Activism, guidance and purpose: The IR issues on the minds of CFOs
CFOs and IROs have a growing list of stakeholders beyond Wall Street: customers, employees, vendors, regulators, philanthropists, social responsibility monitors and others who want to know how their company’s strategy and financial performance are benefiting their community and the world at large. The Business Roundtable’s statement on the Purpose of a Corporation, signed by 181 CEOs, reflects this trend.
As investors broaden their criteria of what makes a company a desirable investment, CFOs and their IR teams might reconsider their IR strategy. A company’s IR function should not be a perfunctory exercise in information distribution, but a means of meeting the needs of an increasing variety of stakeholders – investors, customers, employees, and so on – that sometimes have competing agendas. It should also seek to create a feedback loop with shareholders and the market. In 2020 financial executives need to pay close attention to the shifting trends in investor relations in order to meet and exceed stakeholder expectations.
Rising interest in ESG
Traditional metrics, while still critical, are no longer the only way investors measure performance. Increasingly, they are turning to company disclosures on ESG issues to help evaluate and monitor a company from a risk and sustainability perspective, as well as a financial one. Investors’ demand for information on sustainability performance and climate change-related risk exposure are prompting many companies to improve transparency on ESG topics.
The number of S&P 500 companies publishing some form of sustainability disclosure increased from 20 percent in 2011 to 86 percent in 2018, according to a report from Morgan Stanley. Research by the Investor Responsibility Research Institute on the state of sustainability and integrated reporting in 2018 found that 40 percent of the S&P 500 voluntarily address some aspect of sustainability in their financial filings, and 23 percent address sustainability in their 10Ks.
Moreover, the 2019 proxy season was the third consecutive year in which ESG-related issues accounted for the majority of shareholder proposals. It’s unlikely the focus on ESG will diminish in the 2020 proxy season. ESG has gone from being a fringe issue – of interest to only a small cohort of stakeholders – to a key consideration. Such a change can make the difference to whether an investor takes a position in your stock, votes in concert with management’s recommendation or buys your product or service.
The ongoing drumbeat of shareholder activism
According to Activist Insight, 935 companies were publicly subjected to demands by shareholder activists in 2018. Sullivan & Cromwell indicates that activist campaigns increased by 5.5 percent in 2018. As shareholder activism edges up, it’s important for CFOs and IR teams to keep an eye on activist investment funds, as well as individual shareholder activists.
Regardless of what’s driving shareholder activism, putting one’s head in the sand is not a solution. Management should proactively engage with investors and be prepared for activists with strong points of view, working with the board. Many senior leaders appear to be doing so, judging from Deloitte’s North American CFO Signals™ survey for the third quarter of 2019.
Nearly 45 percent of the 172 CFO respondents, representing many of North America’s largest and most influential organizations, say their company has experienced activism in the last three years, most commonly via direct communication to management. In addition, slightly more than half say they have considered, taken or expect to take action specifically because of activism – even if their company has not recently experienced activism.
Keep in mind that shareholder activism has advantages as well as drawbacks. Many companies have benefited from activists that have directed management’s attention to opportunities to accelerate growth, improve the bottom line, monetize assets or return capital to investors. A self-examination can help uncover vulnerabilities not just for activists, but also for competitors.
Indeed, 80 percent of the CFOs participating in Deloitte’s survey indicate they provide an activist’s view presentation to leaders at least yearly.
What CFOs are telling us
Against this backdrop, the survey also finds that most IR analysis and communication activities continue to occur on a quarterly basis: 70 percent of the public company CFOs surveyed say their company issues guidance quarterly, and 64 percent say their strategy for guidance is to provide best estimates along with the assumptions upon which they are based.
Seventeen percent of the CFOs say they provide guidance only yearly and 11 percent not at all. Nevertheless, 90 percent of CFOs surveyed say they review analysts’ comments and talk with key analysts and shareholders on a quarterly basis.
Strategies that entail less extensive and less frequent guidance are far less common among the surveyed CFOs: just 5 percent cite providing only directional guidance or guidance around a narrow set of metrics. Only 4 percent say they provide guidance less frequently than quarterly and/or provide estimates that cover one-year to five-year time horizons.
In an era of extraordinary information transparency, it is now more important than ever for companies to carefully consider how they guide the market to their conclusion of value. Otherwise companies risk analysts drawing their own conclusions, which may depart from the company’s views.
Time to re-evaluate your IR strategy?
So what does this mean when considering your IR arsenal? Do investors see the information your company presents as transparent and complete enough? Do they understand management’s short and long-term strategies, and the risks to those strategies? Are they confident in the leadership team? Do they hold misperceptions about the company or stock? An effective IR function monitors the marketplace and shareholder sentiment to obtain the answers to these questions.
While it’s encouraging to see the continued pace of quarterly engagement with investors and others, in today’s connected environment, should more be done? For example, digital technologies have transferred a measure of organizations’ control of information to investors. Now, investors and other stakeholders, including activist shareholders, can communicate with millions of people at the click of a mouse rather than waiting for reports to be delivered by mail or other pre-digital methods. CFOs and their IR teams might want to take the new landscape into consideration as they plan their outreach to the investment community.
Chris Ruggeri is national managing principal of Deloitte Transactions and Business Analytics