A select group of European IROs gathered at the Concorde La Fayette Hotel in Paris on October 13, 2004 for IR magazine’s first-ever European think tank. There, behind closed doors, they compared notes and spoke freely about some of the biggest investor relations issues of the day. What follows is a selection of their comments, which were made under the provision they would not be attributed.
Communicating with diverse groups of shareholders
European IROs find themselves communicating with a widening pool of stakeholders rather than just their traditional institutional investors. The press, employee shareholders, hedge funds and retail shareholders have all become key constituents of the IR audience.
‘Between 30 percent and 50 percent of our time is dedicated to internal audiences. It’s a high percentage because more and more colleagues and staff are becoming shareholders; it was definitely lower some years ago. These individuals are becoming the most demanding and critical internal audience, so you really need best practice investor relations with them.’
‘We came to the conclusion that the people who come to our shareholder meetings are not representative of our smaller shareholders. Because their average age is something like 97 and they have just one share, they come along to get some free food, which is more of a dividend than they would get as a cash dividend.’
‘If you’ve got half of your share register actively lending out its stock, that’s not helping. I’d demand to know whether your big shareholders lend stock or not.‘
‘Retail shareholders have become much more sophisticated so you have to dedicate much more time to putting more information on your web site – such as presentations to allow investors to get a feel for what the company is doing.’
‘In terms of the press we spend more time with journalists because, in some cases, the communication department maybe doesn’t have the skills to explain things the way IROs can.’
Shareholder activism
As the 2005 proxy season approaches, firms are bracing themselves for more engagement with activist shareholders. Issues surrounding executive compensation, boardroom appointments and corporate governance will likely top the agenda.
‘We see two styles of activists: those who feel more comfortable behind a microphone, and others who know publicity isn’t the most effective way to catalyze change within management.’
‘Unlock shareholder value, yes – but for who? Some activists go after a cash-rich company and complain about corporate governance just to gain access to the capital reserves and distribute them back to the shareholders through a special dividend. Other activists look for a short-term gain just to get out of the stock, then destroy the shareholder value they have just created.’
‘To ignore retail shareholders is a PR disaster waiting to happen.’ ‘Institutions such as Deminor and Institutional Shareholder Services write you a letter saying, Please respond to this within two days or else we’re going to put out an active report against you! Unfortunately, these are institutions reaching into European capital markets with a very Anglo-Americanized standard for how governance should work.’
‘We see a plethora of governance and investor networks and you kind of don’t know where to begin. The amount of networking going on is unbelievable; it’s becoming more organized, particularly at the larger pension funds.’ ‘
Some shareholders are not very active in voting but they are very active in embarrassing boards.’
‘You can’t even begin to know your shareholders, or to deal with actively engaging with them on behalf of the board, if you only know 50 percent or 60 percent of them.’
‘Don’t ignore activists because they won’t go away. Also, don’t underestimate them because they may represent a much broader sentiment that’s out there – they could be the tip of the iceberg.’
‘Public sympathy is firmly on the side of the activists: they’re the David and you’re the Goliath, and activists have very easy access to TV, radio and newspapers.’
Sarbanes-Oxley
A US listing has become an expensive and perilous process for foreign companies, including those from Europe. The phasing in of new requirements is causing many of them to rethink their US strategies, while others regard the Sarbanes-Oxley legislation as part of the inevitable push toward global corporate governance standards.
‘The name of the game in 2005 is going to be Section 404. We’re going to see the accounting firms coming up with significant deficiencies and material weaknesses.’
‘The key problem is litigation risk. It has had quite an impact on internal procedures – the positive side of which is that it keeps your company on its toes.’
‘I don’t think Sox is necessarily going to dramatically increase foreign issuers’ risk in the US from what it has been in the past; we simply have to realize that the US has been, and will continue to be, a much more litigious society.’
‘My board asked twice last year whether we could de-list in the US but the short answer is that once you’re in you can’t get out.’
‘We listed in the US in 2001 and the main reasons still stand: it’s a vehicle for financing and it’s serving our shareholder base.‘
‘The part of Sox that concerns your internal procedures is a nightmare. It’s also clear some accountants and consultants are making big business out of this. I can’t remember the exact cost for us because I want to forget the amount!’
‘I think we are all agreed there is skepticism from US investors about European companies. We should give US investors more information about our local and national corporate regulations because at times these are tough enough to give investors comfort about the crucial policies.’
‘It’s a cumbersome process; it increases the risk of litigation and it makes life difficult.’ ‘There is a clear trend in Europe toward Sox-style legislation, so don’t feel you can escape by leaving the US because it will catch up with Europe.’
‘Having an ADR program doesn’t guarantee you’ll have good access to investors, but it’s certainly a prerequisite.’ ‘We don’t see Sox as an enormous cost. It’s simply getting to best practice – but once you align your corporate governance with Sox, it develops confidence with the investor base and leads to a higher creation of value.’
‘You can de-list but you cannot de-register, so it doesn’t make sense to go through that process and then get out of New York – better make the best of it.’
‘Even among French companies not listed in the US there is a considerable interest in Sox because it’s viewed as part of the best practices package.’
‘Sox makes clear who is accountable for what. We believe that once it is in place it will be good for everybody and will set up a higher standard of disclosure for companies.’
Recipes for empowered IR
Is investor relations a destination job or a stepping stone to executive positions higher up? What are the most appropriate reporting lines for the IR function?
‘A really good IRO is someone who’s credible internally and externally. Your credibility may be based on knowing the numbers, knowing your company, or knowing your sector, but you have to be better at it than everybody else.’
‘In Germany we’ve got this expression: egg-laying, wool-milk pig. It describes a person who needs to know a little bit of everything and needs to be able to juggle a lot of skills. And I think that is what you really need to become an empowered IRO.‘
‘You don’t need to be a lawyer to be a good IRO but you do need to have some feeling for the legal issues arising in Europe at this stage. In the next few years EU regulations are coming your way and being translated into national legislation – and a number of those will affect your work quite dramatically.‘
‘The incorporation of IR into corporate communication, as opposed to IR being a single function directly below the board, is a problem. If someone who understands IR does not head this department there’s a danger the IR function won’t get the freedom needed to do a good job.’
‘For some companies the IR role is kind of a dead-end job or one you have to do to be close to the chairman before moving on to another operation.’
‘The IRO normally reports to the CFO and the communication director reports to the CEO, so the reporting line could sometimes be a problem. There could also be tensions created by the different budgets allocated to the corporate communications office and the IR office.’
‘If you sit with a finance team, you’re going to have to work with the communications team and if you sit with the communications team, the finance team is going to be your single biggest client – it’s not something I get very worked up about.’
‘Some family-owned companies perhaps don’t focus as much on the need to communicate with the market. In fact, that’s one of the main barriers I’ve found.‘ ‘In Germany investor relations is a stepping stone job – not necessarily a destination job.’
