The Effects of Auto-Pilot

Let’s face it.  It’s hard to beat the market.  Those who can do so consistently are few and far between and get paid serious money.  Whereas investing in a fund that tracks the market– a so-called “passive” fund because there’s no active choosing of individual investments – is like being on auto-pilot; it’s easy and low cost.

So, it’s no surprise investors big and small often put a portion of their money in passive funds like indexed mutual funds and exchange traded funds (ETFs).  A large chunk of these funds track the S&P 500 or Russell 3000, but passive funds can follow a myriad of other indices.

Over the last decade, passive investing has grown prolifically, from approximately $2 trillion to $10 trillion today, representing nearly 40% of assets under management.  Rapid change can make people uncomfortable.  As a result, some are raising questions about the broader effects of auto-pilot investment funds.  For example:

  • Can passive investing fuel a bubble or increase financial instability?
  • Does it crowd-out small, high-growth companies from the public markets?
  • Does it, or can it, distort the capital allocation process?
  • Does it stifle competition? Or create an anti-competitive environment?
  • What is, or should be, the role of these passive institutions in exercising oversight over their investments?

Serious questions, but can we really pin all this on passive funds?  Let’s take a closer look.

By definition, passive funds are designed to follow an index (however defined). Accordingly, they own a market-capitalization weighted interest in the companies comprising that index and rebalance their portfolio on auto-pilot.  Consequently, passive funds are followers, not leaders, of market trends, so it’s hard to imagine them causing a speculative bubble or bust.  Yet, some research indicates that the increased size of passive funds, their use of leverage and derivatives to manage risk plus market correlations among and between stocks, may result in passive funds increasing market vulnerabilities to idiosyncratic events. For example, when multiple funds on auto-pilot simultaneously buy and/or sell the same stock or if they suffer a liquidity event in the face of a rash of fund redemptions.  The good news is research shows passive fund holders tend to be less reactive, so the latter is not too likely.

Next, it logically follows that as money flows into index funds and ETFs, there is a proportionate increased investment in the companies comprising the indices.  Since generally larger companies belong to an index (depending on the specific index), passive funds basically facilitate the big getting bigger. Indeed, since 1997, we’ve seen the average market capitalization of public companies increase, while the number of public small-cap companies has dropped dramatically.  However, other factors such as industry consolidation, M&A and robust venture capital and private equity markets are also drivers of this trend.

In a similar vein, passive funds are, in essence, allocating capital to the underlying components of an index without regard to a specific business’s opportunity or fundamentals.  Sanford Bernstein analysts argue this is sub-optimal with potential long-term economic consequences as compared with active management, or even Marxism.  This is because under active management and Marxism, investing agents seek to optimize capital flows in an economy based on desired objectives or principles.  This is an interesting concept and one that bears watching, but in my opinion not critical at this time since passive investing represents less than half of all assets under management and access to capital remains robust through the debt, private equity and venture capital markets.

While not unique to passive investing, it’s very common for indexed mutual funds and ETFs to hold competing companies in the same industry.  Some academics theorize this could lead to anticompetitive behavior.  The thinking goes that given these funds’ portfolio optimization goals, some fund managers may try to influence the competitive strategies of portfolio companies so as to limit the negative impact portfolio companies in the same industry have on each other.  Amplifying this concern is the high level of common ownership at institutions and the collective influence they can bring to bear on companies.  This theory is a stretch in my view given my understanding the nature and behavior of institutional investors; the fiduciary responsibilities boards have to all – not just some – investors; and the significant compensation incentives managements have to optimize business performance.  Nevertheless, this theory has enough traction that the Federal Trade Commission held an open hearing on the subject in December 2018.

Finally, the major passive institutions can have a powerful voice in the corporate world given their ownership stake and corresponding proxy voting power.  Largely they have used this voice to focus on governance and board accountability matters, such as board operating principles and composition – including diversity. They are also focused on how well boards exercise their oversight of executive leadership, compensation, company strategy, corporate culture and risk management.  This includes asking boards to ensure companies assess relevant social and environmental risks.  As part owners of a company, passive investors have every right to expect boards to execute such responsibilities effectively.  Still, there’s a delicate balance between asking thoughtful questions and offering perspectives and being accused of overreach.

Deep breath here. Passive funds are not the source of all the business world’s problems – or even half of them. While passive investing has grown to a significant level rapidly, passive fund managers act and work independently, compete against each other for client dollars and have differing priorities.  In the end, passive funds have been a boon to a broad swath of the investing public and if there are any unintended consequences of their growth or size, it should be handled with a scalpel, not an axe.

Lisa Ciota
Lead-IR Advisors, Inc.

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That’s what BlackRock Chairman and CEO, Larry Fink’s annual letter to CEOs is: purposeful.  Purposeful in its language. Purposeful in its thinking. Purposeful in its intent to advance a dialogue about corporate purpose.

Yes, purpose.  It’s a concept that befuddled many last year who seemed to think that serving a corporate purpose was antithetical to profits.  Yet, as Fink laid out in 2018, companies without a sense of purpose cannot reach their full potential and will ultimately deliver subpar returns.  This year, Fink further expands upon this concept, noting that:

“Purpose is not the sole pursuit of profits but the animating force for achieving them.
… when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability.”

In Fink’s view, corporate purpose informs strategy, guides culture and provides a decision-making framework.  With clarity of purpose, organizations can become more resilient, aware and aligned, making them better prepared to adapt and evolve.

Fink’s perspective appears to be resonating more deeply this year.  Perhaps this is due to today’s more volatile and uncertain environment and the erosion of trust in government and media.  It may also reflect the current debate about shareholder primacy and the role of business in society.  What we do know is the general public and institutional investors increasingly look to business to be a bulwark of trust in an increasingly dystopian world according to the 2017 Edelman Trust Barometer.

So, what’s a company to do?  First, I dare say most companies do have a purpose, but it hasn’t been front and center in their thinking.  This is probably the hardest part.  It requires companies to thoughtfully answer and act on questions like:

  • What do we aim to do as a company? Why do we or what we do matter?
  • Where are we most vulnerable?
  • How does (or should) our purpose shape our culture and strategy?
  • How does our purpose create value (for customers, employees, communities and shareholders)?
  • Do our strategies, tactics and actions support this purpose and create value?

The answers to these questions need to be communicated internally via employee townhalls, new employee on-boarding, training programs, etc. and externally via the company’s website, the CEO’s annual shareholder letter, investor days as well as 10-K and 10-Q filings.  As part of its engagement efforts, BlackRock will be looking for this type of information in a company’s external communications.

For those who still pooh-pooh the concept of corporate purpose, I ask:  Isn’t, for example, a consumer product company that offers new products to make consumers’ lives easier or more enjoyable … or an industrial manufacturer making equipment that enables factories to operate more effectively … each serving a social purpose?  Don’t we expect companies to consider the upstream and downstream implications of their activities and be good corporate citizens? For an example of a company that adheres to its purpose while delivering results, read Judith Samuelson of The Aspen Institute recent Quartz at Work posting which highlights Southwest Airlines.

In the end, there’s a purpose for it.  Be purposeful about it.

Lisa Ciota
Lead-IR Advisors, Inc.

Dubious Distinction

“As the world’s largest and deepest equity market, the U.S. tends to be the relatively steady hand among volatile peers.  Not anymore.” (Lee, Bloomberg, January 7, 2019)

This was the opening comment in a recent Bloomberg article about increased volatility in U.S. markets. Morning Brew (Freyman, January 6, 2019) provided additional perspective, noting that the VIX Index (aka Wall Street’s fear index) had the dubious distinction of outpacing the corresponding measures in Europe, Hong Kong and emerging markets in December. vix historyYes, volatility in the U.S. was higher in 2018 than in the recent past, but for perspective, its still largely below the levels experienced during the financial crisis and roughly on-par with the levels during the dot-com bubble at the turn of the century.

Still, volatility being up sounds worrisome.  But what does this really mean?  Let’s breakdown the components used to arrive at the VIX Index:

  • The S&P 500 Index is a market-capitalization weighted average of the 500 largest public companies in the U.S. As such, the S&P 500 Index is a calculated value, existing only on paper, although you can buy mutual funds and ETFs designed to replicate the index. The S&P 500 Index is considered a benchmark for the overall economy and equity portfolio performance.
  • This is where S&P 500 Index (SPX) future options come in. Investment managers use SPX futures as a form of insurance – to hedge portfolio performance in changing market conditions.  Others simply want to predict (speculate on) the future level of the S&P 500 Index.  There are a series of weekly and monthly expiration dates on SPX futures which can extend well into the future. Just like buying insurance, the SPX trades and settles using cash – something to think about given the extent to which index futures are traded on margin.
  • The VIX Index uses SPX future options as a means to predict the volatility in the S&P 500 Index over the next 30 days. The VIX is calculated using the midpoint of the bid/ask quote on a constantly changing portfolio of SPX future options that have expiration dates more than 23 days but less than 37 days away.  Like the S&P 500 Index, the VIX is a calculated value, existing only on paper

So, let’s follow the logic chain:  We start with a weighted-average based on the real market value of the 500 largest companies in the U.S.  Because there’s a desire to hedge, predict or speculate on this benchmark’s outlook, futures options are available to do that.  But, every minute of every day there are different views of where the benchmark is headed and to measure this variation a weighted-average based on said futures options is used.  This sounds logical when you read it forward, but can you read it backwards: Can changes in the VIX drive or influence changes in SPX trading and in turn effect the value of companies in the S&P 500?  Can the tail wag the dog?

Today, more than a third of all assets under management is passively managed (i.e., in index funds or ETFs), a big chunk of which use algorithms tied to the S&P 500 Index to inform its trading strategies.  So, while the financial markets are considered efficient and rational, it’s hard not to worry about getting caught in a feedback loop.

For example, there are future options on ETFs like the SPDR S&P500 Trust ETF (SPY). Could an anomaly with a well-known ETF like this spread to the VIX or other similar instruments?  Many believe it’s unlikely and note that estimated total assets invested in individual index futures like this is tiny (in the billions of dollars) compared the total S&P 500 market capitalization of $21 trillion, so any impact should be contained. That’s good news, but a dubious comfort.

Lisa Ciota
Lead-IR Advisors, Inc.

Something in the Air

It all started with a short reply to a National Investor Relations Institute (NIRI) eGroup chatroom just before the holidays.  In the week after this posting, I received a dozen or so calls and emails asking about my experience running an integrated investor relations and corporate communications function a few years ago.  There must of have been something in the air given the variety of companies and industries saying they were thinking about this.

I was little surprised by this interest as investor relations is often siloed within the finance department with limited involvement with other audiences.  This largely reflects the specific information needs of investor audiences.  Yet, the idea of an integrated communications makes perfect sense when you consider the importance of companies speaking with one voice.  Of course, the complexities of the disclosure environment, multitude of information sources and relentlessness of the news cycle are also factors.  Bottomline, everything communicates.

It’s naïve to think what a company says to one audience isn’t heard by another and perceptions aren’t shaped by it.  So integrated and aligned communications are a must.  But this can take many forms, with varying degrees of centralization or coordination based on the company’s industry and product lines, its critical audiences as well as the nature and intensity of the messaging needs and communications channels.

In my case, when due to a company restructuring I assumed leadership for corporate communications, my first step was to define the integrated function’s strategic purpose and functional scope.  This was informed by the company’s broader strategic focus and a prioritization of critical audiences and stakeholders.  We defined our critical audiences as investors, financial and industry/trade media, industry councils/associations, governance/regulatory affairs and our local communities.  A SWOT (strengths, weakness, opportunities, threats) analysis helped define our priorities and pillars for success. As a small industrial materials processing company with little visibility outside our industry and the communities where our facilities were located, combining external-facing communications under one umbrella made sense.

It may be more difficult for consumer-facing, high visibility companies to integrate the functions just given the volume and types of communications and channels involved.  In such cases, I’ve seen a strategic message council approach be effective.  This is where leadership from investor relations, corporate communications, government affairs, marketing and human resources, regularly meet to align strategies, priorities and messages and use that alignment to lead their respective teams accordingly.

Something may be in the air when it comes to combining investor relations and corporate communication, but whether it’s a soft breeze or the strong wind of change only time will tell.

Lisa Ciota
Lead-IR Advisors, Inc.

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Taking Stock

It always happens at the end of the year – people take stock of the past 12 months and measure what was most important, popular, read or viewed.  Not to miss out, below is Lead-IR’s top 5 blog posts of 2018.

Lead-IR Advisors
Top 5 Most Viewed Blog Posts of 2018

  1. Ahead of the Curve, April 18, 2018
  2. Replay: New Kid in Town, September 26, 2018 (Original post: February 21, 2018)
  3. Face North, October 31, 2018
  4. Long Days, Short Stint, October 10, 2018
  5. Its Personal, Redux, August 1, 2018 (Original post: January 5, 2018)

In reviewing this year’s top posts, three key themes emerged:

Beyond Business Issues
Should CEO’s and companies address public policy, political or social issues? If so, when and how?  In the past, such topics were considered beyond the normal scope of business and companies and CEOs could stay out of the fray.  However, the general public and investors increasingly believe it appropriate for companies take a stand on issues relevant to fostering a healthy business environment. Both the Ahead of the Curve and Face North posts offered perspectives and best practice pointers on doing just that.  The former outlined how Jamie Dimon, Chairman & CEO of JPMorgan Chase discussed public policy issues in his annual letter to shareholders.  The latter highlighted the importance of having a deep understanding of company purpose, values and culture to guide decisions on where when and how to take a stand.  While not in this year’s top 5, the Stay or Go post from early May 2018 also addressed this topic.

C-Suite Transitions
From the sudden passing of Fiat Chrysler’s CEO Sergio Macchione, to Pepsico’s CEO Indra Nooyi’s retirement and the surprise ousting of GE’s former CEO John Flannery, CEO transitions were a hot topic in 2018. So, it’s no wonder readers found It’s Personal, Redux’s discussion of key disclosure considerations related to CEO health matters and Replay: New Kid in Town’s pointers on introducing a new CEO to investors, particularly relevant.  If you’re working with a new CEO, I suggest reading October 2018’s Just Being post and reflecting on what “becoming” a CEO means in the full sense of the word.

Focusing on Tomorrow
Or rather, there’s not enough of it – focusing on the long term, that is.  Everyone and their brother complain about the short-termism prevalent in the markets today.  Yet, as discussed in the Long Days, Short Stint blog post, it seems every solution to counter this is focused on what companies should or shouldn’t do.  Certainly companies can do some things to counter this as suggested in the Give No Quarter post.  But, as outlined in the Easter Bunny blog post, the current market structure is designed to support investors who drive a big chunk of trading today and have short-term investing horizons.

Lisa Ciota
Lead-IR Advisors, Inc.

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Making a List and Checking It Twice

That is, checking new public company listings.  2018 is on track to record more than 210 IPOs including some big names like Spotify, DropBox and Cushman & Wakefield.  This compares favorably with 181 IPOs in 2017 and 105 in 2016.  The early 2019 outlook appears exciting with recent confidential filings by Lyft, Uber and Slack.

Yet, this news belies the fact that in the past decade the average number of IPOs per year is 20% below the average between 1999 – 2008 (a period that includes both the dot-com bust and financial crisis)[1].

This is worrisome to many who see a lack of IPOs as reflective of a less dynamic, more stratified economy.  The reasoning goes that IPOs are innovative companies who help drive long-term growth, so a decline portends a potentially weaker economy.

Many blame the complexities of the regulatory environment for scaring companies away from going public.  Certainly, much can be done to simplify the IPO process and streamline ongoing disclosure requirements. There are a number of ideas and proposals underway in Congress and at the S.E.C. to help expand the IPO on-ramp.

But, this is only part of the story.  Others say there’s some distinct disincentives for going public including the market’s short-term orientation and volatility and the risk of activism.  There’s also an understandable reluctance to cede (at least partial) control to outsiders who weren’t part of the company’s founding – the classic tension between value-creators and perceived value-extracters.

The reality is many firms don’t need to tap the public markets to raise capital thanks to changes to the Investment Company Act in the late 1990s, which increased the number of investors a private company is allowed. It’s probably no coincidence that since 1999 over $750 billion has collectively been invested in startups by venture capital (VC) firms[2].  At the same time, private equity (PE) has grown substantially with an estimated $2.5 trillion of assets under management globally in 2016 vs. $600 billion in 2000.

The result:  more total companies in the U.S. – up 10% since 1997 – but a much lower propensity of companies of any size, but especially small ones, to be publicly listed[3].  So, while the number of IPOs is lower than in the past, it’s not necessarily due to a less vibrant start-up and entrepreneurial environment.

However, fewer IPOs does raise worries relative to retail investors and industry concentration.  Equity in young, early-stage companies is typically held by founders, employees, VC/PE firms and sophisticated “qualified” investors.  Main Street investors are essentially shut-out of this opportunity and don’t share in the significant value created in the early-stages of a company’s life.  This sounds concerning from an income-equality perspective, but its important to note that only 14% of U.S. households own stock directly[4].  More IPOs will not solve this problem or broaden U.S. household stock ownership levels.

As for increased industry concentration, today there’s roughly half as many listed companies as in 1997 and those that are listed are, on average, older and larger than 20 years ago.  Stocks are also more highly correlated with each other.  This may raise questions as to the robustness of and risks inherent in the market, but in and of itself, its hard to say if it’s bad or just a natural evolution of the financial markets.  At this point, it doesn’t appear to have slowed innovation, impacted the ability of new companies to form and attract capital or affected overall economic vitality.

The dynamics of public and private companies are changing.  No longer does being public assure a premium valuation or better access to capital.  Younger, smaller companies appear to benefit from staying private longer, while larger, more mature companies appear to benefit from the liquidity and visibility being publicly traded provides.  In the end, I believe that going forward the private vs public decision will be driven just as much by a need for liquidity as capital.

Lisa Ciota
Lead-IR Advisors, Inc.

[1] Statistica, Number of IPOs in the U.S. since 1999

[2] PwC, Thomson Reuters, MoneyTree Report, January 2018

[3] Doidge, Craig and Kahle, Kathleen M. and Karolyi, George Andrew and Stulz, René M., Eclipse of the Public Corporation or Eclipse of the Public Markets? (Working paper – January 2018). Available at SSRN:

[4] Federal Reserve’s 2016 Survey of Consumer Finance

Who’s Got the Power?

The most powerful person in the world is the storyteller.  The storyteller sets the vision, values and agenda of an entire generation that is to come.
                                                            – Steve Jobs

Are you a storyteller?  Can you create a compelling narrative about your company, its strategies and results?  If you’re in investor relations (IR), do you think it even matters?

I know some will say NO – investors are rationale beings and only (expected) results matter.  Others will point to the rise of passive and quant investing strategies or increasing use of big data, analytics and artificial intelligence (AI) to guide investment decisions as evidence a company’s story doesn’t matter.

But, the idea of being data-driven cuts both ways as investors don’t just look at financial results.  For example, some are using nascent AI applications to mine linguistics and behavioral analytics to explain, describe and potentially predict future outcomes or evaluate a speaker’s level of cognitive dissonance or truthfulness.

Then there’s the increased investor scrutiny of environmental, social and governance (ESG) factors.  In my view, this ESG focus is really about investors wanting to know the “how” of a company:  How does the company manage risk (environmental, social or other) … how does the company source/produce/operate and the impacts thereof … how does the company interact with key stakeholders (employees, customers, communities, etc.)?  In short, how does the company conduct itself?

It’s in answering the how that a company’s story is told. When it comes to financial performance, the story puts context around how results are achieved:  Was it great strategy … fabulous marketing or customer relationships … disciplined execution or operating efficiency?

So, in every earnings release and call, investor presentation or roadshow meeting, a story is being told.  With that in mind, here’s some tips:

  • Be clear and concise: Establish context and convey results via effective headlines with supporting bullet points – this is something IR practitioners are well-versed in doing.
  • Master the narrative structure: Most stories have a story arc consisting of a main character who faces a journey or challenge which leads to an outcome. In business, the story arc goes something like a company with a business opportunity/problem executing strategies to address that opportunity/problem which creates operating and financial results.
  • Engage the eyes: A picture is worth a thousand words, or rather graphs, charts and infographics can get your point across with few words.
  • Make connections: Use examples to make your business narrative resonate. Highlight customer benefits of your products, innovations that create new market opportunities or employee initiatives that enhance productivity and efficiency.
  • Build on outcomes: Offer some direction on how the company expects to build on, extend or sustain performance long term in a given environment.

A memorable and credible business story can build confidence in a company, its management and strategies, thereby breaking through the clutter, attracting investor interest and potentially enhancing valuation.  Indeed, storytellers have the power.

Tell me a fact and I’ll learn. Tell me a truth and I’ll believe.
But tell me a story and it will live in my heart forever.
                                                         – Native American Proverb


Lisa Ciota
Lead-IR Advisors, Inc.

Laser Focus

You know that uneasy feeling that gnaws in the back of your head?  Well, I’ve got it bad right now.  I talk with a lot of people and what I’ve been hearing over the last several months has contributed to a growing sense of unease about the future of the investor relations profession.  Of course, the National Investor Relations Institute’s (NIRI) Think Tank survey on the future of investor relations did nothing to allay those worries.

Change is nothing new.  IR has weathered changes and evolved over the years and I believe has come out stronger and more influential as a result.  However, from the rise of private equity, the dearth of IPOs and decline in number of public companies … to the pressures of short-termism and growth of algorithmic/robotic trading … to the impact of MiFid and the secular decline of the sell side … it somehow feels like we are on the cusp of a paradigm change.

Will these changes further elevate IR as a strategic function or will IR become more tactically focused? Anecdotally, I’m hearing companies are upping their focus on financial disclosure, analyst projection models/estimates and capital allocation.  The notion is to focus on the same things analysts and investors do and use the quarterly earnings process as the milepost for driving valuation.

What I’m not hearing is a focus on communicating about company purpose, market opportunities, strategy, operations or reputation – factors that create value – with analysts and investors.  Nor does there appear to be any priority being placed on developing relationships or having a dialogue with analysts and investors.  Maybe this is because this is the easy part and it’s all been done.  Maybe it’s because “soft” subjects are hard.  Maybe it’s because investors aren’t interested.  Maybe its all of this, or none of this.

What worries me is the laser-like focus on the financials may narrow IR’s sphere of influence.  When there’s a matter related to strategy, operations or reputation, will the C-Suite seek counsel from IR?  Will IR have a seat at the table or simply serve as the messenger?  Will this laser-like focus limit IR’s ability to sense a shift in investor perceptions or develop the supportive long-term investor relationships important during challenging times?

I have no crystal ball to answer these questions. IR as a profession has proven resilient in the past and may continue to prove such long into the future.  But as we look ahead, I want to paraphrase something I recently heard: “Facts (i.e., financials) are like bones, but there’s a lot more to life.”

Lisa Ciota
Lead-IR Advisors, Inc.

More than a Story

Myths are clues to the spiritual potentialities of the human life.
                                                                                  –Joseph Campbell

Between meetings and mad dashes to the store to make sure my fridge is fully stocked for Thanksgiving, I was scanning news headlines when a New York Times article by David Brooks caught my eye.  The article about fighting the spiritual void struck a chord on many levels.  But, it was the Joseph Campbell quote that caused me to pause.  Myths inspire and instruct.  They can serve as a compass and create context for the human experience.

I’ve seen the power of such as a volunteer for the Chicago Architecture Center’s educational programs.  Our flagship program is a 90-minute journey covering Chicago’s history and architectural heritage.  On this tour, we step inside the restored entry of the London House hotel (formerly the London Guarantee Building) where we recite a variation of the ancient Athenian Oath inscribed above the doorway.

IMG_1100London House Rotunda, 85 E. Wacker Drive, Chicago, IL 60601

As we talk about the oath, students gain a sense of connection to a democracy thousands of years ago and what it means to be a citizen.  We build on this inspiration with a visit to Heald Square for a stellar view of iconic Chicago skyscrapers and to reflect upon the quote below the statue of George Washington, Robert Morris and Haym Solomon and the ideals of America.

By the end of the tour students are most impressed with how the buildings and places visited have a story to tell and there’s meaning behind them.  They may not realize it, but they are experiencing how stories and myths can connect us to our history and each other, and can serve to inspire, instruct and guide us.

As you sit down for Thanksgiving with family and friends, take some time to discuss and reflect upon the stories and myths that have shaped and informed your lives.

Happy Thanksgiving!

Lisa Ciota
Lead-IR Advisors, Inc.

Look Who’s Talking … Again

Increasingly, its corporate directors.  That’s a key highlight from a snapshot summary of the National Association of Corporate Director’s (NACD) annual Public Company Governance Survey, which reported that 58% of respondents said a representative from their board(s) met with an institutional investor over the last 12 months.  This is up from 50% reporting same in the prior year.

Driving this is an environment where expectations for transparency and board engagement are much higher.  Also contributing is a recognition among many boards of the proxy voting power of certain institutional investors and their ability to effect governance changes (think majority voting and proxy access).

Shareholder engagement is no longer an event-driven, proxy-related process.  Boards increasingly approach shareholder engagement strategically – as an opportunity to gather constructive input, foster trust and support and dialogue on issues meaningful to the creation or protection of shareholder value.  But, this doesn’t mean boards are involved in day-to-day investor interactions – that responsibility still resides with management.  Rather, boards are exercising more oversight.  For example, boards are looking for more information about the company’s:

  • Governance team: Who is on the team?  Does it have the right set of knowledge, competencies and skills?  Can it effectively represent the board’s view?  Can it articulate the nuances of the board’s perspective vs. the company’s position where applicable?
  • Shareholder monitoring and engagement plans: Who are the company’s top investors and how has this changed or is expected to change?  In view of this, what are the top governance areas of strength or opportunity?  Are any investors (or advisors) more influential than others and should be prioritized?  What is the engagement plan and when does it makes sense for directors to engage directly? (See the post republished below for some thought starters on the latter.)

Shareholder engagement is an opportunity for companies to build better understanding, relationships and alignment with long-term, stable investors.  Forward-thinking boards are embracing this opportunity.



March 21, 2018

It’s fun to be popular.  Everyone wants to talk to you. Investors big and small with long- and short-term horizons seek opportunities to meet with and speak to company leadership.  Today, even passive investors – index funds, etc. – expect to occasionally engage with companies on relevant issues.

Now, who should do this talking?  Company management.  With, of course, investor relations leading the day-to-day.  However, it’s naïve to think Boards do not or should not talk with investors.  While I believe board-shareholder engagement should be the exception and not the rule, if done for the right reasons with the right people it can be extremely valuable.

To that end, you should have or develop a communications policy that encompasses the potential for board-shareholder engagement.  A well-crafted policy will provide a framework to guide the engagement decision given the specific circumstances and needs of the company.  Let’s start by considering what topics are best addressed by management vs. the board:

Example Management/Board Engagement Topic AllocationDirector-shareholder engagement topics

Next, consider with whom and when board-shareholder engagement makes sense.  Any decision will be a judgement call based on myriads of factors and the specific investor(s) at hand. Things to think about when deciding include the company’s strategies, results and relative performance, the nature of the investor’s issue(s), general investor opinion/perception about the matter(s) as well as the size of the investor’s holdings and influence within the investment community.

Here’s some thoughts for when it comes to the actual meeting or call:

  • Agree to an agenda upfront
  • Select directors for engagement based on board roles or prior experience
  • Prep participating directors on the issue(s), company messages and investor background
  • Provide directors a Reg FD refresher and a brief on company information in the public domain
  • Focus on active listening
  • Consider including a company representative such as the IRO or corporate secretary in meeting but allow for a private conversation for part of the time if requested
  • Capture investor feedback; ensure follow-up as necessary.

Board-shareholder engagement is an opportunity to gather constructive input and engage on issues meaningful to the creation or protection of shareholder value.  Approach the process with an open mind.


Lisa Ciota
Lead-IR Advisors, Inc.