Set out on any wildly ambitious project and the only safe bet is that there will be uncertainty, or that the path ahead won’t be completely smooth. For Electra Battery Materials, which is building an environmentally sustainable battery materials park north of Toronto, the biggest wrinkle has been an age-old possibility: economic fluctuations, in this case, hyperinflation.
Joe Racanelli, Electra’s Vice President, Investor Relations, says that while inflation may now be under better control, the company is also contending with volatile commodity prices because of the war in Ukraine, as well as supply-chain delays due to a number of key components affected by microchip shortages.
Problems like those faced by Electra are increasingly the norm in an age of extreme geopolitical, climate, economic and other uncertainties.
“As an IRO, having one eye focused on your company’s operations and one eye looking externally has become more and more of a requirement,” says Racanelli.
Uncertainty has always existed, of course, but there’s a sense that unpredictable events are occurring more regularly and insistently than ever before. In fact, the sense that uncertainty is an ingredient of business worthy of study has spurred a few formal efforts to measure just how much uncertainty the world is facing.
Take, for example, the World Uncertainty Index created by academic researchers and economists at the International Monetary Fund. While uncertainty spiked to its highest levels during the early days of the COVID-19 pandemic, trend lines have crept steadily upward since 1990.
Rethinking Communications
Uncertain times call for novel approaches to investor relationships, according to Andrew Arnovitz, Senior Vice President, Investor Relations and Enterprise Risk Management for CAE, a Montreal-based manufacturer of simulation technologies.
CAE is the dominant player in civil aviation training. The pandemic brought enormous business challenges, as 90% of passenger flights were grounded, recalls Arnovitz. “We went from being able to provide specific guidance in terms of growth and various metrics to dialing back our communications to what we could see,” he says. Providing more limited outlooks was a necessity, he adds, given “limited visibility.”
One silver lining is that CAE’s conversations with investors often morphed into a joint exercise in figuring out where aviation was headed, says Arnovitz. “More than ever,” he explains, “our investor base became a valuable resource, helping us inform our own views.”
The kind of radical paradigm shifts brought on by COVID are happening in other areas too, according to William Pellerin, Partner in international trade at the Ottawa office of McMillan LLP. He is convinced that geopolitical matters, including international trade, can no longer be “confined to a trade compliance officer’s bailiwick.”
Whether it’s supply chain disruptions, Trump-era tariffs on steel and aluminum, the war in Ukraine (and related sanctions), or anti-money-laundering efforts, volatile issues like these have become “C-suite issues,” says Pellerin.
For IROs, the need to monitor an ever-widening number of external factors – from this summer’s spreading wildfires to international relations – is heaping fresh tasks on an already mushrooming workload. That’s because it’s widely believed that IROs should communicate more in times of uncertainty, not less.
“I’m of the school that more engagement is better,” says Racanelli. “Engagement helps you set the proper expectations. If you’re not as engaged, then it creates more uncertainty.”
At Electra, Racanelli has found that carefully explaining the problems that contributed to a milestone going unmet is as critical as discussing the numbers themselves. Once the problem has been identified, he says, investors begin asking about the underlying situation rather than just focusing on missed targets.
The communication challenges can be particularly acute for companies with a large retail base. For Electra, which falls into this category, communicating well means reaching a very broad audience, says Racanelli.
“Retail investors don’t have the same day-to-day focus on their portfolios as institutional investors have,” he says. “You may have thought you did a good job explaining an issue, but you may need to revisit it.” He continues: “For an IRO [addressing retail investors] some degree of repetitiveness is necessary, and some degree of patience, too.”
New Risks, New Convos
Josh Cobden, Executive Vice President at Proof Strategies, a Canadian PR and marketing agency, sees the evolution of corporate social responsibility into ESG as a turning point in how IROs communicate about uncertainty. Now that ESG is so closely associated with enterprise-wide risk, IROs need to give uncertain events more attention in their communications agendas.
The good news is that while ESG was until quite recently a wild and woolly topic, without much regulation or even clear guideposts, the consensus around what matters – and what must therefore be communicated – is gradually coming into focus.
“We refer to the TCFD (Task Force on Climate-Related Financial Disclosures) as de facto mandatory because you have most large publicly traded companies in Canada, Europe, and increasingly in the U.S. aligning their public reporting to the TCFD framework,” says Jessica Butts, Principal at ESG Global Advisors in Toronto.
She insists that “IR folks have to be brought around the table to connect the dots” between uncertain climate prospects and what climate events augur for a particular company. What a public company wants to avoid, she says, “is to wait for the activist investor to come in and say: ‘What about X, Y and Z?’”
A relatively new dilemma in boardrooms and corner offices is whether or not CEOs should take a stand on the hot social, environmental and geopolitical questions of the day.
“I’ve been in situations,” says Racanelli, “where a CEO felt comfortable in dealing with Black Lives Matter as a key issue and wanted to talk about what steps the company was taking to become more of a diverse and inclusive company.”
Cobden notes that the pressures for CEOs to enter into the burning debates of the day are growing.
When surveyed by Proof for its CanTrust Index, the majority of Canadians (57%) expressed a belief that business leaders should regularly speak out on important issues, such as climate change, racism, and social equity, with another 31% saying leaders should address these issues only in rare instances. A mere 12% said that leaders should never comment.
“The public opinion is that CEOs should be out there,” says Cobden, and yet being outspoken carries reputational risk. As a case in point, he cites employee pressure for Disney CEO Bob Chapek to speak out against a recently enacted educational law in Florida that is widely deemed anti-LGBTQ. Because of Chapek’s stance, Florida Governor Ron DeSantis has retaliated in various ways, including subjecting Disney to new regulations for the inspection of its rides.
“Why I find the Disney case so interesting is that it exemplifies that a company’s different stakeholders may hold very different views,” says Cobden. “And that’s where it gets very hard to be a CEO and take a position.”
Another fraught issue is the decision to halt business with Russia because of the war against Ukraine. Although some Canadian companies have made this decision, a number of contacts were unwilling to discuss the topic for this article.
Reticence here is arguably a smart strategy, says Pellerin.
“Some companies may not want to talk too much about why they’re exiting the Russian market because that could lead to reprisals and could have effects on their assets or even their employees in Russia,” he says. “It all comes down to understanding the risks, including the risks of communicating transparently.”
Is Resilience on Your Radar?
Uncertainty can prompt IROs to stay on their toes, but black swan events, or highly unpredictable events with extreme consequences, may simply be beyond anyone’s crystal ball.
Arnovitz notes that while IROs might feel they’re experiencing extreme uncertainty right now, uncertainty has been with us for decades. There have, in fact, been a series of ‘macro-shocks’ since the 1990s – from the Gulf War to the pandemic – that have pushed executives to view corporate ‘surprises’ differently.
Instead of better prediction powers, the answer may be building resilience into a company so it can respond swiftly and effectively to any event that occurs.
As an example of resilience, CAE used the pandemic period to make strategic acquisitions and to strengthen internal processes by consolidating training centres serving the same market. The company also began providing more training and simulations for business aviation and private jet travel – two areas poised to expand during the pandemic that have been important sources of growth ever since.
‘Resilience’ is becoming an important concept in the climate-change context, too, as a gauge of how well a company is responding to the physical risks that future weather events may pose, explains Butts.
She notes that speaking about the steps a company is taking so it can survive uncertainties can be a competitive advantage. “If one company has no disclosure and another says, ‘Don’t worry. We’re resilient,’ investors often find that type of disclosure reassuring,” says Butts.
Discussing resilience can backfire, however, if a company presents itself as overly confident or keen to shrug off risks. “You don’t want to provide a blithe reassurance that everything’s fine when we know that’s not so,” says Butts.
Going forward, IROs have no choice but to find more helpful ways to discuss uncertainty while continuing to deal with specifics.
“Volatility and uncertainty are now the norms,” concludes Arnovitz. “As an IRO, you have to always be prepared for the unexpected.”