The pandemic has created a unique, albeit double-edged, opportunity for companies to build trust, do things better, and position for the future.
While the ends of investor engagement remain the same, the means to achieving them have changed. Here are five things every listed company needs to understand to emerge a winner from the melee of market confusion.
1. Now is the time to build your Investor Brand
Despite the simmering crisis, the market seemed to sail through reporting season. As usual, responding to the bad as if it were good when the terrible has been avoided. Even so, investors are as hungry for quality data delivered in a timely manner as they were in March. Now is the time to build trust with all stakeholders through an authentic narrative.
An Investor Brand is the active ingredient that shapes the decisions investors make when uncertainty is greatest. It is the invisible thumb on the scales that will tip things in your favour, or against.
Messaging should be clear, simple, consistent and honest. It is important to show courage by facing into challenges and speaking honestly about what needs to change. Leaders should address specific failures and learnings directly. Those who have benefited, sometimes through blind luck, should be careful not to get cocky or grow complacent. This is no time to gild the lily.
2. Risk management and sustainability are the same thing
Sophisticated investors understand that what gets measured gets managed. They have lost patience with a culture of minimum compliance, externalisation of costs and pro-organisational unethical behaviour.
Companies are experiencing sustained pressure in the public square to act on issues like climate change, modern slavery and indigenous heritage. Regulators as well as investors now view inaction or poor disclosure on these matters as unmitigated risks for a business.
ASIC is now strongly encouraging listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework. This gives rise to the possibility that Directors will be held directly liable for inadequately addressing climate risk. We can expect these matters to be tested in the courts before too long.
What we are learning is that there is no such thing as ‘non-financial risk’. Demonstrably, the reputational consequences for companies and individuals are serious and quantifiable in dollar terms. Weak culture and poor governance lead to value destruction.
After witnessing the Financial Services Royal Commission, Westpac’s $1.3 billion fine and the decapitation of senior figures at AMP and Rio Tinto following recent scandals; surely there could be no one who still believes this to be a matter of opinion?
3. ESG reporting and capital allocation are inextricably linked
Even if you are managing long-term risk prudently, it counts for nothing if you are not reporting this to the market, clearly and comprehensively. I am amazed by the number of companies that issue a bare bones compliance document as their annual report and then wonder why recruiting the right long-term investors is so difficult for them.
This year global index investment giants Blackrock and State Street made it clear that ESG metrics will be formally included in their capital allocation decisions and that they expect companies to report in an integrated manner. In Australia, superannuation funds have been active on these issues for a long time.
The recent joint statement of intent issued by CDP, CDSB, GRI, IIRC and SASB provides a shared vision for financial accounting and sustainability disclosure, connected by integrated reporting. This has taken the pressure to the next level by creating a united front.
The global shift towards embedding ESG metrics and reporting into capital allocation decisions is irreversible. Companies need to proactively select which metrics are most relevant to their business and report on these consistently over time.
4. Virtual roadshows are the future
The ease of virtual engagement has facilitated increased interaction between investors and listed entities. Frequency is making up for proximity in building trust. Habits are being formed.
Institutional investors are increasingly comfortable engaging online with company management teams. Many have already moved to remove internal governance practices that require personal meetings before an investment can be made.
The Interim Report of the Senate Select Committee on Financial and Regulatory Technology, released in September, confirms regulatory accommodation of virtual investor engagement. Allowing companies discretion in the hosting of virtual AGMs and making electronic shareholder communications the default are long overdue rewards for sound advocacy by listed companies.
But why would a company stop at a virtual AGM? Virtual investor roadshows are compelling, especially for smaller companies with low index weightings and tight travel budgets.
5. Investor targeting is critical
Growing unemployment, wary consumers, rising geo-political tensions, ‘free money’ monetary policy and energy markets in flux, have combined to create the ideal climate for chronically volatile equity markets. This is occurring against the backdrop of shrinking sell-side research teams and decimated corporate access departments, downstream from MiFID II.
The result is an equity mis-pricing nirvana for active fund managers, particularly among small-cap and mid-cap stocks. This is terrible news for listed issuers who want to attract long-term investors and see their securities fully valued.
Companies need to take greater control of their own investor targeting. This means in-house capability or expert external advice. Access to a global investor database and CRM is essential. These things should no longer be considered ‘nice to have’. They will be either an invaluable source of competitive advantage for the prudent or a handbrake to happiness for the negligent.
Mario Falchoni is the Managing Director of Retorix