Post-Covid financial communication: The new role of IRs
There are investors for every type, size and situation of business, but historically dominant sectors and companies are losing weight in indices and in managers’ portfolios. Competition for capital is increasingly intense despite the high liquidity of the markets.
The definitive integration of sustainability criteria into investment analysis, the growing weight of passive management, the high level of trading via alternative platforms, the negative impact of Mifid II on the fundamental analysis of companies and new business models that go public with strong valuations have collectively generated new challenges for listed companies and their investor relations departments.
Mobility restrictions caused by Covid-19 have given rise to a virtual meeting model, supported by improved technology support. Going forward, 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 managers. We see more and more CEOs of listed companies actively participating in these networks. Individual shareholders, often overlooked in recent years, have found a powerful channel for communication, intermediation and influence.
The gradual blurring of the role of brokers has resulted in more direct contact between investors and companies, where the latter must be proactive in finding investors, who are gradually reducing the number of companies in their portfolios and the average duration of detention.
The strong weight of new sectors on the stock market, often with very different balance sheets from those of traditional companies, was supported by the markets. This is called capitalism without capital, with little asset weight and little or no short-term cash generation, but strong volume growth. The companies of the new digital reality – TikTok, Zoom, Google, Amazon, etc. – have reached stratospheric capitalisations which have modified the composition of the indices. Tesla, whose contribution to global auto production is less than 1%, has a higher market capitalization than all other automakers combined.
In the case of smaller companies, the introduction of Mifid II has resulted in a loss of coverage for brokers who have to adjust their costs to lower revenues. Small companies also don’t get invites to roadshows if their shares don’t have the free float and liquidity to generate commissions that offset the expense of writing a report or arranging meetings with investors. .
The new World
In this new scenario, RI departments need to be more proactive and speak directly to potential investors. Their managers must integrate new skills for the development of their work. In addition to knowledge of evaluation and balance sheet analysis, they must improve their communication and synthesis skills. Nobody these days reads a 600-page report, like many large corporations produce. Time is the scarce resource, not information.
Sustainability and IR now form an inseparable core. Climate change policies, diversity, compensation policy and corporate governance issues have become an integral part of a company’s equity story.
Extra-financial communication is an area that an IR manager must also manage and is part of the information regularly requested by investors. In the future, the reporting of extra-financial information should be integrated into the corporate control department, subject to the same requirements of veracity, frequency, accuracy and audit as accounting information.
The IR professional must also be comfortable with legal concepts, given the greater weight of the compliance department due to the continued increase in passively managed funds, with lower costs for investors. Corporate governance issues are increasingly at the forefront of investor concerns, and it is essential that the RI team is aware of the voting policies of its institutional shareholders.
When a company seeks support from its institutional investors for its AG proposals, it must address these areas of governance, because passive management by machines is phasing out the traditional portfolio manager. Coordination between the IR department and the legal department of the company is essential.
Traditionally, discussion of corporate governance issues has been through proxy advisors. Today, companies must directly seek dialogue with their shareholders on these aspects, in particular if there are any proposals to be approved by the general meeting of shareholders which could conflict with or deviate from the standards usually applied by proxy advisors.
The irreversible evolution of corporate finance, which has evolved from bank financing to the capital market via bond issues, has added rating agencies as new interlocutors for companies and their IR services alongside their treasury services. .
Equities are increasingly traded via alternative platforms, which can account for 60-65% of trade. This fact and the non-obligation of financial intermediaries to declare their daily purchases and sales made it very difficult to know the shareholders of the companies. Companies are blind to who their actions are through.
The growing weight of quantitative funds has sparked algorithmic trading, which implies that decisions are made by machines, not people (who only decide what criteria go into the algorithms). This phenomenon has increased the volatility of stock prices. The large variation in stock 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 rather than long-term value creation 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 significant participation in the company to be able to influence and modify its strategy; IROs need to be very alert to this risk. There is a clear tendency on the part of large shareholders, the so-called Big Three – BlackRock, State Street and Vanguard – to support smaller activist funds. This was the case at Exxon, where a small fund with barely $250 million secured three seats on the board of directors thanks to the support of these big funds.
IR departments no longer take a purely numerical approach, only explaining past performance or future trends. Today, they are a pillar in building the reputation of companies, managing a series of intangible factors that are becoming increasingly important for investors. In the fight to attract investment, IR departments are more important than ever, but the demands are also greater. They must constantly adapt to the needs of their customers: the investors.
Not existing in the minds of investors is the worst case scenario for a publicly traded company. The efforts of RI managers should therefore not focus on the stock price. Their work should be focused on building trust. The company’s business will experience ups and downs over the years due to internal operational reasons or exogenous factors such as interest rates, regulatory changes, country risk or others.
It is investor confidence that will ultimately decide the share price and therefore its cost of capital and its reputation with the various stakeholders.
Ricardo Jiménez Hernández is a partner at Sigma Rocket and former Director of Investor Relations at Ferrovial