Role of CFOS
Investor relations (IR) has traditionally been a role outside the perimeter of responsibilities of the chief financial officer (CFO). But this appears to have changed, with the CFO doubling up as an IR officer in many cases.
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Investor relations: whose job is it?
This responsibility is among others piled on CFOs in their ever-evolving role,
LYNETTE KHOO
30 March 2012
Investor relations (IR) has traditionally been a role outside the perimeter of responsibilities of the chief financial officer (CFO). But this appears to have changed, with the CFO doubling up as an IR officer in many cases.
Whether this is a desirable trend remains debatable. Depending on the set-up of an organisation, it tends to be more pronounced in smaller companies that may not have sufficient budget for a designated IR department or to outsource that function.
Ong Joo Sun, former financial controller of BP Asia Pacific and current finance director of Nanyang Inc, notes that CFOs should stay away from IR given the competing demand for time, resources and a potential compromise of independence.
‘Investor relations is about attracting investors and projecting a certain message across to the investment community,’ says Mr Ong, an associate chartered management accountant, accredited by Chartered Institute of Management Accountants (CIMA).
There is risk the CFO could be tempted to present a view that is more optimistic than actual business realities, he adds.
But in some smaller companies, the CFOs may be taking on the IR role on an ad-hoc basis for the purpose of cost-saving, whenever there is a major corporate action such as mergers and acquisitions.
Exercising prudence
‘In such a situation, the CFO has to be careful in not presenting information too bullishly and bear in mind the code of ethics in disseminating information for a listed company,’ Mr Ong says.
He believes it is better for the IR and finance function to be separate departments and having the IR department to work closely with the CFO, who is able to provide financial data at the back of his palm.
In a recent report in The Business Times, the writer Ernst & Young head of assurance Mak Keat Meng noted that CFOs not only have to manage a portfolio of investments that are diverse in risk and return profiles, time horizons and characteristics, they now have to be able to ‘distil this complex, and sometimes contradictory, information into a clear and coherent narrative for investors’.
A recent survey by Ernst & Young (E&Y) interviewed over 750 CFOs globally and found that few CFOs consider investor communications as a top priority.
Many CFOs interviewed in this report titled, ‘A tale of two markets - Telling the story of investment across developed and rapid-growth markets’, ranked investor relations the lowest in priority among various investment strategies.
In that same report, CFOs indicated that investor communications was one of their greatest challenges. In fact, less than half of them believe their relationship with investors to be good or excellent.
But Mr Mak notes that whether or not CFOs are prepared to take on the role of an investor relations officer, they are already required to play an important role to build and retain investor trust in the company.
‘As the ‘conscience of the organisation, armed with a unique overview of the company and their fact-based training, CFOs are increasingly sought by investors for answers,’ Mr Mak says.
He notes that CFOs interviewed in the E&Y survey find investor relations to be most challenging among other key roles due to their sense of inadequacy in communication skills required for the role.
The expanded role to be strategic leaders and effective communicators may cause CFOs, who are not trained in the soft skills of communication and presentation, to find investor relations an added burden, Mr Mak says.
He notes that CFOs have to play a balancing act between meeting investors’ demand for insights and guarding against the risk of disclosing competitive information or making a profit forecast statement.
No one-size fits all
According to Mr Mak, many larger listed companies have a formalised investor relations (IR) department. These IR departments specialise in handling queries from investors and their role includes communicating the financial position and company strategy. In so doing, they integrate the functions of finance, communication and compliance.
With the IR officer providing an advisory role to the CFO and CEO on communication and compliance matters, companies with formalised IR departments tend to do better in terms of investor communication and management, he says.
Ryan Siek, CFO of China Minzhong, notes that whether a CFO should take up the role of investor relations really depends on the set-up of individual companies.
‘The investment community requires a clear window into the financial performance and affairs of a company before they would consider investing in them,’ he says. ‘Typically, the best person to communicate such issues to the investors are the CFOs themselves, as they are typically part of the senior management and would be better able to understand the informational needs of the investment community.’
Even in bigger organisations where there is a separate investor relations department, investors still want to be able to reach the person in the organisation who has all the corporate and financial information. ‘Again, this person is usually the CFO,’ he says.
China Minzhong used to engage an investor relations firm before engaging a full-time in-house investor relations manager.
Another listed company, BH Global, has an IR firm to assist in investor relations activities. Its CFO Keegan Chua notes that having a separate department to execute investor relations strategies or having the function outsourced will greatly reduce the burden on the chief executive officer and the CFO.
Koh Choon Kong, CFO of EMS Energy, notes that the CFO has to strike a balance and ensure that investor relations work does not consume all their time and energy.
While a company may have other key management personnel who can share the strategies and plans of the company effectively to shareholders and investors, investors typically want to hear from the chairman and CEO who run the business on their plans and the CFO on how the numbers will play out, he says.
Mr Koh, who has been the key spokesman for past companies like Fuxing China and China Sunsine where he was CFO, adds that he feels ‘there will be a dilution in the impact to investors if they were to hear the head of investor relations share the company’s strategic plans compared to hearing from the CFO on the same strategic plans’.
‘There are a lot of operational issues, broad business plans that are useful for investors to understand the challenges facing the company, and the CFO is in a good position to share such company-specific information and market knowledge,’ Mr Koh says. ‘I don’t suppose investor relations will put the CFO in any compromising situations. Whatever is public can be shared. However, CFOs must be careful not to provide non-public information.’
Terence Ng, managing partner at Kreab Gavin Anderson in Singapore, believes that in practice, companies cannot fully outsource their IR function without an internal IR support.
‘For IR to be effective, you have to have insights into the company’s strategies and financial performance,’ he says. ‘You need someone inside whether it is the CFO or investor relations manager to work with the agency.’
But without designated IR personnel in the company, some CFOs in small companies could be spending some 30-40 per cent of their time in investor relations, which is a ‘major time commitment’, Mr Ng observes.
‘Likewise, the external investor relations consultant plays a complementary role in supplementing the company’s outreach to shareholders and other stakeholders,’ she says. ‘In addition to strategic initiatives to engage and win shareholder support, the investor relations consultant adds more ‘eyes and ears’ to the CFO and allows him to be more nimble in responding to market developments and changes.’
Emerging challenges
At the same time, there are more pressing issues that are vying for the CFO’s attention. Cash management is becoming an important area this year as companies take on projects or expand their business overseas, according to Mr Koh of EMS.
Concurring, Mr Chua of BH Global notes that cash management and hedging have taken up much of his attention this year, no thanks to the debt crisis in Europe and rising commodity prices.
‘We are taking a much more cautious approach in our sales policy and monitoring closely on the movement of commodity prices,’ he says.
Mr Chua observes that with the uncertainties in economic and business conditions, CFOs may increase their focus on risk management and may find it hard to achieve profit targets this year given the uncertainties and rising costs. This has led to a more reserved approach when it comes to forecasting and strategic planning.
‘For CFOs, managing exposure to risk arising from uncertainty is an increasing challenge,’ Mr Mak of E&Y says, pointing to three key areas.
Firstly, companies that provide credit to customers need to be aware of the financial risk that stems from potential default if these customers go under. Companies also need to respond better to variable changes in demand and supply of their products and services. Lastly, the escalating operating costs can add to the financial burden of businesses.
CFOs also note that increased market volatility and economic uncertainty has made forecasting of financial performance more difficult.
At Chinese agricultural company China Minzhong, the uncertainties that the CFO has to grapple with include exchange rates movements, potential easing of reserve ratios by the People’s Bank of China, potential spike in energy costs arising from the Iran crisis, continued rise in labour costs and credit tightening arising from the Euro debt crisis.
This means there is greater need for communication with shareholders so that they can better understand the group’s business, especially in a volatile market when investors are more risk averse and expect higher management accountability, Mr Siek says.
To assuage shareholders’ concerns, the group has intensified its communications with commercial bankers to have a better sense of the credit markets and improved its risk management framework, particularly in the area of credit extension and monitoring.
China Minzhong also lets its action do the talking, by rolling out greater factory automation to raise productivity and reduce labour costs, improving inventory movement tracking, reducing raw material wastage and promoting resource recycling.
‘With greater shareholder activism, CFOs need to track investment community concerns closely and report or address them in a timely manner. At the same time, they need to ensure that their companies’ business plans are synchronised with shareholders’ expectations,’ Mr Siek says.
‘Having a separate IR department certainly helps to lighten the burden of the CFO, but then again, this would not relieve the CFO of his responsibility for good communications with his shareholders or investors,’ he adds.