Published 14 April 2022 by CMi2i Editorial Team
You state that a listed company should devote as much focus and resources to its investors and shareholders as it does to the end customer of its business. Can you explain it to me?
Once a company is listed on an Exchange and their shares are publicly quoted, they should remember that they exist on two levels - to market their goods and services to create demand, and to likewise market the company as an investment vehicle to create demand for the shares. To do both you need to “know your customer” – to know what the customer (for the shares) requires in terms of transparency to enable them to buy more. Once established who the customers are, then a profile can be established and the company can then more effectively determine which segments of the international investment community are going to be most interested in their equity story.
The latest CMI2I reports on activism indicate an uptick in this phenomenon in Europe. What are the main characteristics of this current in the continent?
The lines of what defines an Activist have blurred. Now nearly all types of investor, Passive or Active, can become an “Activist”. Investors are under ever increasing pressure from both Regulators and their own investors. Stewardship Codes have required Asset Managers to demonstrate that they are carrying out due diligence to ensure they do not commit investors capital to overly risky or ethically unsound stocks. This is especially relevant to Passive Investors (Index Funds etc) who might not be able to sell the shares, so are required to use their voice AND their vote to become an “agent for change” to bring the company in line with accepted “Best Practice”. This has led to an increase in both engagement with the Issuer - and a huge increase in AGM Voting levels. This has materialized most significantly in negative voting on both Renumeration Policies and Board Appointments. This has made more traditional investors adopt characteristics historically associated with “Activists”.
Another point of the report refers to the new tactical models of the activists. For example, the construction of platforms or joint shareholding positions to pursue objectives with a greater margin of influence. Especially in the United States. Can you elaborate on this aspect?
In addition to other less formal platforms, the Stewardship Codes, having increased the responsibilities of investors - and to work with other shareholders in order to take collective responsibility to monitor their investee companies. Platforms like the International Corporate Governance Network have developed to facilitate the interaction between all types of investor. The view of one might now be the view of all.
What weaknesses in listed companies are opportunistic funds now looking for? What are the differences between the North American and European stock markets?
Activists are ultimately looking for opportunities to unlock “Value”. This can be through financial engineering – disposal of assets, acquisitions etc - or through improving how a company is run – alteration to Board composition, REM policies etc. However, latterly ESG has emerged as a key área for improvement to unlock potential value. This can lead to better Ratings, a better position on “Best Practice” League Tables, etc. All of which will make the company a more attractive prospect to the international Investment community. This naturally leads to increased demand for the shares and a positive impact on the share Price. If an Activist can put forward a proposal to unlock value through improved ESG standards, they are more likely to get engagement with (previously unwilling) investors – given the funds increased responsibilities outlined above.
Sometimes, listed companies only pay attention to targeting or shareholder identification when they receive an activist attack or when they find that they have an unwanted investor with a significant stake in their capital. What should be the policy to be followed by a listed company in this area?
As all companies, (irrespective of their size, sector, or geography) can be subject to an Activist Campaign - from either external OR internal Activists, the Management needs to know whether their shareholders will support them - or the Activist. It is vital that the Management has a Defence Playbook to counter any hostile moves on the company. The company needs to know where they are most vulnerable, both from a financial or corporate governance perspective, to be able to have a coherent action plan to make improvements - and therefore control the narrative. They also need to know whether their investors are aligned to these moves - and whether they will demonstrate their support, should their vote be required at an EGM or AGM. It will be imposible for a Management Team to be equipped with this intelligence if they do not have knowledge of who holds their shares, or what their Voting Policies are. Trying to establish this intelligence through a Risk Analysis - whilst already under attack - will severley limit the Mangements ability to consolidate support from their existing shareholders. This knowledge should be one of the Managements overall Strategic Risk Analysis factors. And as shareholder structures are never static, this intelligence should be a continuous process. Additionally when a company targets new shareholders it is vital they determine whether those potential shareholders will support Management should a situation arise. In other words avoid inviting a “Fox into the Hen House”.
Regarding the engagement between companies and investors, what is, in the experience you see in your day to day with customers, the most notable trends now?
Companies are much more proactively engaging with investors to assess their support - and make sure they have the requisite information to be able to consolidate this support. Companies are making much more effort to understand their investors – through determining their perceptions of the company, their Voting Policies, their ESG standards, etc. - to make sure they are aligned. Companies are realizing that they create unnecessary vulnerability if they do not have this intelligence.
Typically, there is more talk or effort devoted to engagement with stock investors than with bondholders. What do you think about this question? What is desirable?
Historically company’s have focussed their Investor Relations efforts on their Equity investors. However they often neglect their Bondholders – forgetting that they too have requirements as investors, and they also have opportunities to vote on material changes to the Bond - especially around Debt restructurings. It is worth remembering it can be the Debt that is the company’s “Achilles heel”. It is just as important to know who holds the Bonds and what their opinions are.
ESG topics are now focusing the agenda of investors with respect to listed companies. Specifically, in three key points such as the identification and economic assessment of climate risks, diversity -and not only gender- and independence on the boards, and transparency and balance in the remuneration of both directors and senior managers. Overregulation and the abundance of standards do not always help to make the right decisions. What would you advise a listed company on these issues?
We would stress that companies need to be moving towards best-practice in all of these areas—from net zero progress, to climate adaptation, to board diversity, to linking ESG KPIs to CEO remuneration. The regulation is only there to push those companies that aren’t making progress of their own volition. And most regulation is actually focused on transparency rather than progress. The abundance of reporting standards is an issue, but we are seeing coordination between frameworks via the Value Reporting Foundation and the International Sustainability Standards Board, so there is effort being made to simplify things.
What do you think of the draft directive on Corporate Sustainability Due Diligence recently presented by the EC? It is receiving a lot of criticism from most of the capital market operators.
It has received a lot of critism because it is seen as a watered-down version of what it could have been, and was largely expected to be. The change in name from the Sustainable Corporate Governance to Sustainable Corporate Due Diligence Directive is evidence of its now reduced focus. But I think it is important to bear in mind that we have to start somewhere and the key tenets of the directive are a crucial step in the right direction when it comes to ensuring companies evaluate their activities on human rights and the environment across their supply chains. The larger problem with the directive may very well be its scope. It only applies to companies with more than €150 million in revenue, which equates to about 1% of EU companies.
How do you see Spanish issuers, in general, regarding the issues we have been talking about? What strengths and aspects to improve do you consider most relevant?
Spanish Issuers have very good Investor Relations standards and advanced IR Programmes, however there is a tendency to think that they are relatively immune to Activist attacks because of their control of the Voting structure. What this doesn’t account for is the reaction of existing shareholders to an Activist approach. If the company is seen to be unwilling to engage with an Activist making a positive set of proposals, they may choose to “vote with their feet” and sell their shares. Or they might react to the Management through negatively voting on Board re-appointments or REM packages. It can also be seen as a barrier to investment to potential investors who may take the company’s reaction as a sign that they do not take investors’ concerns seriously, or give them the transparency they require. The result may be that they choose to invest in peers who are more cooperative and willing to engage.
CMi2i, the world’s leading forensic capital markets intelligence firm, specialises in the world’s most accurate Equity & Debtholder identification service and supports issuers and their advisors with their ESG investment, investor relations, M&A, AGMs/EGMs, corporate governance, shareholder activism and capital restructuring goals through its integrated approach. The company has supported more than 1000 corporate transactions and over 500 clients worldwide.