When it comes to measuring shareholder sentiment and perceptions you often get what you pay for, but new technology can make perception studies more cost-effective
Measuring shareholder sentiment can be tricky. You can pay a consultancy a huge fee in the hope that the carefully crafted questions will elicit the response you need. You can request feedback from the sell side, and hope it’s not too doctored. You can even pick up the phone and talk to investors direct. The tack you take depends on how much money you’re prepared to throw at the exercise – feedback can be an eye-wateringly expensive process – and how important that conversation is to you at the time, especially if there’s a new strategy in the offing.
‘We take a very straightforward approach to feedback,’ says Karen Cramér, head of IR at South Africa-based global IT specialist Dimension Data. ‘It’s mainly driven by cost. We regularly speak direct to the sell side, sales desks, brokers, shareholders and potential investors. The feedback from a sell-side institution may not be totally independent; it’s a question of what you want to get from it. We normally run a survey after our results period or an analysts’ day, so there would be a mix of specific and open-ended questions, views on the current strategy or business generally. We like to keep it simple. Sometimes you need a reality check.’
Ensuring feedback is not just real but also accurate and valuable is not a simple process, however. ‘I’ve seen reams of feedback that tells you absolutely nothing,’ says Andy Edmond, CEO of UK equity research provider Equity Development. ‘Good information comes from sensible people who have the best access to your audience: financial journalists and fund managers. Experienced individuals working in a regulated industry, to my mind, will yield more valuable information in terms of market understanding.
‘Properly qualified brokers should also be capable of having that dialogue, but some will be more competent than others. They’re driven individuals who might feel an information survey is simply not going to generate revenues for their firm and themselves.’
Independence say
Of course, brokers are well placed to give feedback, being on both sides of the wall but, as Cas Sydorowitz, a director at Georgeson, points out, conflict-of-interest issues will inevitably surface. ‘On the institutional side, brokers’ relations with investors are close, but investors don’t want brokers to have too much insight for fear of brokers on the trading desks getting useful information,’ he explains. ‘A consultancy approach, on the other hand, gives you an element of distance. If an investor talks to an issuer directly, there may be some reluctance to provide candid feedback. It needs to be from a third party.’
This view is strongly backed by Anita Skipper, head of governance at Morley Fund Management in London. ‘Shareholders are much more forthright with a third party,’ she stresses. ‘That’s when you really get the truth. Some people are quite diplomatic, especially analysts and fund managers. They may be concerned that if they upset management there’s a risk they could be cut out of ongoing communication, though of course there’s no proof of this.’
If the cap fits
A well-crafted perception study should also be able to give an aerial view of just why an investor is buying into your company, even if it doesn’t look like a natural fit. ‘If you’re looking at a ‘does my company match your investment style’ approach, that can be a very interesting conversation,’ says Sydorowitz. ‘You can ask what other stocks the investor is investing in. If you have an investor in your stock following a certain style that does not fit the profile of your company, at some point that could mean a major change in ownership.’
Some companies may feel commissioning feedback is merely a box-ticking exercise, something for the annual report to show that shareholder communication is taken seriously. The quality can certainly be variable: speaking off the record, one industry insider describes the content of most shareholder surveys as ‘absolute rubbish’.
‘They’re not done by market researchers or specialists – they’re done by capital markets companies or IR agencies,’ he explains. ‘Market research should be carried out by market research companies. A perception study is not a series of transcripts and a summary to go with it. A perception study is a collection of transcripts with quantified information, so you can see clearly that X percent says this and Y percent says that. Most studies don’t do that.’
Value for money
Brian Rivel of the Rivel Research Group, a Westport, Connecticut company focusing on the investment community, says the true value of a perception study is really going to be worth having only if it’s taken seriously by management. ‘Perception studies work when there’s already a culture where management understands the link between shareholder perception and valuation,’ he points out. ‘We can point to cases that clearly show the impact good IR has on valuation. In our experience, 10 percent of company valuation is tied to truly superb IR. A downside valuation of 15 percent accounts for bad IR. That’s a 25 percent swing, so companies that communicate well attract a much higher valuation.
‘We take every sentence and every transcript and put them into buckets where we see themes developing. We can segment distinct themes even further and break down views from secondary investors, whether they’re GARP or growth, because that affects how you communicate with your target audience. You can then take specific steps to deal with issues, and go back the following year and measure again how your communications impacted your story.’
Such a survey, of course, is not designed to be a cheap option. Carol Friend of London-based Pielle Consulting says there are other options, like Pielle’s online system, tagged Insight, which is based on a risk analysis model for providers registered with UK financial watchdog the Financial Services Authority.
‘Extensive research, whether by phone or post, is fairly costly,’ Friend explains. ‘Our approach is to use an online questionnaire assessment of investors’ perceptions, but to frame it with three separate elements related to the same topic, so you’re always sure you understand the response. It’s similar to how psychometric testing is done. If you have an investor’s email address you send the investor a log-in password to a secure website. Because this is relatively inexpensive to implement, you can engage with people again and again, when needed. It’s a genuine two-way process.’
Overall, Friend says the costs of running and using Insight are likely to be around £20,000 ($39,459) a year. So it’s your choice: pick up the phone – if the investor hasn’t called you first – or outsource the perception study to a specialist, but make sure the cost is worth it. Like most things in life, you get what you pay for.
