U.S. blue chips ill-equipped
to win back investors from foreign firms
By Dominic Jones, IR Web Report
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.
Related:
Read our