The incredible pressure on companies to report is distracting market participants and straining the relationship between companies and investors, a new report warns.
Value creation is at risk because the sheer volume and breadth of reporting is crowding out the critical dialogue between corporates and investors with the risk that investors can’t see the wood for the trees. That’s the conclusion of Shaping Tomorrow’s Dialogue – a report by the Investor Forum, a non-profit community interest company set up by institutional investors in UK equities.
Sallie Pilot, a Senior Adviser at the Investor Forum and a member of ICAEW’s Corporate Reporting Faculty Board, says: “Reporting and disclosures are helpful. But it’s dialogue that builds relationships, not data. The focus needs to be on the quality of the interaction rather than the quantity.”
The report also warns that the pressure to disclose – among both corporates and investors – means that systems are being created that only the biggest organisations can afford.
Meanwhile, changes in voting practices together with an evolution of shareholder composition, scrutiny and priorities mean that addressing misconceptions and conflicts has become an urgent priority. “Voting ‘against’ is not a sign of effective stewardship. It’s a very binary measure. To be effective, stewardship requires much more than voting,” Pilot warns.
The findings are the culmination of a six-month programme of workshops and individual conversations led by Pilot, partnering with the Investor Relations Society, Accounting for Sustainability (A4S), The Audit Committee Chairs Independent Forum and GC100 representatives to unpick some of challenges responsible for the underlying friction between companies and investors. “There just wasn't enough listening going on,” Pilot says.
The study focused on four critical areas of dialogue between companies and investors: investor relations, audit and assurance, governance and voting, and sustainability.
“Language does matter, particularly around ESG (environmental, social and governance), and sustainability, because it’s so broad; everybody’s got different perceptions of how they talk about these things, and often they’re not on the same page in their own organisations, let alone the way they talk to other people,” Pilot explains.
She says a complex regulatory environment was a further cause of friction between corporates and investors. “The challenge in the UK is that nothing is joined up – you’ve got all these different regulators and legislation on top of it. It’s overwhelming, and sometimes the rules are overlapping or conflicting. It’s the source of a lot of frustration.”
The focus on little areas of friction is forcing companies and investors to take a short-term view, when in fact a longer-term view of value creation is needed. “There’s actually more that unites companies and investors than divides them.”
“Reporting is part of the journey, but it’s not the final destination,” Pilot says. Dialogue is so important because stakeholders have different needs and expectations so there are trade-offs to be made and balances managed.
Communication with stakeholders must be clear and transparent about what the organisation is doing and why. You can’t satisfy the needs of all stakeholders so it’s about understanding the purpose and objectives of conversations, she adds. “And yet organisations try to apply the same approach over and over again without asking, ‘do we have the right people in the room, am I sharing the right information that they want to hear?’”
At the same time, a tendency for corporates to throw investors into one homogeneous group is also unhelpful, Pilot says. “They are actually very different – they have different strategies and are working against different time horizons. A lot of this is about understanding what the other party wants from you.”
10 things that investors would like companies to do
- Make access easy – corporate websites should make it easy for investors to engage and sign up to distribution lists (and maintain a generic IR@plc.com).
- Determine the purpose of meetings – information gathering, investment decision-making, strategic or thematic engagement. Address specific information needs and attendee expectations.
- Tailor communications – think about your different audiences - eg, equity, credit ESG – and consider their priorities, investment strategies, risk appetite and long-term goals.
- Communicate authentically – be straightforward in all interactions to build credibility and trust.
- Be bold in crafting your narrative – emphasise your unique value proposition and sustainability journey.
- Understand the materiality of issues for your company – and use this to inform how you address regulatory and reporting requirements.
- Align reporting with strategic objectives to ensure coherence and relevance.
- Avoid unnecessary complexity in reporting – provide clear summaries and links. Present information in formats tailored to the needs of different investors.
- Be aware of the pressure and influence that different asset owners mandate on asset managers.
- Don’t be offended if investors don’t engage regularly but do ensure the lines of communication are open and available.
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