In this edition of Overture we argue that gathering data and measuring contribution is an important step towards the re-rating of any professional group. Who does the measuring is a moot point. While the intellectual exercise of identifying and measuring value in new ways is tough, Fidelio does not see an alternative. Setting the agenda, gathering the data and framing the debate can make a powerful impact – as the campaign to increase female representation on Boards has shown. Other professional groups take note.
Gillian Karran-Cumberlege
In March 2013 Overture tackled “Articulating the value of Investor Relations and why the CFO cares”. We are delighted to receive feedback and Overture readers clearly do care about this topic. Keen to articulate the value of IR, our readers wanted to know how that value should be measured. In this edition of Overture, Fidelio provides answers.
Investor relations matters to the global buy-side. To most (62%), investor communications plays a tangible role in helping establish a stock’s price. This conviction currently is strongest in North America and the Asia-Pacific region.
– Driving Valuation with Superb IR – What the Global Buy-side expects, Rivel Intelligence Council
Fidelio’s recent CFO survey “Accessing Capital – What the CFO needs: Profile, Skill Sets and Resource” (view here) reviews how leading CFOs structure their equity and debt IR capability. Sustainable access to capital is critical but not at any cost. The IR function is part of the cost of capital and as a result good IR is typically lean and efficient. Notwithstanding most CFOs and indeed IR Directors would be hard pushed to attribute a value to IR. If sustainable access to capital is important for a corporate, then measuring the value or the effectiveness of IR must also be important.
Fidelio also notes that career progression is typically determined by the (perceived) value an individual or role brings to the organisation. This can present a challenge for IR Directors whose value contribution is not well understood. The same may well apply to senior Executives with functional responsibility but no P&L. Corporate Affairs, Human Resources and Risk Directors, as well as Legal Counsel also have a more complex argument to make regarding value contribution. Recent regulatory focus, including on Executive remuneration, has sharpened appreciation of the roles of HR and Risk Directors.
We do not pretend that measuring the value contribution of complex functions such as Corporate Affairs or IR is easy. Indeed business schools have shied away from this challenge. But if the notion of value is central to how corporates are structured and resourced, it seems foolish to duck the issue. It is a commonplace that finance is the language of Boards. If so why not couch the debate in language of the Boardroom?
Intuitively both Corporate Affairs and IR have a critical contribution to make, in particular in such a stubborn low growth environment. Today’s high level of risk aversion, combined with increasing populism and at times rampant social media mean that a company’s licence to operate cannot be taken for granted. Equally, growth strategies need to be bold but how can management convince (risk averse) shareholders who have a clear preference for cash to be returned rather than re-invested. Calculating the value-add of handling vitally important but often quite troublesome stakeholders is tough.
Fidelio was therefore delighted with the pragmatism and ingenuity of the Corporate Affairs Director of a leading multinational who created a group wide P&L for Corporate Affairs. Expenses are clear; profit represents the value to the business. Such a P&L is calculated in each division and signed off by the division head. Yes, there are flaws in the methodology but it is a practical and uncomplicated way of drawing attention to the contribution of Corporate Affairs and simultaneously generating a high quality debate.
IR Directors have a very obvious metric – the share price. Like success, a rising share price has many fathers; a falling share price can land on the desk of the IR Director. Teasing out the IR contribution to valuation lies well within quant territory. Smart IR Directors will focus on more manageable metrics and targets: for example, geographical re-weighting of the shareholder base; targeting and establishing relationships with potential long-term shareholders. Industry wide data also help build the case. We note from Rivel Research, a marketing research company with a sole focus on the global investment community, that almost 2/3 of fund managers see good IR contributing to valuation.
The fund managers interviewed demonstrate insight in recognising that the real contribution of IR is minimising the discount rather than maximising the premium. We also note from the survey that Asian and US fund managers are stronger advocates of IR, surely indicating greater optimism.
A first step to calculating value is capturing good data. Here lessons can be learned from the much publicised campaign across Europe and the US to increase the representation of women on quoted boards. Professor Susan Vinnicombe of Cranfield School of Management has pointed out the availability of data on female participation in the workforce is one reason why Women on Boards has almost become a proxy for a wider diversity campaign. Calculating the performance uptick from a more diverse Board is not an easy calculation. Measuring the progress towards the 30% Club’s goal of 30% female representation in FTSE100 Boardrooms by 2015 is a much simpler task.
Board diversity is an important aspect of the wider topic of good corporate governance aimed at improving business decisions, reducing risk, sustaining profits growth and therefore higher long-term returns for shareholders.
– Helena Morrissey, CBE, CEO, Newton Investment Management and founder of the 30% Club
We fully understand the risk of imposing simple targets. The initial increase in women on Boards at the non-executive level appears to have been at least partially achieved by depleting the ranks of women at the executive level. This does not undermine the case for measuring and setting targets. It is an argument to better understand the data, in order to remedy the problem.
‘Shifting the Needle’, a recent presentation by McKinsey to the 30% Club, looked behind the miserable statistic that women are still substantially less likely to become a partner at leading professional services firms – this, despite significant investment in remedying the discrepancy. An analysis of why men do better at every promotion juncture reveals a more complex challenge than childcare. Understanding the myriad reasons why women are not promoted and/or choose to leave has to be a good first step to removing some of these barriers.
Fidelio was recently surprised by the IR Magazine Global Practice Report (2012) arguing that women in IR are paid less than their male counterparts. Intuitively this research seemed flawed as there are very obviously a relatively large number of successful, well paid women in this profession. The right response, however, has to be to find out more.
In conclusion, Fidelio recognises the importance of contributing value and articulating that contribution. Undoubtedly there are professions and professional groups whose contribution to corporate success is not well understood. We argue, don’t shy from the tough task of calculating value. The very act of measuring and collecting data may indeed unearth some surprises. But determining what gets measured and how is crucial to setting the agenda. Setting the agenda drives the debate. And debate is the best opportunity to make the case why IR, Corporate Affairs or Women on Boards add corporate value.
Researched by Shu Zhang
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will explore
• How Boards keep on learning
• Leading outside the comfort zone
• Building leadership teams for new markets
• Owning, building, defending Corporate reputation
Please contact us with comments or for more information on Fidelio Partners at info@fideliopartners.com