The investor relations industry has come a long way over the past 40 or 50 years. At the beginning, the function was manned by ex-financial hacks scribbling out press releases, while the reaction to someone who said they did IR was: ‘yes, but what is your full-time job?’
It’s a long way from the well-staffed, highly sophisticated departments now operating in public companies. As noted in our most recent cover story, the team at Roche features a heady mix of doctorates, language skills and MBAs.
The question that arises is: have companies – and IR departments – become too powerful when it comes to influencing market sentiment?
At a recent IR conference, retail analyst Tony Shiret complained that, on results day, the analyst is like one man fighting against an army of advisors employed by the company to push its message.
(His solution – not very surprising for Shiret – was guerrilla warfare, for example ambushing the CEO in a shouty manner at the results announcement.)
The audience at the conference concurred; over 50 percent said in a live poll that companies shape market opinion more effectively than analysts or journalists.
There was more evidence in today's Times, where Martin Waller writes that ‘an entire industry, investment relations, has grown up to lead them [analysts] gently by the hand to the “right” conclusion’.
Waller also notes that analysts ‘are incapable of producing their own “forecasts” without an awful lot of prompting from the companies they claim to understand so thoroughly’.
Companies have always been in the strongest position when it comes to shaping sentiment. They control what information is released and the manner in which it is disclosed. But, with the decline in quality of equity research witnessed over recent years, the balance is tipping further in IR’s favor.
On a different point, what’s this ‘investment relations’ Waller speaks of? If you’ve ever built a successful relationship with an investment do let us know!
By Tim Human
ProLogis’ investor relations team are keenly anticipating Earth Day, which falls tomorrow on April 22. No, not because Avatar is being released on Blue-ray DVD. Rather, they are excited because the company is using Earth Day to launch its latest corporate responsibility (CR) report.
The CR report, once dismissed as corporate fluff, is now an important part of many investor-targeting strategies. To meet the criteria for inclusion in sustainable investment funds, a lot of detailed information is required, and here the CR report provides a valuable service.
What’s more, the amount of assets managed by CR-focused investors is on the up, noted ProLogis’ head of IR, Melissa Marsden, during a webinar yesterday. ‘They are becoming a force to be reckoned with,’ she added.
Other issuers seem to agree. CorporateRegister.com, an online CR resource, says 3,764 standalone reports were produced across the world in 2009, up from 3,408 in 2008 and 3,011 in 2007.
With climate change risk an ever-hotter topic (and now a suitable issue for inclusion on shareholder resolutions in the US), 2010 is likely to be another record year for CR reporting.
-To hear the webinar, visit the IR magazine website.
-Read about Vodafone’s award winning CR report.
If you want something done, it’s best to do it yourself. Such advice could be offered to Xavier Rolet today after the London Stock Exchange’s chief executive bemoaned the lack of retail participation in the UK’s capital markets.
‘One of the distinguishing features of the UK market, if you compare it to our European neighbors and frankly also our neighbors to the west in the United States, is the relative underrepresentation of private, retail investors,’ he told delegates at the UK IR Society’s annual conference.
‘It is much more difficult for them in terms of costs, in terms of availability of electronic broking venues. We believe this is one of the reasons why liquidity in the UK markets is significantly underdeveloped.’
To be fair to Rolet, he did bring in a retail trading platform for bonds in February this year, a point he made during his speech.
But on the question of retail equity investment, all Rolet had to say was: ‘We believe there is still much more to do in terms of providing new tools, particularly electronic, transparent, liquid and neutral tools.
‘We’ve started to take action, and I expect over the coming months we will introduce new initiatives to make access to equity markets easier for retail investors.’
Let’s hope some of these initiatives take a more concrete form soon. If Rolet can’t offer a solution, who will?
News that Lady Nina Bracewell-Smith has decided to appoint US private equity fund Blackstone to find a buyer for her 15.9 percent stake in Arsenal raises questions over the future ownership of the club and could mark the end of the last English football giant in public ownership.
Bracewell-Smith is the fourth largest shareholder and her decision to sell could mark a return to the intrigue that has pitted Russian billionaire Alisher Usmanov against Stan Kroenke, the US sports franchise mogul. As yet she has not attempted to sell piecemeal on PLUS Markets, the specialist trading venue on which Arsenal’s shares are traded. This would have meant breaking up a tactically important stake in a desirable concern.
A buy-out of Arsenal by Kroenke or Usmanov would mark yet another twist in the increasingly international make-up of club ownership and a further stock market de-listing. Listed British clubs are now a rarity. The majority that listed did so in the mid-to-late 1990s following lucrative broadcasting deals with Sky. However these were hit by initial over-valuations and a lack of profitability, due in part to inflated player wages. Moreover the decision by clubs, such as Manchester United, to raise money by floating on exchanges has led to buyers swooping on these saleable commodities. Manchester United de-listed in 2005 following the successful (but highly unpopular) takeover by the Glazer family.
Consequently only a handful remain on the market. Arsenal and Tottenham represent the largest of these and are joined by Millwall and Preston North End in the lower leagues. For listed teams outside the elite Premier League investor relations does not seem to enjoy the same level of prominence displayed in other sectors. Preston North End’s investor information is woeful. I assumed for an hour they had de-listed but an interview I discovered with their chairman seemed to suggest otherwise. Comparatively Millwall actually possesses a site, and it was easy enough to find, but it hardly presents a milestone for attractiveness. Given that the majority of the small shareholders at such clubs are fans (the financial lifeblood and the teams raison d'être), it comes as a surprise that there is not a greater attempt to reach out via user-friendly IR sites to answer investor queries, or at the very least to encourage dialogue between the board and stake-holding supporters.
‘Got Milk?’ goes the advertising slogan. Increasingly, investors are responding in the affirmative, as the price of milk edges up.
The situation is one example of pricing power coming into play following the downturn. As competitors thin out, investors are looking for industries where the remaining players can flex their pricing muscles.
One example is the dairy market. Here’s Matterley’s take on it, from the UK fund’s March commentary.
‘It is with a degree of sadness we report that one dairy farm goes out of business every day and this has meant that, as a nation, we are producing less milk today than at any time in the last 40 years. It is our view that ongoing falling supply will bring about improved pricing in the coming years to the incumbent players.’
When it comes to CEO succession, promoting from within is viewed as best practice. But, in the case of struggling companies, bringing in fresh blood may be the better option. That’s one of the findings of a survey by the Toronto branch of Spencer Stuart, an executive recruitment firm (via The Globe and Mail).
The results find shares perform better if a company brings in a CEO from outside the company, compared to if they hire internally. And that this is particularly true if the company is in crisis and has fired the incumbent CEO. In this case, shares outperform by 4.3 percent over three years, according to the survey, which used a group of Canadian companies for its sample.
The results are unsurprising. If a company has made mistakes and is in a rut, internal candidates probably lack the ideas to turn it round. But, perhaps even less surprising, is the involvement of Spencer Stuart in such a survey, which makes its money by placing top-level executives. Triples all round then!
This is an article that originally appeared in last week's edition of our weekly newsletter, IR insider. You can subscribe to the newsletter by signing up here.
Investors have, on occasion, been likened to wildebeest: frequently guilty of adopting a herd mentality. Yet unlike the hoofed mammals that traverse the African plains, investors have many information sources to consider before they migrate out of one stock and into another.
As well as relying on their experience and acumen to second-guess macroeconomic trends and the resulting impact on their portfolios, investors receive wisdom from the analyst community. A valuable resource, you would think, but it begs the question: how much attention do investors really pay to analyst recommendations?
Given the amount of time issuers spend with the analyst community, the question is one well worth pondering, yet it remains one difficult to resolve in one way or another. Some increasingly feel recommendations have less and less effect on investor behavior. This was particularly the case in the midst of the financial meltdown when one of my IR contacts complained that his company’s share price sank dramatically on the same day all his firm’s analysts issued a buy rating on the stock.
A recent study conducted by hedge fund GLG Partners analyzed European share price movements and broker recommendations. Among the anecdotal critiques from fund managers is the assertion that analysts tend to act as unreliable stock pickers, providing a more useful function as an information source on companies. Another criticism is that analysts are also prone to herd mentality, tending to be momentum-driven. In other words, they have a tendency to put buy recommendations on outperforming stocks – a conclusion ultimately refuted by the GLG report’s authors.
The question of how much influence recommendations actually have is a tough one to answer, because relationships of causality are difficult to establish. Firstly, because brokers tend to issue recommendations immediately after news announcements such as earnings, it is hard to determine how much the share price would have moved on the basis of the recommendation alone. Secondly, no fund manager with any sense would admit to relying solely on the recommendations of analysts to do his or her job satisfactorily.
Perhaps the most interesting assertion, however, is that the really good investment ideas come from equity salespeople. The report argues that information gleaned from sales teams helps fund managers achieve better performance than recommendations directly from research departments. While the performance of research salespeople is clearly strongly affected by the performance of the broader research function, the authors find that recommendations from salespeople outperform the broader universe of all analyst ideas.
This is worth bearing in mind when it comes to roadshows, when issuers can end up spending a great deal of time on the road with analysts. If this research is to be believed, it is arguably worth putting a greater onus on cultivating a closer relationship with the sales team.
It is also worth thinking about how you organize your time with analysts. When there is disagreement between analysts about a stock, the recommendations of certain analysts are more likely to influence your stock price. Perhaps unsurprisingly, the GLG study finds recommendations from large, global brokerage firms have more of an impact on stock prices than smaller brokerage firms when they disagree with the consensus.
Another dilemma for some listed companies is what to do about ‘rogue’ analysts who don’t engage with issuers. IR people occasionally complain that investors ring up citing an analyst report the issuer isn’t on the distribution list for. Increasingly, IROs need to acknowledge these reports and proactively engage with the analysts in question to avoid any nasty surprises. As the number of research houses increases, the case for responding directly to these analysts could gain momentum.
By Clare Harrison
Warren Buffett’s annual letter to shareholders alludes to Kraft-Cadbury deal and criticizes the role of bankers
Legendary investor and CEO of Berkshire Hathaway, Warren Buffett, began his annual letter to shareholders with a warning to journalists. Sound-bite reporting, the letter says, can mislead investors who pay the price. Appropriately, his readers have to look between the lines to find a reflection on Berkshire’s recent activities.
Poorly judged acquisitions, in which investment bankers are incentivised to complete a deal regardless of its value, are particularly common in stock-for-stock deals, the letter implies. Companies, Buffett says, are commonly convinced by the value of the company they are buying. ‘In more than 50 years of board memberships, however, I have never heard the investment bankers (or management!) discuss the true value of what is being given,’ the letter says.
In the text, Buffett evaluates Berkshire’s acquisition of Burlington Northern Santa Fe, which required Berkshire to issue 95,000 shares. However, not once does he refer to Kraft’s acquisition of Cadbury – a deal that he criticized because he felt that Kraft’s shares were undervalued and too much was being offered.
‘You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders,’ the letter says.
Many chief executives probably sympathize with Apple CEO, Steve Jobs’ statement that shareholder meetings keep him awake at night. Sadly, for those thinking of sending the Apple boss a note saying they know the feeling, Jobs was joking.
The quip came at Apple’s shareholder meeting in California last Thursday where there was very little to lose any sleep over. Investors voted down environmental responsibility disclosure measures at the meeting, only for the illegal practices of Apple’s Asian suppliers to be detailed in their supplier responsibility report the next day.
Not all companies are so fortunate, however. A story in today’s FT warns that European companies could face more challenges from non-domestic owners as we approach the annual meeting period.
Foreign investors currently own 37 percent of listed European companies, according to the federation of European Securities Exchanges, up from 29 percent in 2003.
An anonymous group of CSR-crusaders are performing anti-investor relations for Royal Dutch Shell.
A database of the personal details of Shell employees and contractors has been leaked by environmental and human rights campaign groups. The document, confirmed as genuine but out of date by Shell, contains the personal details of 176,000 individuals. Released on the evening of February 11, it comes with a 170-page 'covering note' from the vigilantes including plans for a campaign to educate the company’s institutional investors.
The covering note claims that all of Shell's institutional investors are oblivious to the company's supposedly maleficent activities in Nigeria’s Niger Delta. As the Financial Times notes, these claims are already well-known and it is unlikely that they would be news to investors.
If institutional investors were not aware of Shell’s difficulties in Nigeria, they should not be surprised by the covering note’s call for a change in policy. ‘Petroleum giant accused of poor corporate social responsibility (CSR) in Africa’ is a well-worn story. Nor does the appeal to CSR appear to affect investor behavior. The company’s share price fell slightly with the news, hitting £17.26 on Friday, down from January’s high of £19.50, but has recovered today.