Introduction
Perhaps unusually for a Board Development and Search firm, Fidelio has a thriving international IR Search practice.
There are good reasons for this:
- Our senior consultants have headed Global IR and capital markets for some of Europe’s largest corporates and have a deep understanding of the challenges facing the function and what is needed to succeed. A founder of Fidelio has also been recognised as a Fellow of the UK IR Society.
- Critically for a quoted company, shareholder engagement should be taking place seamlessly at both Board and Executive levels: the two are intertwined.
MiFID II has created even greater need for the Board and IR to work closely together. Traditional broker relationships are being disrupted by this and other investment trends. There is a clear opportunity for companies to connect more effectively with their investors. But for smaller companies (and smaller investors) the challenge will only increase: neglecting the IR function has become a high risk strategy.
In short, there are three questions that Board Directors of any listed company should be asking of the IR Function:
- Do we have an IR Director and capability in place that reflects the company in the market professionally and well, and is effective in building trust with investors which will underpin long term valuation?
- Do we have a proactive plan for communicating with the financial community, and a structure in place for potentially high-risk events e.g. earnings calls?
- Are we listening to what the IR Director is learning from the market: reasons for current share price; concerns re strategy; concerns re management and the Board; activist engagement?
If the answer to any of the above questions is no, Board Members should be concerned. This is an unnecessary home goal that can expose the company in reducing its access to capital, depressing valuation and potentially giving rise to hostile activist or takeover activity.
IR is frequently taken for granted. It shouldn’t be, and smart Boards do well to ensure that the function is not overlooked. Getting it right is an important driver of value: not only in terms of an appropriate share valuation, but also for access to capital. Getting it wrong can expose the company to unnecessary risk and can be very expensive when, for whatever reason, capital markets access becomes essential to the execution of strategic goals.
Why Investor Relations Matters
The role of the Investor Relations function is to act as the company’s face to the financial markets and to act as a conduit for information in both directions. It needs to ensure consistent communication of the company’s story to both equity and debt investors, as well as driving compliance with relevant legal requirements concerning financial communication.
Meaningful IR also provides a route for the company to receive valuable – and at times uncomfortable – feedback on how the company’s shares and bonds are viewed in the market, both by sell-side analysts and by buy-side investors. Effective Investor Relations is strategic in its impact, in ensuring that the company communicates pro-actively with the financial markets. It is external facing, but good IR will also be building strong internal relationships with the Board and Management will also take steps to build strong relationships between investors, the executive and non-executive Board members.
MiFID II: Changing the rules of the game…
The EU’s MiFID II regulations came into force at the beginning of 2018, but their impact on communications between investors and companies will take years to play out. While the immediate impact is being felt clearly among brokers and the buy-side, MiFID ll should also be a wake up call for Board Directors of listed companies, particularly those that are not able to answer the three questions posed in the introduction to this Overture in the affirmative.
The new rules take direct aim at a widespread conflict of interest, namely that investors have historically not paid brokers directly for research, but rather bundled this into the trading costs paid directly by their clients. That this is no longer an acceptable practice is part of the general movement towards transparency, and must also be seen in the context of other trends within the money management industry, notably that towards low-cost passive investing. Nonetheless, some implications are already clear:
- The majority of investment managers have opted to absorb sell-side research costs rather than pass these on to their clients.
- The overall budget for research is falling significantly – not just due to MiFID II but due to unrelenting pressure on investor fees and thus costs.
- Sell-side research is under pressure to prove itself as a genuinely value-adding activity, which is as much a risk to the companies covered as it is to institutional investors.
- Investors are much less willing to pay brokers for arranging meetings or roadshows: these are increasingly arranged directly with companies. What was formerly done by the sell-side “for free” now has to be done in house, increasing IR’s administrative burden.
- To the extent that they remain committed to active investment, Asset Managers are strengthening their in-house research teams, again creating more points of contact for IR.
- Smaller companies are having to work extremely hard to get their investment story heard in the markets, and many are opting to pay for sell-side coverage, surely creating a fresh conflict of interest.
- The complexity for IR Directors has increased – all well and good for high calibre IR teams or individuals but a major risk for listed companies and Boards that are underinvested in this important function.
Overall, we expect MiFID II to significantly re-configure connections between companies and their investors, and it’s clear that it represents a real opportunity for companies to connect directly with their shareholders. But in a fast-moving and disruptive world the competition for airtime has also increased, and Boards are thus exposed if the IR Director:
- Is not aware of key corporate issues and decision-making
- Is not on top of investor concerns
- Does not have the perspective to anticipate major shifts.
Who is Getting it Right?
Investor Relations teams can be structured in a number of different ways: given it includes both finance and communication it could in theory be part of either function. In practice, however, the function tends to report in to the CFO. IR is less frequently included with Communications / Corporate Affairs function; this can work well if the Head of Communications has an IR background and thus has the requisite financial knowledge.
The IR function has also evolved differently across different geographies, with markedly individual approaches across Europe, the UK and the US: the current disruption from MiFID II is an opportunity to look laterally at what works in practice.
- In Germany, we find a more strategic and structured approach to IR with the function often being better resourced and the Head of IR frequently progressing their career in a CFO role. Continental European IR teams often take broader view of IR that more readily incorporates stakeholders as well as shareholders.
- The US is the birth place of IR and stands out as being the market where it is possible to build a highly successful career in ever bigger IR roles. The US can, however, also have a very legalistic approach to IR which sits less well with European companies and investors.
- The UK has a very deep market of IR professionals with considerable expertise. Apart from some major FTSE teams, IR has typically been a smaller function with brokers traditionally providing considerable support for “free”. MiFID II will almost certainly change this which may in turn lead to greater investment in this important function.
Where the UK does have an advantage with the unitary Board is establishing a closer relationship between the Board and the IR Director. A case can be made for a “dotted” reporting line to the Chair. John Allan now Chair of Tesco and previously Chairman of Dixons has shared with Fidelio and The IR Society how a good relationship between the Chair and IR Director is important. The Board should be concerned if this is not the case. We recognise that this is more easily implemented in Boards with a unitary structure such as in the UK, whereas markets with a two-tier structure such as Germany can leave both the Chairman of the Supervisory Board and the Head of IR feeling that there is an uncomfortable legal grey area.
For Non-Executive Directors of listed companies, it is important to expect the following from the IR Function:
- Adequate resourcing to ensure the routine and compliance elements of the role do not dominate: viewing IR as a “one man (or woman) band” is extremely risky. Some UK companies have historically relied on their brokers to do much of the work: in a MiFiD II world this is no longer viable.
- A systematic approach to identifying and building relationships with key stakeholders – not necessarily always investors. The broader constituency is part of a global trend toward stakeholder involvement, and continental European groups lead the way in this regard with a much more integrated approach to communications than in the US and UK.
- A proactive approach to the financial calendar, including regular briefing of Board and Chair and engagement meetings with shareholders. Careful planning of meetings ahead of the AGM is essential, especially where issues have been identified, for example around remuneration.
- An ability to make the voice of the market and investors heard by both Executive and Board teams: this is most difficult when it is most important, namely when the company is unwilling to listen to challenging feedback. It’s vital that the Board and Chair are familiar with the shareholder register and understand the agendas of major investors, who hold the stock, who could hold the stock, and who are shorting the stock.
What Should the Board Be Looking for From the IR Team?
Boards should be looking for high calibre individuals with relevant sector experience (or the ability to come up to speed quickly) and crucially a combination of financial literacy and excellent communications skills. This blend can be tricky to find in one individual, but any weakness in either aspect is likely to be mercilessly exposed by the demands of the role. Clearly a larger IR team enables the selection of individuals with complementary skills. While the US in particular has established IR as a life long profession, for many IR Directors in Europe it can be a valuable role for career progression: some larger companies view the role as an important qualifying experience for finance professionals on the route to Board level appointments; while smaller companies can give additional responsibility from the outset.
What Should the Board Be Getting?
The Board should insist on receiving regular briefing reports from the IR team, including market insights, including controversial sell-side research reports. Overall, the Board should expect:
- Good feedback and explanation as to what is driving the share price
- Board reports not always be intermediated by the CFO – the Board needs to connect with the IR Director
- IR to play a role in Board induction
- To feel confident that IR can communicate directly if necessary
- To feel confident that the company has an effective early warning system for activism
The Board should always be alert to the possibility of meeting with major investors, especially around potentially tricky issues such as remuneration, or where the issue of activism raises its head. These contacts need to be planned with care by the IR team, however, to ensure Board members are well briefed, competent tellers of the current company story, and are aware of the dangers of venturing “off-piste”.
Conclusion and Next Steps
If, as the Board Member of a listed company, you are feeling uncertain about any of the above and are keen to provide support to the IR function, or as an IR Director you are concerned that the Board does not have a robust understanding of IR, please contact either Mark Cumberlege (mcumberlege@fideliopartners.com) or Steve Cheetham (scheetham@fideliopartners.com), who can support in building and enhancing your IR capability.
For further questions regarding Board Evaluation, Board Search and Board Development, please contact Gillian Karran-Cumberlege at gkarrancumberlege@fideliopartners.com.