FTI Consulting’s Corporate Issues Study focuses on six key corporate issues – M&A, Shareholder Activism, IPOs and Spin-Offs, CEO Transitions, Regulatory Changes, and Crises – as seen through the eyes of institutional investors. Part II of the series takes an in-depth look at the role investor confidence plays when it comes to evaluating a variety of corporate issues including CEO Transitions, Regulatory Changes, and Crises.
In this portion of Part II of our series, we take a closer look at how investors evaluate regulatory changes – which policies and type of reform concern them most, what types of communications they prioritize, and what sources of information they rely upon to make investment decisions. With the incoming Administration signaling a possible relaxation of certain regulations, this is a particularly relevant topic.
Policymakers have always had an impact on how companies conduct their business – recent years have been no exception. Regulatory changes can be fast moving, such as the elimination of many of the benefits of inversions or the creation of a new regime for credit default swaps. Meanwhile, other regulatory reforms, particularly tax and environmental reform, may occur slowly over time. Regardless, regulatory shifts will continue to have a meaningful impact on the bottom line and capture the attention of investors.
Nearly 70% of respondents indicated that regulatory change has had a meaningful impact on the value of companies in their portfolios. Of highest import were pending financial market reforms and changes to the corporate tax system.
There were also several areas where industry preference showed: unsurprisingly healthcare investors listed healthcare reform among top concerns, while energy investors did the same with energy policy. Regardless of industry, tax reform and financial market reform remained top concerns across the investors surveyed.
Beyond the issues at play, shareholders are keenly focused on the implications – nearly all respondents found the financial implications and strategic implications of a regulatory change important.
Unlike in the other areas of our study, when shareholders have confidence in the company and its leadership, they are 19% more likely to have a lot of concern when that company is navigating potential tax reform. The possible reasons for this are twofold – first, tax reform rests largely outside a company’s control and, despite the quality of a management team or investors’ confidence in them, could have negative implications for bottom-line results. Second, high performing companies potentially have a lot more to lose from tax reform.
Outside of tax reform, investor concern was not statistically linked to confidence in other tested areas of regulatory change.
The majority of investors use a wide variety of sources to gather information about potential regulatory changes – general media coverage and sell-side analyst reports make up the majority of the source material, while financial data services and trade publications also score highly. Information disseminated directly from the Company, such as conference calls and company press releases, play a much smaller role in the investors’ evaluation of the impact of possible regulatory changes.
This information preference has implications for how a company should best evaluate and discuss regulatory change. For instance, the SEC is currently evaluating new policies around non-GAAP disclosure. While companies should have a point of view of where they fall and how the changes might impact them, they should also be involved or at least cognizant of what sell-side analysts and other publications are saying regarding the potential change’s impact on their results.
Companies experience a broad variety of events, transactions and issues throughout their lifecycle – all of which can dramatically impact enterprise value. Smartly managing these critical inflection points can be the difference between success and failure in the eyes of investors, customers, the media and the public at large. FTI Consulting Strategic Communications’ Corporate Issues Study was conducted among more than 300 institutional investors worldwide, and takes an in-depth look at these critical issues through the eyes of the investment community.
In our two-part online series, we take a closer look at key unifying themes that emerge from our Corporate Issues Study, which is based on survey responses regarding M&A, Shareholder Activism, IPOs and Spin offs, CEO Transitions, Crises, and Regulatory Changes.
Throughout the survey, we also investigated the role that investor confidence plays when it comes to evaluating the six issues above. As data from FTI Consulting’s proprietary 2014 Enterprise Value Study demonstrates, confidence is the key to influencing behavior among employees, customers, investors, governmental leaders and the public at large. In fact, our research demonstrates that confidence is the key to driving action among stakeholders – employees to join or stay at a company, customers to buy products and services, investors to purchase and hold stock in the company, and policymakers and citizens to advocate for the company in their communities. The overarching takeaway, which will be borne out in our series: when investors have confidence in a company, that company receives significant breathing room to operate, particularly when faced with a critical event, issue or transaction.
To determine the impact of confidence on the perceptions and behaviors of investors, FTI Consulting developed a split sample survey approach whereby participants were randomly selected for two groups. This was done for each confidence related question. The questions posed to each group were identical with one exception: one group was asked to answer the question about companies they were confident in, the other about companies they were not confident in. Results were then compared and the differences (delta) between the means of both groups were calculated. Statistical analysis was then performed on the data to ensure that the differences were statistically significant at the 95 percent confidence level.