CFOs and IR teams to keep an eye on activist investment funds

20 Feb, 2020 07:34
source: Singularity Financial

Chris Ruggeri, the national managing principal of Deloitte Risk and Financial Advisory team, voiced her thought to the IR Magazine recently, beyond Wall Street, CFOs and IROs have a growing list of stakeholders who want to know how their company’s strategy and financial performance are benefiting their community and the world at large.

“A company’s IR function should not be a perfunctory exercise in information distribution, but a means of meeting the needs of an increasing variety of stakeholders – investors, customers, employees, and so on – that sometimes have competing agendas.” wrote Chris. “In 2020 financial executives need to pay close attention to the shifting trends in investor relations in order to meet and exceed stakeholder expectations.”

Management should proactively be prepared for activists

Hedge fund activism, a form of active ownership, refers to the practice of having a dialogue with companies on environmental, social, and governance (ESG) issues and exercising both ownership rights and voice to promote change, which can be expressed through voting activities, dialogue with management, shareholder engagement, and shareholder resolutions.

Hedge fund activists are a small part of the overall USD3.2 trillion hedge fund industry. However, they are achieving greater legitimacy and clout given their track record of driving shareholder value through changes at the board level.  Existing hedge fund ESG activists will likely gain larger pools of capital, and additional hedge funds and responsible investors will likely follow their path.

According to “2019 Review of Shareholder Activism” issued by Lazard, 187 companies targeted by activists in US, in line with multi-year average levels. Activism against non-U.S. targets accounted for ~40% of 2019 activity, up from ~30% in 2015; and multi-year shift is driven by an uptick in activity in Japan and Europe. As shareholder activism edges up, it’s important for CFOs and IR teams to keep an eye on activist investment funds, as well as individual shareholder activists.

Activist investor Daniel Loeb is going to devote even more of his firm’s resources to activism. His firm, Third Point, which manages about $15 billion, said in a letter to investors, “…activism, which is now over 50% of equity exposure, has been a source of outsized returns for us since 2011 and has become a more valuable strategy in a changing market environment. We have allocated internal resources to sourcing and implementing activist and constructivist ideas and increased exposure to these names.”

Understanding vulnerabilities and benefiting from activists

Investors today have access to increasingly sophisticated data-mining tools, along with artificial intelligence, risk-sensing, and other digital technologies, to gather performance and competitive information to build their case. These tools have become especially useful for those activists that establish alliances with other large shareholders (a growing trend) prior to confronting their target.

Chris Ruggeri encourages public companies to shift the negative view of investor activism,  her article titled “The Activist Investor: A CFO’s Unlikely Ally” is asking CFO and IR managers to consider learning to view their own companies through the eyes of an activist investor: poor performance, balance sheet issues, lack of confidence in management to meet targets, too many earnings surprises, or inordinately large cash holdings. Perhaps the company is not moving fast enough to adopt new technology or a new business model and risks being disrupted.

“CFOs must build and maintain a strong dialogue with investors, particularly large ones, to understand their points of view, expectations, and concerns. Equally important is channeling that information back to management and the board for possible action.” Many companies have benefited from activists that have directed management’s attention to opportunities to accelerate growth, improve the bottom line, monetize assets or return capital to investors.

IR leaders today have to be top-notch communicators

According to Carol Schumacher, who has held roles as both investor relations (IR) officer and corporate affairs officer, including 11 years at a Fortune 10, told Deloitte CFO Program, “In fact, it’s not uncommon today for funds to ask companies how they’re using capital allocation to deliver on sustainability. That’s a sea change compared to just a few years ago, when capital allocation questions were more focused on financial and business implications. Proxy access and “Say-on-Pay” continue to be important for the companies that have yet to adopt these policies. Additionally, shareholders will likely see more proposals on board diversity from an experience and skillset perspective, as well as the board’s men-women ratio.”

IR leaders today have to be top-notch communicators, not only in telling the financial story, but beyond that. If an environmental disaster occurs, that’s going to affect the company, and IR has to be ready to communicate what the company’s doing to fix it. It is important to discuss the financial implications and risks that are critical for shareholders to understand if there is an issue weighing on the company’s reputation.

“CFOs should make sure IR is collaborating with legal, compliance and other key departments in responding to governance issues that could impact shareholder value. CFOs should also expect IR to engage on governance across the buy-side spectrum, meaning portfolio managers, analysts and governance professionals, to help understand and address governance concerns before they become proxy proposals. It’s IR’s job to make the CFO, the CEO and, to a certain extent, the board aware of investors’ governance concerns so that leadership isn’t surprised when they hear about a proxy proposal or when they get a question on environmental or sustainability policy at a road show.” Carol added.

Finally, it’s important that IR work closely with corporate affairs and PR to ensure consistent messaging on governance issues. It is strategically important that IR, PR and corporate affairs be joined at the hip in developing and delivering the messaging on company governance, just as they should be in crisis management situations and earnings announcements.