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.

RD:IR RUNS THE VITALITY 10K

A crack team of RD:IR athletes took to the streets of London yesterday to run in the annual Vitality 10K on behalf of Lymphoma Action. Around 23,000 runners pounded the streets of London on a warm morning for the capital, beginning on the Mall, heading through the City and looping back round near Bank to finish by Buckingham Palace.

Lymphoma Action has been chosen as our charity for 2019 after a colleague was diagnosed with non-Hodgkin’s lymphoma towards the end of last year. The charity is the only charity in the UK dedicated solely to lymphoma, informing & supporting those affected by the disease, and connecting them with experts.

Now our colleague is in remission as of last week, he proceeded to run a strong race and did the company and all those supporting proud. David Bissell came in at a very respectable 42 minutes, putting RD:IR within touching distance of Mo Farah’s winning time of 28 minutes. Our leading lady, Andrea Miz, crossed the line in an impressive 54 minutes.

A huge thank you to all those who donated, allowing us to smash our target of £1,000. There is still time to donate, so please feel free to do so by clicking here. We are passionate about this cause and appreciate every penny!

RICHARD DAVIES MODERATES IR MASTERCLASS

The second panel (L-R: Trelawny Williams, Rob Beale, Andrew Ninian, Richard Davies)

On 25th April 2019 Richard Davies, Managing Director of RD:IR, curated and moderated the first of two IR Masterclasses for 2019, organised by the IR Society and hosted at the offices of Instinctif Partners. This Masterclass looked at topics relating to governance.

Richard opened the morning with a broad overview of the current investment and IR landscape, as well as introducing the various speakers. Richard commented that the environmental, social & governance (ESG) industry is growing at notable pace, with portfolio managers becoming more aware of these issues, as well as the governance teams.  This has led to a culture for 2019 in which every AGM is potentially contentious.

Following the introduction, Richard gave way to Tom Nolan of Fidelity Management & Research Company, who spoke in-depth about the macroeconomic environment and how this could develop in the short- to mid- term. His research had concluded that there are three points that stand out the most within macroeconomics:

  • The economic cycle is mature yet still has legs;
  • Consensus expectations are finally reflecting some caution;
  • Risk assets are typically exhibiting more volatility, but returns are still strong.

With these points in mind, it was noted that the global economy is in late cycle and about to go into a cyclical pickup. Tom took the view that a recession is not likely soon, which is contrary to a lot of market commentators. To bolster this thinking, Tom presented evidence of interest rates not having risen, as these rates have risen directly prior to previous recessions. Tom proceeded to dig into a great deal of economic data, discussing everything from Brexit to Trump, UK politics to trade wars.

The first panel came to the stage after Tom, consisting of Will Pomroy of Hermes Investment Management, Leighton Barnish of Emperor, and Simon Gleadhill of Howden Joinery Group. Their topic of discussion was the increasing challenges of ESG reporting. An eye-watering $30tn is now flowing into ESG matters one way or another, making this a very pertinent topic. It was noted that ESG topics have been considered by investors for quite a few decades, under the different guises of more specific terms like ‘governance’, ‘CSR’, and ‘sustainability’. While in the past, companies focused heavily on health & safety, modern times have seen a shift towards environmental and equality issues at company level, and this will become more relevant as Generation Z replaces Millennials and Generation Y as investors, consumers and employees.

Simon Gleadhill took the view that getting investor feedback is crucial to understanding how to report on the company – what do investors want to hear about, and what are their main concerns? The panel agreed that it is possible to give too much ESG information to investors, flooding annual reports with every case study and detail. Websites can be used to showcase most data and case studies, but annual reports should be thought through and targeted to specific audiences. To demonstrate this shift over time, a fact was offered that ten years ago a CFA study found that almost no CFA members were paying attention to ESG matters, compared to a notable 73% today.

An important point to take away from the first panel session was that the ESG marketplace is very crowded with various metrics. There are myriad indices in existence. Will Pomroy stated that Hermes, for example, conducts its own research into companies to understand a company’s ESG standing. The crowded marketplace is a sign of good, however. Leighton Barnish said that Moody’s conducted a retrospective analysis and found that there was an almost perfect correlation between companies they downgraded and those companies’ poor sustainability record. This added evidence to the idea that ESG-focused investing does not affect returns, and in fact having a strong sustainability record could benefit a company.

The second panel was made up of Andrew Ninian of The Investment Association (IA), Trelawny Williams of Brunswick, and Rob Beale of Capital Group, looking at the AGM season for 2019 and investor concerns for the meetings. Broadly speaking, these concerns were around governance, with the primary focus being on boards and board members. A list of the top five issues for 2019 was read out and summarised, with those issues being:

  • Board diversity
  • Directors’ pensions
  • Overboarding
  • Directors’ tenure
  • Proxy advisory agency (PAA) transparency

Andrew Ninian told the audience that the IA’s view is that diversity is positive for sustainability and long-term growth. He referenced the aim to have one-third of all board members to be female, established by the Hampton-Alexander Review, and how the IA has been contacting companies to ask them to change the make up of their boards. An approach of ‘one and done’ has been adopted by a lot of companies apparently, meaning they have appointed one female board member and then considered their work on diversity done. This is something the IA has been battling against, believing that diversity should be something constantly addressed and with a full commitment to and belief in the end goal. The view was taken that pay gap analyses based on other aspects than gender are also on the way.

With regard to the broader topic of boards acting in the best interests of all stakeholders, Trelawny Williams noted that there is no enforcer of section 172, Companies Act 2006. This causes a potentially confusing interpretation of the law and an inconsistent approach between companies. The question was asked as to whether the successor to the current Financial Reporting Council (FRC) will have some enforcement capabilities to bring understanding and discipline to the market.

The power that PAAs have over the outcome of companies’ general meetings was acknowledged as an issue, along with the view that those same PAAs also provided a very useful and important function. Steps have been taken to address the one-way nature of the information that PAAs give to investors, with Glass Lewis now allowing companies to comment on its recommendations. Andrew Ninian praised the incoming Shareholder Rights Directive II (SRD II) that the EU has instigated, and which will become law later this year. This legislation places requirements on PAAs for them to be more transparent in what they are recommending and how they have come to their conclusions. We have published a piece on SRD II, which is available to read here.

The top tip from the speakers at the end of the second panel session was for companies to keep communicating with stakeholders and the wider market. If a board has chosen to do something, it should be open and explicit as to why, explaining itself with clarity.

The third and final panel session for the morning included Adrienne Monley of Vanguard and Simon Bailey of JLC Investor Relations. With Vanguard having recently opened up an office in London, and with $350-400bn invested in the UK, it was interesting to hear from such a major fund manager. The topic of discussion for Adrienne and Simon was the impact on IR from the rise of passive investing. Simon Bailey kicked off by noting that around a third of the investment market is now passive, but that it is never a case of simply active versus passive. Both approaches to investing coexist, and passive could not exist without active managers pricing and providing liquidity to the market. With this in mind, Adrienne noted that Vanguard actively manages around $1tn of investments in the USA, despite the fact that Vanguard is most well known for its passive investing.

Adrienne Monley made it clear that passive investors like engaging with companies just as much as active investors. This is particularly relevant during times of down markets, as investors tend to seek more engagement with companies, and so more resources are focused on stewardship.

With Vanguard being an US-based manager and Adrienne Monley’s experience being heavily US-focused in the past, her experience has been that governance and wider ESG issues are spoken about more openly in the UK than the USA. In addition, she noted that boards are more open over here and are happier to engage with large shareholders. It is very common in the US for the top three holders of a company to own most of the shares; in the UK, share registers are more dispersed.

SRD II was brought up as an important next step in market clarity, and the point was made that this will impact PAAs. The speakers agreed that PAAs have an important role to play, especially with fund managers having to research so many companies, so they should still occupy an important place in the market, but the new legislation will place greater emphasis on their transparency.

Engagement was the key point of the final session. Both Adrienne Monley and Simon Bailey were of the view that engaging with passive investors is what companies should be doing. The message was that passive is going to be considered the new normal, so companies may as well get used to it.

As ever, the IR Masterclass was a very insightful event and 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 or any of our other services further.

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.