job.
The corporations also did not have any interest in listening to their shareholders – the focus was on a one-way stream of information from the company to the financial publics. No feedback was received or analyzed. No dialogue was promoted. Nobody was listening.
As a result of this history, public relations became almost a derogatory term in investor relations. This was also a reason investor relations professionals started trying to actively distinguish themselves from public relations, and disassociate themselves from public relations education, professional associations, and consulting agencies. Cutlip et al. (2000) observe, “As press agents grew in number and their exploits became more outrageous – albeit successful, more often than not – it was natural that they would arouse the hostility and suspicion of editors and inevitable that the practice and its practitioners would become tainted. This stigma remains as part of the heritage of public relations” (p. 107).
This stigma remains strong in the financial world: “The word public relations became increasingly a pejorative in Wall Street” (Morrill, 1995). Financial publics lost any credibility they might have had in public relations practitioners, their ethics, integrity, or simply capabilities of handling investor relations. Investor relations engaged in significant efforts to distinguish itself from any public relations background. If initially joining the Public Relations Society of America (PRSA), a professional association for public relations practitioners, was considered, in the 1960s investor relations practitioners began talks about the need to create their own professional organization where the public relations “chaff” would not be allowed.
The association of investor relations practitioners, the Investor Relations Association (IRA), later NIRI, came about in 1967. It kept its promise and made every effort to differentiate its members from public relations practitioners by conducting strict background checks on all the applicants: “Our aim is to separate ourselves from the so-called financial public relations consultants, who operate on the fringe of stock touting, and who are fouling the nest” (Morrill, 1995).
Thus, in its earliest days investor relations began as a subset of public relations. However, it began at a time when public relations itself was rarely more than a press agentry. Lack of financial expertise, lack of ethics, and lack of strategic vision hurt investor relations at its early stages and moved the function away from public relations departments. Much of the public relations and communication expertise was voluntarily cut off and disregarded as unnecessary or even harmful in favor of financial and accounting expertise.
Financial Era
The 1970s saw the shift from individual retail investors to institutional investors.
On one side, the enormous growth of investment activities in the 1950s and 1960s put pressure on the financial market infrastructure. The growth in individual investors was exponential in the years after World War II: from 4.5 million people in 1952 to over 20 million people in 1965, which represented every sixth adult in the United States. Chatlos (1984) explains:
As the trading and brokerage system creaked and strained under the increasing load of activity imposed on it, Wall Street’s response was less than prudent. Profitable success after success as “the only game in town” proved to be a harsh taskmaster to the system. When problems emerged because sale activities were extended beyond the back offices’ ability to handle the resulting volume, the immediate response was arrogant quick fixes rather than anticipatory long-term business planning.
(p. 87)
When it became painfully obvious that the system could not handle any more transactions, the response was a monopolistic one. Banks stopped taking on any new clients. Brokers became particular in choosing who to work with or whom to drop from the client list. The processing times were long, and the services were not friendly.
Another problem was the track record. The market was growing in leaps and bounds after World War II and shareholders (especially individual shareholders) expected it to continue like this forever. The expectations became too high for the reality to deliver. In other words, “success bred a level of expectations that could not be fulfilled” (Chatlos, 1984, p. 87). The system was destroying itself: the system built on volume of transactions could not handle that volume anymore, and the investors were ready to quit:
Customers were less than happy and did what might have been expected. They walked away. They did not sell their shares. They just walked away. For a system geared to the retail trade – and in many respects it remains so today – it was a devastating blow. The system was geared to volume, couldn’t plan for high volume, and suddenly had very little volume. Again, as could have been expected, broker failures and bankruptcy-avoiding mergers followed. It was a grim sight and the individual shareholder moved further away from the system.
(Chatlos, 1984, p. 87)
Professional investors began replacing retail investors. Consolidation was the name of the game. It was time to take all these retail investors with just a few thousand dollars and pull them together in investment funds. Although mutual funds existed for years, they really became popular only in the 1970s as more and more investors entrusted their cash to the fund managers. The first ever index fund available for individual investors, First Index Investment Trust (Vanguard 500), was launched in 1976 by the Vanguard Group as a response to the changing market demands.
This, however, meant a change for investor relations – instead of retail shareholders they would now face professional investors. Instead of less than knowledgeable individuals, overqualified stock analysts became the main contacts for the IROs The whole expertise previously geared toward private retail shareholders was becoming less and less relevant. Communications through mass media to reach large crowds of retail shareholders or conducting majestic special events to put the company’s name out there were not appropriate anymore: “Because of the legal fiduciary responsibilities to their clients, these institutions have demanded detailed and timely strategic and financial information” (Higgins, 2000, p. 24). They could not be satisfied by gift baskets or tours of company headquarters – they demanded detailed information on the company’s financial performance.
Financial analysts, however, were not valued highly in the corporate world; in fact, they were often regarded as “pests or worse” (Morrill, 1995). Yet, educated and knowledgeable analysts demanded lots of information on the company’s finances, strategy, sales, research and development, and so on. Investor relations practitioners with no or little knowledge of finance were not capable of providing such information and often could not even speak the same language as the analysts did.
In addition, financial analysts themselves were not accustomed to dealing with investor relations people. In fact, analysts were around long before the 1970s. In 1945 the New York Analysts Society already had 700 members and the number was growing fast. IROs, however, did not communicate with the analysts before the 1970s as they were mostly occupied with the retail shareholders, the dominant market force at the time. The job of communicating with analysts often fell to the chief financial officer (CFO), or somebody in the treasury department. As a result, when the 1970s brought the shift from retail to institutional ownership, many of institutional analysts already had their pre-established contacts at the corporations – most often in the finance department. Many analysts were not even aware that they needed to communicate with the investor relations people. They tended to go to the same source they used to go to earlier – a person in the treasury or finance department. Retail investor and professional investor communications were completely separated. Even today, because of this history, at some US corporations there are two separate departments: the investor relations department, aimed at professional institutional shareholders; and the shareholder relations department, aimed at individual retail shareholders.
The role of mass-mediated communications in investor relations suddenly lost its importance. Public relations practitioners were losing their grip on investor relations, while the financial departments were engaging in talks with analysts and institutional investors more and more often. It was not a one-day switch, but a slow transition over the years that eventually brought investor relations from the