IR Monitor – 24 July 2024

In this week’s newsletter:

• Retail as the new frontier of shareholder engagement: some thoughts from FTI 
• The FCA’s latest overhaul of listings attempts to revitalise the London market. The Lex column suggests that institutional investors may prove an obstacle
• Unwritten rules, budget squeezes and trust issues: inside post-event investor feedback
• How a CEO knows when to quit: The relationship between CEO tenure and firm value
• It’s time Japan’s shareholders buy their own wine. The tradition of offering investors gifts is charming, concedes Bloomberg. But such perks are no longer needed
• And finally … Sondrel gaffe gives new meaning to profit and loss statement

This week’s news

Retail as the new frontier of shareholder engagement 

Increasingly, activist challenges are a matter of “when” rather than “if”. Companies today face a historically unprecedented number of challenges, ranging from ESG to financial performance, management strategy, DE&I…. the list goes on. Retail investors today account for 25% of daily fund flows, and technological advances have provided them a level of access to the capital markets greater than ever before. Moreover, nearly half of millennial investors proactively plan to vote their own shares which makes them an important constituency for any company looking to fight an activist. In response,  FTI Consulting have been considering how companies should be answering a key question: “who is influencing my retail base and how can I ensure our Company’s voice is the loudest?”.  First, shift perspectives – the “retail doesn’t vote” narrative is outdated. Second, mobilise & consistently engage with retail shareholders to effectively train them in peacetime. This might be via creative campaign ads, social media engagement, or via another route entirely, but at the end of the day, a strong brand matters and shareholders will respond to it. Contact the FTI team for more information.

The FCA’s latest overhaul of listing rules attempts to revitalise London 

The FT commented on the new listing rules announced by the UK FCA. Admittedly more flexible for issuers, including around dual class share structures, the measures will come into effect on July 29, following endorsement from Rachel Reeves, the UK’s new Chancellor, who said the rules would bring the UK “in line with international counterparts”. Dual class share structures are frequently used by founders and venture capital firms to make decisions without shareholder votes, effectively reducing the voting power of other investors. Unsurprisingly, the move has been met with considerable backlash from institutional investors, despite many already backing overseas organisations with dual class shares, including in the US. The FCA has acknowledged the increased risk to investors but argued that the changes would “better reflect the risk appetite the economy needs to achieve growth”. With further changes on the horizon as the FCA looks to launch a review of the UK’s prospectus rules, the quiet summer we’ve been hoping for may not come to pass.

Inside post-event investor feedback

According to IR Magazine, 84% of IROs in Europe consider investor feedback to be the top metric in assessing the performance of IR activity. However, following Mifid II, broker capacities were slashed, budgets tightened and buy-side firms implemented governance practices that restricted feedback shared directly with the sell side. IROs have chosen to pivot their approach in a variety of ways; some opting for tech-based solutions with questionnaire functionality, others for more extensive perception audits. It could be argued that important matters are, by-and-large, brought up proactively by investors during direct engagement, which reduces the need for further probing. However, obtaining candid views remains a long-running challenge, with investors often feeling as though their opinions may be undervalued or potentially misused by brokers. So, maybe the option of providing anonymous feedback is, in fact, a necessity. However you choose to do it, most of us agree that gathering feedback data is crucial, and gathering data that is genuinely reflective of investor sentiment even better. Contact the team here at FTI if you are interested in a perception study. 

How a CEO knows when to quit

Leaving a job early in your career can be as clear-cut as a weather check: if the thought of going to work every day feels more dismal than a rainy Monday, it’s time to consider a change. However, for a CEO basking in high status and perks, knowing when to step down is more complicated, argues The Economist. The “aura of indispensability” that CEOs often feel means they struggle to imagine anyone else performing their role as effectively. This phenomenon is illustrated by Bob Iger’s extended tenure at Disney and Dave Calhoun’s ongoing saga at Boeing, highlighting the difficulty many CEOs face in letting go. Studies also show that after 14 years under the same leadership, a company’s value generally starts to decline, but for founder-CEO led firms, any valuation premium at IPO typically fades within three years. So, instead of rigid rules to announce when the time is up, what might be needed are boards with backbones and leaders with the humility and self-awareness to know when their sell-by date has arrived.

It’s time Japan’s shareholders buy their own wine – Bloomberg

Japan’s delightful tradition of showering shareholders with gifts (known loosely as yutai) is starting to lose its fizz, as the stock market soars to new heights, according to Bloomberg. One third of listed companies, like Saizeriya Co., are pulling the plug on perks like free wine and pizza coupons, much to the dismay of retail investors who sent the stock down 9% in protest. Prior to this, investors holding 100 shares in firms such as Saizeriya were able to get ¥2,000 (~£9.93) worth of coupons each year to spend at the famously cheap restaurant. However, as dividends become the new darling, it’s clear that the days of enticing investors with rice and beer are numbered. Instead, it may be time to toast to a more mature Japanese market, where financial returns are the real treat.

And finally… Sondrel gaffe gives new meaning to the profit and loss statement

The AIM listed issuer Sondrel Holdings last week recently pulled a financial Houdini, initially reporting a £4.5 million profit for 2023, only to reveal it was actually a £4.5 million loss, causing shares to nosedive by 28.6%. The Times reports that sales halved to £9.4 million, with operating losses ballooning to £17.3 million, prompting the appointment of John Chubb from the Ministry of Defence as the new CEO. Only time will tell as to what this means for the long-term, as shareholders will now face the pivotal decision of whether to let Sondrel disappear from the AIM market entirely at its annual meeting of shareholders next month.

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