Some groups of investors are more important than others. True or false? Most investor relations officers will tell you their focus is on the largest shareholders – the institutions that hold the majority of shares in public companies. Except in the case of recently privatized companies, the argument goes, retail shareholders are not as important because they don’t have enough votes to affect any of the company’s decisions, and they are unable to organize themselves collectively to do so.
Right now, at the start of the 21st century, a new breed of retail investor is starting to grab the headlines, and woe betide those companies that ignore them. Forget hedge funds, or active investors such as Hermes Focus and David Herro; current thinking is that employee shareholders could be the most important part of your investor base.
Employee shareholdings are more widespread than they might seem. This is perhaps unsurprising; in the US, for example, individual share ownership is well-established and it is natural that employees will buy shares in the company they know best – the one they work for. Sometimes there are tax incentives for doing so, and many buy shares in their employer to put in their 401k plan, a decision taken – and regretted – by many Enron employees.
Companies in the UK often operate a ‘save as you earn plan’, where the employee saves a percentage of their wages each month which is then used to buy shares at preferential rates. Tax incentives exist here too, and many companies that were privatized (the big transportation and utility companies, for example) still have many employee shareholders.
For large private companies seeking public listings, it is usual for shares to be offered to employees prior to flotation; Goldman Sachs in the US is a good example. In addition, companies regularly use share options to incentivize employees as part of their overall remuneration – not just for the upper echelons of company management, but also for the rank and file.
Who’s holding the fort?
Investor Relations magazine contacted 50 companies in Europe and North America to ask them about the extent of their employee shareholdings. The companies were drawn mainly from the Eurotop 300 and Fortune magazine’s list of companies people most like working for. Eleven declined to answer, but 39 were happy to provide the information, although some had to make some effort to seek it out. Among the companies that replied, an average of one third of the workforce are shareholders (see chart, page 28). This is a substantial proportion, and one not to be ignored.
There are two main reasons why companies may not know the extent of their employee shareholder base. The first is simply that they have never bothered to find out. It is hard to justify such ignorance in today’s falling markets. Every IRO reading this article should be able to answer the two questions that we put to the 50 companies we contacted: how many employees are there in your company? How many of them are shareholders?
The other reason why IROs may not know the answer to the second question is simply that they may not be able to find out. Many companies in Europe have so-called ‘bearer shares’, with ownership conferred on whoever has physical possession of the share certificate. Originally designed to promote shareholder anonymity, the system makes it very difficult to establish who the actual shareholders are, let alone how many of them are employees.
In advance of key shareholder votes, many companies use proxy solicitation to identify their shareholders and encourage them to vote for management’s proposals. Georgeson Shareholder, a shareholder communications firm, finds its services increasingly used to identify employee shareholders.
‘Outside investors are always keen to know that the management of a company is alert to maximizing opportunities for incentivizing employees across its shareholder base – and it is surprising how many boards in the UK and Europe are unaware of employee/shareholder overlap,’ comments Guy Barker, managing director at GS in London. ‘The employee is a key diplomat of reputation to both shareholders and to customers. They may sometimes be overlooked, but their support in helping to maintain a reputation for business stability to outside shareholders and customers, as well as their support as shareholders in difficult times, can be crucial.’
Motivating the team
GS has managed the communication process for employee shareholders during various routine and non-routine transactions, including takeovers and AGMs in the UK and Europe. We know, however, that enlightened companies act before being faced with an event. Take Enel, the Italian state electricity company: ‘We conducted an extensive retail shareholder exercise that identified the nature and location of this constituency to enable investor relations to communicate more effectively throughout the year. Many of these were employees. The bottom line is that loyalty needs to be fostered; it cannot be taken for granted.’
Even when the extent of employee share ownership is known, what does this mean for IR departments? Lots of employee shareholders are a blessing, not a burden. Their interests are (or should be) closely aligned with those of external shareholders.
Andraea Dawson-Shepherd, director of Hedron, an internal communications and change management consultancy, has observed at first hand cases of IR departments working closely with internal communications staff to reach employee shareholders. ‘It is important to remember that companies have to employ a high degree of transparency when communicating with a shareholder base that includes a lot of employees,’ Dawson-Shepherd says. ‘Messages deliberately calibrated to have a positive spin are fine, but if they contrast too sharply with the reality of what is going on at the front line it will resonate badly with employees, who see a company exactly as it is. Not only can incongruent messages be demotivating and unnerving for employees, they can suggest that senior management is completely out of touch.’
Dawson-Shepherd believes employee shareholders present a real opportunity for any company. But she cautions, ‘Never assume employee shareholders are able to assess the company with the same degree of sophistication as professional investors or even experienced private investors. They are not used to talking about their employer and its performance in the same language. Companies can do much to educate their employee shareholders about their financial results, and why and how the workforce influences those results. Educating employees in this way helps no end when it comes to giving out hard financial messages.’
‘In the current market, shareholdings once viewed as a motivator can be demoralizing for employees,’ Dawson-Shepherd goes on. ‘Employees are working hard, but still see their savings held in company shares declining in value. Some feel they are beating their head against the proverbial brick wall and give up the effort. Others with considerable talent jump ship and take the financial loss, lured by comparative gain with a competitor.’ She advises that in such times, it is crucial that employees understand what is happening and why the share price is moving, and to have confidence in what senior management is doing to improve the situation.
Strategic moves
Internal communication of IR information can be a considerable challenge. Price sensitive information cannot be transmitted in advance of the official disclosure news releases. How do you avoid panic, leaks or speculation? Staff may well hear the news of their company being taken over on the radio on the way to work. On the other hand, shift workers may be very difficult to reach at all. When BAE merged with parts of Marconi, a telephone hotline was set up so scattered Marconi employees could get answers to their questions.
Management changes are another area where the synergy between Wall Street and employee shareholder audiences may be important. The ways in which a CEO’s profile has been created for the different audiences might be quite different. For employees the persona might represent the vision and values they have been asked to buy into, whereas the institutions may have identified with the CEO’s long-term strategy. While consistency of facts is vital for both audiences, more work and even different type of work needs to be done for the employee audience. If depth of management has been emphasized to institutional shareholders by presenting a range of different managers, then make sure that you present them to your staff, too.
One company that had to mobilize investor and internal communications simultaneously is Wincanton, a UK company that recently announced the acquisition of P&O Trans European, part of P&O plc. Before the transaction, Wincanton had around 14,000 employees and P&O Trans European a further 7,000. Wincanton put together an integrated communications plan with three main groups of stakeholders in mind: investors, employees and customers.
One of the critical parts in Wincanton’s plan was a ‘key message’ document to ensure consistent communications across all these and other stakeholder groups. Many Wincanton employees are shareholders and therefore received the statutory shareholder circular. Charles Carr, head of corporate communications at Wincanton, believes this proves the perils of developing an ’employer brand’ that is separate to that portrayed to the institutional shareholders.
‘An integrated brand with consistent messaging is an absolute requirement,’ Carr says. ‘In our case the task was complicated by the fact that we were transforming the company from a UK and Irish-based operation to one with people and customers across 15 European nations, with eight principle languages.’
The solution Carr settled on was to use a voicemail ‘push’ and an e-mail to all managers directing them to an password protected extranet site. This operated in all eight languages and had briefing notes and letters for each stakeholder group, together with guidance for managers and supporting question and answer packs. ‘The fact that we had gone to the time, trouble and expense of doing this sent an important message to our employees that they mattered and we cared about them – a prime objective of the communications plan,’ Carr recounts.
Shopping for support
The message seems to be loud and clear that companies are waking up to one of their most important investor constituencies – and it is right on their doorstep. J Sainsbury, a FTSE 100 company with almost 150,000 employees, started 2003 with a bid for rival Safeway. It recognizes that employee shareholders are as big a priority as any other investor class. Lynda Ashton, IR director, comments, ‘Our shareholders rightly expect a lot from us – and it is in our interest to meet their needs to the best of our abilities, namely with sustained sales and profit growth.’
Indeed, Sainsbury has one of the highest employee ownership ratios in the country, and Ashton acknowledges the dual role this gives workers: ‘They have two very good reasons for knowing the company’s strategy and gaining a good understanding of it – their jobs and their investment.’
Without buy-in from employees, Sainsbury wouldn’t be able to survive the current shake-out in global retail. ‘We are currently embarked upon a radical business transformation program designed to update our business and give us a winning chance of gaining commercial advantage,’ Ashton proclaims. ‘We work in one of the most competitive business sectors – which our colleagues live through every day – and the additional pressures for changing the way we work are challenging. The more that colleagues understand the end game, the more likely they are to invest their energies in the business to realize greater reward.’
As we move into the 21st century, internal communications is becoming as sophisticated as its sister, investor relations. It is not enough to have delivered the message successfully in the first instance. Once the initial IR and media audiences have been covered by an announcement, the employees (whether shareholders or not) need additional communication.
Nowadays the most enlightened firms bring the internal communications specialists into the planning process as early as possible and make sure they are taken seriously. Best practice includes feedback mechanisms every bit as necessary as those employed to deal with institutional shareholders – and for the same purpose. Feedback allows for the comprehensive briefing of senior management on which issues they should expect to be questioned on. Indeed, internal communications is the new investor relations.
