FP&A and investor relations (IR) can be thought of as cousins. They share a similar family tree, have elements that look the same, but maintain separate identities. They each have good information to offer each other that can make both parties better at their responsibilities. They also represent potential intertwining career paths and potentially broadening career development for the finance professional.
National Investor Relations Institute (NIRI) defines Investor Relations as having the responsibility to ensure the development and continuance of two-way communication between a company and its external stakeholders, specifically investors.
While there are some instances of IR being under the FP&A organization, more frequently the two retain separate departments under the domain of the CFO. The disclosure and reporting proscribed by the SEC and other laws represent a separate body of knowledge from other finance functions, even though there is overlap in subjects of financial reporting and guidance. In addition, the communication skill set in prose, presentations, and relationship management often lend themselves to a different spot on the org chart.
SIMILARITIES AND OVERLAP
FP&A often has a role in supporting IR with forecast, operational analysis, variance to plan, and inputs to valuation models. IR can provide market intelligence and peer comparisons to FP&A models and assumptions. The core skillsets are directly transferable between the two disciplines:
- Corporate finance role: centralized finance functions reporting to the CFO, and both require the same detail oriented approach to financial information
- Partnership: requires sourcing information from across the enterprise in order to understand the business and have current information. This requires access to senior management and relationships across finance, legal and communications.
- Data analysis: reliably sourcing, analyzing and interpreting data is a key element of both teams; the skills of data management and analysis are transferable.
- Financial modeling: must be able to build a financial model, and interpret models built by others, to understand the past history and future direction of the company. Per the Corporate Finance Institute website: “The goal here is to create a story from the numbers given, i.e. to turn data into information that can be populated in the corporate investor relations presentation.”
- Communication: create relationships and build trust with key constituents; deliver information through reports, models, meetings and calls. Data visualization and business “story telling” help give meaning to the numbers.
- Market knowledge: need to be highly informed on competitors including maintaining a list of comparative metrics, track news source, and monitoring regulations, economics, or other exogenous events.
The application of this similar skillset is where the IR team separates from FP&A.
- Key customers are outside the organization: While FP&A is in the business of allocating capital to its most efficient use inside the company, IR explains those decisions to the owners of that capital. This includes preparing the CEO and CFO for earnings calls and investor meetings by preparing presentations, writing scripts, and anticipating questions that may arise.
- In between earnings calls, IR maintains client relationships with various types of investors who have their own motivations. For example, debt investors want repayment of their capital; equity investors want growth relative to their risk profiles; sell-side research analysts want to update their valuation models, and rating agencies want details that support the risk rating of company securities. It may be useful to think of IR as an account executive in charge of various relationships, trying to keep the customer satisfied and revealing the right amount and level of information without running afoul of disclosure laws such as Reg FD.There is also a sales aspect to IR, as the team is trying to identify potential investors and convince them of the merits of the stock (and persuade them to purchase!) This may be accomplished through attending sector conferences, networking, and persistence.
- Internal modeling is different: IR’s customers are concerned with valuation (equity investors) and cash flow to support repayment (debt investors). The models IR builds will support this by relying on inputs from FP&A, but will not be as detailed as a planning model. This will also allow the two models to be asynchronous so that the internal one can be “live” and continually updated for operational use, while the IR one can be frozen pending investor releases.
- Use of external models: In addition, IR will want to estimate the models built by the external analysists in order to proactively prepare potential questions. These may be a discounted cash flow model, which requires an understanding of key drivers and profitability; and “relative models” derived from market comparable, which requires a heightened understanding of competitive forces and their internal impacts. IR would certainly have peer benchmarks updated regularly. These models also will have market focused metrics centered on ratios to share price.
- Storytelling: IR needs to understand the company’s strategy for competing in the market and plans for growth (new products and services, markets, customers, supply chains, etc.) and then funnel all financial and operational messaging through that lens. This also works in reverse; IR would advise the internal management of how the market would react to new strategies, M&A, reorganizational or personnel moves.
Per NIRI, investor relations is the “art and science of positioning and communicating a company’s story and investment proposition to its investors.” Knowing how it works can help other branches of the CFO’s office support their colleagues, and it can be a broadening role for the experienced finance professionals.Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him at BLapidus@AllegianceAG.com.