Investor relations (IR) An analysis in the context of Vietinbank

establishing good relations with investors is very important, in other words, Vietinbank needs to establish professional and standard IR activities.At present, Vietinbank is evaluated to

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

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-IXA D fcRSHir CXCtLLCNCE

MAI THI HONG

INVESTOR RELATIONS (IR): AN ANALYSIS IN THE CONTEXT OF

VIETINBANK

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Nguyen Thanh Trung

Hanoi - 2011

To me, writing a Master thesis is a challenging task, which requires a lot o f time and efforts My thesis couldn’t be completed without the supports o f several people In this acknowledgement, I would like to give my thanks to all the people who have given me a lot o f supports in this thesis.

First o f all, I would like to express my profound gratitude to my supervisor - Dr Nguyen Thanh Trung at Hanoi School o f Business, who has supervised me during the time o f the thesis His professional advice is really valuable for me to complete this thesis.

And, I would like to give my special thanks to my family and my friends who always stay by my side and support me in the research progress.

Hanoi School o f Business, October 2011

M ai Thi Hong

INVESTOR RELATIONS (IR): AN ANALYSIS IN THE CONTEXT OF

VIETINBANK Mai Thi Hong MBA Candidate, 2009 - 2011 School of Business - Vietnam National University, Hanoi

Supervisor: Dr Nguyen Thanh Trung

October 2011, 86 pages

More than 10 years ago, the Vietnam stock market was established, as a result IR activities appeared as a mandate o f listed companies Now, IR activities in Vietnam haven’t developed yet In most listed companies, IR activities are just understood as basic information disclosure and investors’ rights fulfillment, these companies don’t have any IR professionals At the same time, there are a few companies, which are aware o f the importance o f IR activities and they carried out

IR activities actively and professionally In Vietnam, now IR is becoming more and more popular with the appearance o f many IR service vendors to support listed companies.

Vietinbank has been equitized since 2007 and was listed in 2009 with the stock code o f CTG Vietinbank now ranks the second in the banking system in terms

o f the chartered capital and network, and CTG is in top 5 biggest market capitalization in the stock market o f Vietnam At present, Vietinbank has more than 20,000 shareholders including: institutions and individuals, foreign and domestic investors In the 5 year strategy, Vietinbank is focusing on rapid expansion nationally and regionally; therefore, it is very necessary to increase chartered capital (tier 1 capital and tier 2 capital) Moreover, Vietinbank is promoting global integration in terms of banking operations and funds mobilizing Therefore,

establishing good relations with investors is very important, in other words, Vietinbank needs to establish professional and standard IR activities.

At present, Vietinbank is evaluated to be a pioneer in IR activities in Vietnam when Vietinbank is the first listed companies which established the IR division in Investment department More than that, Vietinbank always tries out many new IR activities in Vietnam, for examples: investor day, market research, etc However, there is still a big gap between Vietinbank’s IR activities and the professional IR activities that have been shaped in the world The thesis is aimed to fill this gap.

The first chapter gives a brief introduction o f the thesis, including: the necessity o f the thesis, the research aims and objectives, the research questions, the research methodology, the scope o f the research and the significance o f the research.

The second chapter researches the current theories o f IR activities In this section, the definition, objectives, audiences o f IR activities are clearly defined There is not a perfect model to organize an IR division for all companies; the IR division can report directly to the CEO, CFO, the chief o f counsel department or the chief o f corporate communications department An IR division should be composed

o f one IRO (with or without one deputy IRO), several staff who are in charge o f different tasks o f IR activities Based on some models o f implementing an IR program, the selected model are 6 steps model: (1) identify the current shareholder base (2) identify the suitable shareholder base (3) identify the gap o f shareholder base (4) Conduct market research (5) Select IR tools (6) Implement IR tools.

The third chapter gives an introduction o f Vietinbank’s operations and the process o f equitization This chapter also provides a careful analysis o f IR activities

in Vietinbank, including the strengths and weaknesses Some weaknesses o f IR activities in Vietinbank are (1) Vietinbank hasn’t applied any IR program model (2) the structure o f the IR division is not clear (3) some shortbacks with IR activities.

The forth Chapter presents the solutions/ recommendations for Vietinbank to correct the weaknesses and to enhance IR activities To maximize its full potential, the IR division should receive enough acknowledgment from Vietinbank’s

management team The IR division should put under the management o f the BOM instead of many levels o f management as now The IR division should be organized with one IRO and several staff who are in charge o f different tasks o f IR activities The Chapter also provides details o f how to implement an IR program in Vietinbank through 6 steps The suitable shareholder base should have balance between 4 categories o f investors (individuals and institutions, domestic and foreign) and have more foreign institutional investors The market research finds out the characteristics

of each category o f investors Based on that, the 5th and 6th step present the detailed actions to achieve the suitable shareholder base.

TÓ M TẮT

TRƯỜNG HỢP CỤ THẺ CỦA VIETINBANK

Mai Thị Hồng Học viên MBA, niên khóa 2009 - 2011 Khoa Quản trị Kinh doanh, Đại học Quốc Gia Hà Nội Giáo viên hướng dẫn: TS Nguyễn Thành Trung

Tháng 10 năm 2011, 86 trang

Thị trường chứng khoán Việt Nam được thành lập hơn 10 năm trước cùng với đó hoạt động IR xuất hiện như một nghĩa vụ của các DN niêm yết Ngày nay, hoạt động IR tại Việt Nam vẫn chưa phát triển Tại hầu hết các DN, hoạt động IR được hiểu một cách đơn giản chỉ là các hoạt động công bố thông tin và thực hiện quyền nhà đầu tư, các công ty không có các nhân sự IR chuyên nghiệp Cùng lúc đó,

có một sổ ít DN ý thức được tầm quan trọng của hoạt động IR và họ triển khai các hoạt động IR một cách chủ động và chuyên nghiệp Tại Việt Nam, hoạt động IR đang ngày càng trở nên phổ biến hom với sự xuất hiện của các công ty cung cấp các dịch vụ IR cho các DN niêm yết.

Vietinbank được cổ phần hoá từ năm 2007 và chính thức niêm yết trên HOSE vào năm 2009 với mã chứng khoán CTG Vietinbank hiện đang xếp thứ hai trong hệ thống ngân hàng tại Việt Nam xét về vốn điều lệ và mạng lưới hoạt động và CTG là một trong 5 cổ phiếu có giá trị vổn hoá lớn nhất trên thị truờng Hiện tại, Vietinbank

có hơn 20 nghìn cổ đông bao gồm: các nhà đầu tư trong nuớc, các nhà đầu tư nước ngoài, các nhà đầu tư tổ chức, các nhà đầu tư cá nhân Trong chiến lược phát triển trong 5 năm tới, Vietinbank tập trung vào việc mở rộng cả trong nước và quốc tể, vì vậy, Vietinbank rất cần phải nâng vốn chủ sở hữu (bao gồm cả vốn cấp 1 và vốn cấp 2) Thêm nữa, Vietinbank đang đẩy mạnh việc hội nhập quốc tế về hoạt độn<_, ngân

hàng và hoạt động huy động vốn Vì vậy, việc thiết lập mối quan hệ với nhà đầu tư

là rất quan trọng, nói một cách khác, Vietinbank cần thiết lập một hoạt động quan hệ nhà đầu tư chuyên nghiệp và hiệu quả.

Hiện nay, Vietinbank được đánh giá là một trong những DN đi tiên phong trong hoạt động IR ở Việt nam khi Vietinbank là người đi đầu trong việc thiết lập bộ phận IR Hơn thể nữa, Vietinbank luôn thử nghiệm các hoạt động IR mới, ví dụ: hội thảo chuyên gia phân tích, hội thảo dành cho nhà đầu tư, nghiên cứu thị trường Tuy nhiên, vẫn còn một khoảng cách rất lớn giữa hoạt động IR tại Vietinbank và hoạt động IR chuyên nghiệp đã được hình thành trên thế giới Khoá luận này được đưa ra nhằm mục đích giải quyết vấn đề này.

Chương đầu giới thiệu các nét chính của luận văn bao gồm: sự cần thiết, mục tiêu của nghiên cứu, câu hỏi nghiên cứu, phương pháp nghiên cứu, phạm vi của luận văn và các đóng góp của luận văn.

Chương hai nghiên cứu các lý thuyết hiện tại về hoạt động IR Phần này trình bày các định nghĩa, mục tiêu, đổi tượng của hoạt động IR Không có một mô hình chuẩn để tổ chức bộ phận IR có thể áp dụng cho tất cả các DN; bộ phận IR có thể báo cáo trực tiếp tới CEO, CFO, giám đốc bộ phận pháp chế, giám đốc bộ phận truyền thông của DN Bộ phận IR thường bao gồm: 1 IRO - trưởng bộ phận IR (có thể có hoặc không có phó trưởng bộ phận IR) và các nhân viên chuyên trách IR phụ trách các mảng hoạt động khác nhau của IR Mô hình triển khai hoạt động IR được lựa chọn nghiên cứu trong khoá luận này gồm có 6 bước: (1) xác định cơ cấu cổ đông hiện hữu (2) xác định cơ cấu cổ đông phù hợp với DN (3) xác định khoảng cách giữa cơ cấu cổ đông hiện hữu và cơ cấu cổ đông phù hợp với DN (4) nghiên cứu thị trường (5) lựa chọn các công cụ IR phù hợp (6) triển khai sử dụng các công

cụ IR.

Chương ba giới thiệu về hoạt động của Vietinbank và quá trình cổ phần hoá tại Vietinbank Chương này cũng cung cấp các phân tích kỹ lưỡng về hoạt động IR tại Vietinbank, bao gồm các điểm yếu và điểm mạnh của hoạt động này tại Vietibank Điểm yếu của hoạt động IR tại Vietinbank là: (1) Vietinbank không ứng

dụng một mô hình IR cụ thể nào (2) cấu trúc của bộ phận IR tại Vietinbank chưa được xác định một cách rõ ràng (3) một vài điểm yếu khác trong các hoạt động IR tại Vietinbank.

Chương bốn đưa ra các khuyến nghị nhằm khẳc phục các yếu điểm và nâng cao hiệu quả hoạt động của hoạt động IR tại Vietinbank Để phát huy tối đa tiềm năng của hoạt động IR, bộ phận IR nên nhận được sự quan tâm thích hợp từ ban lãnh đạo của Vietinbank Bộ phận IR nên được đặt dưới sự quản lý của Hội đồng quản trị thay vì nhiều cấp quản lý như hiện nay Bộ phận IR nên bao gồm một IRO

và một số chuyên viên chuyên trách về IR để phụ trách các mảng hoạt động khác nhau của hoạt động IR Chương này cũng đưa ra chi tiết cách thức triển khai các chương trình IR bao gồm 6 bước Cơ cấu cổ đông hợp ỉý nên có sự cân bằng giữa 4 nhóm nhà đầu tư (trong nước và ngoài nước, tổ chức và cá nhân) và có thêm nhiều các cổ đông tổ chức nước ngoài hơn nữa Nghiên cứu thị trường chỉ ra các đặc tính của các nhóm nhà đầu tư này Trên cơ sở đó, bước 5 và bước 6 trình bày các hành động cụ thể để đạt được cơ cấu cổ đông phù hợp.

TABLE OF CONTENTS

A C K N O W L E D G E M E N T S i

A B S T R A C T ¡i

L IST O F F IG U R E S xi

C H A P T E R 1: IN T R O D U C T IO N 1

1.1 Necessity of the thesis 1

1.2 Research aims and objectives 2

1.3 Research questions 3

1.4 Research m ethodology 3

1.5 Scope of the research 4

1.6 Significance o f the research 4

1.7 The structure o f the thesis: 5

2.1 IR definition 6

2.2 Objectives and benefits o f I R 9

2.3 History and evolution o f IR in the w o r ld 10

2.3.1 The first era - the communication era 10

2.3.2 The second era - financial era 11

2.3.3 The third era - The synergy era 11

2.4 The audience o f IR activities 12

2.5 The IR division 15

2.5.1 The role o f the IR division in listed companies 15

2.5.2 The position o f the IR divisions in the hierarchy o f companies 16

2.5.3 The responsibilities o f the IR division 18

2.5.4 The structure o f the IR division 20

2.6 The procedure for implementing an IR program in companies 23

2.7 IR tools 28

2.7.1 Corporate website 29

2.7.2 Blogs and Social Media 30

2.7.3 The Annual Report 30

2.7.4 Shareholder Letter 31

2.7.5 Financial A dvertising 31

2.7.6 Public M eetings 32

2.7.7 One-to-One M eetings 32

2.7.8 Roadshows 32

2.7.9 Reverse Roadshow 33

2.7.10 Conferences 33

2.7.11 Analyst and Investor Days 33

2.7.12 Conference Calls 34

2.7.13 Open Days 34

2.7.14 The Annual General Meeting (AGM) 34

2.7.15 Factbooks 34

2.7.16 Written Disclosure P olicy 34

2.7.17 The Shareholder’s Guide 34

2.7.18 Corporate Social Responsibility Report. 35

2.7.19 Fact Sheets 35

2.8 Chapter review 35

C H A P T E R 3: IR A C T IV IT IE S IN V IE T IN B A N K 37

3.1 An overview o f V ietinbank 37

3.1.1 The history and development o f Vietinbank 3 7 3.1.2 Scope o f business 38

3.1.3 Organization chart 38

3.1.4 Business strategy 39

3.2 The overview o f Vietinbank’s stock 40

3.2.1 The equitization process o f Vietinbank 40

3.2.2 Stock data records 41

3.2.3 Stock dividend records 42

3.2.4 Chartered capital raising 42

3.2.5 Shareholder structure o f Vietinbank 43

3.3 IR activities in V ietinbank 45

3.3.1 The history and development o f the IR division in Vietinbank 45

3.3.2 The objectives o f IR division in Vietinbank. 45

3.3.3 Structure o f th e IR division 45

3.3.4 IR activities in Vietinbank 46

3.4 Evaluation of IR activities in V ietinbank 63

3.4.1 Strengths 63

3.4.2 Weaknesses 65

3.5 Chapter review 68

CHAPTER 4: RECOMMENDATIONS/ SUGGESTIONS TO ENHANCE VIETINBANK’S IR ACTIVITIES 69

4.1 Organization o f the IR division 69

4.1.1 The acknowledgement o f the BOD and BOM. 69

4.1.2 The structure o f the IR division 70

4.1.3 Human resources 72

4.2 The process of implementing an IR program in V ietinbank 72

4.2.1 Identify the current shareholder base 72

4.2.2 Identify the appropriate shareholder base 73

4.2.3 Identify gaps in the shareholder base 73

4.2.4 Market research 74

4.2.5 Select IR tools & Implement IR tools 74

4.3 Chapter review 81

REFERENCES 83

LIST OF FIGURES

LIST OF TABLES

3.3

Lists o f fund management companies that Vietinbank has met

during the last six months

49

LIST OF ABBREVIATIONS

CHAPTER 1: INTRODUCTION

The Vietnam stock market began in 2000 with the establishment o f the Hochiminh Securities Trading Center which became Hochiminh city stock exchange (HOSE) in 2007 A second security trading center launched in 2005, Hanoi stock exchange (Haste) and the two now have between them nearly 700 listed companies; among them, nearly 300 companies listed in HOSE and nearly 400 companies listed

in Haste Since that time the Vietnam stock market has had more than 10 years o f history with some notably big achievements.

When a company is listed on the stock exchange, that company must comply with the laws and regulations o f the stock exchange These regulations may vary from the disclosure o f information to production o f particular financial statements

As a result o f all o f these compulsory tasks and the active promotion activities o f companies, a new business area has been created - Investor Relations (IR) In other words, IR is a job that has only recently appeared in Vietnam - it is the activity o f listed companies to create a 2-way communication with investor communities.

With only a 10 year history o f operating o f the Vietnam stock market, IR activities in Vietnam are not fully developed yet In most listed companies, IR activities are just understood as the disclosure o f basic information and investors’ rights fulfillment, these companies don’t have any IR professionals At the same time, there are a few companies, which are aware o f the importance o f IR activities and they are carrying out IR activities actively and professionally IR is becoming more and more popular in Vietnam with the birth o f many IR service vendors to support these listed companies.

Vietinbank has been equitized since 2007 and was listed in 2009 with the stock code o f CTG Vietinbank now ranks second in the banking system in terms o f the total assets and equity, and is in the top 5 biggest market capitalization in the

stock market o f Vietnam At present, Vietinbank has more than 20,000 shareholders including: institutions and individuals, foreign and domestic investors In the 5 year strategy, Vietinbank is focusing on rapid expansion nationally and regionally; therefore, it is necessary to increase chartered capital (tier 1 capital and tier 2 capital) Moreover, Vietinbank is promoting global integration in terms o f its banking operations and mobilizing o f funds Therefore, establishing good relations with investors is very important, in other words, Vietinbank needs to establish professional and standard IR activities.

At present, Vietinbank is evaluated to be a pioneer in IR activities in Vietnam

by many analysts as it was the first listed company to establish an IR division in its Investment Department Additionally, Vietinbank has been trying out many new IR activities in Vietnam, for example: investor day, market research, etc However, there is still a big gap between Vietinbank’s IR activities and other professional IR activities around the world.

The stock market in the world has a much longer history and IR activities have a close relationship with the stock market Many big stock exchanges in the world have published guidebooks for IR activities Most o f big corporations in the world have carried out IR activities a long time ago.

Therefore, it is necessary to research theoretic, models o f IR activities to apply to Vietinbank’s IR activities in order to build up a strong IR division within the bank, which will contribute significantly to the overall strategy o f Vietinbank in the near future This is the reason that the author chose this topic:

“Investor Relations (IR): An analysis in the context o f

V ietinbank”

The aim o f this thesis is to (1) propose a suitable model for an IR division (2) propose a model to implement IR activities (3) give some recommendations to enhance the current IR activities in Vietinbank The ultimate aim o f this thesis is to

make the IR activities in Vietinbank more professional and efficient, achieving international standards In order to do that, there are some objectives that should be reached:

• Thoroughly research current theories o f IR activities, including: models o f constructing the IR division, models o f implementing IR programs and IR tools.

• Analyze Vietinbank’s current IR activities and define its strengths and weaknesses.

• Give recommendations to Vietinbank for the organization o f its IR division, implementation o f its IR program and improving its IR activities

in general.

In order to give recommendations to enhance Vietinbank’s IR activities, the thesis is going to find answers to the following questions:

Major research questions:

• How to improve Vietinbank’s IR activities to support the bank’s general

development strategy?

Minor research questions:

• What is a suitable model to organize the IR division in Vietinbank?

• What is a suitable model to implement an IR program in Vietinbank?

• What should be done to implement IR program in Vietinbank to make it more efficient and support the general strategy o f Vietinbank in the future?

In the thesis, the author adopts analytical methods to analyze both domestic and foreign material to identify the most suitable IR theories and models for IR activities in Vietinbank.

Both primary and secondary data are used in the thesis to analyze the current situation o f IR activities o f Vietinbank Based on the theories o f IR and the author’s

own judgment, the author presents the strengths and weaknesses o f the IR activities

in Vietinbank and gives suggestions to enhance the bank’s IR activities.

The thesis aims to find solutions to improve IR activities in Vietinbank The thesis focuses on:

• Study the models o f organizing the IR division, models o f implementing IR programs and IR tools that are widely used by big corporations.

• Analyze different aspects o f the IR activity in Vietinbank: the way that the bank organizes its IR division, the IR tools employed and IR programs, etc to find out both the strengths and weaknesses o f IR in Vietinbank.

• Give suggestions to enhance IR activities within the bank.

The thesis has both theoretical and realistic significance; it could be a good reference material for: (1) Leaders and the IRO o f Vietinbank (2) IR professionals (3) researchers of IR activities in universities and research institutes.

The thesis provides a review o f IR theories that covers many aspects o f IR activities including: models o f organizing an IR function, models o f implementing

IR programs and many IR tools that are widely used in the world now.

The thesis provides the careful analysis o f IR activities in Vietinbank, one o f the companies pioneering IR activities in Vietnam All the current IR activities and tools, along with its strengths and weaknesses are presented.

The thesis also provides the recommendations that are applicable to the current IR activities o f Vietinbank: the models o f organizing the IR division, the way to implement IR programs in Vietinbank and some suggestions to enhance the

IR activities in general in Vietinbank.

1.7 The structure of the thesis:

The thesis is composed o f 4 chapters:

CHAPTER 1: INTRODUCTION

This Chapter gives a brief introduction to the thesis, including the necessity

o f the thesis, the research aims and objectives, the research questions, the research methodology, the scope o f the research, the significance o f the research and the structure o f the research.

CHAPTER 2: LITERATURE REVIEW OF IR ACTIVITIES

The second Chapter focuses on the theories o f IR activities, including: the definition, the purpose of IR, the organization o f the IR divisions, models o f implementing IR activities and IR tools Based on these theories, the author will point out which theories can be applied to the current situation at Vietinbank.

CHAPTER 3: THE CURRENT SITUATION OF IR ACTIVITIES IN VIETINBANK

Analyze the current situation o f IR activities in Vietinbank: the structure o f the IR division, the way to carry out IR activities, some highlighted IR activities.

Present strengths and weaknesses o f IR activities in Vietinbank.

CHAPTER 4: SOLUTIONS TO ENHANCE IR ACTIVITIES IN VIETINBANK

From the theories studied in the second Chapter, the author gives solutions to all the weaknesses of IR activities in Vietinbank that will make the IR activities more professional.

C H A PT E R 2: L IT E R A T U R E R EV IEW

According to NIRi {National Investor Relations Institute): “Investor

Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community and other constituencies, which ultimately contributes to a company's securities achieving fa ir valuation

According to this definition: IR activities cover many areas:

The ultimate objective is to bring the market price o f an ordinary stock to its fair value.

According to the UK IR Society - the leading professional IR body in

Europe: ‘‘''Investor Relations is the communication o f information and insight between a

company and the investment community This process enables a full appreciation o f the company’s business activities, strategy and prospects and allows the market to make an

informed judgement about the fair value and appropriate ownership o f a company”.

According to this definition, IR is mainly the communication between companies and financial communities.

The agreed point between this definition and the one o f NIRI is that the ultimate objective o f IR is to help the market to correctly evaluate the fair valuation

o f companies and based on that evaluation, the market price o f companies will be brought to its fair value.

According to CIR1 (Canadian Investor Relations Institute): IR is defined in a

similar way to the definition o f NIRI when CIRI points out that IR is the combination o f financial principles, communication and marketing to increase the efficiency o f 2-way communication channel between public companies and financial communities to accomplish the final result o f bringing a fair and efficient capital market.

The difference between the CIRI’s and NIRI’s definition is that CIRI is more detailed in defining the subject o f IR to be public companies not companies in general.

Almost all the stock exchanges in the world have regulations concerning the communication between listed companies and financial communities London Stock

Exchange (LSE) published the “Investor relations guideline fo r listed companies', in

this book, IR is defined as continual efforts o f listed companies to communicate with financial communities Investor Relations is the combination o f compulsory and non-compulsory communication between listed companies and current shareholders, potential investors, analysts and the media Investor relations have many forms: meetings with investors, press releases, annual reports, corporate websites, etc, to stimulate the understanding o f investors about the business, corporate governance, financial outcomes and future plans o f companies It doesn’t mean that IR is just one-way communication from companies to financial communities, but IR is the dialogue in which companies disclose the information to stakeholders and stakeholders receive and respond to the information.

The new aspect in this definition is that IR includes both compulsory and non-compulsory mandate o f listed companies in providing information to investor communities as well as other audiences.

The LSE also agrees with the above institutes that IR is the 2-way communication channel with the purpose o f increasing the mutual understanding between listed companies and investor communities Besides, in this definition, the LSE begins to list some o f the IR activities: meetings with investors, annual reports, corporate websites, etc.

In the scope o f this thesis, the author only focuses on the Investor Relations

o f listed companies.

To summarize these above definitions, IR is the combination o f finance, communication, marketing and laws to increase the efficiency o f the 2-way communication between listed companies and financial communities, which is demonstrated in the understanding o f financial communities about: corporate business, company structure, corporate governance, com pany’s future plans, etc to achieve the ultimate goal o f bringing the market price o f companies closed to its fa ir value Investor relations (IR) includes both regulatory and non-compulsory activities.

The following chart illustrates the definition o f IR activities in a listed company:

Figure 2.1 Definition o f Investor relations

2.2 Objectives and benefits of IR

IR has 3 main objectives:

First, good liquidity and fa ir price fo r ordinary stocks o f listed companies in the stock market:

Fair price o f ordinary stock depends on the fair value o f companies, which is based on two elements: the current value o f a company and the potential value of a company whereas good liquidity is only defined in comparison with the liquidity o f the market and o f the industry And it is very important for a company to have good stock liquidity to mobilize capital easily at a favorable cost of capital.

However, many companies mistakenly believe that the objectives of IR are to make the price as high as possible and the liquidity as such as possible In fact, the objectives of IR are the sustainable good price and liquidity The high price and liquidity in a short term don’t bring benefits to the companies but can destroy the confidence o f the investor communities in the stock o f the company for after climbing to the peak, the price will fall down significantly and the liquidity will become volatile.

Second, easy access to capital at low cost o f capital when issuing new stocks and fix e d income securities:

This can be considered the most important objective o f companies when being listed on the stock market IR creates a 2-way communication channel between the company and financial communities bringing the confidence o f financial communities in the company, which will be rewarded with low cost o f capital.

This purpose is considered the ultimate goal o f an IR division - “IR the

strategy and practice o f the investor relations” commissoned by Nasdaq stock market, p i 8.

Third, symmetric information:

As defined in the first section, IR is the 2-way communication between companies and investor communities IR is commonly one-way communication from companies to financial communities, but in companies with good IR activities, companies provide enough information to financial communities, and vice versa financial communities will become a good source o f valuable information to the BOM and BOD to manage companies in a right way.

The history o f Investor relations is bonded with the establishment o f publicly traded companies According to Britannica, the first publicly traded company was The Dutch East India company in the 17th Century, but some other sources point out that the first one should be Stora Kopparberg mining company in 13th Century Whereas the first public company in the USA was The Boston Manufacturing Company founded in 1814 However, at this time, publicly traded companies were very small with only a few shareholders, so their BOD didn’t pay much attention to

2.3.1 The first era - the communication era

In 1945, the economic boom o f the post World War II years created extra money which could go into investment Publically traded companies were in fierce competition to attract this idle capital; therefore, the BOD of companies was becoming more and more interested in communicating with investors and potential investors, which paved the way for the development o f IR activities However, on

those days, companies were not familiar with IR activities and the only function that they found some similarities with is PR activities So in some companies, which pioneered IR activities, IR activities were assigned to the PR department The features o f this era were that:

S Investor Relations tasks were assigned mainly to publicists who were largely press agents and technicians who focused their job on putting the company’s name into mass media.

information to the publics mostly through mass media channels.

2.3.2 The second era - financial era

When the financial market became more highly developed, the number o f individual investors decreased whereas the number o f institutional investors with deeper financial knowledge increased significantly So, IR activities had to adapt to new audiences Investor relations responsibilities were shifted from communication specialists to accountants and financial professionals.

The features o f this era were that:

the disclosed information was mainly financial.

meetings.

from investors and modified the message to sell the organization The ultimate purpose o f IR activities was maximizing the stock price.

2.3.3 The third era - The synergy era

The competition for capital has become more and more fierce, so companies have to use many ways including finance and communication skills to attract capital And they also realized that both communication and finance skills sets are equally important Moreover, there are some strategies in the previous era not suitable anymore; for example, the strategy o f aiming for as high a price as possible is not

always good for a company (if the price is unreasonably high compared with the fair price o f the stock, it will fall down dramatically and create the volatility in price and volume o f stocks and in the worst scenario it can damage the reputation of the company).

Hence, the IR activities developed into the third era - the synergy era This era has some following features:

• The goal o f IR activities is to bring the market price o f the stock to the fair value o f stock by increasing understanding o f the company’s business and its value;

sought and shareholder research is conducted The feedback is analyzed at the highest level o f the organization and is used in the decision making and strategic planning.

international best practices o f financial communications ” that there are 4 types o f

audience o f IR activities:

Details follow in table:

Table 2.1 The target audiences o f investor relations

Shareholders and bond holders Capital market participants

Buy side financial analysts => institutions

Employee shareholders Sales forces

Rating agencies (credit, socially responsible investment, corportate governance)

Journalists Business partners and other stakeholders

Trade associations

(Source: Anne Guimard (2008), p35)

It is easy to understand shareholders and bondholders Shareholders are the people or entities which own the shares o f companies including: individual, institutions as well as employees; bondholders are the people or entities which own the fixed income securities o f the company.

Institutional investors', they are insurance companies, pension fund, mutual

funds or hedge funds who manage their assets or the assets o f a third party They are big players in the financial market, so they have big impacts on the stock price Institutional investors can sell or buy large quanties o f stocks or request a seat on the board o f management.

Sell side analysts: work for investment bank or securities companies They

analyze companies, give their evaluation, predict the income, set the target price and give the recommendation to buy, hold or sell the stock Their customers will be the people who act on this information.

Research coverage has a strong link with the market capitalization If your company is a large one, analysts will come to you and write analysis for you For smaller companies, it is very difficult to get the attention o f analysts so you have to approach them and provide them with information about your company.

Buy side analysts: analyze and give recommendations to buy, hold or sell

only for portfolio managers o f their companies.

Brokers: While IROs don’t often deal directly with brokers, brokers are the

source o f information for many portfolio managers Companies often host conferences for brokers because brokers have an impact on the action o f portfolio managers and they can provide valuable information and the opinion o f the market about companies.

Media: Media relations are the task o f corporate communications department

not the task o f the IR division Media and financial analysts, however, have close relations in the respect that media is a good way for SMEs companies to approach analysts Moreover, the financial media is one o f the main sources affecting the investment decisions o f individual investors.

Bondholders: Today, bonds are not considered a safe asset anymore but a

tool to diversify the investment portfolio Therefore, companies issuing bonds should organize some events to provide information to bondholders IR programs o f companies should be the combination o f stock and fixed income securities.

Credit ratings institutions: Credit ratings institutions give the credit ratings o f

companies based on the default risks o f the issuers People investing in the stock exchange only notice if this rating is down There are several big players in this industry: Moody, Standards and Poors, etc.

Customers and suppliers: They are not the targeted audience o f IR, but they

are also the people who have an interest in the financial outcome o f companies.

2.5 The IR division

2.5.1 The role o f the IR division in listed companies

The IR division can be considered as a bridge between BOM and BOD of companies and financial communities The below model is a combination o f 4

models in the book “Investor Relations: Principles and International Best Practices

o f Financial Communications”, Guimard Anne, 2008 (p26,27,28):

Figure 2.2 The investor relations relationship framework

Information request

Assessment

Valuation

Market perception Market intelligence Valuation

communication

-«—

Board of directors Supervisory board Chief executive officer Chief financial officer

Financial statements, Competitive

differentiation corporate strategy

Financial analysis

Presentation of the company’s

business activities, Prospects

information helps companies understand the opinion o f communities about their business and set proper strategy.

2.5.2 The position o f the IR divisions in the hierarchy o f companies

Both “The IR Strategy and Practice o f The Investor Relations” and

“Principles and International Best Practices o f Financial Communication” agreed

that there is not a perfect organization for the IR division for all companies The key point is making sure that IR has the opportunity to be effective.

Investor Relations divisions can report to the CEO, CFO or senior officer with corporate communications and public affairs responsibilities.

The current trend is that the IR division is a part o f the chief financial officer’s responsibility because a large part o f the division’s job is related to financial management However, in this case, the IR division should have close relations with other divisions/ departments: operation and strategic planning department, etc.

The IR division can also report to the CEO This case demonstrates that the BOD and BOM o f companies pay much attention at IR activities and the IRO can have better access to strategic information o f company.

In other cases, the IR division can report to the senior officer in charge o f corporate communications as the IR activities in very simple terms are similar to PR activities However, this model might hinder the efficiency o f IR activities to just the level o f communicating information.

Few companies have their IR division reporting directly to the chief legal counsel as some parts o f IR activity belong to legal compliance But as with the example above, this model is also not good for the IR division.

At some companies, the IR division is headed up by a senior officer such as the CFO or CEO Typically, this might by true in SMEs because these companies don’t have enough budget to hire an IR specialist or they don’t really need a separate

IR division.

According to “//? The Strategy and Practice o f The Investor Relations”,

regardless o f the IR division model, the IR division should get their information from the CEO, CFO or both:

Table 2.2 Information source

Primary leader — CEO/

Board-level accountability and interface

Fiduciary responsibility for SEC

Understanding of operations and financial impact of decision making Short- and long-term strategic decision making

Primary leader — financial management Support for worldwide operations with financial information designed to aid decision making Primary interface with audit and/or finance board committees CEO support with analysis for long-term strategy Sounding board for CEO ideas/partner

(Source: The Nasdaq stock market, p47)

Anne Guimard points out in “Principles and International Best Practice o f

Financial Communications ” that the IR division needs to have a close relationship

with other functions/ divisions/ departments: finance, marketing, communication and law This relationship enables the IR division to master the daily operations o f the company and from that provide accurate information to the relevant communities.

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2.5.3 The responsibilities o f the IR division

IR divisions have 4 main responsibilities: (i) Combine financial communication and strategy (ii) Build the internal IR acknowledgement (iii) Be the spokesperson to financial communities (iv) Report feedback to BOD and BOM.

(i) Combine financial communication and strategy

The IRO has to ensure the consistency of content and format o f IR activities from the beginning to the end In order to do that, the IR division needs to participate in the process o f shaping the financial message o f companies and has the voice in changing these messages.

The IR division has responsibility for:

• Alerting role: The IR division is responsible for alerting the BOD and

BOM o f changes in the recommendation o f analysts, the gap between the estimation

o f analysts and internal estimation, rumors, changes relating to the stock, application

o f new stock regulation, and analyst report o f the stock, etc.

• Suggesting role: The IR division makes the suggestions concerning

financial communication and corporate strategy as well as financial messages This division also suggests the channel and the way to communicate the information to essential audience.

• Ensuring the consistency between internal features and published

ones: The IR division and finance department should work closely to eliminate any

differences between internal and published financial criteria.

(ii) Build internal IR acknowledgement

The IR division works with finance, law, human resource and internal communications to:

• Help these departments understand the compliance with regulations in disclosing any price sensitive information.

• Help the BOD and BOM understand that apart from financial and strategic information, there is a lot o f price-sensitive information, for example: the health status o f the Chairman, the change in BOD, the land right, etc.

example, change the attitude in building the customer relationship in the financial communities, develop the global communication especially communication in English.

essential aspect to be considered in any investing decision.

(iii) Be a spokesperson fo r the listed company within financial communities

There are 4 types o f audience for IR activities The IR division will be in charge o f the official and main source o f information about the company to the financial communities.

(iv) Report feedback o f communities to the BO M and BOD

The IRO should use their contacts with investor communities to understand their needs and opinions o f the corporate operation and strategy The IRO needs to prepare a report on the opinion o f the financial market for the BOD and BOM, which is becoming a common standard in corporate governance The frequency and content o f this report will vary from company to company, but in general it should include the following information:

• The stock price o f the company and o f its competitors and the trend o f the price in terms o f both absolute and relative value.

prediction).

meetings) and related materials.

2.5.4 The structure o f the IR division

There are many ways o f organizing the IR division, below is the model from

“Principles and International Best Practice o f Financial Communications

(Source: Anne Guimard, 2008, p40)

The book “IR the Strategy and Practice o f the Investor Relations ” states that

most corporate IR staff consist o f one or two professionals and an administrative assistant Probably under 10% o f US public companies have three or more professionals on their IR staff However, the IR divisions have a tendency to outsource some o f their activities and hire some outside IR experts: consultants, writers, suppliers o f valuable data (p45).

The IR division doesn’t need to have many people but the people here should

be of best quality Moreover, IR staff should possess the following characteristics:

• Master the essential principles o f finance, the stock market and its regulations;

• Be able to communicate well in English;

Investor relations officers (IRO): A company appoints an IRO as the official

company’s spokesperson with the financial communities.

To be a good IRO, the person should have comprehensive knowledge o f finance, financial analysis, sales, marketing and law; additionally the IRO should be able to communicate very well in both writing and speaking Event organizing is also a critical skill that an IRO should have.

Companies should appoint their IRO from internally because an internal person understands thoroughly the company’s business as well as the products or services that the company provides.

From the main objective o f Investor Relations to help the market gain a better understanding o f the business and strategy o f the company, the main responsibilities

o f an IRO are:

many aspects o f finance and investor relations.

to financial communities, IRO also takes charge o f interacting with other parties: credit ratings institutions, media and others.

important enough to arrange a meeting with high level managers of the company.

relating to IR activities in the company; coordinate with other departments to shape the financial messages;

and financial analysts are interested after the announcement o f income and strategy.

• The IRO identifies the shareholders and continuously makes efforts to understand them, which is an important step in developing and carrying out the IR plan.

Deputy investor relations officer: is the person who is ready to stand in for

the IRO at anytime to answer any questions from analysts, investors and potential investors when the IRO is absent Therefore, a Deputy IRO should have the same skills and knowledge as the IRO: finance, company understanding, etc.

IR information systems manager, has an important role in improving the

efficiency o f IR activities in the company to reduce time and costs Responsibilities

o f IR information systems managers:

Debt IR: companies which issue a large amount o f bonds and debt securities

should appoint a debt IR staff member to work closely with the corporate treasury department, credit ratings agencies and conduct regular debt investor roadshows Relating to debt IR, companies should provide this information: effective financial statements, treasury accounting policies and outstanding capital market issuance by currency, amount, interest coupon and maturity date.

Investor relations support and logistics: Staff who are in charge o f these

tasks will do all the administrative work o f the IR division, notably the management

meetings, share ownership identification exercises and do logistical support for the Investor Relations team.

External IR service providers and advisors: The IR service that can be

provided externally: more information disclosure, press coverage, share trading volume, institutional investor ownership, analyst following and market valuation,

For large companies, they often use external IR providers but only for services such as: advisory services, perception studies.

In “The Strategy and Practice o f Investor Relations’’'1 published by Nasdaq

stock market (p32), there are 4 components o f an IR program:

Figure 2.4: The process o f IR program

Market research

Design the message

Choosing IR tools

Administer IR program

Step 1: Market research, to develop knowledge and expertise on the capital

markets, investment process, investor behavior, investor perceptions and attitudes toward the company, and to track progress in the communication process.

Market research has 3 key activities: market intelligence, audience analysis, and benchmark survey.

• Market intelligence is to understand how the company is viewed by the equity market in both absolute and relative terms, in other words to define the position o f the company in the stock market.

The input o f market intelligence includes:

S Daily trading volume

S Patterns o f volume to indicate liquidity and volatility

S Stock price against industry and other peers and against the market

S Comparison o f volume and price

S Comparison o f relative measures o f investor confidence, such as the

price/ earnings, price/ cash flow and price/ sales ratio

S Comparison o f measures o f relative performance, such as price/ book

ratio, return on equity and return on assets

S Analysts’ earnings forecasts for the company and peers.

especially shareholders: where they are, why they invest in the company, their investment style, etc to find the best way to approach them, use suitable tools to attract them.

The output o f audience analysts:

S How well your company’s strategies and implementation initiatives

are being recognized and accepted.

S Extent to which analysts and investors have absorbed your investor

information

S Attitudes o f investment players toward the company, generally and

specifically

S Accuracy or inaccuracy o f perceptions

■S Investor’s evaluation o f management and the investor communication

• Benchmark surveys: are conducted periodically to track changes in the perception, knowledge levels and attitudes o f investors The results o f these surveys

put in the context o f the changes in the valuation and price o f stock will help the

company to value the strategic decisions and communication efforts.

Step 2: Design message, aimed at communicating the investment strengths,

major factors and points o f information important to the market that will help create

fair value.

Based on the output of market research, companies will design the message

to communicate their strengths, advantages, etc to their investors to satisfy the

information needs o f investors in the right way.

There are 3 types o f information desired by investors and analysts:

S Financial and operating details that thoroughly explain business

operations;

S The company’s vision, mission, strategies, direction and programs,

■S The industry context for the company

Step 3: Choosing IR tools, namely the best ones to use in getting the message

and information to the market, investors, analysts and brokers in the most effective

manner: select appropriate tools to target each types o f audience with maximum

efficiency and lowest costs.

Step 4: Administering IR program, involving the use o f staff, consultant,

suppliers, technology-based and other tools to manage the investor relations process

at highest efficiency levels.

In the “Investor Relations: Principles and International Best Practices o f

Financial Communications”, Anne Guinard shaped a procedure composed o f 8

steps:

In this model, step 1 and 2 should be thoroughly analyzed, the other steps are similar to the first model.

Step 1: Identifying current shareholders to fin d out:

• Who they are: individuals or institutional investors

• How many shares do they own

• Their investment style: short term, long term, dividend or capital gains oriented.

It is common that investors don’t need to disclose their investment in one company except perhaps when their number o f shares they own exceeds a regulated threshold Therefore, it is difficult and costly to identify the shareholder base o f