19th June 2018
Grayling's Shiwei Yin and Melissa Barientos reflect on the latest trends impacting the Investor Relations landscape.
This past week NIRI (National Investor Relations Institute) hosted its annual conference. The key take-away? Fundamental changes are taking place in the North American and European capital markets, and IR professionals should adapt programs accordingly to better meet client needs.
Important changes on the buy side
Active vs. Passive investing
Passive investing is essentially the buy-and-hold strategy, and is increasingly executed through the use of rule-based, index-tracking ETFs (Exchange Traded Funds). While ETFs by definition are passive, passive need not be ETFs, as human investors with the virtues of patience and foresight can also invest passively and successfully.
Passive investing has been growing rapidly in recent years, now accounting for about 20% of global equity markets and 30% of the US markets. Global ETFs AUM (Asset Under Management) broke the 5 trillion USD milestone early this year. Publicly traded companies in the US today are likely to be included in at least one ETF and the percentage of passive ownership tends to vary between 15% to 40%.
What does this mean for IR? Since ETF operators generally do not meet with company management, growing share of ETF ownership requires higher quality engagement with non-ETF-based passive investors, as these investors also employ the buy-and-hold strategy but are receptive to interacting with management. And once they buy into the investment thesis, they tend to stay invested for the long run, and provide stability to share price. Higher passive ownership also necessitates better targeting of active investors for company shares to benefit from trading liquidity. Lastly, passive investors and even ETF operators can be important allies in the event of proxy contests and should be proactively engaged as such.
ESG (Environmental, Social and Governance)
A recent NIRI interview of 200 buyside managers revealed that ESG consideration is becoming mainstream, with 47% of the respondents saying they consider ESG during their investment process. Among the main ESG factors that investors examine are corporate governance, cybersecurity and environmental issues.
Perhaps the rise of ESG-conscious investing is underpinned by the fundamental shift in business structure away from ones dominated by tangible assets to intangible assets in recent years, yet we do not have good tools to value intangible assets such as board diversity, data security, and carbon footprint. As a result, ESG is coming into play as potential new metrics for valuing business in the new world we live in today.
What does this mean for IR? Start disclosing non-financial issues on conference calls and investor meetings that are relevant to a company values and operations, which can have a financial impact. Closer work with corporate issuers to verify and confirm their opportunity in reviewing MSCI sustainability reports prior to public dissemination, and correct inaccuracies and misinformation. SASB (Sustainability Accounting Standards Board) has been recommended as a good starting point to look for standardized ESG metrics and practices.
There has been a clear increase in the number of activist campaigns, increasing from 85 in 2003 to 277 in 2017 (the number is higher if we includ behind-the-door negotiations). The majority of the proxy fights happened to companies below 1 billion USD market cap, and two thirds of proxy contests were for short slates.
Today’s activist investors (1) conduct comprehensive due diligence of a target company, speaking to anyone and everyone relevant to a company’s business; (2) attract high-quality director nominees who have relevant background and experience to effectuate the proposed changes; (3) aggressively pursue sell-side backing and actively cultivate support from long-only funds; and (4) employ sophisticated IR/PR strategies to win proxy contests.
What does this mean for IR? The board and management should become more aware of activists, and work with specialists on vulnerability assessments if corporate resources permit. If and when approached by activist investors, management should care more about activists’ ideas and determine if they have merits. If so, act on them, and don’t fixate on the individuals and turn the matter into an emotional feud. Given the protracted and expensive nature of public activist campaigns and investors’ built-in bias to settle, IROs and management should steer conversations in the direction that reflects the fundamentals of company business, and try hard to find common ground with activists.
Important changes on the sell side
Markets in Financial Instruments Directive (MiFID) II is a key legislative framework of the European financial regulation, and unbundled fees for trade execution, research and corporate access. European asset managers now must pay for research from their own P&L or with a research payment account funded by client money.
Shifts in research spending by the buy side are happening as firms reallocate resources around analyst ranks and coverage: (1) small caps and less popular sectors are seeing a reduction in coverage and corporate access; (2) small independent houses with niche specializations are on the rise; (3) star analysts are in high demand on both buy sell side; (4) asset managers are focused on consuming and rewarding high quality research.
What does this mean for IR? A progressively polarizing research field means that management and IR teams need to maintain better relationships with top analysts, as their opinions will likely carry outsized weight in a shrinking coverage universe. The reduction in the number of sell-side forecasts also means that companyies' own guidance will be more important in guiding investor expectations throughout the reporting cycle. Corporate access remains important to the investment process, and an IR agency has the opportunity to pick up attrition of corporate access service on the sell side as a result of the unbundling. Relatedly, IR teams are expected to go more directly involved with the investment or corporate access teams on buy side.
Important changes in business mentality
Long-termism vs Short-termism
In early 2016, Blackrock chairman and CEO Larry Fink sent a letter to chief executives at S&P 500 companies and large European corporations, urging resistance to short-termism afflicting corporate behavior, and asking CEOs to lay out for shareholders a strategic framework for long-term value creation.
In a June 6, 2018 WSJ Op-Ed titled "Short-Termism Is Harming the Economy", Berkshire Hathaway chairman Warren Buffett and JPMorgan Chase & Co chairman and CEO Jamie Dimon encouraged all public companies to consider moving away from providing quarterly earnings-per-share guidance.
What does thismean for IR (and others)? The most influential American business leaders are actively steering the corporate mantra toward long-termism over short-termism and quality over quantity, marking a fundamental shift in business culture and mentality in this country that will have profound impact for years to come. Specifically for IR professionals, it means working with management to re-orient the frequency and the nature of corporate guidance to reflect long-term values and strategies. It means, when engaging with analysts, portfolio managers or financial journalists, to be mindful of steering the conversation to various aspects of business fundamentals rather than getting bogged down on beating or missing one metric. Ultimately, it means telling a richer corporate story using both financial and non-financial metrics, and telling it from corporate, environmental, social and governance angles to achieve higher visibility and create stakeholder value.
Shiwei Yin and Melissa Barrientos are part of Grayling's New York Investor Relations team. Find out more about Grayling's IR capabilities here.
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