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Substance abuse

Investor Engagement by its nature is complex, situations are heterogenous and so do not lend themselves to the fashion for platform solutions. There are commonalities in any given situation – type of listing, size, sector, liquidity, valuation, perceived peers, advisors, regulation, management, and shareholders – but they will play roles of differing importance when applied to a specific corporate at a specific time. Factors are also fluid, both in terms of real change within the firm concerned and developments in landscape externalities, relating to fact and fashion. IR matters for access to capital, promoting shareholder stability, facilitating the attribution of an appropriate valuation and in turn, the avoidance of the attention of corporate raiders in all their current and future forms. The capital markets Eco-system is more fragmented than ever, the risk of misalignment and erroneous resourcing decisions is greater than at any time in my career and so a focus on substance over the superficial is the foundation for success.

The strategic imperative for a corporation’s IR function is to achieve coherent and successful interaction with capital markets. Practically achieved through the articulation of an accurate, clear, and compelling investment case robustly distributed to providers of capital and in turn the development of a stable, high quality and supportive shareholder base, facilitating access to reasonably priced growth capital. The marrying of strategy and tactics.

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”                 

Sun Tzu, author The Art of War

Regulation, the ongoing democratization of capital markets and the pressured economics across investment industry firms is generating change in how participants behave. In turn the corporates themselves are changing how they perceive and act with respect to Investor Engagement. We are in a long duration arms race on capability. For IR to deliver, a structure is required that allows and leverages an unfettered flow of honest and timely information between the management and board into and out of the Investment Community. In a crowded marketplace for capital, with ever more fragmentation – having independent and experienced guidance to decipher and distill the complexity is core to efficient equity capital market success and the road to lower funding costs and uncompromised liquidity.

“What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organization to do so.”

Peter Drucker, Social Ecologist

Looking below the banner objectives of an investor engagement strategy there are further specifics to consider. Many opportunities present themselves as numerical key performance indicators that can be managed, as simple as the number of analysts covering a company, to the volume of investor meetings undertaken and a myriad of liquidity related metrics referencing shares traded. The initial and ongoing risk is that the wrong metrics are chosen, compounded with the wrong bench-mark values to assess progress. Applying an element of subjectivity and curiosity is key. Success in Investor Relations should firstly reference value over volume. The CEO and CFO meeting with a potential investor might be a good risk-weighted use of time, even if no support or funding is forthcoming, but it might equally well be a resourcing error if the investor is precluded from investing for any one of many potential reasons. Experience, understanding, and preparation are ongoing requirements.

The well-structured execution of an Investor Engagement function by corporations can meaningfully leverage strong operational delivery. The impact of management should be amplified and time with the IR team should rank pari-passu with management in many instances. It can and should provide a conduit for the honest and constructive flow of information and feedback between management and investors, driving a positive reinforcing loop of strategic and tactical adjustment. The EY Industry report of 2018 remains applicable. It highlighted more than 2/3rds of Investor Relations functions were never internally or externally audited and that only around 10% were subject to annual review. The picture is fluid and ongoing review is necessary. An independent external party is patently the best auditing mechanism of a firms’ Investor Relations capabilities. The same EY report suggested managements key desired input from their Investor facing resource was a higher volume of feedback. I would attest relevance and quality should trump quantity.

DP Advisory was founded by the author to identify business limiting capital markets dynamics and provide solutions. If you would like to have an exploratory discussion regarding the specifics of your business, please get in touch at your earliest convenience.

Rich McGlashan

Director

DP Advisory

www.dpadvisory.co.uk

June 2021