The year has started busily, and there are innovations and challenges ahead for IROs. Richard Davies assesses the state of the IR industry.
As we move into Spring, after what turned out to be a surprisingly bleak end of Winter, it is a good time to think about the year ahead and what it can offer by way of new ideas. Many seasoned IR practitioners would believe that there are only so many ways one can cut the IR cake but even so, there remain many interesting challenges and opportunities for IROs to widen and deepen their roles within their companies.
We all know about the challenges that MiFID II offers issuers in terms of marketing their equity to investors, though, as yet, admittedly, life seems pretty much the same for UK mid- and large-cap companies (a case of wait and see, indeed). Many IROs are taking on the tasks of investor screening, targeting and roadshow management with positivity, sensing that this is an opportunity to manage their time and that of their senior management with greater precision than hitherto.
The move to a greater engagement with investors on a direct basis brings with it the opportunity for IROs to think more deeply about fashioning the narrative of how their company is viewed by stakeholders, including and beyond the equity investor. We have heard over recent years to sometimes perhaps stultifying extent about the requirements of the ESG community in terms of disclosure, but the research still shows that most fund managers consider most companies’ reporting on their strategy as lacking depth. The annual reports get larger because of ever increasing discourse on governance-related issues, while this basic problem remains.
We talk much in the IR world of investor relations as a two-way communication flow, but companies seldom ask their major audience, the buy side, their views on their financial communications, other than via the irregular, and often absent, route of perception audit. Most portfolio managers would welcome more time spent by boards on defining strategy to produce the foundation of their investor materials.
Of course, as passive investment in equity ownership becomes ever more significant, the importance of proving corporate credentials in ESG issues increases commensurately but governance analysts understand very well that a company without a clearly defined strategy is not going to perform as well as others with the same fundamentals over time.
This convergence of governance and business management evaluation has been one of the most striking aspects of the development of the governance industry over recent years. The recommendations provided by the major proxy advisory agencies in M&A and activist defence campaigns are these days as much analyses of business risk as they are critiques of adherence to the prevailing governance codes.
As we all know by now, the role of IROs in targeting active investors is increasingly important under MiFID II. The traditional routes by which investors meet companies is changing as a result of both regulatory and financial challenge. It is, however, a mistake to consider passive or index investors as not worthy of outreach by IROs, who should rather be placing relationships with the governance analysts at these firms at the same level as their interface with the portfolio managers at the active firms.
Any IR strategy must include governance in its breadth, even if discussions on remuneration remain ensconced within the company secretary domain. Investors view companies as one entity, albeit communicating often via different channels, and companies must apply joined-up thinking to their approach to investors. This is not a case of a ‘land-grab’ by IROs from the company secretary team, as much as a more evolved way of communicating with the financial markets.
The IRO or IR team should be the hub of the communication process across all channels, whether equity or governance or debt. Even if the IRO does not attend company meetings with the governance or debt investors, held by the company secretary or treasurer respectively, they should be aware of these meetings and their content.
The ‘M2’ environment offers IROs a wonderful opportunity to place themselves at the centre of their company’s interface with the market, by way of a deeper understanding and better management of the current and potential investor audience. It will take some time for some senior management teams to realise that the environment in which their shares are marketed has changed in ways the impact of which we have yet fully to discover.
For the vast majority of equity issuers, IR budgets have not yet caught up with the increasing levels of responsibility for equity purchase outcome that IROs now carry. This is a story that continues to evolve.
I wish you all the best for a successful and prosperous 2018.