details of
Their Models.
Vital Roles in Value Creation
Process
• 2. Identify Shareholders and
Analyze Shareholder Base.
• Is Basis to Understand Why Each is
a Shareholder.
• Helps Determine Information
Important to Each.
• Provides Basic to Compare Drivers
of Their Model with Drivers of
Company’s Value.
 Vital Roles in The Value
Creation Process
• (2 Continued)
• Enables Company to Predict Investors
Who Will Become Shareholders.
• Is Basic to Know When Shareholders
Will Add to Positions or Sell Shares.
• Enables Management to Better
Understand the Strategies, Initiatives
and Value Drivers the Market Will
Support and Not Support.
 Vital Roles in The Value
Creation Process

• 3. Identify and Provide the

Information to the Market that
Determines the Company’s Stock
Value.
 Vital Roles in The Value
Creation Process
• 4. Help Management Understand How
the Market Currently is Valuing the
Company.

• This is the Basis for the Current Stock

Price Indicating Whether the Company is
Under, Over, or Fairly Valued.
• Plus the reasons for its Valuation.
 Vital Roles in The Value
Creation Process
• (4. Continued)
• Help Management Identify the Drivers of
Company’s Value.
• Compare Management Views on Value Drivers
with those of Investors.
• Goal is to have Management and Market Agree
on Value Drivers as Basis to Track Them in the
Future.
• Educates Investors on Management Views of
Value Drivers and Educates Management on
Investors’ View of Value Drivers.
 Vital Roles in The Value
Creation Process

• 5. Serve as Key Participant in

Determining Company’s Value.
• IROs have an Opportunity to Lead
the Analysis and Calculation of the
Company’s Intrinsic Value.
 What Is Intrinsic Value?

• The Calculated Worth of ALL the

Company’s Assets.
• Incorporates Physical and Intangible
Assets:
--More Effort Is Underway to Put
Values on Intangible Assets.
--Most Investors Seek an
Economic Number (Cash Flow, not
Earnings).
 Intrinsic Value Is Based on
Calculating a Value For:
• Physical Assets: Plant, Property,
Equipment.
• Talents of Management and Employees.
• Scientific/Technology Capabilities.
• Patents and Licenses.
• Product and Services Competitive
Positions.
• New Products and Products in Pipeline.
 Intrinsic Value Is Based on
Calculating A Value For:
• (Continued)
• Plant and Administrative
Productivity/Efficiencies.
• Partnerships.
• Levels of Creativity/Leadership.
• Social/Environmental Citizenship.
 Intrinsic Value Is Based on
Calculating a Value For:

• (Continued)
• Financial Assets and Capabilities:
--Revenue Generation.
--Cash Flow Generation.
--Profit Margins.
--Cash Available to Reinvest.
 Subtracting from Value

• Lawsuits.
• Regulatory Issues.
• Environmental/Social Issues.
• Declining Market Positions.
• Obsolescence.
• Fading Markets.
• Rising/New Competition.
 Can Executives, Investors,
Analysts Put a Value on a
Firm?
• Yes,
• But It Never Is Precise.
• That’s Why There Is a Market:
Constantly Changing, Highly
Complex
 Study: Half the Companies
are Over and Half Are Under
Valued
• Lesson for Companies and IR Officers
• >Understand Where Your Company Stands.
>Compare Current Price with Your Calculation
of Intrinsic Value.
That’s What the Market Does.
• Smart Investors Try to Determine the
Inflection Points, Notably When the Price is
Starting to Move Up Toward Intrinsic Value or
Down from Intrinsic Value.
 Earnings Versus Cash Flow

• Economic Measures Widely Recognized as

True Measure of Value.
• Cash Flow Is the Basic Economic Measure.
• Earnings Have Grown as Most Popular of
Market.
--Earnings Promote Shorter Focus.
--Market Driven Today by Short-term Action.
--Pushes Prices Faster.
--Serves Traders Well.
--Frustrates Long-term Investors.
 Is All This a Ridiculous
Exercise in Futility?
• Arguments to Suggest Effort Is Futile:
-- Market Isn’t Focused on Intrinsic Value.
-- Market Is Driven by Change, Occurring
Daily/Hourly.
-- Market Mostly Uses Imperfect Metrics.
-- Market Has Increasingly Become
Short-term Driven.
-- Intrinsic Value Cannot Be Calculated
Precisely.
 Yes, It Is Worth the Effort

• Focuses Management and Board on

Creating Value.
• Long-term Value Creation Must Be
Management Focus
• Gives IR Function a Solid Basis to
Be Effective.
Factors Determining Intrinsic Value
Are Translated into Numbers
• Numbers Are Given to Each Contributor to Value.
• Appraisal Techniques Are Used to Arrive at
Numbers.
• Numbers Are Converted to Ability to Generate
Cash Flow.
• Cash Flow Forms Basis to Calculate Intrinsic
Value.
• Process Hasn’t Reached That Level of
Sophistication Yet.
• Cash Flow Becomes Basis to Determine if
Market is Under, Fairly or Over Valuing the Stock
and Company.
 What to Do, As a Company
and IRO
• Focus Information/Communication on
Drivers of Value.
• Also Provide the Other Information Most
Important to Shareholders/Analysts.
• Advise/Prepare Management for What Is
Likely to Happen to Stock Price.
--Higher if Market Perceives Stock to be
Under Priced.
--Lower if Market Perceives Stock to be
Over Priced.
 Management Must Be
Working Always to Create
More Value

• Whether Stock Currently Is Seen

as Under or Over Valued.
• For Sure When Stock Is Seen as
Fairly Valued.
 Analysis Of the Role of IR
Combines Theoretical and
Real
• At Any Time, Big Macro Factors Can
Drive or Overwhelm the Market
• Market/Investors Are a Big, Diverse
and Complex Group.
• It is Impossible to Understand and
Predict All Their Moves
 How Much Does IR
Contribute to Value?

• You Can Put in the Number,

• Based on the Role, Quality of Your
IR Program, Level of Management
Support and Size of the
Opportunity.
 IR Role in a Crisis

• Investment Community Is Critical

Audience.
• Stock Price Can Crash, or Rise.
• IRO Is Best Qualified to
Gather/Assess Market Attitude.
• IRO Should Be Able to Influence
Management on How Best to
Behave.
 IR Role in a Crisis
• IRO Is Uniquely Qualified to Know How to Act
in Company’s Best Interests.
--Is Expert on Company.
--Knows Various “Publics” Well.
• IRO Is Qualified to Assess Situation
Accurately.
• IRO Is Qualified to Recommend Best Actions
and Determine Information to Provide.
• IRO Is Qualified to Project Likely Outcome.
 IR Role in a Crisis

• Key Activities:
--Make Sure Focus Is on the Facts. No
Hype.
--Advise Management on Vital
Information to Provide.
--Assess Attitudes of Investors and
Analysts.
--Serve as Information Conduit to
Investment Market.