Customs Street Advisors is a full service investor relations firm based in Lagos, Nigeria.

Shareholder Engagement and Sustainable Growth

This week in Alrroya Aleqtissadiya, the United Arab Emirates (UAE) business and financial daily, I urge companies to stop viewing shareholder engagement as a distraction or waste of management time. On the contrary, it may be the weakest link in the drive to secure the future of the companies and boards will do well to recognize it as such.

Companies often complain that investors and analysts set unfair standards for them. For example, those in their growth phase feel irritated when pressured by dividend clientele to make payouts like mature companies. These companies protest that if they followed those dictates they would have insufficient capital to reinvest in the business which puts their competitiveness in jeopardy.

The exasperation is not limited to rapid growth companies. Recently, I had an encounter with the CFO of a major food and beverage company on the Nigerian Stock Exchange. He narrated how investors relentlessly press the board for the type of share price appreciation that is practically impossible with a mature company. To achieve growth of that velocity, the company would have to be radically restructured and probably dispose of some of its key assets. But if it did that, the regular dividends investors treasure would be history. You can’t eat your cake and have it.

These two examples reveal the frustration many public companies feel about their value narrative getting lost in translation. Heads you lose, tails I win. They are stung that investors are picking on them over qualities that are so fundamental to their investment case.

However, companies are not totally blameless for this miscarriage of expectations. The traditional approach to pitching companies to the investment community has emphasized investment return and little else. While return will always be a central theme of the investment case, it does not make a company unique. Every company harps on its return potential.

In contrast, companies do not spend enough time explaining their distinguishing features. The result has been that investors have focused on investment return as a number without the contextual fabric in which it is embedded. Therefore, investors stubbornly continue to judge companies in different growth phases, cycles and sectors based on the statistics of return and totally ignore the peculiarities of each company.

Companies need to understand their own attributes and discover what value that can deliver to an investor’s portfolio beyond the catch phrase ‘attractive returns’. This added value may be diversification, or counter-cyclical stability or other moderating influence. White-label investment return should be seen as the departure point for an extended narrative on the support a company brings to the investment portfolio. In fact, a stock’s differentiation case is critical if a company wants to stem investor grumbling. Companies should always bear in mind that an investment portfolio is simply a basket of future economic events. By defining the type of economic exposure they provide, companies give investors a better understanding of the value they deliver.

The onus is on companies to wean investors off a singular focus on investment return. They need to balance that focus, which remains a valid one, with a full-fledged discussion on their wider set of qualities. How well they do so will determine the pressure they face from impatient investors. Companies must be able to distinguish between calls for improved business performance and those driven by demands for unreasonable shifts in the business strategy or model.

For a start, they need to rededicate themselves to educating investors about their business. If investors make so-called unreasonable demands then they need to understand why. Are shareholders in peer companies making similar demands? Are these demands symptomatic of deeper expectations or one-off calls?  How popular are these demands with the shareholder base, in particular, institutional investors? Does the company have a scale for grading the urgency or significance of demands? How are these demands processed and escalated within the company? These are just some of the issues that companies need to be addressing. They need to take a system-wide as opposed to an ad-hoc approach to dealing with such demands.

Shareholders need to be brought over the wall to understand the imperatives of running the company for sustainable growth. If their focus on short-term gains puts the future of the company at risk then it is a no-no. The recent statement by Michel Barnier, the new European Union Commissioner of the Internal Market and Services, on the predominant ‘activist’ shareholder behaviour during the credit boom goes to the heart of the matter captures that view:

Many shareholders acted with a short-term perspective rather than acting with the long-term viability of the institutions they own in mind . . . We need to reconsider the role and responsibilities of shareholders, how risk committees work, whether internal and external audits are working as they should, and the compensation of executive boards.

If shareholders insist on running a company to the ground through demands that run counter to sound judgment, it is the duty of managers to convince them otherwise. As outsiders, shareholders will always know less about a company than managers. Those at the helm of public companies should start seeing their role as two-fold: managing the company and managing investors. The latter is not a distraction. It is central to the future of the company.

If investors do not understand the business, they will misestimate its risks leading to a higher cost of equity capital for the company. This can only have negative effects on the company as the higher cost of equity puts it at a disadvantage with competitors who can raise equity at cheaper rates. Companies have got to see engagement as an ongoing process with a dynamic feedback loop. Until they do so, they will be saddled with nagging shareholders, who like Oliver Twist will always ask ‘I want some more’.

The original article can be read here on the Alrroya Aleqtissadiya website.

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