Enhancing shareholder engagement is a necessity for quoted Boards and a priority for Fidelio. For all but smaller companies the Investor Relations Director will play an important role in this equation.
Fidelio was therefore delighted to join and support the UK Investor Relations Society’s Annual Conference last week. Against a turbulent political backdrop, the theme of “IR: Leading Change, Driving Value” resonated and the conference explored how IR Directors can support Boards and engage effectively with shareholders during times of significant political, regulatory, and societal upheaval.
“It’s an increasingly transparent world, which should be liberating rather than daunting” – Keynote Speaker, John Allan (Chair of Tesco plc, Barratt Developments plc and President of the CBI)
Two very clear themes emerged:
- ESG is featuring ever more prominently on the shareholder, Board and IR Agenda with the climate emergency disrupting investor portfolios and company business models
- The buyside is being radically reshaped by regulation and technology so that companies struggle to engage with a dwindling pool of active investors. As a consequence Boards and IR Directors must surely also rethink their respective roles in shareholder engagement?
Fidelio sees these Board and IR challenges reflected in our Search, Evaluation and Development assignments with quoted companies internationally. The IR Conference proved a good forum to socialise new ideas and prepare FTSE companies for the extraordinary change that lies ahead.
From Shareholder to Stakeholder Value
The shift from shareholder primacy to a model that takes much greater account of stakeholder interests was flagged by BBC Presenter and conference host, Evan Davis, at the start of the conference and ran like thread through the day.
Reflecting this, nearly all conference contributors – buy-side, sell-side (dwindling) and corporates – agreed that Environmental, Social and Governance (ESG) factors have risen very substantially up the agenda in the past 12-18 months. A FTSE 100 Chair described hosting an ESG day for shareholders; institutional investors spoke of a groundswell of interest in ethical investing from individual clients; IR Directors and Non-Executive Directors described how sectors such as aviation are approaching the challenge of a ‘Net-Zero’ Carbon Future.
But the carbon transition and the shift to stakeholder value is far from linear. A panel of IR Directors argued that most of the pressure regarding ESG is driven by customers and staff rather than investors, while a panel of investors (including Jupiter, OLIM Asset Management, and CPP) outlined a commitment to long-term sustainable investing but with substantive differences in approach and terminology. This lack of consistency on the part of ESG investors is not helpful for Boards and IR Directors seeking to develop and communicate an effective and sustainable strategy. As explored by Fidelio earlier this year, “the sharp rise in the importance of ESG creates an additional complexity and ambiguity for Boards to absorb”.
Moreover, Boards will increasingly be assessed on their ability to navigate this uncertainty; one leading governance analyst is researching how to rate Boards and Board Members on their competence to respond to climate change.
The Triangle of Shareholder Engagement: The Board, IR and the Shareholder
As complexity increases and investors become more active and demanding, Boards inevitably rely heavily on their IR Directors. Reflecting an increasingly sophisticated understanding of shareholder engagement, in effect a triangle involving the Board, the Executive including the IR Director, and the shareholders, the IR Society Conference chose to explore one arm of this triangle – the critically important relationship between the IR Director and the Board. Indeed, Fidelio has regularly argued that that Non-Executive Directors of quoted companies should care deeply about the calibre of the IRO representing the company in the capital markets.
For Fidelio it was therefore tremendously important that the IR Society Conference included the Non-Executive voice. We were pleased to support here and delighted that three prominent UK Board Directors recognised the importance of IR and took time to reflect on the critical relationship between the Board and the IRO:
- John Allan (Chairman, Tesco plc and Barratt Developments; President, CBI) commented on the turbulent times for UK plc, not least due to the extraordinary uncertainty regarding Brexit. John has experience of working with IR both as a CEO and now Chair and commented on how for the IR profession has developed. In the early days it was very much figuring it out and learning on the job; today IR is a substantially more rigorous and financially literate profession. But John also drew attention to two key aspects of the IR role which should not be overlooked in this focus on finance:
- The importance of speaking truth to power. The Board must have confidence in the IR Director and be certain that she or he has the gravitas and integrity to relay difficult messages.
- With anti-business sentiment riding high, the purpose of the IR Director is much more than articulating shareholder value. IR has to play a role in regaining trust with stakeholders and the public.
- Susan Hooper (Non-Executive Director, Uber UK, Wizz Air Holdings, Affinity Water, DExEU) reflected that Non-Executive Directors do not automatically have good visibility of the IR role. The Chair will typically determine how the IR Director engages with the Board. While most Boards regularly receive IR reports in their Board packs with details of IR activity and what is driving the share price, IR Directors can and should be playing a more significant role. This includes feeding back shareholder sentiment and trends, competitor benchmarking and best practice. Susan singled out the trends in ESG investing and reporting. Here the IR Director can make an important contribution in “educating” the Board on some of the very profound changes in investor behaviour driven by ESG. A well-informed Board is much better placed to take good decisions and approve effective strategies.
- This theme of Board education was picked up by the day’s final Keynote Speaker – Sarah Bates (Chair, Merian Global Investors; former Chair, St. James’s Place and one of only a handful of women to have chaired a FTSE 100 company.) Sarah woke the conference up as she described the tectonic shifts underway in the capital markets:
- Once companies could rely upon face to face contact with portfolio managers from long-only investors holding the majority of the stock. No longer.
- Passive investment has increased dramatically now representing some 50% of holdings and profoundly changing how companies engage with shareholders.
- As passive investment increases so too does shareholder activism, frequently providing a direct challenge to incumbent Boards
- Added to the mix is quant trading driven by algorithms not interested in one on one meetings with the company.
- And the time horizons of many of these investors are far shorter than the company’s strategic objectives. The Board’s responsibility, by contrast, is to promote the success of the company including the likely consequences of any decision in the long-term.
Sarah suggested these profound changes in the investor landscape have implications for IR. One possible conclusion is that IR no longer has a role as there given the dwindling pool of active managers to “relate” to. Sarah drew an alternative conclusion. The sheer complexity of these structural changes in share ownership are poorly understood by many Boards. Here IR can play an important role in enabling the Board to understand:
- The structure and nature of the shareholder base
- The implications for strategy and valuation
- And the opportunities for attracting supportive capital and shaping the shareholder base.
Boards, IR Directors and the Direction of Travel
The IR Society Conference concluded successfully and in good cheer. It also succeeded in shining a clear spotlight on the very significant changes underway in the capital markets and in society at large, which in turn have dramatic implications for IR Directors, the Board and shareholder engagement.
Successful companies will be alert to the risks and opportunities represented by these shifts in the capital markets. Long-term active investors and their passive counterparts are looking for strong governance, and the rise of ESG investing will reward companies that are good at rewarding both shareholders and stakeholders.
Shareholder and stakeholder expectations for Boards are changing. This will drive Board composition. Respected and valued companies will ensure that the Board has a good grasp of both shareholder and stakeholder interests. When these interests collide an effective Board will exercise good judgement in navigating a path that is good for business, as well as the public interest.
The IR Director has a key role to play: interpreting what the changing shareholder base means for the Board, the company and its strategy; and enabling the Board to give due weight to shareholder and stakeholder expectations, even when the two collide.
Non-Executive Directors and Chairs should care about the calibre of IR and IR Directors should ensure that they are visible and accessible for Board Members.
Fidelio has a track record in building effective Boards and leadership teams for public companies. We have a deep understanding of the IR role. If we can support your Board through Search, Board Evaluation, or Development, please do contact Gillian Karran-Cumberlege or call us on +44 (0)207 759 2200.
Photography Credit: Naomi Gabrielle Photography (http://naomigabrielle.co.uk/)