INFORMED ARTICLE BY RICHARD DAVIES

Springing Into Action

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.

Two-way flow

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.

Including governance

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.

IR budgets

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.

Informed Article by Richard Davies

 

Richard_031_web  New World, New Demands

I have written in past columns about the changing world of investor relations in terms of the additional demands that are being placed on IROs as a result of those changes. As well as the uncertainty that the Brexit vote has brought to the City, we find that technological development is gathering pace in terms of the formation of new ways of thinking about IR data and processes. The world of investor relations is not immune to the current sense of disruption and innovation.

There has been much comment on the potential changes in the corporate access market brought about by MiFID II. Even though we can only guess when exactly this market Directive will be finally introduced in the UK – it is flagged for 2018 but we have been here before – most commentators are of the opinion that it is coming to our shores, in whole or in part, whether we leave the EU or not.

One clearly flagged outcome of MiFID II has been and will be the seismic shift of the payment mechanism that hitherto existed between the buy-side and the sell-side with regard to research and access. While the exact formulation of the Directive has yet to be revealed through “the finalisation of the EU implementing legislation”, as the FCA website so poetically states, the City has started slowly to come to terms with the proposed changes, though some would argue that many on the sell-side remain in denial, hoping that one day all this nonsense will simply go away.

From the IRO’s perspective, life can either look pretty much the same right now or it can look very different from just a few years ago. We are now living somewhat in a two-tier market system.

For large- or larger mid-caps or for those companies which are more heavily traded or have M&A in the offing, then the banks and brokers remain keen to please. We find that these companies may have to endure the attention of up to 25 sell-side analysts. Sadly, the proportion of those analysts that these companies rate as “good” has fallen sharply over the last few years. It is not entirely the analysts’ fault as they are being squeezed to cover more companies due to the economic pressures being applied to their employers, the banks. However, there is a feeling among many IROs that the quality of sell-side research has drifted down in tandem with the perceived influence of that research on the buy-side. For the first time in my career, I now get regularly asked by IROs of these “well-covered” stocks, how they can stop analysts writing on them because the IROs neither have the time to deal with so many of them nor the belief that what some analysts produce has any value, except as marketing material for the bank.

Alas, on the other side, we have the situation of the small- and micro-cap stocks where there is no coverage whatsoever from the sell-side, including, in increasing numbers, even from their own broker. The institutions have in many cases retreated up the value chain to focus their funds on larger, more risk-averse companies, while either concentrating their portfolios or taking a “closet index” approach to investment to save on research costs. Some wonderfully well-run and profitable UK small cap stocks have been simply left to hang out to dry by both the buy- and sell-side. This flies in the face of the notion of the efficient market and also highlights the fact that hedge funds do not necessarily spot every nugget of deep value going.

Independent research has frequently been cited as taking up the breach for those companies that have been left high and dry but being written about is not the same as being read about, and the small- and micro-cap markets are still very dense, despite the attrition on issuer numbers overall that I have written about in former columns. There are many voices clamouring for attention in this area and a close examination of the UK stock market in terms of issuer fundamentals reveals that not everyone knows how to shout nor what to shout about.

There has long been a need for those smaller companies which have a good equity story to be more pro-active about reaching out to the market and demanding investor attention but the irony is that these companies are those less likely to have an IRO to make this happen. These companies are also more likely to have senior management who have historically relied completely on their broker to provide engagement with the capital markets.

The growing issue now is that these problems of reduction in corporate access levels and dwindling institutional investor support are moving up the ladder of market capitalisation but most senior management without a dedicated IR team will have little idea how to benchmark themselves to know, for example, that meeting so few new investors each year is not necessarily how things should be. There has been a paradigm shift the in the markets but many companies have not yet worked out what that means for their stock in terms of price or demand.

This is, or should be, good news for the IR market in terms of the growth in the number of companies who take on IR professionals for the first time. Given that the proportion of public company equity issuers, excepting investment companies, which have a dedicated IR person remains under 50%, then there is tremendous scope for new IR jobs under the current circumstances.

Of course, agencies and consultants can fill some of those gaps but there are still dozens, if not hundreds, of public companies that will, I believe, over time take on a dedicated IR function.

MiFID II has yet to be fully implemented and there is still scope for vast change in the capital markets ahead of 2018. As I have previously commented, we are at the start of a very long road and if the Brexit vote has achieved one thing, then it is that we are more certain of our uncertainties now than before. However, those fund managers and stockbrokers who think that things will go back to their previous state as a result of the vote are misguided. The changes have already begun.

Informed Magazine Article by Richard Davies

RD  IR and the aftermath of the Brexit vote

I write this on the morning of a new phase of existence for the United Kingdom – the great leap into the unknown represented by the vote for Leave, as decided yesterday by the British public. While there is a broad plan for our exit from the European Union, the finer details have still to be decided or, at least, made known to us.

The impact of Brexit on the economy for any term of time is as yet unclear but already currency and equity markets, and the announcements on plans for some US financial services companies with UK offices to move to the Continent, have shown that life ahead in our new ‘liberated’ format will not be a smooth ride.

Much has been written from both sides of the argument of the likely or possible implications for UK business of a vote to Leave but it is clear that IROs in the UK face busy times ahead, whatever sector they operate within.

Uncertainty is hardly the preferred environment for the long-term equity investor and every UK public company must be prepared to attempt to explain the impact of market conditions which have yet to be understood fully.

Given that we already know that other major European markets outside the UK (for example, Norway and Switzerland) conduct themselves largely according to EU regulatory practice, there may be little chance of ridding ourselves of what many firms see as the common market’s stifling bureaucracy. Given the potential loss of the EU passport model (a strong possibility as I write), we may yet see the outflux of many financial services companies from London to Frankfurt or other EU cities.

The poll taken at this year’s Society Conference showed overwhelming support for remaining in the EU, as a result, I assume, of the belief among UK IR professionals that departure would be bad for their companies and the economy in general, if only for an indeterminate while.

I am sure many of those conference attendees now wonder what will happen next: to their businesses, to sterling, to the regulatory environment, to their share price, and to the markets within which they operate.

The ripples of Brexit spread far and wide – many have spoken of this as a global event, extending way beyond our shores. The whole EU project is now under threat from dissent in some of the major market constituents. Talk of nationalism and self-interest has replaced the now tainted project of globalisation. Market protectionism is the avowed way forward for US presidential nomination, Mr Trump, who is perhaps a more likely winner of his election as a result of Britain’s choice.

Brokers have been saying that the IPO and M&A markets would get busier in September, after the Referendum and the summer recess, but I am not sure that took into account a Leave voting outcome. Markets may well become far more active but perhaps not for the best reasons. I am sure the hedgies are delighted by the current turmoil, and the sell-side will enjoy trading levels they will remember from the halcyon days, as volatility ramps up.

UK IROs should enjoy their summer holidays as much as they can, as the next months could prove arduous. There will be much to do.

Convergence Culture – Richard Davies writes for ICSA

Article appearing in February issue of  ICSA Governance and Compliance

Company secretaries and investor relations officers must work closer together

The impetus for the development of investor relations (IR) as an independent profession was largely the implementation of the 1985 Companies Act. This gave public companies the right under s212 to interrogate shareholders as to their real ownership. Hitherto, shareholders, whether institutional or retail, could hide behind ‘front’ or ‘shell’ nominee companies, mainly operated by the custody departments of banks and stockbrokers. Nominee companies – or custody accounts to use the international term – existed then and now for two main purposes: firstly, as an easier way for their operators to collect and distribute dividends to underlying shareholders, and secondly, to allow investors not to appear on the UK share register in their own name.

Over the past 30 years there has been a concentration of ownership of UK plc by nominee companies. These companies act for the majority of institutional investment and increasing swathes of retail investment, with the growth of execution-only and broker platforms. As the banking and custody markets have consolidated globally, we now find that a handful of international players dominate the UK share register, as opposed to the much more fragmented situation when s212 was initially introduced.

The introduction of the s212 dispensation predicated the emergence of IR as a corporate function because the change in the Act allowed companies to understand more fully who owned and managed their shares, and with this knowledge came the urge to communicate.

Before 1985, UK companies relied heavily on their corporate broker for market intelligence, and share ownership information was just one of them. The house broker would know who had traded the company’s stock far more closely than anyone else because, in those days, most trades would go through the house broker’s book. In those days, there was a requirement for fund managers to seek best execution from stockbrokers for their trades – today this is usually no longer the case. The house broker’s institutional and retail clients would also be the major buyer of the company’s shares, often on the basis of a ‘nod and a wink’, as insider dealing was considered a normal part of City life, until it was outlawed explicitly by the Company Securities (Insider Dealing) Act of 1985.

Share ownership

Understanding who owned your shares was also not so important in a time when most stock in companies was owned by friends and family of the founders or directors of the company, and the overall retail ownership of your stock was much higher than now. The most significant change in the structure of the UK equity market from the 1960s onwards was the rise of the institutional investor and institutional asset management. This was the result of significant growth in the amount of money allocated to savings and insurance, whether through pensions or insurance funds initially or later via the intermediary collective investment vehicle of the unit trust (now more commonly known as the mutual fund). The level of retail ownership did not fall as much as shrink in proportion to the amount of money pouring into equities from the new breed of money managers of the 1970s.

The new investor profile of UK plc brought with it new challenges: although retail investors usually sided with management and were loyal long-term holders in their investee stocks, professional investors were a much more fickle bunch, willing to sell their shares to the highest bidder to bulk up the returns for their demanding clients. The market liberalisation of the Big Bang in 1986 heralded a sea-change in the UK capital markets, as the old-school boxing style of gentlemanly capitalism gave way to the rough-and-ready US bare-knuckle fighting of mergers and acquisitions. We entered the dangerous world of the unsolicited contested bid.

Suddenly, UK companies needed to know who owned them in order to defend themselves properly. They needed to know who owned other companies to take a view about whether they should buy them, as a defensive merger or to join in the feeding frenzy of acquisition and conglomeration. Senior management needed advisers in-house and externally to manage and advise on how to deal with these new turbulent equity markets and the predators that emerged therefrom. Thus were borne financial PR and investor relations in their modern forms. Financial PR was no longer just about acting as an out-sourced provider of content for annual reports and regulatory press releases, but instead it became a strategic and often public arena. Titans of industry, locked in corporate battle, would try to achieve knock-out blows against each other, guided by their trusty knights of combat, the PR gurus. The fight between Virgin and British Airways of 1993, commonly dubbed ‘the dirty tricks campaign’, is a classic of the genre but there were many others during the late 80s and early 90s. The gloves in UK business were off, as US styles of management and finance took hold.

Corporate Governance Code

Another aspect of US business culture that gained strength over the same period was corporate governance. This began not as an ethical or moral piece about the behaviour of company directors in their management of business but more as a way for shareholders to flex their muscle as owners of companies to improve returns on their investment. Governance and activism have always been close bedfellows, particularly in the US market historically and certainly in the UK latterly.

There was increasing media focus on the behaviour of major UK companies and their boards in the newly liberated financial markets, fascinated by both the febrile atmosphere of the M&A world and the various corporate scandals of the era. After BCCI, Polly Peck and, arguably more importantly, the shenanigans of Robert Maxwell, the City recognised that some new structures and rules, even if self-regulated, had to be introduced. If only to persuade the alarmed general public that order could be brought to what seemed like chaos and corruption.

Sir Adrian Cadbury set up his Corporate Governance Committee in 1991 under the auspices of the Financial Reporting Council and the London Stock Exchange, with the support of the accountancy profession, in order to bring back confidence in the UK markets. This lead to the production of a code which forms a major part of today’s Corporate Governance Code in the UK and similar codes around the world. A particularly British aspect of the original Cadbury Code, still in place, was the notion of ‘comply or explain’, which allows companies which do not follow every aspect of the Code to provide background to their diversion therefrom.

Many aspects of Sir Adrian’s Code are now taken as common-sense approaches to running public companies in the interests of all stakeholders. Although criminality and corruption cannot be regulated away, good governance in corporate life is viewed as basic market practice by the vast majority of investors and boards – and largely adhered to.

Principles of governance

A whole industry has built up around these basic principles of governance. This includes specialist governance investors within asset management firms, advisers who guide companies on governance and agencies measuring and auditing governance, in order to advise investors on the state of governance at their investee or target companies. Companies or investors have never taken governance so seriously. The recent changes to the UK regulatory environment surrounding ‘say on pay’ and directors’ re-election have sharpened the minds on both sides of the governance equation.

Governance matters and liaison with governance fund managers (or fund managers with governance concerns) have traditionally been the bailiwick of the company secretary in conjunction with the chairman, the senior independent director or occasionally executive management, if and when relevant. Governance could be seen in this sense to be a non-executive function, with a necessary distance from the executives, especially in the area of remuneration, where a critical distance can only be seen as healthy.

Investor relations officers (IROs), where present, have often not been party to or even aware of the discussions held between the ‘governance team’ and investors. However, it is often the governance officer at the asset management firm that the governance team meets, not the portfolio managers or buy-side analysts that the IROs deal with.

The company secretary

Every company is different and so we see many configurations of the ways that the company secretary and IRO work together. Yet there is a distinct correlation between the size of the company, how long it has been in existence and the degree of division between the functions. Simply put, the larger the company and the longer it has been operating, the more likely it is that company secretarial and investor relations functions will operate in separate ‘silos’ within the business. The only ongoing common bond, other than at AGM time and the production of the annual report, may well be the production of the IR section of the board report.

We know that this is not merely a case of governance ‘capture’ by the company secretarial profession. Many IROs will roll their eyes at the mention of governance, perceiving these issues to be non-strategic, an unwanted imposition of regulatory burden and a matter of non-substantial box-ticking, only with little upside for them or the company. This view has to change.

The understanding of investor relations and governance work as two separate practices is no longer sustainable. We already have a situation where the life of the public company can be affected significantly by external factors: voting by shareholders at the annual general meeting and the role of activist shareholders in creating change. Neither of these are new features of corporate life but there have been material changes over recent years in the way that decisions are made by investors. These changes affect the remits of both the company secretary and the IRO equally. They include:

  • Higher levels of voting by institutional investors at shareholder meetings as a result of the Stewardship Code
  • Increased importance of the proxy advisery agencies in terms of their influence on institutional shareholder voting 
  • Governance officers at asset managers have greater influence over voting decisions relative to the portfolio managers than ever before
  • Greater prominence given to governance and related issues (such as environmental and social issues) by investors when making stock selections and carrying out analysis of companies’ valuations
  • Rising levels of aggressive activism and the arrival in the UK of US-style litigation culture
  • Greater willingness amongst UK long-only ‘vanilla’ investors to join with activists to achieve corporate change
  • The arrival of collective engagement in the form of the newly formed UK Investor Forum.

On a practical basis, at IR meetings on their non-deal roadshows, IROs will now often meet a group of fund managers from the same investment management firm where equity, debt, governance and SRI-interested (socially responsible investment) fund managers are represented. Many investment management firms are breaking down their own silo approach, so that their governance officers will regularly accompany the portfolio managers to missionary or retention corporate access meetings.

Governance and IR

Corporate communication to the financial markets needs to be holistic. Just as we have seen the growth at larger companies of an integration of the equity and debt IR functions, there should also be greater integration of the governance and IR functions across all companies. The audiences are becoming unified and communication practice should follow suit.

There are circumstances where there should be a separation of process, in order to avoid conflicts of interest, such as around remuneration of directors. In general however, it seems clear that there should be a better knowledge capture and record keeping of governance meetings between company secretarial and IR teams. This will ensure that both sides understand better who has seen whom, when and why and therefore advise senior management accordingly.

This is the future of good IR and corporate secretary practice. If the audiences for IR and governance are integrating, and the importance of governance investors on the future of UK plc is also growing, then maintaining a silo-led approach is in itself poor corporate governance.

The dialogue between IR professionals and company secretarial teams must widen and deepen in the face of the changing nature of capital markets. This is especially important now that the role of the sell-side is evolving as a result of the regulatory changes regarding payment for corporate access and sell-side research. Companies need to understand their investors better than before and take a more proactive stance towards their IR activity, as the traditional support from their broker may deteriorate due to commercial pressures.

Company secretaries and IROs should work together more closely and efficiently to ensure that their companies have the best chance of flourishing in an increasingly difficult environment. Governance and investor relations are more closely linked than ever from the investor’s perspective, so corporate practice should reflect this.

ICSA Annual Conference 2016

Richard Davies will be speaking at the ICSA Annual Conference on 8 March. Book your place via the website.

Richard Davies is Managing Director at RD:IR

Richard Davies looks back over three decades of Investor Relations

 
After three decades in IR, including two years as the Chair of the IR Society, RD:IR’s Managing Director, Richard Davies, believes that though the IR industry has come far, there is still a long way to go.

 

Summary

  • Technological change has driven faster, cheaper and more accurate data
  • IROs are better qualified than ever
  • Regulatory changes have had huge effects on the capital markets
  • The sell-side is here to stay, despite what some people think
  • Companies with dedicated IROs typically perform better

 

The best thing about working in the IR industry is the constant change, which provides both challenge and opportunity. This is matched by the continuity in the profession of the striving towards better practice. Looking back over the last 27 years of my time in the sector, I see much that has changed and much that has stayed the same. The most startling developments have, of course, been in the area of technology, with the impact of faster processing speeds in computing and the arrival of the internet. Many readers will find it difficult to imagine a time before digital and, indeed, I find it difficult to believe that we used to perform so much data entry and analysis manually in the late 80s. I started my IR career creating one of the first share register analysis systems, which was a spin-off of a hard copy publication I was hired to edit, The Index of Nominees & their Beneficial Owners. This directory of nominee companies and the funds they represented became a minor City classic, which I still get asked about, 15 years after its final edition was published. The early iterations were researched using fiches from Companies House, telephone calls to nominee companies and inspections of often hand-written or typed registers of beneficial owners, derived from interrogation under the old Companies Act Section 212 legislation (now known as s793). We went on to use this painstaking research (further augmented by fund-to-fund manager researched linkages) to analyse share registers, which arrived in hard copy format in piles of boxes, which we sifted and entered manually into computers the size of a desk. Analysis which now takes seconds, with electronic registers and sophisticated data processing, took days in some cases – and the fees reflected this.

Big data

The commoditisation and universalisation of data has certainly been a key change in the IR and financial services industry. Today’s IRO has easy access to information that would have been unimaginable 30 years ago. The challenge remains, however, in understanding how data should be used efficiently and strategically. It is a cliché in the industry to point out that IR is now taken more seriously by company boards but this is, of course, true. IR has become more professionalised in the UK, partly due to the impact of the IR Society. Gone are the days when fund managers and analysts would only speak to senior management, largely due to the rise in financial competence of the average IR officer (although I am not of the opinion that IROs necessarily have to be ex-analysts to have gravitas).

Disrupted industry

A major change, which historical significance in total, like the French Revolution according to Zhou Enlai, has yet to be fully understood, has been the forced unbundling of broker fees to fund managers for corporate access and research. I suspect that this is only the beginning of a deeper and wider disruption of financial services as market Darwinianism and internet technology scythe their way in months through centuries-old relationships in the City. There are so many other changes to the way that the capital markets operate that have impacted on the world of IR, all of which we now take for granted: internationalisation and consolidation of the asset management sector; the rise of hedge funds and proprietary trading; the impact of EU regulation (for example, MiFIDs 1 & 2); high-frequency trading and dark pools; the rise of Asia and other emerging markets as part of the globalisation process; the increase in interest in governance and the commensurate rise in importance of the proxy advisory agencies.

Big banks are here to stay

While so much has changed, so much has stayed the same. It is a rather wonderful aspect of the IR market that many of the market players of 27 years ago are still in place, whether as companies or IRO professionals. The young bucks of the 80s are now part of the IR establishment, albeit with greyer hair and expanded waistlines (including this writer). The arguments about companies needing to be pro-active about their equity marketing strategy are as true now as they were then, if not more so. People have decried the end of the sellside since I started work in the City. It hasn’t happened yet and will not happen for some years to come: there are too many vested interests. The major investment banks will be part of the scene for the foreseeable future and life for larger companies in terms of the services they receive therefrom will go on much as usual for the time being. Given the changes in the research and corporate access fee model that the recent FCA and forthcoming MiFID changes precipitate, my concern relates to the funding of small- and mid-cap public companies. Growth companies are the basis of a healthy public company market, where investors, retail and institutional, can invest in entities which are subject to market scrutiny, unlike the private equity market, where the only real oversight is provided by the auditor. Many of our current large-cap companies started life as small-caps but I wonder how many would achieve the same growth under today’s capital market conditions.

The role of the IRO

We have come very far in the IR industry in the UK but there is still a long way to go. Many UK public companies still do not see the need for a dedicated IR professional. Even those companies that do employ an IR officer may not take a pro-active approach to marketing their equity. The UK IR industry includes some of the world’s leading IR professionals, running sophisticated processes and strategies, utilising a mix of data and consultancy to take their company’s equity story to the global marketplace. On the other hand, there are companies that still do not consider IR to be important or which rely totally on a lacklustre broker with no interest in promoting their equity. The most exciting aspect of my last 27 years in the IR world is that I see that the former category is growing and the latter is shrinking. Research shows that companies which do not perform IR so well tend to disappear faster than those that do. In my experience, it was always thus and I am sure this will continue to be true. I wish the IR Society a very happy 35th birthday. I am delighted to have been part of its history. I look forward to the future of the Society and of the global IR market as we all embrace change and challenge. 

 

Richard wrote this article as a contribution to the IR Society’s 35th anniversary celebratory edition of Informed Magazine. A copy of the magazine can be downloaded on the Society’s website here.