HBS Cases: Using Investor Relations Proactively

Investor relations has a delicate balancing act. It communicates with stakeholders, of course, but can also help employees take a step back and analyze their firm as outsiders do. Harvard Business School's Gregory S. Miller, Vincent Dessain, and Daniela Beyersdorfer explain where IR is going, with energy giants BP and Total leading the way. Key concepts include:
  • Good news for stockholders can be bad news for other stakeholders. IR should be consistent and proactive on all fronts.
  • Investors increasingly care about geopolitics, the environment, and social responsibility; financial communication will need to factor this in.
  • Develop IR in a way consistent with your firm's unique operating position.
  • Outside information is important, but the extent to which it should influence a firm's decision-making is an open question.
by Martha Lagace

How should a company deliver financial news—both good and bad—to a broad spectrum of stakeholders, including investors, customers, government, and environmentalists?

Energy giants Total and BP have learned best practices through trial and error, and are among the first European companies to build strong investor relations (IR) departments, according to HBS professor Gregory S. Miller. Two cases he recently coauthored describe how these different firms in the oil and gas industry—controversial of late for its mile-high profits—have carved a path as models in financial communication and IR.

"While the energy industry has been in the forefront of a demand for more information from a broad group of stakeholders, this demand is becoming more and more common across almost all firms. Thus, the oil companies are likely examples of what we will see in many other industries in the future," Miller says.

There is no blueprint for the right way to share information, he adds. A strong IR function is best developed in a way consistent with the firm's unique operating position. "What is really fascinating is that both BP and Total have been so successful with such different implementations."

In this e-mail interview Miller discusses lessons learned with colleagues Vincent Dessain (HBS MBA '87) and Daniela Beyersdorfer of the Paris-based HBS Europe Research Center. Dessain, executive director of the center, cowrote "Investor Relations at TOTAL" with Miller while Beyersdorfer, a research associate, coauthored the BP case, "IR at BP: Investor Relations and Information Reconnaissance." (Research associate Anders Sjöman was third author on both cases.)

In this interview, Miller, Dessain, and Beyersdorfer identify trends in financial communication, the importance of delivering a consistent message to different stakeholders, and the risks and rewards of introducing external financial information into a firm's planning and operations activities.

Martha Lagace: What important themes do the 2 cases raise about challenges and trends facing the management of financial communication?

Greg Miller: The French group Total and the British BP are both major players in the oil and gas industry, which is increasingly moving into the center of public interest due to its booming oil and gas prices and profits. In addition, this industry is inextricably linked to politics, economics, and ecology. Any bit of news, such as an oil tanker spill, a technical problem at a plant, or a political crisis in 1 of their sourcing countries, can send their share prices into a tailspin.

Even good news for stockholders can be a negative issue for other stakeholders. For example, pointing out the money saved by tough bargaining with a union could cause a real problem with employees. Announcing a dividend may lead to anger from employees who think it should have been a bonus or from environmentalists who think it should have gone into environmentally friendly upgrades. This partly explains, I believe, why they have been among the first European companies to build strong IR departments. Now they can use IR to explain their business to stockholders as well as communicate to their many other stakeholders.

Beyond this shared incentive for developing a strong IR group, the cases document how both companies share many best practices in IR principles, such as the goal of getting managers directly in contact with investors, the need for consistency in reporting over time, and the desire to be proactive in anticipating questions. However, the different ways in which these principles are implemented shows the need to develop IR that is consistent with each firm's unique operating position.

“Investors trying to keep on top of things in a more interlinked environment will be asking for more, and more targeted, communication." — Greg Miller

For example, both companies know that their investors are very concerned about the large amount of cash generated in oil and gas, but each has committed to explaining its use in a different way. While BP is very willing to state they will have an ongoing policy of paying large amounts of cash to shareholders, Total focuses on explaining how their cash use is prudent. Similarly, BP has a large base of retail investors but in many ways it treats them as just slightly different versions of its institutional investors. That is, BP assumes the objective is still primarily a good return. Total approaches retail investors much more as being like customers or employees of the company—even using a computer system to track preferences.

They have both received awards by IR magazine for good investor relations. So in some ways these cases show that there may be universal principles to communication, but the tailoring in implementation is likely to be very different across situations.

Vincent Dessain: There are differences between Total and BP due to their origin and size, but they both face the challenge of building long-term relationships with investors in an industry characterized by fluctuations in prices and the geopolitical and macroeconomic environment in general.

Total, for example, learned the hard way how important it was to be viewed as a stable firm when its shares dropped a total of 22 percent after it acquired the Belgian group PetroFina in 1999, a move that had not been explained to the financial markets nor found consistent with the firm's previous objectives. Total also learned that it had to be prepared to communicate about accidents. Its slow response when the oil tanker Erika split in 2 and sank in 1999, causing extensive environmental damage to the French Atlantic coastline, continues to tarnish Total's image in its home market today. An explosion at 1 of their plants in the south of France in 2001, addressed immediately—with Total's chairman going to the site to show support and take responsibility—did not have the same effect.

Daniela Beyersdorfer: In addition, both companies had to learn how to cope with the increasing interest in their business—not only by their traditional shareholders but also by new classes of share- and stakeholders. Total, for example, is followed closely by its investors, employees, customers, and partners, but also by environmentalists, the government, and the general public in France. This made it interesting to investigate in a European context: European companies are traditionally more closely scrutinized by public opinion, and investors need more explanations and attention, especially as share ownership is still less common in Europe than in the United States.

Miller: As business becomes more global, much of this learning will be increasingly valid for companies in any kind of industry. Managers have to explain their increasingly complex firms to different types of external stakeholders. Investors trying to keep on top of things in a more interlinked environment will be asking for more, and more targeted, financial communication. They are gradually becoming more attentive to companies that position themselves as ecological and socially responsible players, and financial communication will have to factor this in. The BP case also illustrates that investor relations is increasingly looking for a more strategic role to play within an organization, trying to take its work to a new level.

Q: "Investor Relations at TOTAL" is set in a particular sociopolitical culture in France, and it shows how, in autumn 2005, the company had to weight its decisions in a controversy surrounding a nearly 6 billion euro profit. How did the company explain the profit to investors, customers, the public, and government? How much was the reaction particularly due to the French context, and how similar or different might the reaction have been elsewhere?

Dessain: By 2005, Total had become the world's fourth-largest oil and gas company. For the first half of 2005 it showed a profit of €5.8 billion, but also planned to save money to create buffers for future downturns. Communicating the financial results in such a context is a very difficult balance to strike for any company. During our interviews for the case, Jerome Schmitt, Total's head of IR, told us: "We want to be confident with analysts and the financial community and say, 'Look how well we've done,' … but at the same time we have to be modest and show them and others that we nevertheless have to prepare for the future." On top of that, the expectations of their audience diverge widely. There is a real tension between, for example, the investment analysts who want the company to talk about dividend policy, share buybacks, and restructuring, and the employees and unions that want to hear about investments and hiring more people.

Miller: This is a tricky communication exercise no matter what the context is. But it is true that Total, for instance, is perceived as a truly French company in its home market, even though in 2004, 95 percent of its profit origins, 77 percent of its shareholder base, and 66 percent of its employees were based outside France. Trade unions and left-wing politicians were especially critical, as they were not used to seeing companies achieve €1 billion profit a month and announcing cost-cutting measures. The debate was fueled by the French finance minister announcing in September 2005 that France might adopt a windfall tax on the "exceptional" profits of oil companies, calling on them to "behave as citizen businesses and make proposals, such as lowering prices at the gas station pump."

There may have been less debate around this in other countries at that particular time, and investors elsewhere may more openly enjoy companies being profitable, but there have been calls for windfall taxes on exceptional profits of oil companies elsewhere, in the United Kingdom or the United States, for instance; especially when their profits were viewed as going to shareholders rather than toward investments. You could argue that these issues are more of a concern for customers and the public relations department of a company, but in fact it affects the investor relations audience as well, especially when it comes to retail investors.

Q: What best practices can other companies learn from Total and its experiences in financial communication?

Miller: Total applies 3 principles to its financial communication. First, it focuses on the long-term process and building its reputation over time. Second, it is consistent in always delivering the same message. Third, it distinguishes between the company's performance and the impact of a changed environment by highlighting the indicators that are under its control (such as costs, efficiency, new technologies, etc.) and those that are not, like a hurricane, for instance. To deliver financial communication it relies on classic tools such as the annual report; quarterly result publications; and conference calls, investor road shows, and the shareholders' annual general meeting, which includes even its small (maximum 100 shares) shareholders. In addition, press releases, frequent conversations with investors, public awareness market surveys, and so on are part of its day-to-day communication process, and are an effective way to stay in touch with its investor base.

Dessain: Total's motto is to deliver "only 1 message" with different emphasis for the different groups of its broadening investor and stakeholder base. This sounds obvious but it's only possible if one intimately knows and understands the different constituencies. The bulk of Total's IR work still goes into communication with institutional shareholders and analysts. When meeting with them at the road shows, for example, Total focuses on its long-term plans, being honest, and never disappointing them. To address its growing retail investor base, most of whom are French, Total uses techniques from consumer services (such as a CRM system) and multiplies contacts through a shareholder newsletter, a toll-free number, events, and training sessions.

Q: Total is French yet part of a highly visible industry that has reaped very high profits in recent years. How can 1 company manage its own financial communication strategy yet also navigate expectations and assumptions surrounding the industry as a whole?

Dessain: In an industry like that, everybody wants to know what you are going to do with all your money, so you better prepare for questions. Total's investor relations, for example, details its cash allocation policy to the public, going over investment projects, dividends, and share buybacks, dwelling more on this or that depending on the audience. For road show meetings, the IR group prepares comprehensive descriptions of selected investments and projects to show how difficult, time-consuming, and expensive the preparations for its future are. To justify buybacks and savings, the IR team makes sure all communication, even in good times, always contains some caution for the things that may go wrong tomorrow.

Miller: Moreover, there is an increasing demand from the public for any company to show awareness of environmental issues such as global warming and limited natural resources, as well as geopolitical instability issues in certain regions of the world. This is nothing new for the oil and gas players. They have been exposed to these problems for quite some time due to their business. Total's experience in the kickoff meeting of their 2005 fall road show demonstrated how important these issues had become when the first question from financial analysts dealt not with the company financials but its sustainable development activities.

“Total's motto is to deliver 'only 1 message' with different emphasis for the different groups of its broadening investor and stakeholder base." — Vincent Dessain

Other signs included the growing number of analysts dedicated to ethical issues, ethical funds, and specific inquiries from large investors. We heard the story of a large European investment fund that told Total's IR organization that it may drop the stock unless the company had a good explanation of why it was in Myanmar (also known as Burma) and how this was in accordance with its ethical chart.

Total subsequently adapted its IR organization to include specialists who address these demands and communicate on commitments such as investments in biofuels or renewable solar energy. And this is not only targeted to ethical funds; it also allows a retail shareholder, for example, to go to a dinner saying he is proud to be an investor in Total.

Q: In the BP case, Fergus MacLeod, the investor relations director, weighed the advantages and disadvantages of incorporating information from the financial markets into the firm's planning and operations activities. What were his goals, and what sorts of obstacles did he face?

Miller: I heard from a couple of different IR professionals that BP used its IR function to bring information into the company—which is still a relatively rare exercise—rather than only issuing information to the analyst community. My immediate thought was that this practice made a lot of sense but also represents serious challenges in balancing information.

Investors have a broad view of the market and may be less optimistically biased than internal management, but on the other hand, they may not have the depth of knowledge to understand the long-term view. So MacLeod's goal was clear: get IR-generated information into use in the company. His challenges were clear also: How could he convince managers that this was useful information, and how could he make sure the company did not overrespond? It may be simple to lay it out this way, but when you think of all the people involved inside and outside the company and the massive amount of information, you can see this is a very formidable task.

Beyond meeting the objective of providing better information for decision-making, this could also open a completely new perspective and prestige for the IR function. It would allow the IR people to become much more a part of the management team, providing them with clear reasons to be involved in key decisions. It also could provide a more promising and challenging career track for talented people in IR, as it would allow them to develop and hone management skills beyond their current communication/analysis role. My second-year MBA course, Accounting and Financial Communication, ends with looking at IR strategies, and I was searching for a suitable example to round it off and help students see the potential for even more growth. This BP situation seemed like a great opportunity to look at the potential next step in the evolution of IR. I asked the School's Europe Research Center, which had already cooperated with me on the Total case, if we could take a closer look at BP.

Beyersdorfer: During the case interviews, MacLeod, a former financial analyst, presented his project to us. He believed there was huge value in the information that investor relations captured during its daily interactions with shareholders and market analysts.

As a first step, he put a formalized process in place to collect and present it in a more systematic way. The team, for example, keeps a record of investor feedback and questions, and closely examines competitors' financial communication. A so-called Broker Book compiles the top 10 analysts' views on BP's performance and targets, as well as the industry overall, on a quarterly basis. MacLeod now wanted to make sure this information was not only used in IR to better understand investor expectations and tailor financial communication to the group but also in other departments. And not just in obvious targets such as press relations or communications.

“[W]hile bringing in external information may look like an evident idea to outsiders, it starts to develop much more complex implications once you dive into the reality of an organization." —Daniela Beyersdorfer

When market analysts believed, for example, that BP's mature assets' value would decline quicker than its own calculations showed, or that the industry's cost inflation would be higher than BP expected it to become, this should, in his mind, feed management discussions.

Going forward, MacLeod imagined this information could also influence BP's strategic decisions. When we talked to his BP colleagues, we clearly saw a consensus on how useful the "outside" voice was for communication purposes. Yet, the views diverged widely on whether this information should influence other areas. While some agreed that analysts, for instance, could have a broader view of the industry trends, others questioned their assumptions. Some were hesitant to see external information in general as a valid source of information, saying that only BP itself had access to the full internal information.

Q: What does the BP case show managers elsewhere about evaluating different types of external information and possibly having that information influence the firm's operational and planning activities?

Beyersdorfer: It was interesting to see that while bringing in external information may look like an evident idea to outsiders, it starts to develop much more complex implications once you dive into the reality of an organization. Adding to that, new initiatives almost always meet with some form of resistance, which makes them harder to evaluate.

What BP's IR team already managed to achieve was to raise internal awareness for the usefulness of outside views that allow you to see things from another angle and in a bigger context. Understanding your shareholders' expectations enables you to improve your financial and any other communications. Following competitors allows you to position yourself against them. Observing analyst valuations and forecasts raises red flags internally when the market has different views on your company's performance and strategies; this allows you to react—either by providing the market with more information or by reviewing your own assumptions.

One of the managers acknowledged, for example, that doubts voiced by an outsider could help people close to projects—who are often conditioned to be optimistic and think in terms of being successful—to take a step back and engage in a more open internal dialogue.

Miller: Overall, I found that BP's IR team does a great job in bringing back and analyzing all this information. Yet, the strong internal debate also showed us that this was not valued equally within the company. BP's operations people, for example, still run their operations very independently from outside views, arguing that they are the closest to their business and the best judges. In short- and medium-term planning, and even more so long term, one could see more room for the use of this information once it has been carefully analyzed, as it can give clues about what to focus on.

What is clear is that external information will never be the only driver for the business of a company. "We can't outsource our management decisions," as someone said. BP, for example, expanded into the Russian market in 2003 even though it knew that the financial markets would disapprove. On the other hand, a decision to sell BP's petrochemical business at some stage was said to have been taken more easily knowing investors had been supportive of such a divestiture for a long time. So for the question of where exactly to set the limits in the internal use of external information—the jury is still out.

Contact the HBS Europe Research Center.

About the Author

Martha Lagace is senior editor of Working Knowledge.