IR Weekly – Monday 6th July
Welcome to FTI Consulting’s IR Weekly newsletter.
In this week’s edition, we explore academic research into corporate responses to short-selling, before reviewing how companies can better incorporate ESG metrics into remuneration plans. Next, we look at the FTSE 100’s shrinking dividend pot, in addition to the benefits of self-regulation for the UK’s financial services sector. We continue with an analysis of how listed companies use social media around the release of financial results. Finally, we discuss the return of “banker bashing”.
This week’s news
Decoding responses to short attacks
Activist short-selling campaigns are becoming more prominent, with “short reports” receiving media coverage and triggering sharp falls in share prices. The corporate reaction could be more telling than the market reaction, though. FT Alphaville discussed academic research which found that companies that launch internal investigations in response to accusations made by short-sellers are nearly four times more likely to discover fraud in their books. The authors reason that if the board needs an independent investigation, they lack trust in existing management disclosure – which isn’t great news. A better response? A counter-analysis that refutes the points made (which is only possible if the shorts were off the mark to begin with).
ESG: putting your money where your mouth is
The corporate focus on ESG has led to increased calls to integrate relevant metrics into remuneration plans, and a recent webinar with experts from CGlytics, Glass Lewis, and FTI Consulting focused on practical steps companies can take to do so. One key is for companies to listen to what investors are looking for around ESG performance when considering their remuneration packages; another is for companies to seriously consider linking diversity metrics to executive pay, especially in the current environment. A further key noted by FTI is to leverage the work being done on ESG strategies and ensure an overlap between materiality analyses and incentive plans. Glass Lewis said that it looks at three key things when judging ESG-linked remuneration: the business rationale (to avoid greenwashing), a materiality assessment, and differentiation between targets that are risks and those that present opportunities. FTI expert Peter Reilly is on hand if you are interested in learning more about how we can help with this topic.
Dividend pot shrinks as giants make cuts
Income investors are suffering, as Investment Week reported that the forecast dividend payout for the FTSE 100 index in 2020 has plummeted by 17%. The FTSE’s forecast yield for 2020 now stands at 3.6% compared to the 4.7% yield expected at the start of the year. While 46 FTSE firms are expected to increase their dividend, those that have slashed dividends have done so severely and were typically larger contributors to the overall pot of dividends. The high levels of concentration – with the top 20 firms expected to generate 74% of the total index’s pay-out – means that investors need to hone in on each high-yielding company’s individual circumstances to ascertain whether they will cut dividends or not. The aggregate earnings cover ratio of the index stands at 1.4x, which equates to a 72% payout ratio.
The City: free to flourish
Matthew Lynn argued in The Telegraph that despite continued uncertainty around the City of London’s post-Brexit relationship with EU markets, the benefits of self-regulation have started to become apparent. This week, in a move lauded by the Quoted Companies Alliance, the Government elected to opt-out of the EU’s new Settlement Discipline Regime. Speaking to this decision, Tim Ward, Chief Executive of the QCA, suggested that “growth companies on quoted markets have dodged a bullet that would have struck at the heart of liquidity in the small cap market”. It follows other promising signals, such as the indication that the UK will not subscribe to cumbersome new EU rules on sustainable finance in favour of the light-touch approach being adopted by the UK’s financial services regulators. Lynn concluded that the opportunities facilitated by regulatory self-determination, such as the potential to rebuild small-cap equity markets, will “more than make up” for that which is lost due to EU barriers.
The importance of being LinkedIn
FTI Consulting published its Annual FTSE 100 Social Media Performance Index, which evaluates the relative success of listed companies when using social channels around the release of financial results. Writing for IR Magazine, FTI’s Ant Moore argued that as engagement from corporate audiences has increased, the most successful companies have been those which incorporated long-term communication themes and developed a comprehensive understanding of their audience. The research also found that paid media has grown in popularity, while LinkedIn has become the platform of choice, with engagement increasing 46 per cent across the year. The research also noted a rising tide of anti-corporate sentiment, which has the potential to create a schism between those that report authentically and responsively, and those that operate solely in “broadcast mode”.
And finally… banker bashing rears its ugly head
Jim Armitage in the Evening Standard argued that despite the current crisis not being one of their making, bankers should be braced for a torrent of public criticism. Armitage suggested that the attacks will come in three waves, the first being that which has already occurred around the delays in issuing Government-backed loans. The second will arrive as repayment holidays come to an end, at which point many borrowers will still be unable to pay and banks will be forced to foreclose. The third and final attack will come as the loans that the Government ordered banks to administer mature. At this point, the banks will likely be generating profit and paying both dividends and bonuses, which will provide an easy target for politicians and journalists when juxtaposed with borrowers defaulting and going bust.
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