UK: Investor Relations: What New CFOs Should Know

Investor Relations: What New CFOs Should Know

Juggling the demands of shareholders, analysts, bankers and ratings agencies is enough to make even a seasoned CFO cringe. For new CFOs, those demands can be intimidating, if not terrifying. Still, there are lessons CFOs should understand about investor relations (IR) before taking the reins—lessons veteran CFOs should revisit on a regular basis.

Below I have provided my top tips for new CFOs to consider, and while far from all-inclusive, it offers a window into the external opportunity IR presents for CFOs, as well as its importance as the de facto sales and marketing function to investors.

• Create your FAQ notebook: As a new CFO, you are going to be asked a multitude of questions in your interactions with investors, and invariably there will be one or more for which you do not have an answer. After listening to a series of quarterly conference calls over several years, I have found that about 80% of the questions are common. If you know the questions and you have a solid understanding of how their models are structured, you can build the answers into a physical FAQ notebook—one you can share with your CEO, IR director and business unit leaders. The other 20% require preparation, including dry runs and leaning on internal resources, particularly when you are new.
• Allocate your time effectively between buy-side and sell-side investors: As CFO, you deal with both sell-side and buy-side analysts. It is important to understand the requirements of both, but who should claim more of your attention? The answer depends on timing. The sell-side analysts, for example, will typically be focused on your quarterly update calls and incorporate that information into their research. The buy-side analysts, on the other hand, often have well-documented strategies of when they are going to enter—and exit—your stock.
• Develop realistic business expectations: In your external communications if you forecast a particular sales target, earnings target, income target, cash flow, etc., you should have a high probability of achieving the target. Financial markets tend to be very unforgiving if you don't. It is critical that you spend the necessary time educating your investors on the drivers of the business and the company's expected performance relative to peers.
• Commit to one comprehensive financial model: Just as there should be one overall strategy, there should be one comprehensive financial model. It should reflect the same set of numbers that the financial planning and analysis team develops inside the business. And just like your strategic model, you may want to include some flexibility for the numbers you're committing to in the event of execution misses.
• Gain working cross-functional knowledge: As CFO, you may miss a lot if you just sit in your office and manage the finance function. To gain a full picture of the business, you have to be ready, willing and able to get out and engage people outside of finance. The more you understand the issues your strategic business unit leaders and the various functions are focused on, the better prepared you will be to address investors' concerns. As you gather your knowledge, develop ways to effectively communicate it to the CEO and the board, so they are equipped with the information to properly oversee the company.
• Give bad news all at once: Inevitably, there will be bad news. When that happens, make sure you fully understand the implications, because you usually get just one shot. If you communicate bad news one week and add to it a week later, it only makes things worse. Before you offer the news, however, make sure cross-functionally that the CEO, the CEO's direct reports and the board understand what is being communicated and why—and that you have their support. 

Ultimately, think like an investor

CFOs want external stakeholders to view them as having high integrity, as being a competent steward of shareholder resources and a strategic thinker, and of course, as being right. Gaining such a reputation does not happen overnight. In order to achieve it, you need to know the business drivers and the questions investors want answered. As CFO, do your homework, be prepared for a multitude of questions, do dry runs and create the FAQ notebook and ultimately, you need to think like an investor.