“Risk averse? Forget about buying our shares,” says McEwen Mining in the first line of its cautionary statement. “Past performance is unreliable in predicting the future.”
Humorous, yes, but this Toronto-based metals, gold and silver mining company is stating an obvious truth that most IROs do not always acknowledge: Many companies that have excellent long-term prospects may perform erratically over the next few quarters – or even years.
Rhylin Bailie, Vice President, Investor Relations, for Vancouver-based Equinox Gold Corp., says that long-termism is central to how mining IROs must make their case “because share price can be completely disconnected” from the milestones these companies are achieving. “You have to keep people focused on your long-term objectives, what you’re trying to build, and your strategy,” she says. “All we can do is manage the milestones and keep advancing the company and meeting our targets. The share price will catch up.”
Bailey has sometimes counseled stressed-out shareholders that “this may not be the right stock for you.” She continues: “If you’re losing sleep and you’re thinking this is going to put your kids through university and they’re in grade 12, this is not the right industry for you. If they’re in grade one, let’s talk.”
Although the tension between explaining long-term strategy and addressing short-term results may be particularly fraught for IROs in the notoriously unpredictable mining sector, this is an issue most IROs face regardless of industry or sector.
Christina Rehnberg, Associate at KKS Advisors, a London-based advisory firm for sustainable business development, says that while long-termism has been a topic of interest for many years, public companies and investors each point fingers at the other about whose focus is too narrow.
“There has been a mismatch between investors and companies over who’s to blame. Investors say, ‘Companies are not disclosing what we want to hear. And companies say, ‘But investors are just thinking about the short term.’ These are two parts of the same debate that need to be bridged because both [companies and investors] would benefit from longer-term value creation,” Rehnberg says.
Long-Termism: What and Why?
For many IROs, long-termism – or an insistence on looking beyond the quarterly earnings treadmill to a three-, five-, or even 10-year time horizon – is key to a well-rounded and more informative investment conversation.
Isabelle Adjahi, Senior Vice President, Investor Relations and Communications, for Groupe WSP Global in Montreal, says: “We don’t want the quarterly results to drive a well-managed business. At WSP we constantly present a long-term, three-year plan, and we try to push investors to look at the long term. That’s what’s driving our messaging in the markets.”
She adds: “People invest in companies for the long term and they want to understand the long-term strategy and how we’re going to grow the company, but they’re really attached to short-term metrics. So we try to find a balance of both.” She clarifies that keeping an eye on a longer time horizon does not mean engaging in vague or aspirational conversations. “Within this long-term plan,” she says, “we use the short term as touch points to make sure we’re still on track to meet long-term objectives.”
Adjahi finds herself in good company when it comes to taking the long view. Mark Machin, CEO of CPPIB, which manages Canada Pension Plan’s portfolio, has made his focus on the long-term outlook public knowledge. A December 6, 2017, article in Benefits Canada quotes Machin as saying: “Investment mandates have the power to be the anchor that aligns behaviour and objectives, focusing asset managers on long-term value creation.” He also serves on the Board of Directors for FCLTGlobal, a not-for-profit organization encouraging long-termism by developing practical tools and approaches to support long-term behaviours across the investment value chain.
While many institutional investors immediately grasp the rationale for keeping the investment conversation trained on long-term goals, this can be a more difficult sell with a retail audience.
Bailie, who notes that roughly 50% of Equinox’s shareholder base consists of retail investors, finds that too many individuals do not understand the companies in which they’ve invested. “Half the time retail investors call in and they don’t know about our projects or where we’re working,” she says. “They’ve just heard our name and bought into the stock. So how can they even have a long-term perspective when they don’t even know what we do?”
When addressing individual investors, Bailie urges IROs to convey the same message over and over: “People hear what they want to hear. If there’s something you want them to understand, you have to repeat it three or four times during the discussion.”
How to View Earnings Guidance
Earlier this year, the National Investor Relations Institute (NIRI) in the U.S. updated its policy statement on earnings guidance and long-termism, expressing the view that “an undue focus on short-term, single-point guidance is undesirable and that all relevant audiences – primarily investors, financial analysts, and the new media – are better served when public companies focus their guidance on their long-term strategy and business value drivers.”
For those companies that do choose to communicate guidance, NIRI recommends that the guidance be long term (one year or longer). The full policy statement is available here: policy statement.
The practice of providing quarterly financial guidance has waned over the past decade, says NIRI, with 67% of survey respondents to its Earnings Process Practices Research Report (2016) saying that they provide guidance that extends across an annual timespan, while only 29% furnish quarterly EPS estimates.
Meanwhile, FCLTGlobal in its October 2017 report Moving Beyond Quarterly Guidance: A Relic of the Past, notes that just 17.8% of the 799 companies in the S&P 500 and the Euro Stoxx 300 gave quarterly EPS guidance in 2016.
What’s more, in a June 6, 2018, Wall Street Journal op-ed titled “Short-Termism is Harming the Economy,” renowned investor Warren Buffett and Jamie Dimon, Chairman and CEO of JPMorgan Chase, argued that public companies should reduce or eliminate the practice of providing short-term guidance.
KKS’s Rehnberg points out that for companies ending earnings guidance, one possible alternative is integrated guidance. She defines integrated guidance as “a framework on how companies can communicate their strategy so it supports long-term investors and provides them with really specific, actionable, forward-looking information.”
She notes that most companies reap unexpected benefits when they move away from earnings guidance. In fact, she says, research shows that companies that stop providing quarterly earnings guidance typically find that long-term investor holdings increase with no decline in analyst coverage.
Sustainability and ESG
Viewing long-termism in tandem with other IR trends, such as the rise in ESG (environment, social, and governance), is perhaps the best way to grasp its full power.
“Long-termism and sustainability are essentially two sides of the same coin. They go hand-in-hand,” says Rehnberg. “If companies and investors are interested in having a longer-term perspective, by default sustainability issues and issues related to financial performance are going to be included in that.”
Cynthia Williams, Osler Chair in Business Law at Osgoode Hall Law School in Toronto, was one of two authors of an October 2018 letter asking the SEC for new rulemaking that would develop a comprehensive framework requiring issuers to disclose identified ESG aspects of their operations. A move like this can have important repercussions for Canada, says Williams, noting that regulators here tend to “wait and watch” and then enact similar moves to those of the SEC a few years after new regulations are tested.
Williams also argues that long-termism in the guise of ESG is a particularly important topic for Canadian companies, given the range of exposures they face from a transition to a low-carbon economy. She continues: “It’s not just the percentage of revenue that’s coming from oil, gas, coal and mining in Canada. It’s all the law firms doing the legal work for those companies, and the analysts and the accountants doing the audits for those companies, as well.”
When asked what mandatory ESG disclosures might look like, Williams points to the frameworks from the Task Force on Climate-related Financial Disclosures (TCFD) and SASB. TCFD, which is chaired by Michael Bloomberg, is a voluntary framework that companies would use to disclose climate-related finance risks. SASB, on the other hand, is a non-profit that launched 77 industry-specific sustainability accounting standards designed to provide investors with information about the impact of a company’s actions on the environment and on society. SASB released these standards on November 7, 2018.
It’s increasingly clear that ESG is of interest to investors. In an April 23, 2018, equity research paper, Goldman Sachs notes that nearly half of all S&P 500 companies addressed ESG topics in their fourth quarter 2017 conference calls. What’s more, Twitter posts mentioning ESG topics increased 19-fold over the past five years.
In addition, a 2018 study by RBC Global Asset Management titled Responsible Investing: Charting a Sustainable Advantage found that 72% of institutional investors are somewhat or significantly using ESG principles as part of their investment approach, compared to 66% last year. Meanwhile, only 28% of global investors say that they are not exploring ESG at all, compared to 33% one year ago.
The Evolving Role of the IRO
In the end, long-termism provides yet another avenue for IROs to deepen their strategic role and move closer to gaining a coveted seat at the table.
“If you focus on the short term, you spend your time just trying to fix things instead of planning,” according to Adjahi. “We want to look at the challenges over the long term and what actions we’re going to take to overcome these challenges.”
Adjahi concludes by pointing out that unfolding geopolitical events, from Brexit to the downturn in the Canadian mining sector, are topics that can only be fully addressed when the time frame used is years rather than quarters.
“Being in a position to fully understand the impact of elections and the economy on your company and how this is going to have an effect is how an IRO adds value,” she emphasizes. “More and more, IROs add value by talking about the long term. If you just have someone pick up the phone and talk to analysts about the numbers, that’s really not enough.”