the tail that wags the dog

friday thoughts from day jobs gone by

In a couple of book promotion interviews, I’ve been referring to the phenomenon of “companies which are run by their investor relations department”, a curious phenomenon which I began to notice more and more over the course of my finance career.  If any readers who also remember those days recognise who I’m talking about here, schtum, please.

“Investor relations” very much grew in importance between the day on which I showed up as a naïve former civil servant at a brokerage which doesn’t exist any more, and the day I left as a cynical old lag at a brokerage which still miraculousy exists.  In the early days, it was pretty much purely a travel agency and diary keeping function – the “Department Of Not Having Your Results Announcement On The Same Day As All The Other Banks”.  These days, people regularly go from IR into top jobs and it’s very often considered a necessary stop for high-flyers being groomed for the C-Suite.

It's a function where you can sort of see why it needs to exist, but while (as I argue in “The Unaccountability Machine”) most of the communication channels in big organisations have been cut or reduced in capacity, this one has hypertrophied.  When I did “IR Roadshows” it often struck me as very strange that someone who ran a balance sheet of billions of euros, with a personal staff numbering in the dozens, who spoke on an equal basis with heads of government and captains of industry, would nevertheless take a week every six months to wander round New York to allow twenty-six year old sharks at hedge funds to tell him exactly what he was doing wrong.  On several occasions I thought I heard one of the CEOs mutter the Énarque equivalent of “that an old soldier should come to this” in the elevator back to the ground floor.

Not much harm was done by the roadshows, I think – it might even have had a slightly mitigating effect on some of the more out-of-control egos in the industry.  But the general practice of turning the chief executive of a country into a salesperson for their equity shares was, in my opinion, kind of weird and bad. (According to friends, the gradual assumption in the emerging markets that a key part of being a finance minister was being a good bond salesperson was even more pathological).

When things were going well, it wasn’t too much of a problem. (Or at least, I don’t think so – the personality cult of Sir Fred Goodwin, as he then was known, was certainly helped into being by investors).  When they got bad, though, it become kind of pathetic, and it’s these situations that are in my mind when I think about “companies being run by their investor relations teams”.

The IR teams themselves had some hilariously pathological incentives.  When things were going badly, their job was to provide positive spin on the lousy quarterly results.  Consequently, they were to a large extent judged on the objective performance measure of whether the share price spiked upward or downward on the results day.

But, of course, the results day move was largely determined by whether the lousy results were better or worse than expectations.  Consequently, the investor relations department had the incentive to spend the entire rest of the quarter talking to analysts like me saying “it’s awful, it’s terrible, it’s so goddamn bad”, so that when the results were merely a bit lousy, we had to upgrade.  I played this stupid game for the best part of a decade, would you believe, and won a couple of stupid prizes for doing so.

Then the day after the results, the IR people would phone round and get feedback on how things had gone across in the market.  I would regurgitate garbled versions of conversations I’d had with my clients, which would presumably be further garbled for transmission to the chief executive.  Companies which were doing well would ignore them, but companies which were doing badly seemed to develop this amazing cringe, and start holding more and more roadshows and meetings where they promised that they were listening to investors’ concerns.

Which was problematic, because investors’ concerns are always “give us more dividends, reduce investment, divest businesses, shrink assets, dividends, we want them”.  This was partly because of the short term financial capitalism blah blah.  But more importantly, we’re talking about a company that wasn’t doing well here.  The investors fundamentally disliked the thing and thought it was a bad business – of course they didn’t want to allocate more capital to it.  They either didn’t own the shares or were in the process of selling them, so obviously they weren’t going to put much thought into its future strategy.

This was the death spiral that came pretty close to extinguishing the industry I was part of.  Presentation by needy presentation, our bosses kept tearfully promising to do better, to cut costs and not waste money. And in doing so, ensured that money would be wasted, in the pointless exercise of trying to get stable revenues out of a cyclical business.  I’ve noticed something similar happening in several other industry sectors; if anyone has a dataset of the career backgrounds and outcomes of IR people over the last few decades, I bet it would correlate with all sorts of interesting stuff.