The Brexit vote has created profound uncertainty which poses a challenge for business and for IR professionals. Through Fidelio’s IR Search and Development capability, we are tracking closely the implications of Brexit for leading IR teams. How and what to communicate in times of market dislocation were the themes of Fidelio’s most recent IR breakfast for FTSE 100 IR Directors.
In early September, with heightened uncertainty becoming the norm, Fidelio was delighted to welcome both Fergus MacLeod, former Head of Investor Relations and Strategy, BP, and Richard O’Connor, Global Head of Investor Relations, HSBC, as keynote speakers at a Fidelio breakfast. The timely subject: ‘Effective IR in Times of Market Dislocation’.
From 2002 to 2011, Fergus was Head of Investor Relations for BP and Head of Strategy and Planning until 2013. With a clear focus on the banking sector, Richard has recently been appointed Global Head of Investor Relations at HSBC. Previously he served as Head of Investor Relations at RBS since 2003. Fergus’s tenure at BP included Deepwater Horizon and Richard was Head of IR at RBS during the Banking Crisis. Therefore both speakers were well experienced to lead the discussion on IR in times of market dislocation.
Following Fidelio’s usual format, we asked Fergus and Richard to address three questions:
- How does IR engage with the market in times of extreme turmoil?
- In times of crisis, what is the role of IR internally?
- What does Brexit mean for the IR profession?
Fidelio was joined at the breakfast by a number of FTSE 100 Heads of IR from a range of sectors including engineering, retail, and financial services from multiple geographies, including the German perspective. The discussion was wide-ranging and lively, debating the future of the IR function as well as shedding light on what skills are needed to weather a crisis. The key themes are summarised below.
IR in a Crisis
Our starting point was an exploration of the different types of crisis that afflict IR and the appropriate IR response. Three specific types of crisis were identified by Fergus MacLeod:
1) An exogenous event: often unpredictable, these occur outside a company’s control; investors and management lack visibility. Market pressure on the IR team for guidance and impact assessment is high.
2) A ‘people’ crisis: refreshment and departures at the top table may be facts of business life, but the sudden loss of senior talent can be a major surprise internally, as well as a jolt to the market which has strong views on people risk.
3) Guidance failure: this is a core IR activity which requires judgment and skill. In the context of increased regulation and scrutiny, inadequate guidance will be heavily punished by the market and potentially the regulator.
Drawing upon the experience of our speakers and other IR Heads around the table, key lessons emerged for handling IR in a crisis:
- The tendency of senior management is to clam up in times of crisis; it is the role of IR to prevent executives burying their heads in the sand, counter-intuitive though it may feel. Our speakers were clear: during a crisis ongoing, consistent communication with the market is critical. Investors will always be seeking hard numbers and looking to quantify impact. Effective IR will be listening and communicating as appropriate. A sensitivity analysis can help investors think about scale of impact; the IR Director should resist being boxed in by confirming or denying specific numbers when visibility is limited.
- Never underestimate the market. Analysts can be extraordinarily well informed, particularly in highly technical or heavily regulated sectors such as banking or insurance. Some analyst questions will cut to the heart of the matter; these are questions that the company should be asking itself.
- If IR is to be effective in a crisis it needs to proactively, and pre-emptively, establish a voice within the company that is respected at the top table as well as across the organisation. IR must be able to convey difficult messages back into the company. Moreover, the IR Director will typically become part of the critical internal communication effort in a crisis. Hence the importance of trust.
- An often overlooked characteristic of IR noted by attendees was the psychological aspect of communication. In times of crisis, the attendant Heads of IR agreed, it is vital to keep calm during the storm. Body language and tone are integral to instilling confidence in a dislocated, uncertain market.
- While our speakers advocated keeping lines of communications open during a crisis, they recognised that media exposure to management should be handled with care. BP provides a case study of the damage that a casual remark on camera can do to both the company and senior executives.
Our focus was IR in a crisis but both speakers were clear that there is much that the IR Director should be doing pre-emptively to be better prepared should crisis hit. A key element is the quality of relationships with senior Executives and the Board. If the IR Director is trusted and respected, it will be possible for IR to deliver difficult messages back into the company. Critically the IR function can provide a corporate institutional memory which has tremendous value in a crisis and beyond. And finally, by establishing good relationships and trust with the market in good times, IR is better able to communicate in times of dislocation.
It was concluded lazy IR is sometimes all that is needed in good times; in bad times, however, good IR comes into its own. Fidelio referred to Rivel Research Group’s January 2013 IR White Paper which demonstrated the buy-side perception that the upside of good IR is a 10% market premium and the downside of poor IR is a negative 20% – suggesting a potential 30% valuation impact driven by the quality of IR.
IR in Times of Crisis
If IR delivers value in times of crisis then arguably Brexit provides an extraordinary backdrop for the IR profession to contribute. The dire warnings made ahead of the Referendum may not have come to pass but the strength of the FTSE 100 contrasts with the weakness of sterling, and the sheer uncertainty of what lies ahead is deeply unsettling for investors. Fidelio was joined by IROs from a range of sectors including:
- Automotive
- Construction
- Financial Services – asset management and banking
- Professional Services
- Engineering
- Retail
- Real Estate
Clearly the Referendum outcome poses specific and distinct risks for each sector. Given the current lack of an obvious overarching government strategy for negotiating Brexit, it is incumbent on each sector to define priorities and key risks. IR has a role to play in articulating to the market where the priorities lie: for retail, free movement of goods is critical; for Financial Services, passporting and the movement of highly qualified labour are deemed vital. The market will play a role in assessing and evaluating the risks to a given sector and this will surely feed through to negotiations.
Fidelio has commented previously that UK corporates have demonstrated considerable responsibility in their communications with employees, in particular post the Referendum. The very week after the Brexit vote, Fidelio held a breakfast with FTSE 100 Communications Directors. A conclusion of this discussion was that corporates bear great responsibility to employees in the wake of the Referendum. Across the corporate sector in the UK, international employees are highly concerned about future employment rights in the UK. IR also has a role to play in ensuring responsible and considerate communication on such sensitive topics as Brexit’s impact on employment and employees.
Conclusion: IR as a Board Priority
And finally Fidelio has argued previously that in order to be effective IR needs to be visible to the Board and to have a voice at the Board table. If quoted companies are to navigate Brexit well, the IR Director will need close interaction with the Board on guidance relating to the Brexit impact for example; or indeed on plans to secure access to the single market.
Given the importance of IR in a crisis, the Chairman and CEO should absolutely care who holds IR office and Fidelio has seen some uptick in IR Search and benchmarking activity since the Referendum.
Fidelio’s recently published White Paper ‘Shareholder Engagement, IR and the Board’ argues that companies face a range of challenges including: shareholder activism, the rise of populism and geo-political risk. Brexit will only intensify these pressures on companies. This represents a very good reason for the Board to insist upon high calibre IR.