Tony Featherstone explains how technology and a smaller global broking industry will reshape organisations’ investor relations policies.
A powerful theme connects investor relations (IR) challenges in 2015 and beyond: technology’s potential to reshape the global IR industry and redefine the relationship between listed companies and their beneficial owners.
IR, like other industries, is being transformed as technology reduces the middle layer between companies and investors. Fewer broking analysts, fund managers and journalists are forcing organisations to own the shareholder relationship like never before.
The result is companies communicating directly with their owners, be they superannuation funds that do more research in-house and rely less on brokers; an army of self-managed superannuation funds (SMSFs) that have less need for financial intermediaries; or retail investors who are easier to reach through social media.
A broad reach
Technology is also affecting how companies communicate with different shareholder segments. The rise of index funds, hedge funds, sovereign funds, high-frequency trading and “dark pools” (a private forum for trading securities) and greater global exchange competition, is magnifying the IR challenge that companies face worldwide.
At the same time, mandated growth in superannuation is lifting the influence of long-term investors in Australia. Companies are rethinking their communication with industry super funds, providing more information on Environmental, Social and Governance (ESG) issues, boosting investor access to the board, and engaging with newer intermediaries, such as proxy advisers. Behind this trend is a gradual move towards integrated financial reporting.
“It has never been more important for companies to own the relationship with their shareholders, as the global broking industry contracts,” says Warwick Bryan, chairman of the Australasian Investor Relations Association (AIRA) and executive general manager of investor relations at Commonwealth Bank of Australia (CBA). “CBA has always focused on owning the shareholder relationship given its shareholder base, which has a high proportion of retail investors. More companies will do the same in coming years,” he says.
There is little room for error. Heightened global sharemarket volatility, a higher regulatory burden, and the rise of shareholder activism, investor class actions and litigation funding in Australia, means the stakes are rising for companies with poor IR practices.
A smaller pool of broking intermediaries presents other IR challenges. Disclosure rules that required ASX-listed companies to inform the market if their earnings deviate materially from consensus analyst forecasts have become trickier, given that fewer analysts are providing forecasts or are taking longer to update them.
Reaching offshore investors is becoming harder as overseas investment banks reduce, or close, specialist trading desks in Australian equities. And there are moves, notably in the UK, to strengthen rules around corporate access and investor roadshows which could have implications for Australian IR practitioners.
A more direct relationship between companies and investors also offers opportunity. Companies with high-performing IR teams should enjoy better control over their message, and have greater scope to interact with key investors, build relationships, understand their concerns, and provide targeted, responsive information to different shareholder segments.
That does not mean listed companies will bypass analysts, brokers, fund managers and traditional media. These remain vital IR channels for most listed companies. Rather, it is a question of balance: finding ways to better engage with a shrinking layer of intermediaries while lifting direct communication and engagement with a changing base of beneficial owners.
This trend, in time, should lift the influence of IR practitioners within listed companies and elevate some to group executive ranks, or even onto boards that want to improve their composition and diversity by adding professionals with IR, ESG and government relations skills. The trend of senior stockbroking analysts becoming IR practitioners will also quicken, as the complexity and breadth of IR’s role expands this decade.
“The biggest challenge in investor relations generally is the effective internal communication of IR issues,” says James Hall, vice-president of IR and corporate affairs at global logistics company Brambles, and an AIRA director. “The IR team must ensure the shareholder perspective is communicated to key decision-makers throughout the organisation, and that there is an adequate representation of the investor in internal planning processes. Shareholder needs must be a central part of the organisation’s decision-making DNA. No company can afford for the investor relations team, the CEO and the chief financial officer to be the only people who truly understand the market’s view.”
Six key IR issues for 2015
No IR trend is more urgent than shareholder activism. Australia is following US trends, with investment funds being established with a mandate to engage in activism, and large institutional investors increasingly becoming active, if not activist, on shareholder issues.
The proxy adviser, Institutional Shareholder Services, identified a surge in activism, with 230 “public actions” against listed companies in 2013. Litigation funder, Bentham IMF, said shareholder activism in Australia was in its infancy; and law firm Clayton Utz described 2014 as potentially the year of the shareholder activist.
Prominent shareholder campaigns against investment company Washington H. Soul Pattinson, building products company Brickworks, David Jones, Qantas Airways, Fairfax Media, Billabong International and several other listed companies in the past five years confirm that shareholders are becoming vocal and pushing harder for change — and that is keeping IR practitioners on their toes.
The risk is that sophisticated activist funds are set up to exploit value in companies with governance weaknesses; that key shareholders increasingly work together on activist campaigns (as was the case of Washington H Soul Pattinson, which had opposition from Perpetual and MH Carnegie & Co) and that activists engage litigation funders for their legal expertise in shareholder activist campaigns.
Greater shareholder activism is also coming from non-government organisations (NGOs) (see NGOs target big business on page 24). The Australian National University’s decision in October this year to shed holdings in fossil fuel companies, although small in the scheme of markets, reinforced the threat of not-for-profit organisations taking a more activist approach with their portfolio mandate by buying and selling stocks on their ESG characteristics, not only their investment potential.
The Wilderness Society’s campaign against Santos’ coal-seam gas projects this year in New South Wales was another example of sophisticated activist campaigns from NGOs — and the need for IR practitioners to prepare for, and respond to, such threats. The Santos annual general meeting in May attracted several protestors with “no fracking” signs that urged Santos to withdraw its $1 billion plus coal seam gas investment.
Some of Australia’s big banks are facing pressure from NGOs to disclose the risks from climate change to their lending and investment portfolios.
Warwick Bryan says the ESG activism trend is quickly spreading to the finance sector. “It started with activists targeting companies that have a greater environmental impact through their operations. Now they are campaigning against companies that finance fossil fuel projects, such as coal mines. We are just seeing the start of this trend and it is something that the financial services industry must prepare for through good disclosure and communication with a broader range of stakeholders.”
Bryan says CBA, like many large listed companies, spends more time talking to industry super funds and proxy advisers about ESG issues. “The big super funds are very ESG aware because their members are increasingly saying they do not want their money invested in companies with poor environmental practices.”
Karyn Munsie MAICD, group executive for corporate affairs and investor relations at Bank of Queensland (BOQ), and an AIRA director, says: “Shareholder activism is an area that keeps growing in Australia and overseas, particularly around climate change-related issues.”
She adds: “It all comes back to disclosure and being prepared. If companies understand the key risks and disclose to the market how they are managing them, activism should not be a big threat. The trend of beneficial owners being more engaged with companies around these issues, as opposed to outsourcing key governance decisions, is a positive long-term development.”
Shareholder activism spiked in 2013-14 when global equity market volatility was relatively benign. So what will happen next year if a slowing global economy and a potential US interest rate rise lead to higher sharemarket, political and regulatory volatility?
Higher volatility could lead to earnings surprises and quicken the trend of mergers and acquisitions. Investor relations teams will need to be on their game to ensure that the market is fully informed and understands how the company is responding to volatility.
“Market volatility definitely makes things harder from an IR perspective,” Bryan says. “There is generally less earnings certainty and higher potential for business performance surprises. Managing stakeholder expectations becomes even more critical in volatile markets.”
Global equities markets had a dose of sharply higher volatility in September and early October. The CBOE Volatility Index, commonly considered a fear gauge of financial markets, hit its highest level since mid-2012. Rising geopolitical risks, global growth fears and the Ebola outbreak spooked markets.
In Australia, the tumbling iron ore price, lower currency and sharemarket pullback in September and early October created a cocktail of volatility. The ASX’s A-VIX index, which reflects investor expectations over the next 30 days in the S&P/ASX 200, and is used mainly as a barometer of investor sentiment and market expectations, showed rising market fear.
Higher volatility is affecting boardrooms. Director sentiment improved noticeably between the second halves of 2012 and 2013, only to deteriorate in the first half of 2014, according to the Australian Institute of Company Directors’ first-half Director Sentiment Index.
If this trend continues, some IR teams will have to contend in 2015 with greater market uncertainty, and complex investor communication. Providing full-year earnings guidance and detailed outlook statements, in particular, could be a problem for some listed companies if trading conditions are volatile.
3. A smaller broking industry
Consolidation in the broking industry is hardly a new trend. For several years, listed companies have dealt with analysts covering more stocks or sectors; senior analysts at some firms being replaced by juniors; and fewer analysts contributing to consensus forecasts, or taking longer to update figures.
Lower global equity market turnover, shrinking commissions and greater competition for capital raising and other corporate transactions could further pressure the global broking industry in 2015. Regulatory reforms could also restrict how companies and analysts communicate.
Kylie Ramsden, head of listed investor relations at property fund manager and developer Charter Hall Group, and an AIRA director, says the quantity and quality of research coverage in the global broking market is a key IR issue. “The Real Estate Investment Trusts (REIT) space in Australia benefited from large broker research teams before the global financial crisis (GFC). But there has been a considerable fall in the size of the teams researching REITs since 2008, and some analysts now cover REITs and sectors such as retail.”
Ramsden says less broking research is acutely felt in consensus forecasts, which are figures (such as earnings per share) based on combined estimates of analysts covering a listed company. “Because analysts have responsibility for covering more stocks, it means their financial forecasts, particularly for smaller market cap entities, are not always as up-to-date as they should be, and in some instances the forecast might not have taken into account a recent material company announcement. The consensus forecasts relied upon by some market participants are then an inaccurate picture of the true position of the company.”
ASX Listing Rules Guidance Note 8 says: “If an entity becomes aware that its earnings for the current reporting period will differ materially (downwards, or upwards) from market expectations, it needs to consider carefully whether it has a legal obligation to notify the market of that fact.” Although there is scope for listed companies to adjust the consensus number to exclude outlier forecasts, fewer analysts contributing to the consensus on earnings presents a disclosure challenge for IR teams.
AIRA held an important roundtable discussion in August 2014 with the Australian Securities & Investments Commission (ASIC) and ASX to gain more clarity around consensus analyst forecasts. IR practitioners feared their companies would have to publish consensus analyst forecasts. The risk was that the market interpreted the forecasts as de facto, company-endorsed guidance. ASIC and ASX confirmed that listed entities are not required to release an analysts’ forecast or consensus estimates to the market.
Like other IR professionals interviewed, BOQ’s Karyn Munsie was against companies having to disclose consensus analyst forecasts to the market. “It is not the company’s data, and in publishing it there is a significant risk that the company is seen to implicitly endorse a forecast that is put together by third parties.”
Analysts’ briefings by companies were also in the spotlight after ASIC issued civil penalty proceedings against Newcrest Mining for contravening its continuous disclosure obligations. The federal court imposed a $1.2 million penalty on Newcrest in July this year, which set a new benchmark on the risk of “selective disclosure”, or companies giving information to analysts that had not been publicly released.
ASIC commissioner, John Price, said in a speech to AIRA in August: “This matter [Newcrest] should send a strong message to market participants to be mindful of the care needed when interacting with analysts.
“It should also reinforce the message that equal access to market-sensitive information is paramount in ensuring that markets operate fairly.”
Ramsden says the IR challenge is ensuring that analysts can draw sensible conclusions from information the company makes publicly available. “Smaller market-cap companies may not get the same level of coverage they used to from analysts, simply because they are covering more stocks. The IR team has to ensure the information the company provides is clear, relevant, and to the point, because there is less time for analysts to put together their research analysing a company event.”
Monitoring analyst recommendations and forecasts is another IR challenge. Ramsden says. “Time-pressured analysts are generally providing fewer written notes on REITs, and instead calling their key clients to verbally provide their opinions, or publishing research in summary form. Consequently, the IR team has to spend more time understanding how the market views their company.”
Ramsden says recommendations that the IR team be located away from senior management, to ensure confidentiality, are unworkable. Recommendation 7 of the report by Dr Maurice Newman AC FAICD, commissioned by Newcrest as an independent review of its disclosure practices and published in September 2013, said it may be desirable to locate the team away from senior company management. “More than ever, the IR practitioner needs to be close to the executive team and able to share information,” she says.
Other IR initiatives can also help deal with a contracting broker market: ensuring company information is distributed to the widest possible audience, publishing analyst conference-call transcripts (a problem for smaller companies with fewer resources), including audio with investor presentations and webcasting them where possible, and releasing information much earlier in the day to the market, a position AIRA has long recommended. Each would provide greater context and time for investors, and reduce disclosure risks for listed companies.
Bringing the annual general meeting (AGM), usually in October or November for companies with a June 30 year-end, closer to a company’s full-year results in August, could be another opportunity to provide greater context around business performance. As AIRA has argued, holding an AGM a few months after the full-year results, when information can be dated, and using the AGM as a first-quarter trading update, makes less sense given the time and cost of such events.
Tapping offshore investors for equity and debt raisings is critical for many ASX-listed companies. But reaching these investors is becoming harder as offshore investment bankers reduce the size of, or close, their specialist Australian trading desks. Fewer offshore-based Australian equity specialists is another casualty of a shrinking global broking industry.
“If you look back five years, there were 10 trading desks with two or three Aussie specialists on each, in major investment cities such as New York, London and Hong Kong,” says CBA’s Bryan. “Now, there are only a handful.”
Brambles’ Hall says: “There is nothing like having a good overseas-based Australian equities specialist who knows the company’s story and its management, and can match it with institutions that are a good fit for its share register. That said, there are still some very good people on Aussie trading desks overseas, but these days there are fewer capable candidates to help arrange broker-led investor roadshows offshore, when there are fewer Australian specialists.”
Hall says Brambles, 45-50 per cent owned by foreign institutions, has strong direct relationships with offshore investors. “Brambles is well known overseas, and in the main, we know who we need to see overseas when we do roadshows. But the offshore broking desks are still an important part of the process and we have cultivated relationships with the most important desks over the years.”
Other ASX-listed companies might have to follow Brambles’ lead, as global regulators challenge the payment for corporate access. Corporate access is when investment banks and brokers arrange for asset managers to meet senior management of companies in which they might invest or already have, sometimes in return for a fee or through higher brokerage to the firm that organises the roadshow.
A survey by Citigate Dewe Rogerson found 43 per cent of European companies increased investor roadshow activity in 2014. The survey noted: “When it comes to IR events there is a clear trend towards more targeted events with smaller, themed group meetings and site visits being used to address specific topics of interest. To ensure key messages are reaching investors through different channels, there is evidence of renewed efforts to engage with the sell-side through one-to-one meetings at the start of roadshows or annual breakfast meetings with the CEO/CFO.”
David Lawton, director of markets at the UK’s Financial Conduct Authority, told the UK Investor Relations Society annual conference in June 2013: “Reports of investment banks charging asset managers several thousand pounds an hour to meet with CEOs of their investee companies suggests that some of the current practices could be pushing out the sort of long-term investors needed for good stewardship in favour of those willing to stump up the cash. We need to have a conversation about how industry can better yield the benefits of corporate access and improve practices, so that corporate access supports long-term stewardship.”
Australian investment banks and broking firms should follow US and UK developments on corporate access, as should IR practitioners who rely on investor roadshows as a channel for their company to promote itself to asset managers. It could mean that listed companies increasingly organise their own roadshow and go direct to key investors, and potentially complicate what can be said, and to whom, at such events.
5. A changing shareholder base
The trend of listed companies having a stronger direct relationship with their beneficial owners is most pronounced in the superannuation sector. Effective communication with industry superannuation funds, at executive and board level, is becoming a bigger issue, especially with the fast-growing $557 billion pool of SMSFs at June 2014.
As some large super funds manage more money in-house and outsource less portfolio management to fund managers, they are taking a greater interest in company management and governance.
Bryan says: “This trend has been around for a while, but it is fair to say different companies are at very different stages with how they engage with industry super funds. These funds are collectively taking a direct stake of share registers, and are very much focused on ESG and long-term corporate issues that relate to the management of superannuation funds.”
Communicating with SMSFs is challenging. The sector had 543,176 entities at June 2014 and no dominant channel or platform to reach them. IR teams at small and mid-cap companies that rely heavily on retail investors need to think how they reach and communicate with SMSF trustees, who collectively are overweight in cash, Australian equities and property, according to Australian Taxation Office data.
Bryan says communicating with index funds is another IR issue. These funds seek to replicate the price and yield performance of an underlying index, rather than actively manage a portfolio to outperform a market. The global exchange-traded product (ETP) market held more than US$2 trillion in assets under management in 2013, according to asset manager BlackRock.
Once seen as passive investors, large ETP providers are targeting corporate governance. Leading asset managers such as BlackRock, an active and index fund provider, have specialist in-house teams that review governance standards of companies in which it invests.
More listed companies will have to lift their communication with index funds, which will hold a larger proportion of their stock in coming years, but have different communication needs to active fund managers.
Bryan says: “In the previous decade, if a company wanted to talk to investors about ESG issues, it primarily went to fund managers. Now, large listed companies have to engage in multiple levels of communication: to industry super funds, proxy advisers, index funds, and a growing number of sovereign funds that hold more stock in Australian companies.”
BOQ’s Munsie says IR executives have to monitor several trading avenues because of the growing diversity of investors. “You can’t just follow one exchange, anymore. On some days, a proportion of a company’s stock could trade in a “dark pool” or on a rival exchange. You have to consider a wider range of trading forums in the IR strategy.”
6. Integrated financial reporting
The global push towards an integrated reporting framework that brings together material information about the organisation’s strategy, governance, performance and outlook in the context of its commercial, social and environmental responsibilities, has been under way for several years. But 2015 could see IR teams pay greater attention.
“Integrated financial reporting will get a lot more attention in the next few years and it is an area that IR teams will need to get their head around quickly,” says Munsie.
“Analysts and investors, such as super funds, are looking more at non-financial information, but it does tend to be an add-on at present rather than something that is fully integrated into valuation models. That will change over time as more market participants factor non-financial data into investment decisions, and seek more of this information from companies.”
Investment banks such as Credit Suisse now publish well-regarded ESG research, in conjunction with traditional broking research, and other firms are expected to follow.
ASIC’s guidance on the Operating and Financial Review, released in March 2013, set out ways company directors could provide more meaningful information in the annual report, a move some governance observers saw as a stepping stone between traditional reporting and integrated financial reporting for listed Australian companies.
The upshot is that IR teams will have to think harder about how they provide non-financial information to the market in areas such as environment risks, occupational health and safety, and employee turnover in 2015 and beyond.
This article first appeared in Listed@ASX magazine, from the Australian Securities Exchange.
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