IR Monitor – 11 September 2024

In this week’s newsletter:

• Our Dublin team unveils key trends in AI shareholder proposals. Companies see the opportunity to make efficiency gains and generate growth through the adoption of AI; investors want companies to adopt AI to enhance / uphold their competitive position
• Betting big on a new boss is not necessarily a mug’s game. Outsized market reactions to management changes have as much to do with failings of the old boss – Lex column
• Is Investor Relations in the Middle East still playing catch up? IR Magazine discusses factors to help IR in the region close the gap with western practices
• UK markets must go ‘risk on’ to meet growth goals, reports Financial News. The Wilson report from City grandees looks to boost investment in UK capital markets
• Temu becomes the world’s strangest case study in capital allocation: the Chinese online retailer has accumulated the biggest net cash position of any listed group not to pay dividends or buy back shares, as the Financial Times reports
• And finally … the IR genius of Sam Altman. Matt Levine’s newsletter describes how to spin an existential threat to the human race into a compelling equity story

This week’s news

Key trends in AI investor proposals

As AI embeds itself into everyday business operations, FTI’s own governance experts Arnaud Cave, Niamh O’Brien and Andrea Hearon have investigated what shareholders want to see their companies doing to ensure its safe and equitable use. The team reviewed 23 proposals submitted to US issuers during the 2024 AGM season to get a sense of what was being put forth and by whom. The key takeaway from FTI’s report is that shareholders’ concern around AI governance is spreading to all sectors and considered critical at all points in the value chain. Proposals typically fall into one of two categories – a request for standardised transparency reporting (around ethical use, human rights risk, mis- and disinformation, etc.) and calls for formalised board oversight responsibilities. Unsurprisingly, Big Tech firms remain the primary target for these proposals. But the past year has also seen the first AI motions brought to media companies, fast-food chain Chipotle and healthcare provider UnitedHealthcare Group. The cohort of filers is similarly varied, presenting proposals relevant to their stakeholders’ interests. Union funds, for instance, wants to know the workforce is looked after, whilst faith-based investors seek clarity around the human rights implications of surveillance and targeted advertising.

Betting big on a new boss is not necessarily a mug’s game – Lex

When former Chipotle CEO Brian Niccol was announced this summer as the new boss at Starbucks, the coffee chain’s share price gained a quarter (equating to $25 billion of market value). This, writes the FT’s Lex column, was not a caffeine-induced anomaly. Investors often react positively and materially to news of leadership changes. International Paper gained 11% when Andrew Silvernail took over in March, whilst engineering group Johnson Controls enjoyed a 45% uplift after John Barth was announced – the biggest CEO change-driven reaction in S&P500 history, according to FT research. Some argue that these share price moves don’t generally correlate to longer-term performance & many factors beyond a CEO affect company earnings and outlook. But instances exist when big jumps do launch a value creation period – this was the case with Johnson Controls. Perhaps it is merely a case of outperformance following the replacement of an underperforming former boss. Time will tell if Niccol has the same good fortune. 

Is Investor Relations in the Middle East still playing catch up?

Last week, IR Magazine spoke to Stefano De Caterina, an IR manager at AMG Critical Minerals. His early career was spent in the EU, which has framed his view of the state of the IR industry in the Gulf Cooperation Council (GCC) region. An imbalance between the level of disclosure provided between European and Middle Eastern firms is described, and this has implications for Gulf firms’ perceived transparency and market risk. Similarly, ESG reporting regulations in the region remain somewhat separate from corporate strategy and investor engagement. De Caterina believes that coupling ESG considerations with financial performance and dividend narratives (as is the trend in the EU) will tell investors a deeper value-creation story. He is also confident this shift will happen as the IR profession raises its profile, and digital transformation facilitates greater data-driven engagement. He plaudits The Middle East Investor Relations Association (MEIRA) as the region’s key advocate of global standards, training materials, and resources for those building out the sector. 

The Wilson report looks to boost investment in UK capital markets

UK markets should be “risk on”, according to City grandees, in a new report from the Capital Markets Industry Taskforce. The report, as outlined by Financial News, calls for a bold shift in the UK’s markets, emphasising the need for a more entrepreneurial & risk-taking approach to meet ambitious growth targets and regain international competitivity. Led by former Legal & General boss Sir Nigel Wilson, the report argues that UK markets have become overly focused on avoiding risks since the 2008 financial crisis, stifling innovation and long-term growth. It suggests that policymakers should embrace more “informed and rewarded” approach, focusing on four key priority areas to unlock £1 trillion in investment: capitalising on green opportunities, increasing investment in domestic companies, restoring risk appetite, and encouraging retail investment. The report concludes there are signs of life yet in the UK market, particularly with the valuations of digital banks like Revolut, Monzo and Starling rebounding. Optimism seems to have truly returned to the Square Mile, and long may it last.

Temu becomes the world’s strangest case study in capital allocation

PDD Holdings, the Chinese e-commerce company behind Temu, is facing scrutiny in the US following an announcement that it would not issue dividends or repurchase shares, which resulted in its stock plunging 30% on a single day in August. The FT reports that PDD has accumulated a net cash position of $38 billion, more than twice that of Tesla, but its decision to hoard cash and its limited financial transparency have raised concerns among investors. Despite PDD’s record profitability, some investors view its lack of shareholder returns as a “red flag,” suggesting potential issues with its accounting or balance sheet. PDD defended its approach, emphasizing that different companies have unique strategies, and its decision not to follow conventional financial practices should not be misconstrued. Meanwhile, several large Chinese companies, including JD.com and Meituan, have announced significant buyback programmes, drawing further attention to PDD’s unconventional (and largely unpopular) strategy.

And finally… the IR genius of Sam Altman

Sam Altman, CEO of OpenAI, is rewriting the book on using IR to drive value creation. His is a novel and frankly bold approach. When he goes around publicly worrying that AI might kill us all, what he is really saying is “I am building a technology that is unimaginably powerful and will transform every aspect of human life, so it sure must be worth a lot of money.” Hailed by Bloomberg as a genius strategy to create a credible narrative around the sheer power of his technology, the piece also touches on OpenAI’s move to become more investor friendly. Promises to rework its “capped profit” model, which limits investor returns, and its current non-profit governance structure again allow Altman to publicly fret over investor concerns of potentially losing out if the valuation is capped at $10 trillion. What a lovely problem to have…

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