Bringing Your Board On Board with IR
Directors of public companies have many duties of care, from approving strategic plans and monitoring implementation to supervising management and setting executive compensation.
While a Board’s fiduciary responsibility is to act in the best interests of the corporation as a whole rather than management or the shareholders, directors take a keen interest in areas that fall within the purview of investor relations – and for good reason. Shareholders are demanding more of directors. They expect greater engagement and, in general, more sophistication in several areas.
As a consequence, many companies are choosing to elevate IR’s status in the boardroom. While this can be good news for IR practitioners, it also adds a new level of responsibility and some career risk. In this issue of IR focus, we consider the challenges, issues and best practices related to engaging your Board in IR.
IROs we spoke to on this topic all reiterated one common best practice: IRO engagement with the Board must always start and channel through the CEO. It should not be directly instigated by the IR department, as doing so will be perceived by the CEO as a threat to his or her authority.
More than a few IROs over the years have found themselves between a rock and hard place when it comes to Board of Director (“BoD”) and CEO relations, particularly when the CEO is managing a delicate business issue and the IRO does not appreciate (or the CEO believes the IRO doesn’t appreciate) what the BoD knows or needs to know! As one CEO contacted for this article said: “I’m a control freak in general so I want to control what is said, when and by whom and that extends to my IRO. In principle, I don’t have a problem with the IRO speaking to the Board but I want to know beforehand what will be discussed.”
Starting from this premise, best practice suggests proactively raising IR-BoD relations with your CEO by posing a simple question: what information can the IR department gather for the CEO that would help him or her improve BoD awareness of investor relations?
To help matters along, here are the kinds of reports that other public company IROs gather for their Boards under the watchful eyes of the CEO:
Quarterly Contact Summary: typically two pages in length, with tables showing i) number of investor presentations (buy-side segmented from sell-side) given during the period by each executive (previous periods should also be covered for comparison purposes) ii) summary of top 10 areas of investor inquiry during meetings and iii) bullet point overview analysis of IR activity levels and investor sentiment.
Analyst Reports’ Summary: One-page extracts of recent analyst reports including table of analyst estimates for EPS and consensus estimate compared to company forecast (public or internal). Some IROs also produce summaries of analyst reports on peer companies.
Performance Summary: Two pages, largely pictorial, that include i) 12-month stock performance graph with peers/sector/relevant indices also plotted ii) total shareholder return (inclusive of dividends as applicable) for varying time periods graph iii) valuation analysis (P/E ratio or price/annual sales or market cap versus peers and sector) graph iv) table with other relevant corporate performance data, the selection of which will vary by industry and may include company and peer metrics such as revenue, ROE, gross margin and EPS, as well as market data such as daily volume and short interest positions (percentage of shares out and days to cover).
Ownership Report: Two to three pages with i) retail/institutional ownership composition (percentage of shares outstanding) now and over time in table format ii) ownership by geography now and over time in table format iii) top 10 buyers and top 10 sellers during the period with columns showing number of shares owned, change versus previous quarter(s), investing style (growth, GARP, value, income, alternative, etc.) and perhaps number of meetings held during the period and geographic location iv) top five new shareholders table, again with columns showing number of shares owned, investing style, number of meetings held with management and geographic location, and v) top traders in table format showing blocks and volume sold and bought by main brokers.
In contemplating what kind of report to issue, consider advice found in CIRI’s Guide to Developing an Investor Relations Program, Third Edition: “The content, format and frequency of an IR report should fit the particular needs of the company – and not take a ‘one-size-fits-all’ approach.”
From time to time, IROs also commission investor surveys, the results of which are shared with the BoD, again with the full support of the CEO. Since perception surveys are frequently long and full of direct quotes from participants on a variety of topics, IROs often prefer to provide a synopsis either in writing or in a brief PowerPoint presentation. Periodic reviews of peer disclosure practices are also recommended for Board consumption and briefings on industry-related news (peer company financings, M&A activity, etc.) can also be well received.
This, however, raises an issue. Since directors often complain about the amount of material they need to review prior to Board meetings, it is advisable to keep Board reports succinct and, once provided, seek BoD feedback to ensure report utility. Well-designed graphs and tables with color also improve communication value and point to the professionalism of report authors.
Before offering these reporting possibilities to the CEO, common sense demands that you consider the logistics behind providing such reports. Without access to good sources of data and the resources to compile the reports on time (italics for extra emphasis), it will be career limiting to suggest them.
Assuming this is not a problem, the next consideration is equally important: do you have the knowledge/insight necessary to answer BoD questions that will naturally arise once the reports are distributed? Gaining an audience with the BoD is a privilege and one that can substantially improve personal career status – or, conversely, illustrate lack of preparedness. Contemplating the questions that are likely to be asked by your directors before they ask them will help to avoid potential embarrassment and improve the quality of the presentation you will make. Personal commentary and analysis (and not written reports, which could be compiled by just about anyone with access to a data service) present the biggest opportunity to demonstrate the value you provide, so be prepared!
Many senior IROs find it invaluable to get to know each director personally, which lessens the stress level when making Board presentations. Again, however, such relationships carry risk for the reasons outlined above and need to be forged with the consent of your CEO.
While developing relationships with one’s Board can offer personal career benefits for the IRO – a process that will certainly be assisted by the creation of IR Board reports –the bigger benefit is to the company, as well-informed directors are likely to have a greater appreciation of investor perception of management, strategy and valuation. Reports such as these can also be helpful during onboarding of new directors.
The Future of Direct Director Engagement
Many directors do not make a habit of meeting with investors other than casually at the annual meeting. This is likely to change in future as institutions demand greater engagement. The point was underscored in a recent U.S. survey conducted by PricewaterhouseCoopers (PwC) that found 48% of institutional investor respondents reported dissatisfaction with the level of Board engagement they are currently experiencing. Interestingly, the same survey reported that 55% of respondents said that the level of direct communication with directors had increased over the past three years.
In future, more BoDs may be pressured to meet with institutions, which makes it all the more important that IROs become a recognized and valued source of investor and capital market information for directors.
Direct communication between directors and institutional investors carries its own set of challenges and risks, not the least of which is that directors cannot possibly have the same intimate level of knowledge as management does of the business they are governing. However, directors are expected to be able to speak with authority on the Board's reasoning behind its policies on topics such as executive compensation, say-on-pay, Board composition, performance and diversity, CEO succession and dividend policy.
Preparing directors for direct shareholder engagement is therefore likely to become another dimension of the IRO role; one that is made significantly easier when the IRO knows the BoD and the BoD is on board with IR.
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