IR Monitor – 09 August 2023

In this week’s newsletter:

• Don’t close the door on an ESG activist, they won’t go away. IR Magazine offers some practical tips on ESG activism.
• An alternative view from Harvard Law School: activists are certainly not always right, and management teams and boards should be confident challenging the notion that activism is always good for the public shareholder.
• Share buybacks get the boot as corporate America reinvests in itself. Capital expenditure is on the rise instead and suggests a confident growth outlook, predicts Bloomberg.
• Three (analysts) is the magic number. It’s time to fund proper company research that truly supports investors – a comment from The Times
• Can ChatGPT help investors process financial information? Yes, suggests a new paper, which also shows that bloated disclosure is a curse.
• And finally … Beware the Moon Emoji. A cautionary IR tale about communicating in a vaguely defined world.

This week’s news

Don’t close the door on an ESG activist, they won’t go away

The rise of ESG activism presents an opportunity for IROs to engage proactively with activists. Despite anticipating substantial opposition from most shareholders, activists still pursue these resolutions to attract public attention and gather support through media coverage. This serves as a vital tactic for activists to build both general and ESG-focused resolutions support. As such, IR magazine highlights that it is essential for IROs to maintain dialogue and engagement with activists rather than closing the door on them. Understanding to which extent the best interests of shareholders are protected or negated is key in addressing activist resolutions, just like building strong relationships with shareholders over time can help prevent activist attacks in the future. However, IROs may want to focus on the emergence of a new generation of “institutionalized activists” with more means, relationships and networks to achieve their goals…

Activists are certainly not always right, and their inability to outperform the market over the long-term seems to confirm it

A Lazard and Harvard Law School review of shareholder activism campaigns over the last five-and-a-half years highlights some important observations. While the market initially reacts positively to new situations involving activist funds, it turns out that relatively few shareholder activists effectively outperform the market on a sustainable basis, beyond the first year following a campaign launch. The review employs long-term data to reveal wider distributions of excess returns, with only a small group of leading activists able to consistently outperform the market over a one-year period. The findings indicate that activists don’t consistently fulfil their pledges of sustained outperformance. Management teams and boards should feel empowered to question the assumption that all activists produce favourable excess returns.

Three (analysts) is the magic number

A recent UK government review into capital markets investment research by Rachel Kent, a senior partner at Hogan Lovells, has identified three as a magic number. The research concluded that three is the minimum level of research sources required to create a consensus around a stock, so that investors can triangulate their thinking, writes The Times. All of this explains Kent’s proposal to establish a “Research Platform” to distribute independent research, particularly benefiting smaller companies and improving the evaluation of pre-float firms. The review also made other recommendations, such as funding additional research through a share trading stamp duty rebate, potentially fostering interest in small cap investments, like the levy that underwrites the Takeover Panel. Journalist James Aston emphasises the importance of comprehensive research to aid investors and bolster growth companies in Britain.

Share buybacks get the boot as corporate America reinvests in itself

The US is showing positive signs of avoiding a recession as CEOs are choosing to invest more profits in expansion projects instead of buying back shares. This shift in cash allocation has been evident during the second-quarter earnings season, with increased investment in plants and technology. Bloomberg credits this move away from debt-funded buybacks after the 2008 financial crisis as a positive step for long-term growth, although it may impact short-term buying power and stock market momentum. The focus on investing in the future aligns with the belief in the transformative power of AI. While buybacks won’t disappear, the recent trend towards reinvestment is seen as a significant move towards increased productivity and earnings growth.

Can ChatGPT help investors process financial information?

A new research paper suggests that generative AI tools like ChatGPT have the potential to reshape how investors process information. The study explores the technology’s effectiveness in summarising complex corporate disclosures. AI-generated summaries were found to be much shorter, often by more than 70%, without sacrificing the actual information content. Employing AI in this way has brought forward the concept of “information bloat” by showing that excessively detailed disclosures have negative impacts on capital markets, leading to reduced price efficiency and increased information asymmetry. In addition, AI can effectively create targeted summaries that identify firms’ financial performance and risks. Overall, the research highlights the significant value generative language modelling can bring – if investors suffer from information overload, machines will certainly not have the same problem…

And finally… beware the moon emoji

Bloomberg reports that meme-stock influencer and activist Ryan Cohen, known for his involvement with Chewy and GameStop, as well as his investments in Bed Bath & Beyond, is now facing a securities fraud lawsuit. The meme-stock hero’s use of a single emoji could hold him liable to alleged fraud and insider trading charges, which claim that he used emojis and filings to manipulate stock prices. A federal judge rejected Cohen’s motion to dismiss the lawsuit, suggesting that emojis and disclosures could be interpreted as influencing meme-stock investors. The case underlines the evolving landscape of fraud standards with regards to meme-stock, where influencers and memes can significantly impact investor sentiment and behaviour.

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