Investor relations (IR) is an important aspect in company management for a number of reasons.
One that is important is IR engagement ensures that investors are well informed about goings on in the company to aid in their decision making. This knowledge ensures fair valuation of the company, increases access to capital, and ensures the liquidity of the company’s stock in exchanges.
However, a question remains about how investor relations and enhanced IR engagement is evolving as a field.
The last year has been tough for managers of young and emerging companies. The capital markets have seen a return to fundamental investing, where investors prefer having their money held in companies with strong asset bases and a track record of solid performance.
How can companies that do not fall into this category improve their investor relations strategy?
Enhancing stakeholder engagement
Many business managers feel their companies are undervalued. Many times, the difference between the managers’ perceptions and those of investors can be put down to information deficits.
And, the good news is this gap can be solved through enhanced engagements with investors.
Companies must improve their investor and stakeholder engagement capabilities to make them hubs for collaboration, communications, knowledge sharing & education, and decision support.
Potential investors and community members should find relevant documents on a dedicated site. These include up to date fact sheets, financial reports, ESG reporting, and FAQ documents, etc. to enhance transparency.
Hosting virtual investor meetings is also important because so many physical meetings were cancelled over the past year.
Virtual investor days give business leaders the chance to give updates to crucial stakeholders who include customers, employees, and investors. Such events also provide visibility and publicity that can contribute to a company’s valuation.
Improving ESG reporting
Every company would like to receive (more) recognition from a large institutional investor. These include large ETFs and other wealth management entities. It is usually a mark of approval of the company’s management and performance.
However, every major institutional investor has a fund that is fully dedicated or includes an element of ESG informed investments. Renowned institutional investors such as BlackRock have taken a tough stance on climate change and diversity, holding companies to high standards on these issues.
Given this, managers and boards of companies must find ways to make ESG reporting a strategic capability. Why?
One problem is that ESG reporting is an annual exercise. This means that by the time the report is available the data it is based on may be 12 to 15 months old and no longer accurately represent the company’s performance.
Another problem is that third party ESG ratings companies use the annual ESG reports as inputs in proprietary formulas to rate company performance. These ratings, as a result, are not easily comparable and, at worst, may be confusing about how a company performs on ESG issues.
A third problem is ‘what’ is reported. There is now evidence that investors consider a lack of transparency on gender and diversity as a form of risk. There is therefore a push for companies to publish data on board compositions as well as number breaking down staff compositions.
And, there are good arguments for this push. First, diversity leads to better quality of human capital at a company. When you have people from different backgrounds, race, and gender, the company culture ends up being richer.
Second, a diverse company is unlikely to attract the attention of activists whose activities can severely affect the perception and valuation of the company’s brand. Pushing for diversity is therefore a way for investors to protect their wealth.
Researchers and analysts, however, point out that despite the obvious importance of information on diversity, investors have no consistent source of information. This hinders comparison between companies as well as year-on-year tracking of single company ESG data.
So, companies, on their own, can and should take steps towards better diversity reporting. Let’s break down a few ways.
Adoption of clear categories
When reporting on diversity, companies need to figure out how to format and report their diversity data.
The racial composition of workforces varies depending on location. Different countries have varying views on the topic of race. In the US, the Equal Employment Opportunity Voluntary Self-Identification form offers a good guide on how to categorize company workforce. Employees in the US fill out this information voluntarily, with the option to disclose also there.
In other countries race may be viewed more or less sensitively. In France, for instance, the law does not allow census data to categorize people by race or religion. Companies can, however, collect and categorize people in a way they see fit. It’s more important for companies to adjust themselves to the customs, regulations, and nuances in each location.
Breaking data by levels
It is not enough to just give data in wholesome figures. Investors are wise to ‘green washing’ companies that offer women and minorities opportunities in the board but not in middle and upper management.
Companies must take time to show their diversity figures at different levels within the company. Doing this is a sign of transparency. It is also a way to hold managers responsible for hiring to account so that staffing stays in line with the values the company espouses in public.
Companies should look to establish key performance metrics around diversity goals.
And, executives should have part of their compensation tied to helping meet diversity and inclusion goals, which is increasingly a best practice as reported in the Wall Street Journal.
The goal tracking should go beyond the number of hires made in a year. It should also include professional development opportunities given, training, and certifications that women and people from minority communities are getting.
Transparency on risks and opportunities
After sharing the numbers, the company must also give context on where they are when it comes to diversity and what they seek to achieve.
For instance, the company may commit to 50-50 gender parity in board composition within 5 years. Tech companies have been male dominated thus far, and most of them are making commitments to have more women join. There should be a clear explanation of how they seek to find and recruit female talent.
The company must avoid having its diversity strategy being regarded as ‘tokenism’ or populism. It must demonstrate that the people being hired to the board and other positions of leadership are qualified for such positions. The company has to demonstrate they were subjected to a hiring process that tests their sector-specific skills.
It’s common that many business leaders feel that investors undervalue their companies. This, however, is often due to information asymmetry that can be cured through better stakeholder engagement capabilities.
Companies must do better to collect, analyze and share data on full set of materiality matters for their businesses including environmental sustainability, business circularity, diversity and inclusion, social license to operate, biodiversity and more which have become critically important topics for investors and stakeholders.