There are investors for every type, size and situation of company but historically dominant sectors and companies are losing weight in the indexes and in managers’ portfolios. Competition for capital is increasingly intense despite the high liquidity in the markets.
The definitive incorporation of sustainability criteria to investment analysis, the growing weight of passive management, the high level of trading through alternative platforms, the negative impact of Mifid II on the fundamental analysis of companies and the new business models coming to the stock market with high valuations have collectively generated new challenges for listed companies and their investor relations departments.
The restrictions on mobility caused by Covid-19 have given rise to a virtual meeting model, supported by improved technological support. In the future, we will have a hybrid model of face-to-face and virtual meetings that will be more efficient than traditional roadshows in terms of time and cost savings.
Digital media and networks are the new communication channels for companies and their executives. We are seeing more and more CEOs of listed companies actively participating in these networks. Retail shareholders, often forgotten in recent years, have found a powerful channel of communication, intermediation and influence.
The progressive blurring of the role of brokers has given rise to more direct contact between investors and companies, where the latter must be proactive in the search for investors, which are gradually reducing the number of companies in their portfolios and the average holding period.
The strong weight of new sectors in the stock market, often with balance sheets that are very different from those of traditional companies, has been supported by the markets. This is the so-called capitalism without capital, with little weight of assets and limited or no cash generation in the short term, but strong growth in volume. The companies of the new digital reality – TikTok, Zoom, Google, Amazon, and so on – have reached stratospheric capitalizations that have changed the composition of the indexes. Tesla, whose contribution to global automobile production is less than 1 percent, has a capitalization higher than all other auto manufacturers combined.
In the case of smaller companies, the introduction of Mifid II has meant a loss of coverage by brokers that need to adjust their costs to lower revenues. Smaller firms also do not receive invitations for roadshows if their stocks don’t have the free float and liquidity needed to generate commissions that offset the expense of writing a report or arranging meetings with investors.
The new world
In this new scenario, IR departments need to be more proactive and go directly to potential investors. Their managers must incorporate new skills for the development of their work. Along with knowledge of valuation and balance sheet analysis, they need to improve their communication and synthesis skills. Nobody today reads a 600-page report, such as are produced by many large companies. Time is the scarce resource, not information.
Sustainability and IR now form an indivisible core. Climate change policies, diversity, remuneration policy and corporate governance issues are now an essential part of a company’s equity story.
Non-financial communication is an area an IR manager must also handle and is part of the information investors demand on a regular basis. In the future, the reporting of non-financial information should be integrated into the controller department of companies, subject to the same requirements of veracity, periodicity, accuracy and auditing as accounting information.
The IR professional must also be comfortable handling legal concepts, given the greater weight of the compliance department due to the continuous increase in passive management funds, with lower costs for investors. Corporate governance issues are increasingly at the forefront of investors’ minds, and it is essential the IR team knows the voting policies of its institutional shareholders.
When a company seeks the support of its institutional investors for its AGM proposals, it must talk to these governance areas, as passive management by machines is progressively making the traditional portfolio manager disappear. Co-ordination between the IR department and the company’s legal department is essential.
Traditionally, the discussion of corporate governance issues has been done through proxy advisers. Today, companies must directly seek dialogue with their shareholders on these aspects, especially if there are possible proposals to be approved by the general shareholders’ meeting that could conflict with or differ from the standards usually applied by proxy advisers.
The irreversible change in corporate finance, which has evolved from bank financing to the capital market via bond issues, has added ratings agencies as new interlocutors for companies and their IR departments alongside their treasury departments.
Shares are increasingly traded through alternative platforms, which can account for 60 percent to 65 percent of trading. This fact and the non-obligation of financial intermediaries to report their daily purchases and sales have made it very difficult to know who the shareholders of the companies are. Companies are blind to who is intermediating their shares.
The growing weight of quant funds has triggered trading by algorithms, which implies that decisions are made by machines, not people (who only decide which criteria go into the algorithms). This phenomenon has increased the volatility of stock prices. The sharp variation in share prices has nothing to do with the quality of the results, but rather with how they differ from what is programmed into these algorithms. This rewards short-term management over long-term value generation by companies.
Shareholder activism is increasingly present and has also arrived in Europe. An IRO must have the ability to detect which shareholders are particularly incisive on certain topics. It is not necessary to have a large stake in the company to be able to influence and modify its strategy; IROs must be very attentive to this risk. There is a clear tendency on the part of the large equity holders, the so-called Big Three – BlackRock, State Street and Vanguard – to support small activist funds. This was the case at Exxon, where a small fund with barely $250 mn achieved three seats on the board thanks to the support of these large funds.
IR departments no longer take a purely numerical approach, explaining only past performance or future trends. Today they are a pillar in building the corporate reputation of companies, managing a series of intangible factors that are becoming increasingly important to investors. In the struggle to attract investment, IR departments are more important than ever, but the demands are also greater. They must continuously adapt to the needs of their clients: the investors.
Not existing in the minds of investors is the worst scenario for a listed company so the efforts of IR managers should not be focused on the share price. Their work should be focused on building confidence. The company’s business will go up and down over the years due to internal operational reasons or exogenous factors such as interest rates, regulatory changes, country risk or others.
It is the confidence of investors that will ultimately decide the share price and thus its cost of capital and its reputation among the different stakeholders.
Ricardo Jiménez Hernández is a partner at Sigma Rocket and a former director of investor relations at Ferrovial