Rob Swystun, Pristine Advisers
Back in July 2012, economist John Kay released a report that pointed to the alarming trend of investors engaging in short-term investing (or short-termism, if you like made up phrases).
And back in March of this year, a working group of companies and institutional investors released a guide to help combat this trend in companies. The guide, Enhancing Stewardship Dialogue actually came out of a different report released in March of 2012 compiled by six institutional investors and called 2020 Stewardship: Improving the Quality of Investor Stewardship. (That’s three reports, if you’re keeping score.)
The 2020 Stewardship report emphasized the need for a practical guide that talks about how to conduct investor-company dialogue and follow it up with feedback from both the company and investors in order to improve their relationship and promote long-term investment.
Enhancing Stewardship Dialogue is that guide and it provides advice on how to develop a constructive engagement strategy, how to set up and run a productive meeting with investors and decide on who should attend that meeting.
Out of focus
One of the reasons that the shift to short-term investing has gained momentum is that long term strategies are generally not discussed in company-investor meetings. Instead, they tend to focus on numbers and short-term gains and losses, which, in turn, promotes short-term thinking on behalf of investors.
“Companies need to move away from a dialogue that focuses simply on the numbers and on-the-spot evaluations that allow analysts to issue buy, hold or sell recommendations,” Seamus Gillen, policy director for the Institute of Chartered Secretaries and Administrators, told IR Magazine.
Dialogue between companies and investors should focus on helping investors understand the value creation narrative, what the strategy behind the narrative is, what the value drivers and risks to those drivers are and what the longer-term prospects are. The thought is that if analysts and investors understand this better, they can look at short-term performance within the context of the larger picture of the market and the company’s long-term performance.
“But we know from practical experience that the discussion of long-term strategy does not happen. It needs to happen more often and it needs to be better,” Gillen says.
Peter Butler, founder and partner emeritus of the Governance for Owners 2020 Stewardship Working Party, concurs.
“Most meetings tend to be dominated by discussion of the latest quarterly results,” Butler says. “What we’re saying is that, firstly, every company should have an engagement strategy that it plans with its major shareholders and, secondly, this strategy should make provision at least once a year for the companies’ investors to meet to discuss that strategy and long-term performance, and the governance arrangements in place to sustain that performance.”
It’s not all on the companies, though. Institutional investors need to get on board, too.
Butler notes that often institutional investors will show a lack of interest in getting involved with discussions about a company’s long-term performance and goals. If they are not interested, this obviously creates a dilemma. He says there is inherent problems with both the quantity and quality of stewardship and there needs to be an attitude shift from them to help fight the tide of short-term investing.
And part of that fight includes developing a better understanding between issuer and investor, which develops more loyal investors, says Anita Skipper, corporate governance adviser at Aviva Investors, who also helped prepare the 2020 report.
“[Enhancing Stewardship Dialogue] is a simple guide,” Skipper says. “[Investors should] be prepared and know what questions to ask. And companies should decide what is important to tell investors. It’s not just about the EPS targets for the next three months. If you develop a discussion, you will also encourage a more long-term approach with your investors. Within the whole discussion of strategy and the long term, you can incorporate discussions about remuneration and board structure.
“You are letting your investors know, This is our strategy for the next five to 10 years, this is how we incentivize our board, this is how we’re going to run the company. It gives the investors more confidence, so they are more likely to invest – and stay with you.”
To implement the recommendations of the 2020 report, it is up to IR professionals to go above and beyond the usual formal means of communication like quarterly reporting, annual reports and AGMs, John Gollifer, general manager of the UK’s Investor Relations Society, says.
“There is a dialogue, an engagement that should be going on over and above that, all the way up to the board, even the chairman,” Gollifer says. “Typically the chairman and non-executive directors don’t get involved except at more formal reporting opportunities.
“One of the points is that IR should be able to manage a whole calendar in terms of different audiences and who attends different meetings. Clearly, part of the dialogue must involve them. And often it’s more sensible to take it out of the formal setting of the AGM.”
Both sides, Gollifer adds, should be free to give feedback.
“Sometimes investors aren’t up to scratch in terms of what they are talking about in meetings, in terms of preparation, in terms of having the right people in the meeting,” he says. “You need to be able to express that as feedback to the buy side.”
2020 Report recommendations
- Companies should have a regular and consistent process of engagement, over time, with its key investors, in order to establish, develop and maintain relationships.
- Companies and institutional investors both need to:
- have a clear understanding of each other’s expectations in terms of the nature and frequency of engagement;
- avoid an automatic assumption that there is ‘no need’ to pursue engagement;
- and review this understanding periodically to ensure its continuing relevance.
- A company may benefit from developing a critical mass of shareholders that can both provide constructive engagement and outline some considerations for the use of collective meetings.
- Once a year, a firm and its owners should focus on the company’s approach to creating value and protecting that value, looking at issues such as:
- board effectiveness
- and reputation.
- Individual issues, such as remuneration, should be placed in that context, rather than dominating the wider strategy discussion.
- Two-way feedback between companies and institutional investors, is an important means of assessing the degree to which each party’s expectations have been met in terms of the quality and quantity of engagement activity. The best feedback for all parties should be: honest, nuanced, constructive and challenging when necessary.
A company to-do list compiled by IR Magazine from Enhancing Stewardship Dialogue:
1. Develop an engagement strategy.
2. Practice good housekeeping. This includes inviting the right organizations and the right people, keeping clear records and reviewing governance arrangements.
3. Strengthen the conversation on strategy and long-term commitment by addressing these key issues in meetings:
- Big-picture strategy, not short-term noise
- Strategic end-game
- Value chain – non-financial key performance indicators in support of financial outcomes
- Compelling argument for any particular strategic rationale
- USPs and critical success factors
- What’s wrong with what exists?
- Who/what needs to be fixed/changed?
- How is pay linked to long-term strategy?
4. Provide feedback by asking these questions:
- Have you met the right people?
- Have we covered all the topics you expected us to cover?
- Have there been any aspects of our discussion that have surprised or concerned you?
- Overall, have you learned anything from the meeting that will influence your view of our company as an investment/investor?