Capital Markets & Investor Relations

IR Monitor – Monday 21st September

Investor Relations News

This week, we discuss the timelessness of Milton Friedman’s theory on the responsibility of business to provide for its shareholders. Next, we assess a defence of the IPO, which makes measuring success easier in comparison to direct listings. We then look at the ongoing spat between the hedge fund Hindenburg Research & Nikola – ironically, a company developing vehicles powered by hydrogen. Turbulence is ahead for Ryanair in our next piece as we detail their shareholder revolt. In our penultimate story, Next CEO Lord Simon Wolfson has been commended for his “reassuring sense of control” during the coronavirus crisis and for his comprehensive updates. And finally, Bestinvest have published their latest edition of Spot the Dog, looking at the best-in-breed and mutts of the fund management industry.

This week’s news

50 years on, Friedman was right: businesses answer to shareholders

City A.M. marked fifty years since the publication of Milton Friedman’s ‘The Social Responsibility of Business Is to Increase Its Profits’, arguing that even today, Professor Friedman was right. His doctrine, often referred to as ‘shareholder primacy’, proved popular in the boardrooms of corporate America, allowing them to pursue profit at any cost. But support for Friedman’s principles has waned in recent years, with CEOs turning their backs on shareholder primacy in favour of committing to all of their stakeholders. However, Friedman’s point is that business leaders are accountable to those who employ them – the shareholders of a company. Executives may pretend to kowtow to an amorphous blob of ‘stakeholders’, but in the end, when their biggest shareholder calls, they answer the phone. The reality of stakeholder capitalism is at the very least questionable too. Boohoo, as an example, was backed by 20 ESG funds and rated AA for its labour standards, but their Leicester factory suggests otherwise. Profits are easy to measure, social good is harder.

In defence of the IPO

Jeremy Abelson of Irving Investors wrote in the Financial Times that the practice of direct listings is not all it is cracked up to be. The arguments for direct listings are persuasive. Proponents argue that companies are “leaving too much money on the table” in the traditional IPO by passing along large profits to investors via the expected Day 1 “pop” in the share price. Direct listings avoid this pitfall and also convert a company’s private shareholder base to an entirely public one more efficiently than any other vehicle. However, whilst a direct listing means that, in theory, a company gets the most cash for the fewest shares, businesses should be aware that not all investors are created equal. IPOs allow companies to find the right type of public investor at the right price through pre-listing allocations. Another issue with direct listings is that it is difficult to measure success – would a company be as successful as it might have been had it done an IPO and allocated stock to the investors it wanted? This is a hard question to answer, but it is the critical question that companies should consider when deciding how to go public.

How not to respond to hedge funds

Breakingviews reported on the irony of a hedge fund named after the infamous airship disaster taking on a company developing hydrogen-powered vehicles. Hindenburg Research accused Trevor Milton, the founder and Executive Chairman of Nikola, of making “material false statements” about the vehicle maker’s progress. The US DOJ and the SEC are delving in too. The focus of Hindenburg’s report highlights Milton’s consistent hyping of the technologies his company is pursuing. Nikola, meanwhile, took several days to respond and only added more fuel to the fire when it issued a ham-fisted denial over the fraud allegations. Nikola also used the defence that many companies employ when in a similar situation: attacking short sellers. For now, Nikola remains a “pre-revenue company” according to its finance chief Kim Brady. Supporters of the traditional IPO (see above) will also have noticed that Nikola was spared the scrutiny of a traditional IPO process via a merger with an already listed special-purpose acquisition company.

Executive pay: turbulence ahead

Financial Times reported that Ryanair suffered a notable shareholder revolt last week, as 33% of investors voted against its proposed remuneration report. The package, reflecting the year ended March 2020, included a €458,000 bonus for Chief Executive Michael O’Leary. Institutional Shareholder Services, the proxy advisory firm, had recommended that investors reject the report, which it labelled “difficult to justify” at a time when the aviation industry is in crisis. The final count saw 65% vote in favour, 33% against, and 2% in abstention.

Up Next, the best in class

Lord Simon Wolfson, the Chief Executive of Next, has been courting praise for his handling of the coronavirus pandemic and for last week’s masterful RNS. Writing in The Times last week, Alistair Osborne reported that despite the company reporting a one-third drop in half-year sales and a 97% fall in underlying profits, Wolfson had maintained “a reassuring sense of control” throughout. Referring to Wolfson’s “typical forensics”, Osborne highlighted the extensive stress-testing conducted by the company at the beginning of the outbreak, in addition to the comprehensive business review which was published alongside its half-year results. This has been well-received by investors: after falling below £40 in March, the share price has since rebounded, closing above £64 following the release of its results on Thursday.

And Finally … Spot the dog

For companies criticised endlessly by investors for underperformance, it’s a rare moment of comic relief when the tables are turned: Bestinvest published its latest edition of Spot the Dog, a research report identifying “the mutts of the fund management industry” and the “best-in-breed” alternatives. Using statistical performance data and comparisons to industry benchmarks, the report highlighted 150 “dog funds”, a 65% increase on six months ago. The funds collectively manage £54.4bn of assets, with a median fund size of £133m, although 18 have assets under management in excess of £1bn. The report identified UK Equity Income (26%) and Global Equity Income (25%) as the sectors with the highest proportion of dog funds, “in part reflecting the slew of dividend cuts during the Covid-19 pandemic and the strong outperformance of ‘growth’ stocks”.

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