RICHARD DAVIES MODERATES IR MASTERCLASS

Richard Davies delivering the opening remarks

RD:IR’s close relationship with the IR Society came to the fore again today, with Richard Davies, Managing Director, curating and moderating a thought-provoking IR Masterclass, hosted at the offices of Instinctif Partners on Gresham Street.

Richard began with some opening remarks about the changing nature of governance, before Mark Robinson, Head of EMEA Issuer Services at RD:IR, set the scene for the morning with a review of current levels of shorting in the UK market. Mark noted that FTSE 100 stocklending seems fairly unchanged since the Brexit vote, perhaps due to the global focus of issuers in the index. In contrast, the level of stocklending in the FTSE 250 has risen over recent years and continues to rise, as the index is very domestic-focused.

We will be publishing a White Paper on stocklending over the coming weeks, with in-depth detail and analysis. Following Mark’s observations, Richard moderated a panel discussion on shorting, involving Matt Hall from Corporate Broking at Deutsche Bank, Jeriel Rivera of FMR Investment Management, and Steven East, formerly a senior sell-side analyst at Credit Suisse. A key takeaway from this discussion was that corporates should speak to those investors shorting their stock, rather than ignoring or refusing to talk to them. IROs must find out why an investor is shorting their stock: has the investor misunderstood part of the business, or do they know something the corporate doesn’t? Being transparent and communicating well to the market is always the best course of action. In addition, if an IRO avoids speaking to an investor, then that investor may begin to wonder what the company is hiding and could take a negative view.

As well as engaging with short investors, a successful approach to disarming them is for a company to publish all news, good or bad, as soon as possible. Investors tend to short stocks when they are aware of something bad beneath the surface that is being suppressed. If the company makes that news public knowledge, the chances are high that it will then be factored into the share price, meaning there is little benefit in shorting the stock. This is also simply good practice – to be honest and transparent with the market – to maintain a good relationship with investors and have a true share price that reflects the company accurately.

Following the panel discussion, the floor was handed to Victoria Sant of The Investor Forum. She discussed what her organisation does in the corporate governance space, by working with investors to help amplify their voices to the boards of the companies they are invested in. Key points highlighted by Victoria include the need for the quality of dialogue between investors and boards to be improved, especially as too much time is spent on remuneration and not enough dedicated to long-term aspects of a business – for example, culture and ethics. Essentially, a board’s focus should be on long-term value creation as much as short-term issues.

The third item of the day was a governance briefing and debate, involving David Styles of the FRC, Rupert Krefting of M&G and Charles King of Halma plc, again with Richard Davies moderating. As Director of Corporate Governance at the FRC, David Styles set the scene for the debate, reminding the audience that the new Corporate Governance Code for 2019 is in fact two-thirds shorter than the current iteration. It goes without saying that shortening this document has, of course, been widely appreciated! The new Code takes the approach of asking companies how they apply its principles in a way that shareholders can evaluate. There was also a loose promise from David that the Code will not be updated for another 18 months at least. With the current state of global affairs, whether this happens or not is anyone’s guess!

The governance briefing included the thought that asset managers need to do more to engage with the companies in which they invest. Investors are spending more and more time thinking about ESG and how the companies they invest in approach the E and S as well as the G. However, a big challenge to companies at the moment is engaging with all shareholders. This is because there are so many quant investors that only stay invested for short periods, as well as index and other passive funds that do not necessarily seek engagement.

To close the morning, Richard Davies interviewed Anita Skipper, formerly of Aviva Investors. Anita has a decorated career and has worked in the corporate governance space since 1993, meaning she is well-positioned to comment on current practice. An interesting point Anita raised was that the average holdings for an investor have decreased in time over the years. When she started out, it would have been around seven years, but now it is around one year or less. This ties in with the point about engaging with shareholders being difficult: there is a higher turnover within each company’s shareholder base these days. Having said this, Anita noted that there is an increasing amount of corporate governance departments at investors speaking with the IR departments at corporates. This is seen as a good thing, as it shows how investors are now recognising the importance that corporate governance plays in 21st century business. As a departing point, Anita said that it is no longer good enough for a CEO to cut costs of a business and increase its profits, thereby earning a bigger salary. These days, the CEO will have to explain how the cost cutting has been achieved, why the cost cutting has been needed, how the board has acted throughout the last year, and other such similar areas relating to governance of the company.

The morning was interesting and useful, with the main takeaway being that the board needs to ensure a strong communication with investors and the market.

We thank the IR Society for organising the event.

RD:IR works in the governance area with companies to assist their communication with the market, either on a one-off or retained basis. Please get in touch to discuss this further.