The UK corporate governance code requires the board of directors to have a dialogue with investors.
A dialogue is a two-way engagement. As investor relations professionals we see lots of pushing of information to shareholders through the regulatory news flow events but little evidence of candidly listening to views from shareholders.
When there is a genuine dialogue with investors the results can be remarkable. A straw poll of our clients indicates that those who use a perception audit as a diagnostic of things to fix, working in cooperation with shareholders resulted in an over 200% outperformance relative to the FTSE 250.
The traditional route, broker feedback—obtaining insights from shareholders after a results roadshow—is incredibly useful.
But did you know that 65% of UK small and midcap fund managers have a policy of no feedback to brokers?
Also brokers and advisors have to protect their own relationships with executives. This is seen as dysfunctional by fund managers:
“The few brokers and advisers who do dare provide unfavourable candid feedback, tell their clients who said what so that ‘troublemakers’ can be identified and dealt with. This discourages investors from being candid because every word gets back verbatim and is attributable, so to compensate they keep their feedback bland.”
Also, a fund manager’s thoughts about a particular stock is their intellectual property, it is their investment thesis and there is a nervousness that this may be shared around the market.
Often boards look at feedback from financial PR agencies who obtain opinions from sell-side analysts; this is equally valid, but the analysts are not the investment decision makers, nor are they the audience that you are required to engage with under the requirements of the UK Corporate Governance Code.
Shareholder views are a powerful resource which should be listened to in order to maximise a company’s valuation.
New non-executives have to deal with a relatively steep learning curve without the luxury of regular meetings with investors. Any intelligence that helps with that, particularly when independently sourced is critically valuable.
To be a productive board member board meetings need to focus on the issues that matter, so the more well-briefed a board member is, the better. Not being informed of what is going on is no defence: you only need to look back at recent corporate history.
An independent perception audit is the only source of reliable intelligence from the investment community.
It is strategic, actionable insight about your business, your executives, your strategy including M&A and your prospects from a group of individuals that have the privileged position of being able to make stark contrasts between you and your other listed peers.
The feedback is specific and target to a single company and includes “warts and all” allowing the board to make decisions made on fact, not fiction, safe in the knowledge of shareholder support: as one leading fund manager stated, it avoids the “corporate client living in a sycophantic fantasy world”. This is not a world that a non-executive can inhabit.
The research can provide intelligence on why investors are not investing. Identification of these barriers to investment can be hugely informative. Independence can only be assured with freedom from commission, deal related fees and retained advisory relationships.
Clearly, a perception audit cannot replace the direct dialogue held between the executives, chairman and senior independent directors in their dealings with shareholders, but it is a useful summary of opinion for those directors who have fewer dealings with shareholders and indeed allows investors to say things that they may not wish to communicate directly to management for fear of damaging personal relationships.
One leading UK fund manager summed this up: “We fund managers can be more candid because our comments are kept anonymous when fed back to the company. Second, corporates are fed back the truth and do not live in a delusional fantasy world. They really do understand how investors view them. Everything else being equal, companies who understand this tend to have a higher P/E multiple.”
Informed IR can’t impact profitability, but it can clearly drive a company’s rating.
Businesses who understand this benefit from their commitment to good corporate governance. They have their multi-layered communication strategy with investors which is then put to the test by an independent perception audit. This allows you to monitor the changes in perception over time. Your share price chart can show you lots of information, but it is clouded by the impact of macro economic and competitor sentiment. To truly judge your performance as a listed business, monitoring sentiment over time is a critical business activity.
Katherine Lee is a founder of Bendon Lee.