Privately owned family businesses should not ignore investor relations

By Travis W. Harms

Visit the website of any publicly traded company, and you will find a link to the “Investor Relations” section. The purpose of the investor relations function is to promote effective communication between the company and its current and prospective investors. While the Securities and Exchange Commission requires public companies to make certain disclosures, the ultimate goal of investor relations is to ensure that the company’s stock is trading at a fair price. Privately held family businesses are not subject to SEC reporting requirements and have no public stock price. But can they safely ignore investor relations? The answer is a resounding no.

What is investor relations?
Investor relations is a strategic interdisciplinary function that draws upon expertise in the areas of finance, communications and marketing. Communication is a two-way street, and a successful investor relations program focuses on telling the company’s “story” to investors in a compelling manner, as well as monitoring investor sentiment regarding the company.

Public companies craft quarterly earnings releases, management conference calls, shareholder meetings and other presentations to provide investors with an easily understood and consistent framework for evaluating financial results. An effective investor relations program translates complex, one-size-fits-all financial statements into a customized picture of the operating and financial performance metrics that are most relevant for the company. High-quality investor relations presentations go beyond merely communicating results; they correlate those results with the company’s strategy.

Wall Street wants to hear from corporate managers, and thoughtful corporate managers also want to hear from Wall Street. Therefore, a savvy investor relations department is focused on listening to the market. Investor relations professionals monitor markets and hold regular discussions with investors and stock analysts to solicit feedback on the company’s story. They compile the feedback and report it to management. This feedback loop is a critical component in evaluating the company’s strategy and how that strategy is communicated.

The ultimate goal of investor relations for public companies is to contribute to a stock price that fairly reflects the value of the company. If investors don’t perceive that the company has a clearly articulated strategy or transparent metrics that relate to that strategy, they are more likely to sell shares, putting downward pressure on the company’s share price. A lower share price increases the company’s cost of capital and makes the company vulnerable to activist investors or hostile takeover.

Investor relations for family businesses
Privately held family businesses do not have a share price that is subject to the perceptions of investors. Most family companies have shareholder agreements with mechanisms that limit the ability of disaffected shareholders to sell their shares. Nevertheless, a formal investor relations program offers four valuable benefits for family businesses:

1. Developing an informed shareholder base. For family businesses, investor relations starts with education. Except for founders, most family business owners have inherited their shares. As a result, they have not engaged in the due diligence activities typical of a significant financial investment. Family shareholders who are not employed by the company may have a hazy understanding of the company’s business activities, strategy and prospects. One benefit of a family business investor relations program is to help family shareholders better understand what may well be their single largest asset.

While public company investor relations departments communicate with professional analysts and investors, the shareholder base of many family businesses includes family members who are engineers, educators, medical professionals and non-profit leaders—capable, industrious and highly educated individuals who nonetheless do not live and breathe financial statement analysis and corporate finance. As a result, an often-­underappreciated component of building an informed shareholder base is equipping shareholders with a working understanding of the basic vocabulary and concepts of corporate finance.

2. Demonstrating management accountability. A structured investor relations program is a valuable discipline for the management team of a family business. It forces the managers to refine their strategy so it can be readily communicated to family members of varied ages and backgrounds. This process of refining the message for family shareholders can ultimately contribute to a more focused and more effective corporate strategy.

A clearly articulated strategy with corresponding operating and financial performance metrics is a natural gateway to a framework for management accountability. This does not mean that the managers of a family business should be on a perpetual hot seat. Rather, managers are accountable for sharing the company’s strategy with its shareholders and communicating how that strategy is succeeding or being challenged over time. Absent such a framework, the business can become susceptible to strategy drift or an undue emphasis on short-term results at the expense of long-term strategic goals.

3. Understanding shareholder preferences and needs. Family businesses may have goals and objectives that relate to a broad group of stakeholders, including employees and local communities. Even so, the family shareholders remain an important constituency. Since investor relations is a process for two-way communication, family businesses can use the investor relations function to gauge family shareholders’ preferences and needs. These differ markedly from the preferences and needs of public company shareholders. For example, it can be frustrating for family business shareholders to receive regular reports on the growing value of their (illiquid) shares, but not feel especially rich because distributions are modest or non-existent and there is no expectation that their shares will ever be converted to cash.

To uncover the preferences and needs of family business shareholders, there is no substitute for simply asking. The results of a shareholder survey can help directors and managers move away from abstract objectives like “maximizing shareholder value” toward more concrete objectives. For example, what are the shareholders’ views on near-term liquidity, current distributions and capital appreciation? Seeking out these opinions enables directors and management to craft a coherent strategy to address shareholders’ needs. Conducting a survey does not mean that the board is offloading its fiduciary responsibility to make these decisions, since a survey is not a vote. Rather, it is a systematic means for the board to consider shareholder preferences as an essential component of deliberating over these decisions.

4. Preserving family harmony. Perhaps most important, a structured investor relations program can preserve and promote family harmony. Lack of communication naturally breeds distrust. Over time, distrust breeds disaffection and broken family relationships. It is a sad fact of human nature that while business success alleviates the financial stresses many families face, it also introduces new stresses and strains that are unknown to “normal” families. Family business surveys consistently rank family cohesion as one of the principal desires of family business shareholders. Yet, we observe too many families that see one another on opposite sides of the courtroom far more often than on opposite sides of the dinner table. Failure to communicate is at the root of most of these disputes.

Investor relations is not just for public companies. In view of the substantial benefits, successful family businesses should develop and implement an investor relations program that fits their business and their family. The costs of failing to do so can prove to be far too high.   

Travis W. Harms leads the family business advisory services group at Mercer Capital. 

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Article categories: 
March/April 2018

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