‘Communications gap’ between companies and investors leaves door open to activists, says survey
Close to half of investors do not proactively engage with the management of companies they invest in or follow, creating a ‘communications gap’ that could be exploited by activist investors, according to new research.
Just 55 percent of investors surveyed by the Boston Consulting Group (BCG) would describe their engagement approach as ‘active’, while only 57 percent say they would feel comfortable speaking directly to management about any frustrations they have with the business.
The survey, conducted annually by BCG, took place during November and December last year and received 251 responses. Around four in five respondents were portfolio managers, while the rest were buy-side or sell-side analysts.
The report authors warn that the lack of frank communication between investors and companies could result in unwelcome surprises for management down the line. The survey finds that two thirds of investors who do not engage proactively would support an activist campaign if they felt there were issues for a company to address – although they may not do so publicly.
‘These survey results underscore how critical it is for companies to better understand their shareholders’ expectations and identify ways to engage more effectively with investors to maintain their support,’ write the report authors.
Companies need to be on their guard given that an increasing number of investors are trying their hand at activism. While the total number of companies targeted by activists fell by 17 percent year on year in 2019, the number of investors engaging in activism grew to a record high of 147, according to Lazard’s annual review.
BCG’s survey also highlights that investors want more information from companies about how sustainability is incorporated into the business plan. Just 38 percent of companies have ‘well aligned’ ESG with their business strategies, according to the respondents. The majority of companies – 40 percent – have ‘partly aligned’ these two areas, while 22 percent are ‘poorly aligned’, respondents say.
The demand for companies to provide more information on sustainability issues continues to grow. Investors and regulators around the world are pushing for greater disclosure, particularly related to climate change.
In a recent example, last week it was reported that hedge fund manager Christopher Hohn of the Children’s Investment Fund had sent letters to central banks and British financial institutions demanding action to curb investment in coal plants.
Speaking to IR Magazine last year, Brian Rafferty, CEO of IR agency Taylor Rafferty, offered advice to companies about how to start incorporating ESG into the investment case.
‘I would go back to how they present their business, the construct, which should always be upside potential, downside protection,’ he said during an interview at the IR Magazine Global Forum 2019 in Paris. ‘If that’s not well organized, organize it. Look for the areas that fall within the current ESG definition, and integrate the most important elements into that structure.’