Boards of small and mid-size listed companies must follow the lead of their ASX 100 peers and lift their investor relations engagement. Directors must be satisfied their organisation is adapting to a fast-moving investor relations landscape that is rife with risk and opportunity.
Chairmen of smaller listed companies will need to spend more time in the investment community and less in the boardroom. Their boards will need deeper understanding of market expectations and greater capacity to consider external views in governance decisions.
Yet many small-and mid-cap companies (those outside the ASX 100 by market capitalisation) view investor relations mostly as an executive task. Board communication with investors is often limited to the annual general meeting, annual report or profit releases.
Smaller companies often outsource their investor relation function and do not have a dedicated internal capability. Remarkably, even some billion-dollar ASX 100 companies do not have an investor relations executive, despite the complexity of this field.
Nobody expects micro-cap companies with limited capital to plough resources into in-house investor relations staff. Or their board to obsess about market expectations when the stock is barely covered by analysts and has few fund managers on its share register.
But those in the ASX 100-500 bracket (by market capitalisation) that underestimate the growing importance of investor relations are doing their shareholders a disservice. And their boards, by default, are exposing the organisation to significant risk and limiting its potential.
Capital is flowing into higher potential small- and mid-cap companies. The Small Ordinaries index, a barometer of ASX companies ranked 101-300, rose 29 per cent in the year to September 2016 (including dividends), S&P data shows. The ASX 200 index gained 10 per cent.
The remarkable outperformance of small- and mid-cap companies over larger ones might be short-lived. History shows that this year’s best-performing asset class is often among the worst performer in the next few years. I believe small-company outperformance is a more sustainable response to persistent sluggish global economic growth that could persist this decade, if not longer.
Record-low interest rates are forcing institutional capital to move further up the risk curve to deliver “alpha” – a return above the market return. For many Australian equities funds, that means allocating more of their portfolio to mid- and small-cap companies. Funds that have mostly held the market’s largest stocks in the past year have underperformed.
Governance expectations will rise as larger funds invest in smaller listed companies. More sophisticated investor relations programs will be required. Boards of smaller companies will have to think carefully about the investor relations needs of larger funds, the make-up of their share register, market expectations for the stock and corporate communication programs.
The rise of Self-Managed Superannuation Funds (SMSF), now the largest component of Australia’s $2.1 trillion superannuation pool, further lifts the investor relations stakes.
Anecdotally, SMSF trustees have greater appetite for mid-cap stocks that can boost their retirement savings. Boards of smaller companies must ask how the organisation is communicating to this $621 billion pool of retail SMSF capital.
Global trends will also influence investor relations in Australia. The boom in shareholder activism in the United States and Europe is forcing executive teams and boards to spend more time communicating with shareholders, to stave off aggressive investor activists.
Leading governance thinkers, such as David Beatty, Conway Director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto, believe shareholder activism will transform listed-company governance over the next 10 years and consequently that investor relations will become a much larger part of the board’s role.
Directors of smaller listed Australian companies should take note. Their boards need to question whether the chairman and other directors can or should have a larger role in the organisation’s investor relations program that complements management work in this area.
They need to test the robustness of the firm’s existing investor relations programs. Is the program meeting the communication needs of different shareholder segments? Have prospective shareholder groups been identified and how will the firm reach them and communicate through sustainable investor relations programs?
Small-company boards should query the firm’s investor relations capabilities. Does the organisation have a sufficiently experienced investor relations executive for what is an increasingly specialist role? Is the external investor relations firm (if used) performing? Does the board have a good line of sight to the investor relations function? Is technology, such as social media, maximising the investor relations program?
Boards should also ensure the investor relations function is audited, at least bi-annually, to check it is up-to-date with regulatory requirements. Organisations with inexperienced investor relations staff, or limited resources in this area, have greater risk of breaching ASX continuous disclosure obligations in areas such as selective disclosure to key investors.
Investor relations programs must be two way. Recommendation 6.2 in the ASX Corporate Governance Principles and Recommendations sensibly suggests that the investor relations program provides an opportunity for investors and market participants to express their views to the company. Communication should not only be from the firm to the market. Small-company boards need to listen to the market’s views on the company.
Most of all, boards must view an investor relations program as a long-term investment rather than a cost – that is, a program that aims to build long-term, sustainable relationships with key shareholders, built on transparency and trust. Viewing investor relations as a short-term marketing tool to boost the share price is dangerously outdated.
Smaller companies should consider the work of ASX 100 companies in investor relations. The largest of them are making their boards more available to institutional investors, such as industry superannuation funds, and spending more time with proxy advisers and other external stakeholders in the lead-up to the AGM and other corporate events.
Many are making their annual reports more readable and their AGMs more engaging. They are improving their corporate websites, using webcasting and other technology to disseminate their news, and their boards are doing a better job of explaining the firms’ strategy and business model in the annual report.
Although there is room for improvement, ASX 100 companies and their boards understand the potential return on high-performing investor relations capabilities. They know that governance for performance is not only about strategy and risk management – it requires communication that brings investors on the journey, and earns the right to govern for the long term.
Smaller companies that believe their organisation’s ‘performance will speak for itself” are naïve. If the market does not understand the firm and its governance, performance inevitably suffers, in good and bad markets.