The eyes have it

Make no mistake. Institutional investors are watching—and taking aim—at companies with less-than-stellar governance practices. That, in turn, puts IR professionals in the line of fire
By Chaya Cooperberg

If it wasn’t already clear, both passive and active institutional investors continue to demonstrate to public companies that they care about good governance.

Over the past year, the world’s three largest asset managers—BlackRock, Vanguard and State Street—have bulked up their internal governance teams. They’re adding resources to more closely monitor the companies in their portfolios on environmental, social and governance (ESG) factors, including the hot button issues of executive compensation and board composition. And they’re letting boards know that they’re watching.

In January, State Street Global Advisors, with more than $2.4 trillion in assets under management, penned an open letter to board members, encouraging them to work with management to incorporate sustainability into their companies’ long-term strategies. Defining sustainability as effective independent board leadership, diversity and talent development, safety issues and climate change, it wrote, “Over the long term, these issues can have a material impact on a company’s ability to generate returns.”

State Street acknowledges it has primarily focused on independent boards in the past, given that a “strong, effective board, committed to the long term and independent of management, is far more likely to lead to attractive results than any particular guidance or rules that we or others may promulgate.” But it is now broadening its sights to environmental and social issues, since they believe that “over time these areas can pose both risks to and opportunities for long-term returns.”

Increasingly, corporate governance issues are being viewed by money managers through a lens of risk management, meaning that companies with poor governance practices represent higher-risk investments, which would likely be reflected in a discounted valuation multiple. It’s not simply about earnings performance. Investors want to be secure in the knowledge that a company is aligned to deliver those earnings in a sustainable, responsible way. To ignore governance is to risk owning the next auto emission or food safety scandal. Conversely, though, companies with strong governance and commitment to sustainability have the opportunity to create long-term shareholder value.

The connection between governance and performance comes into sharp focus during hostile proxy situations. “When companies become targets of activists or shareholders looking for change, we peel back the onion and usually see some governance issues at the board,” says Amy Freedman, chief executive officer at Kingsdale Advisors, a proxy solicitor and strategic financial communications firm. “There is a link between a lacklustre performance and poor structures in terms of corporate governance and often that’s why activists are poking at those holes when they’re following an underperforming company.”

Under this new regime, investor relations are on the front lines as institutional investors take aim at companies with poor practices. And shareholders—from the world’s largest index-oriented institutions to smaller, active portfolio managers—now expect to engage directly with board members on governance issues just as they have always engaged with management on matters of operational strategy and execution.

Investor relations officers can and should be the conduit to assist their companies’ boards in this engagement process. An investor relations team that is in close contact with a company’s investor base can also, to an extent, represent the “voice of the shareholder,” and act as an internal advocate for shareholders with the board as well as with management. Likewise, boards should expect their investor relations officers to assist in crafting the company’s narrative and identifying the best ways to deliver key messages around governance and sustainability to shareholders.

Poor corporate governance—or even poor communication around governance—can all too easily become the wedge issue that activist shareholders use to gain support from other investors for change. Boards that recognize and act on the link between governance and shareholder value will have the best defence.

Chaya Cooperberg is chief communications officer and senior vice- president, corporate affairs, at AmTrust Financial Services. E-mail: Chaya.cooperberg@amtrustgroup.com.

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