In developing an internationally diverse shareholder base, you must first understand the investor’s perspective. The investor has two objectives – capital preservation and wealth creation – that crystallize into one: to maximize return at the lowest possible risk. Liquidity, transparency, trust and credibility are important components of any investment decision, and effective cross-border IR has a significant part to play in meeting those requirements.
As an investor base expands internationally, a broader, deeper capital base is established. This in turn creates increased liquidity and incremental demand. Greater liquidity creates a more efficient, lower-risk trading environment for the investor. This contributes to improved valuation for a company’s stock. Markets are not always or not altogether efficient – so effective cross-border IR has a key role to play in shaping and defining investor sentiment.
Seeking distinction
Why expand internationally? Companies rarely believe their stock is fully or fairly valued. An effective IR program can address this ‘value gap’ by increasing visibility, transparency and, most importantly, trust. Looked at in this context, IR is very much an investment, not a cost.
Consistent, committed communication establishes trust – this is the role of the IR team. Consistent, committed performance builds credibility – this is the role of management, and is key to enduring success in the capital markets. We deliberately make this distinction: credibility is a basis for trust, performance is the basis for credibility.
To understand what makes an effective cross-border program work, there are distinctions between the major markets of Europe and the US – points at which these markets diverge and converge.
On the issue of divergence, in Europe the sell side continues to have a greater overall impact on market sentiment than in the US. In practical terms, the sell side is an important constituent of your cross-border program. In Europe, the concept of a ‘house broker’ is alive and well, and is often the medium through which general market expectations are managed. Our belief is that, in time, the US model will prevail and ‘house brokers’ may simply be seen as too heavily conflicted to be effective. In the US, the sell side has already moved away from using intermediaries, and recent decisions to base sell-side compensation on stock price performance will accelerate that process.
While an evaluation of regulatory framework and corporate governance would take a separate article, the major points of difference today include Sarbanes-Oxley and Reg FD. Market expectations continue to be managed differently in Europe as disclosure requirements differ. Despite proposed regulation in Europe, the concept of equal access to information for all is not fully established – selective disclosure is alive and well.
Point of convergence
From a convergence point of view, both US and European companies should compete for capital and commit to the provision of frequent and transparent financial information (and performance) as the basis to establish enduring credibility and trust.
For US companies, IR is part of a market-led culture. On average, US CEOs commit 35 percent of their time to the process. In Europe, our experience tells us it is considerably less. Our response is that transparency, trust and credibility build multiples. US companies report quarterly and, we would argue, to a higher reporting standard, with greater certification requirements. These may be points where the markets should converge but, in reality, actually diverge. The objective for any European company is to provide a level playing field for the US investor.
There are other less tangible – but no less important – benefits to expanding a shareholder base internationally. Cross-border market context provides a rich resource for companies. It leads to better capital allocation decisions if you understand what the market thinks and how it looks at valuation. At the very least, it shows you are listening.
Finally, many companies have global aspirations but continue to act locally. Your investor base should provide you with breadth and depth, reflect your geographic diversity, and provide you with the highest sustainable market value.
