In academia, professors almost never express something in clear understandable prose when a jargon filled expression can be used. Hence, the title of today’s post. Pareto Principle is the fancy name academics give to the 80/20 rule; that is, that 80 percent of effects come from 20 percent of the causes, or to put it another way, the few (20 percent) are vital and many (80 percent) are of little consequence.
This comes into play in investor relations in two important ways. First, almost every investor relations department I know works with constrained budgets and limited staffs. As a result, they need to be efficient with their time and effort. (My personal theory for this is that IR usually reports to the Chief Financial Officer and not the V. P. of Marketing, but that a topic for another day.) Second, most companies today are 70% – 80% owned by institutional investors, and it is within this group that the 80/20 rule has effect. Plainly put, 80 percent of the shares in a company are usually held by the top 20 percent (or less) of the institutional shareholders. Therefore, in order to efficiently reach the maximum number of shares in your investor relations efforts, you need to give first priority to the top 20 percent of your institutional shareholders.
As an example, and in order to put some numbers on this theory, let’s say that a large company has 500 institutional shareholders and 100,000,000 shares outstanding. A typical investor relations staff cannot reach out and be in contact with 500 investors every quarter. There is usually not enough personnel and budget to get the job done. However, the 80/20 rule tells you that of the 500 institutional investors, 100 investors will control 80,000,000 of the 100,000,000 shares. One hundred investors is a much more manageable number for investor relations departments to stay in contact with.
It’s a simple marketing principle: Take care of your best customers. This is not to say that you violate disclosure practices in prioritizing your shareholders. Material, nonpublic information should always be released to all shareholders at the same time. Rather, these large investors should never be disappointed because you failed to regularly communicate with them regarding normal, nonmaterial voluntary disclosures. A good investor relations department will have standards for how often these shareholders should be “touched” and a tracking system to make sure they are being met.
John recently retired as a Lecturer in Management at Rice University’s Jones Graduate School of Management, where he taught investor relations. Prior to that, John was in charge of investor relations for Sysco Corporation and Walgreen Co. He holds a MBA from the Kellogg Graduate School of Management at Northwestern University and a law degree from Loyola University of Chicago.
You can learn more about John’s thinking about investor relations at his blog, Investor Relations Musings.
