A board is ultimately answerable to the company’s shareholders. As the person responsible for leading the board, it is generally the chair who has the main relationship with the business’s existing and potential investors.
A number of challenges, including the rise of activist shareholders and the predominance of environmental, social and governance (ESG) issues, have led the relationship between the board and shareholders to become much more critical in recent years.
This in turn is changing the way the board, and the chair in particular, engages with the market. It also means there must be a much closer relationship between the board and the investor relations (IR) function.
The role of IR
When it comes to market communication, the IR team should be the chair’s best friend. IR is usually responsible for identifying local and global investors who are appropriate for the business given its level of maturity. For instance, the IR team will know which investors are into growth-oriented stocks and those that have a bias for value stocks.
IR will also prepare information for board reports, field investor questions and calls and prepare the chair and executive for investor road shows and conferences. It also prepares material for earnings announcements, presentations and annual reports.
According to the Australasian Investor Relations Association’s (AIRA’s) March 2017 Biennial IR Benchmarking Survey Results, which explored the role and practice of investor relations within Australian and New Zealand listed companies, IR is one of the board’s core concerns. For instance, results from the research show the majority of boards spend up to 10 per cent of their time on IR matters.
“The chair should use the IR team as their eyes and ears to the market. IR has the benefit of talking to analysts and investors. They know their concerns and issues. So it is up to IR to provide an honest assessment of market thinking to the board and chair,” says David Wilson, deputy head of equities, Australian equities growth, Colonial First State Global Asset Management.
Rebecca Wilson, chief executive officer (CEO) of WE Buchan, which provides investor relations advice for businesses, says IR professionals have in more recent times, become trusted board advisers. For example, they have become responsible for leading discussions and strategies around sustainability, corporate social responsibility, executive remuneration policies, issues management and mitigation and shareholder activism.
“Investors are focusing on elements beyond the bottom line. Given these matters are increasingly discussed at a board level, investor relations officers need to keep their finger on the pulse to demonstrate their value to directors,” she says.
Chairs and institutional investors
If you want a great relationship with the market, you need a fantastic head of investor relations. “In some companies there may be a team, but the head of IR is the person who should interface with the chair most and also with the rest of the board by attending board meetings. There’s generally also an IR update in the board report,” AIRA chair Ian Matheson FAICD says.
“IR should have a regular and open dialogue with the chair, CEO and chief financial officer (CFO). Between board meetings it is up to the IR team to update the chair about changes to the company’s share register, reactions from investor road shows and particular feedback coming from the investment community of which the chair should be aware,” he adds.
Matheson says the board, as the shareholder’s representatives, should be interested in what is going on with the business’s listed securities. It should also be across positive and negative feedback from the market following regular communication to the investment community such as results presentations or road shows.
It is also up to the IR team to let the board know about any unusual activity on the company’s share register that might indicate an entity is building up a meaningful ownership stake in the company, with a view to launching a takeover.
“The chair should meet with major shareholders periodically. By that I mean at least once a year on a governance road show that is separate to the company’s management road shows,” Matheson adds.
This is because it is important for major shareholders to feel they can have a separate conversation with the chair than they may have with the management team. It might also be appropriate for the chair of various board committees, for instance the remuneration committee, to meet with shareholders, especially when the approach to remuneration is changing.
“But I stress it should be the chair first and foremost who is the interface between the company and the major shareholders,” Matheson adds.
There are mixed views about whether other directors should interact with major shareholders. It’s inadvisable for directors to meet individually with shareholders, but often directors may be present at group investor gatherings, for instance dinners involving major shareholders and the board.
“In that case,” says Matheson, “there’s no particular agenda, the board is in ‘listen-only’ mode. It’s management’s job to explain company strategy and communicate performance. It’s the chair’s role to be the shareholders’ representative and listen to the views of and feedback from shareholders.”
Reducing risk: selective briefings
The concept of continuous disclosure is a central market mechanism. It’s a requirement for ASX listed businesses to meet listing rules by disclosing material information – that which has the potential to move the share price – through the stock exchange, so all market participants have access to the same information and are trading on the same basis. It’s a way of ensuring an orderly and fair market.
Any officer of the company who is talking to investors must take care not to selectively brief them – that is, drop a couple of nuggets of juicy information such as a potential takeover offer, which could see a share price rise.
Most chairs are well aware of their continuous disclosure obligations. It’s also very easy for authorities to identify any unusual share trading in a company’s shares that could indicate insider trading. With this in mind, it’s important for chairs to be well versed in how to manage selective disclosure.
“As a fund manager, the last thing we want is to be raked over the coals because we’ve been selectively briefed. The IR team, chair, CEO and CFO need to be across this issue so they don’t selectively brief the market,” says David Wilson.
“It’s not up to the chair to talk to us about the day-to-day running of the company. This is driven by the CEO and, to some extent, the CFO. The things that come up in discussions with the chair tend to be around the mix of the board,” he adds.
Remuneration of the board and senior executives is another hot topic for chairs and investors. This is especially the case if the business has been subject to a “first strike”; where shareholders vote against the business’s executive remuneration report at the annual general meeting (AGM). It’s worth the chair and investment community talking about the “rem report” with investors well before the AGM to avoid a strike.
David Wilson agrees with Matheson that it’s worth having a discussion between the chair and shareholders if the remuneration policy is changing.
“It’s a way to avoid a strike. Succession planning is the other topic the chair will talk about,” he says.
In the better relationships between the chair and the market, there will be a level of open exchange. For instance, in one case, Wilson says the chair of a top 50 company wanted to meet with him to find out why CFS had not invested in his business. He says the fact the chair sought this consultation opened his eyes to the stock.
When it comes to avoiding selective disclosure, Matheson says in any meetings with major shareholders that the chair must make it clear that they are not able to talk about operational issues.
“The chair is there to talk about governance issues. They can listen to feedback from investors on operational issues, but any detailed questions should be directed to management,” he says.
It’s also an idea for the head of IR to accompany the chair on governance road shows, which can also act as another layer of risk management to reduce the chance of inadvertently selectively briefing a shareholder.
“If the chair does take meetings with major shareholders outside governance road shows, they must be fully aware of what is in the public domain to ensure they don’t breach continuous disclosure rules and run the risk of selective disclosure,” says Matheson.
Activism on the rise
Shareholder activism is a growing issue for many boards. In recent years activity has been mainly targeted at listed investment companies (LICs), many of which have underperformed or are trading at a discount to net asset value. LICs are vehicles activist or hedge funds typically buy into, in many cases taking big stakes in these entities.
Says Matheson: “A lot of the activism coming from offshore has been targeting LICs. They’ve been the low-hanging fruit, to a large extent.”
Remuneration has been another source of institutional shareholder activism recently. But activists are also turning their attentions to ESG issues such as funding fossil fuel projects, carbon emissions, gender diversity on boards and supply-chain issues.
“These issues make it all the more important for companies to disclose and explain what they’re doing on those fronts and the material ESG risks to the company,” he adds.
This is especially important given a recent Australian Prudential Regulatory Authority directive to companies to consider climate change issues, irrespective of their ethical point of view or approach to climate change.
The growing importance of ESG is also reflected in the increasing focus investors and analysts place on ESG issues. AIRA’s benchmarking report found there had been a 95.5 per cent increase in the number of requests from investors to listed companies about ESG issues in the past year. For analysts, this figure is 75 per cent.
Martin Lawrence is one of the founders of governance advisory business Ownership Matters. He says the best way for boards to respond to activist shareholders is to meet them. “There’s a temptation to circle the wagons and ignore them. But one of the reasons why it’s important for boards to listen to activist shareholders is because [activists] will often get a hearing from other investors when the market is unhappy with what is going on at a company.”
So engaging with activist shareholders is a good way to find out if other institutional shareholders have concerns with the company. “Forewarned is forearmed. Not all wisdom resides within the board and management team which is why it can be worth talking to activist shareholders,” Lawrence advises.
If there is conflict between activist shareholders and the board about the direction in which the company should be going, Lawrence says it’s perfectly acceptable for the management team to stand its ground – as long as it’s prepared to deal with the fallout. For instance, if activist shareholders don’t support the company’s strategy, they can build up a five per cent stake in the business and requisition a general meeting to try to remove the board. So be prepared if you want to go in a different direction to your activist shareholders.
In light of increasing shareholder activism and the growing importance of ESG issues, investor relations is an area of growing risk for companies of which directors need to be aware.
If a business does have an IR issue, it poses a risk not just to the company’s market capitalisation, but also to directors’ and chairs’ reputations. For that reason alone directors should ensure they are across the company’s IR issues and ask questions of management on a regular basis.
Boards that do this put themselves in a position of power next time the company faces an issue with institutional investors or wishes to raise capital.
While the rules of engagement for chairs and the market are clear for listed businesses, the same cannot be said for start-ups. Early-stage ventures do not have to abide by the ASX’s strict listing rules, but it is equally as tough, if not more so, for them to raise capital.
James Chin Moody, founder of Sendle, a carbon-neutral, door-to-door delivery service, knows this only too well. Helen Souness, managing director of Etsy in Australia, recently joined Sendle’s board, and they have spent considerable time thinking through governance issues as they relate to the business.
To date, Moody and his team have raised all the business’s capital themselves, which means they have an especially close relationship with their investors.
“If you outsource that you end up creating a boundary between the business and its investors. We’re very particular about who we allow to be an investor, which is one of the luxuries of being a non-listed company,” Moody explains.
“We have been able to pick and choose who invests in the business so far. It’s important for there to be an alignment of goals and values between the executive, the board and the investors,” he adds.
Early investors were high-net worth individuals and more recently private equity firms have bought into the company, and now have a seat on the board.
“We provide regular monthly updates to investors. One of our investors once said to me, ‘the most important thing you can do is take me on this journey. I don’t want to hear nothing from you and come back to me in a year’s time, and say, you need more money’. So one of the most important things you can do is be completely honest and communicate frequently around how the business is going,” Moody adds.
“For some of our investors, they offer more than just the capital they inject into the business. I go to some of our investors for advice and we even have small projects we work on together,” he adds.
For instance one investor is working on a project looking at next horizons for the company. “We’re working deeply with this investor on that question. They bring an awesome view, because the next horizon will require an additional capital raising,” Moody explains. Another investor has been able to contribute marketing expertise to the company.
Above all, says Moody, a good relationship between the board and investors is all about trust, no matter how big or small the business is. If the shareholders can trust the chair, then they will be more likely to remain invested and contribute additional funds when required.
Managing changes at the top
How best to manage market communication when there is a change of CEO is a perennial issue for companies.
Often, an incoming CEO will seek to reset the market’s expectations about the company’s future performance, which usually involves revising earnings downwards, which causes a share price contraction.
If a business is changing its CEO, it’s important to start managing market communication well in advance of the new appointment, including carefully releasing any news that might affect earnings guidance.