The Re-Evolution of Investor Relations
Change is normal in the regular course of business. Some changes are easy to navigate whereas others can bring disruption to an entire industry. One such event -The Financial Crisis of 2008- brought a major change in the behaviour of shareholders. The crisis not only left investors in shock but also pushed them to be actively engaged with their portfolio companies. Shareholders started to increase their engagement with management of the companies to better understand and review their decision making. This has significantly transformed how companies engage with shareholders, bringing into focus the function of investor relations (IR) and shareholder engagement.
Deepening of constructive engagement
With the rising trend of active investor engagement, shareholders are keen to understand more about the business practices and the environmental, social and governance (ESG) policies adopted by companies. In addition to their focus on the company’s business outlook, shareholders are also advocating for the board of directors to play an active role in the oversight of business plan implementation. They are also on the lookout for the board to regularly engage with shareholders on these matters. Being better informed about all of these aspects play a role in helping shareholders make better decisions for their continued investment in the company.
To cater to the increasing participation of diverse shareholders, the company’s management and IR teams need to tailor their approach to better suit the shareholders. Clear and regular communication plays a vital role in deepening a constructive relationship with the shareholders. Adoption of modern methods and digital tools can help companies achieve this goal.
Modern approach to Investor Relations
Traditionally, investor relations were largely limited to mandatory reporting and dissemination of information. This included engaging with shareholders for financial disclosure reporting and corporate governance matters. During General Meetings, the communication was predominantly one-way, the Chairman together with the company secretary (CS) and/or the Chief Financial Officer (CFO) presenting the company performance reports to the shareholders. The shareholders would largely be focused on the earning potential and growth aspects of the business, and not actively engage in a discussion beyond these aspects.
However, over the last few years, shareholders have become increasingly curious to know about a variety of key elements of the company’s operations. These include human resource practices, corporate governance practices and diversity matters. This had led to companies realising that maintaining long term relationships with the shareholders requires a year-round commitment to address these concerns.
For effectively building these long-term relationships, investor relations officers (IRO) need to increase their support to the management team. The responsibilities for IROs include ESG and CSR communication, competitive analysis, relations with rating agencies and maintaining relations with debt investors. It also involves social listening i.e., keeping a check on the buzz around the company on multiple social media channels. The IRO needs to be a skilled communicator who understands both marketing and finance, while having good business acumen.
Among the key elements of focus, there has been a big push from shareholders on ESG considerations while making investment decisions. As per an industry survey report, there is an increasing trend globally of investors bringing an ESG specialist to an ESG focused meetings. In Asia Pacific, 85.5% of investors brought an ESG specialist whereas only 27.5% of companies brought an ESG specialist to an ESG focused meeting. Moreover, Principles for Responsible Investment (PRI), a global organization has seen a growth of over 40% in the number of signatories over the last 2 years.
Companies can use the framework proposed by Climate Disclosure Standards Board (CDSB) to incorporate climate change and environment-related information in their financial statements while presenting to their shareholders. Organisations can also keep track of ESG ratings, which is currently monitored by 64% of the investor relations departments surveyed in Asia. We are also witnessing the Stock Exchanges actively driving improvement of ESG standards. For example, the HKEX has recently laid down ESG requirements applicable to all listed entities on the exchange, following years of work in building awareness in this area. The exchange is doing noteworthy work to ease the process of ESG reporting. They are pushing for ListCo leadership to play an active role in ESG accountability and are driving for reporting of ESG-related issues that pose material risks to the business.
Shareholder Engagement- A positive-sum game
On the outer surface, all the above elements may seem like an added responsibility. But a healthy relationship and engagement with the shareholders is a positive-sum game. There are a host of benefits for companies who adopt an actively managed shareholder engagement policy.
Firstly, good shareholder engagement increases the visibility of the company among multiple stakeholders which in turn enhances the brand recall. This helps attract increased investments from existing shareholders, while attracting new funding. Secondly, strong communication on the company’s business purpose helps align the interest of the shareholders and the management, bringing them on the same page. Consistently engaging with the shareholders builds trust. This good relationship can be highly beneficial in case of an unforeseen crisis, where timely shareholder input can help protect the brand value of the company.
Investor Relations also play a particularly important role in providing oversight and check on corporate governance practices. Actively engaged shareholders can help the company look at issues from an outsider perspective and provide value through constructive criticism. Furthermore, if a company is transparent with the shareholders and adopts ethical practices, such values are transmitted to the employees of the company. This leads to an increase in job satisfaction and reduces employee turnover.
Best Practices for active shareholder engagement
With increasing scale and avenues of investment opportunities globally, investors want to invest in companies that are not just ‘doing well’ but are doing so responsibly. To attract and retain investors, IR teams need to adopt best practices consistent with the requirements of the investors. Some of the best practices include:
- Have a plan: Management need to develop a yearly plan on how the company will engage with both institutional as well as non-institutional investors. Secondly, management should consider participating in additional analyst calls (other than the normal quarterly/interim/annual Analyst call), roadshows, etc., besides attending investor meetings and conferences.
- Know your investors: Knowing the investor is important to understand their expectations and requirements. It also helps build trust. The IRO should engage with specific institutional investors by organizing one to one meetings.
- Digitize IR practices to attract global investment: In this era of the 4th industrial revolution, it is crucial to adopt digital practices for shareholder engagement and relationship management. The global pandemic has accelerated the need to adopt technology across all processes, including in IR. A company can organize online webinars, Q&A sessions and adopt e-Proxy/hybrid meeting to increase the participation of shareholders in voting.
As the Management and IR teams implement the above practices, an increase in engagement and transparency becomes a normal course of business. They create a win-win situation for both shareholders and companies in the longer run, while leading to increased credibility of the management.