IR SOCIETY CONFERENCE 2019

RD:IR was once again Gold Sponsor for the Investor Relations Society Conference, now in its 33rd year. The conference was hosted on 18 June at Kings Place in King’s Cross, London, with 400 people in attendance from issuers and service providers alike. Working so closely with the IR Society allows us to be at the forefront of the development of the IR profession, but also to feature heavily at the conference. It was great to see so many people brandishing RD:IR-branded tea towels emblazoned with our signature crumpet! We sincerely hope all attendees enjoy thinking of market-leading IR services while drying their dishes.

As with last year, the conference was very well hosted by the BBC’s own Evan Davis, who was joined on stage by the great and good of the IR and investment worlds. John Allan, chairman of Tesco and Barratt Developments, and president of the CBI, started the day with the keynote address. Setting the scene, he opened by mentioning that sustainability, climate change and corporations’ effects on the environment were at the forefront of younger generations’ minds. The distrust of corporations by the general public is something that the corporate world needs to address, and John noted that “thinking about your shareholder register will continue to be very important”. Of course, with climate change covered, no opening address would be complete without a mention of Brexit. John made his views clear that a no-deal scenario would be profoundly negative for British business, the economy and people. This would lead to a further depreciation of sterling, which may indeed encourage greater levels of foreign direct investment but would weaken British business’ purchasing power abroad and open companies to potential takeovers from foreign corporations. None of his comments on Brexit were too positive, but he did not become hysteric, instead noting that life will go on even with short-term disruption and long-term degradation. With so much negativity present in the political and business environment, John stressed that it is hugely important for IR professionals to remain honest and transparent. IROs are the eyes and ears of companies, so they must remain in constant contact with all stakeholders, unafraid to deliver unpopular messages if so required.

The day continued with seven different sessions interspersed with two keynote interviews with Susan Hooper and Sarah Bates respectively. The running theme throughout all sections of the day was ESG, which is a theme that seems to have almost wholly eclipsed MiFID II and – dare I say – Brexit. The former seems to have brought about a lot less change than anticipated, and the latter is such an unknown that people and companies do not know in which direction to head without further details from the government – no-deal, May’s deal or some other future? With ESG in mind, Gareth Hayward of Charles Stanley told the audience that he had recently been told by a company that they focused on what they called the three P’s: planet, people and profit. It would not have been too long ago that ‘planet’ would not have made this list.

There was wide agreement throughout the day that ‘ESG’ can be a problem label. It can be interpreted in so many different ways, so it is either better to break it down into its component parts or use the term ‘sustainable’, as per the suggestion by Andrew Parry of Hermes Investment Management. However, there is definite recognition that ESG issues, in whatever form, have been rising rapidly in the past twelve months and are now front-and-centre for most industry professionals. Indeed, Evan Davis asked for a show of hands by the audience to see who recognised this change and everybody agreed that they had noticed the change over the past year.

Rather contrary to the message of the day from many speakers was that put forth by the IROs. There was agreement that while the buy-side seem to bang the ESG and sustainability drums externally, it is exceptionally rare that investors will ever ask about ESG issues when in meetings with IROs. So it appears there is still work to be done for ESG to truly permeate all aspects of the investment industry. To aid this push, the afternoon panel dedicated to ESG made the case that ESG factors should not be thought of as entirely separate to the financial health of a company. It is far more accurate and helpful to see ESG issues and sustainability as part of how to value a company, with these topics being included into traditional reporting. There is still a long way to go for ESG ratings to be successfully implemented, however, and this is improving all the time.

Despite ESG being so dominant, there was space for other topics, and MiFID II was still a considered one. Now in play for 18 months, any effects from the legislation should be at least starting to be seen. Anne Scott of Kames Capital noted that analyst interaction has decreased by around 30%, though corporate access has stayed at a fairly constant level. In line with the declining level of analysts, Steve Davies of Jupiter has seen research declining, so his approach is to have fewer analysts but pay them more. This would be to avoid the process of ‘juniorisation’ that is taking hold in the industry, where quality declines as more junior analysts produce the research.

MiFID II was then considered by a panel of IROs, two of whom were from larger caps Sainsbury’s and easyJet and have seen a very limited reduction in analyst coverage, if at all. On the contrary, Richard Amos of small-cap Wilmington has seen coverage reduce quite considerably, meaning he is now considering going the route of sponsored research. The challenge is to keep this trustworthy and avoid the market viewing the research as conflicted due to the corporate footing the bill. A solution to this suggested would be to have the research without any investment recommendations and more focused on being an honest review of a company.

The interaction between investors and issuers has fundamentally changed since MiFID II came into force, with the sell-side becoming less relevant in many respects. Dani Saurymper of AXA Investment Managers told the audience that he has taken it upon himself to organise a recent roadshow to meet corporates. He found these corporates to be very accommodating to his requests and there was no sell-side either present or needed. This model of direct access is something we are likely to see much more of as both issuers and buy-side firms build out their corporate access teams. In addition, conferences and capital market days are something that will prove very useful as the market continues to adapt, as noted by Carl Murdock-Smith of Berenberg.

To build and maintain strong relationships with investors, outsourcing entirely to third parties is not the answer, but David Phillips of Hays noted that outsourcing is still a very useful tool because IROs are only going to become more busy. Being able to have assistance with 7am email announcements and meeting organisation from third party providers are things that will only boost any IR strategy. This level of organisation will always be required, as Sarah Heald of Pennon Group noted that while video conferencing is on the rise, investors will always want to see the whites of the eyes of an issuer’s board before investing.

In addition to MiFID II and ESG issues, many other topics were touched upon in what was a very full event. Evan Davis’ interview with Susan Hooper at the beginning of the afternoon was very interesting indeed. Susan is an NED of Uber, Wizz Air, Affinity Water and The Rank Group, as well as being on the board for the DExEU. She primarily focused on the role of NEDs in the efficient running of companies, noting that they exist to “kick the tyres of the strategy, fundamentals and culture” of a company. Climate change and sustainability are important to Susan, so she has identified that an important challenge for boards over the coming years will be to give a positive message to stakeholders that isn’t about growth. This will prove difficult in an environment where business ‘success’ and ‘growth’ are often synonymous, but the pressure exerted on the environment by business means a requirement for less consumption.

The final interview of the day was with Sarah Bates, the chair of Merian Global Investors. She focused on the changing investment environment and how ownership of companies has transitioned hugely with the rise of passive investments and ETFs. Sarah said that part of the role of being an IRO was to make yourself and your company available and easy to deal with, not hiding away when times get tough. Investor relations is where the bridge between investors and issuers is created, so it forms a vital part of an issuer’s longevity and ability to connect with the market.

In all, the day was interesting and well organised. We thank the team at the IR Society hugely for their hard work and look forward to seeing many of the attendees at other events throughout the year.

SRD II: A CHANGING LANDSCAPE

Further to our factsheet published earlier this year, we have put together an article looking at the upcoming Shareholder Rights Directive.

Titled Shareholder Rights Directive II: A Changing Landscape, this piece looks at the legislation more in-depth to provide a deeper understanding of how the market may change and how its participants will have to adapt.

You can read the article by clicking here.

INFORMED ARTICLE BY RICHARD DAVIES

Pondering The Imponderable

At the time of writing, the UK seems a chaotic place, at least in terms of its political situation. The US is also going through its own difficulties as the Federal shutdown goes on and its equity markets remain unstable.

Given that we have yet to understand the direction of travel of the country in terms of Brexit – or lack of it – it feels almost impossible to write of things of certainty when uncertainty seems to be the current standard operating model.

I have previously written of the role of investor relations to offer a place of rationality in an increasingly irrational developed world where facts are not deemed as interesting as untruths and conspiracy. There is comfort to be found in the immutable structure of mathematics, but we also know that finance and accounting can easily drift towards art rather than science. Valuation of assets is a particularly nebulous area, as we know when it comes to the tricky issue of pricing derivatives. I am mindful also of the ongoing FRC investigation into Carillion and its auditors, and the questions of trust this issue represents.

There is so much to consider right now in our world of IR, over and above the chaos that reigns in the realm, so here is my list of things I am thinking about this month in relation to the UK market (in no particular order):

  • The impact of No Deal Brexit on the continuing implementation of MiFID II.
  • The lack of major IPOs in process or in sight (the number of public companies listed on the LSE continues to fall month on month).
  • The rise again of the importance of prime brokerage for the revenues of the investment banks with all its concomitant risk for equity issuers in terms of being set up to being shorted.
  • The slow war of attrition that is mid-tier corporate broking (surely, as Otis Redding once sang: “It’s been a long, long time coming, but I know, but I know a change is gotta come”).
  • Sustainability is now a sustainable part of corporate culture; and the need for IROs to view this as an opportunity and not just a burden or challenge.
  • Institutional shareholders becoming increasingly hard-line in their voting practice (it is going to be a very intense AGM season this year, and no company should take investor support for granted).
  • Increasing levels of takeover of UK equity issuers as sterling remains at depressed levels, reducing the number of public companies, with little topping-up of the market through the listing of new companies.
  • The increasing significance placed on the E and S as well as the G by investors.
  • The increasing importance of company reporting on HR and the training of their employees for ESG-oriented investors.
  • The future of the High Street and its impact on the quoted retail sector.
  • Traditional long-only plain-vanilla institutional investors muscling up and calling themselves “activists”.
  • The rise in the numbers of interventions by collective investor engagement to achieve change in companies that are deemed to have bad governance.
  • Concern that some senior management may take the (in my view incorrect) view that during tough times, their IR teams should talk less to the market and not more.
  • Britain will now be viewed with distrust as a place of investment, whatever happens.
  • Global growth slow-down due to US-China tariff wars exacerbating an already tough economic situation here and in Europe.
  • The slowdown or reversal in the switch to passive investment in the light of any impending major correction of the equity markets.
  • Changing skill requirements for senior management in the era of social media.
  • Shifts in cashflows from the developed to the emerging markets.
  • The ongoing convergence of governance and investor relations due to the rise of passive investment and the increased commensurate importance of companies understanding the ESG needs of investors including improved reporting on intangible assets.
  • Increasing concentration of ownership by asset managers of equities leading to investor “cliques” that potentially lead to anti-competitive collusion while increasing pricing volatility.
  • Uncertainty continuing for longer than anyone hopes…

Keep calm and  carry  on  reporting!

Whether or not our political situation, and to some or greater extent thereby our economy, will be more certain by the time I write my next column for this journal cannot be determined at this time. During turmoil, one can only continue to carry out the fundamentals of the IR process: Keep Calm and Carry on Reporting!

The job of communication to the market goes on whatever happens in the macro-environment, and one could argue that all companies should be talking to  the market more right now to ensure that investors are kept in the information loop as much as possible, both as pro-active engagement to help create demand for the shares to protect share price but also as part of a strategy to fend off activists wherever possible.

Understanding investor sentiment, both at the portfolio manager and at the governance fund manager level, is vital to the defence against those investors who seek change, who generally can only achieve leverage for that change at shareholder meetings where they have the active or tacit support of the traditional institutional investors who feel their voices have not hitherto been heard by management. It is rare that an activist presents management with a suggestion on strategy that has not been aired before by another investor.

Uncertain times

As I wrote last quarter, understanding the views of the ‘negative investors’, the shorting investors, is also important in terms of framing an understanding of market sentiment, however difficult those conversations, if they indeed can take place at all.

We live in uncertain times, but the IR role remains as important as ever. I wish you a splendid and successful results season, for those to whom this is relevant, and to all a happy and healthy 2019.

RICHARD DAVIES SPEAKS AT THE EDISON & TRUST ASSOCIATES INVESTMENT COMPANY SEMINAR

Richard Davies spoke this week at the Edison & Trust Associates Investment Company Seminar held at the offices of Edison in London. Richard set the scene for the seminar with an overview of the UK investment trust sector in terms of current and historic share ownership, based on RD:IR’s granular analysis of the share registers of our circa 200 investment trust clients.

The audience of investment trust chairs then heard from two representatives of the investor platform industry, Moira O’Neill of Interactive Investors and Mark Walter of Hargreaves Lansdown, who talked about how their platforms operated and the future of investment trusts on platforms.

With such uncertainty and potentially big market change coming up over the next few years, it was a great occasion to hear from other people working in the sector. We thank both Edison and Trust Associates for organising such an insightful event.

SHAREHOLDER RIGHTS DIRECTIVE II

Ahead of the Shareholder Rights Directive II coming into law in H2 2019, we have produced a factsheet to cover the key points and keep clients and market professionals alike up to speed.

You can read our factsheet by clicking here.