IR Monitor – 24 May 2023

This week’s news

Shareholder activists should be careful about quick settlements

According to a piece in Forbes, shareholder activists should be careful about quick settlements. With a recent increase in activists reaching quick settlements with management, concluding shareholder resolutions with negotiation rather than full proxy votes, the article suggests that activists fully consider the consequences before agreeing to compromise. Factors such as damaging optics if disagreements were settled too quickly, onerous standstill clauses, confidentiality clauses, the impact of universal proxy cards, and financial reimbursement should be comprehensively assessed and discussed before activists decide to shorten a potentially protracted campaign. In the words of The Rolling Stones’ front man, you can’t always get what you want.

Record buyback spree attracts shareholder complaints

A record $1.3 trillion worth of shares were collectively bought back by the 1,200 biggest global public companies in 2022, tripling the level a decade prior and shattering previous records. As the FT observes, this has resulted in an increasingly worried investor base, aware that executive bonuses are boosted while shareholders reap only limited rewards. Some warn that buybacks have the potential to manipulate EPS numbers to meet management incentive targets rather than provide financial reward for investors. Abrie Pretorius of Ninety One has argued that “most buybacks help optical growth but destroy value”. US President Biden has introduced a 1 percent tax on Wall Street buybacks, with a view to increasing the taxation amount, but industry professionals do not feel it will be effective. Much to the worry of certain shareholders, the trend is expected to continue in 2023.

Fewer investors considering ESG

Fewer investors are considering environmental, social or governance factors when making decisions on where to put their money. A poll by Charles Schwab reveals that among British investors, the popularity of sustainable investing has taken a significant drop following the cost-of-living crisis. The Times writes that the proportion of retail investors who prioritised sustainability over profitability fell to 47% from 55%; willingness among investors to pay more for ESG investments has declined from 58% to 50%. The article suggests that due to the economic turmoil of the past two years, tightening purse strings have resulted in reprioritisation for many Britons. Also in the findings, UK investors now prefer the US as a place to invest rather than the UK, exacerbating worries that London is losing its competitive attractiveness for global and local investors.

CEO pay packages fell in 2022

Whilst, historically, companies have reported executive compensation based on its value at the time of receipt, this year a new measure called “compensation actually paid” has been introduced under Securities and Exchange Commission rules. This new system moves beyond the moment-in-time snapshots traditionally employed and accounts for gains & losses in stock awards over time. The results show that in 2022, about two-thirds of the top executives at S&P 500 companies ended the year with smaller pay packages than they were initially awarded. More broadly, the shake-up has seen a shift in the ranking of CEO compensation. Under the traditional model, CEOs of tech giants like Apple and Alphabet typically topped the charts. However, with the incorporation of market returns, energy companies such as Chevron surpassed them in compensation due to surging stock prices in 2022. Overall, while some S&P 500 execs earned more than expected, with 140 CEOs surpassing their projected compensation, and 46 CEOs receiving at least double the planned amount, the median pay package in 2022 declined to $14.5 million from a record $14.7 million the previous year. This marks the first time in a decade that executive compensation at major U.S. companies did not reach new highs.

Published estimates should be taken with a shovelful of salt – Lex Column

City analysts hold a lot of sway when it comes to determining share prices, but the FT’s Lex claims their estimates should not always be taken at face value. While sales and profit forecasts from analysts play a significant role in determining share prices, the aggregate of analysts’ estimates do not always accurately predict overall market performance. For example, Q1 2023 reported earnings beat analysts’ forecasts by an average of 14% and companies expressed optimism about the future, with many expecting profit margins to hold or expand. Yet share prices did not react significantly to the beat, suggesting that shrewd investors had already applied a healthy level of scepticism to analyst forecasts. Several factors are said to contribute to the imperfections of estimates, including infrequent estimates publications. The consensus is also said to reflect a mix of updated and older numbers, where near-term estimates receive more attention than medium-term outlooks. While analysts provide a valuable service, particularly when analysing individual companies, investors should approach published estimates with caution.

And finally … Silicon Valley Bank was also a case study in bad investor relations.

Most people will now be familiar with the downfall of Silicon Valley Bank, but a new report adds a further twist to the story. According to Bloomberg, the lender quietly removed a key risk disclosure from its year-end 2022 financial statements, just 14 days before the bank collapsed on March 10. The disclosure, known as Economic Value of Equity (EVE), disappeared – without explanation – from the risk management section. Although voluntary in nature, SVB’s 10-K had included the risk metric for over a decade. Whilst the impact of this move is hard to assess, the EVE analysis could have provided additional colour on the risks associated with the bank’s assets. More broadly, the removal of this disclosure once again thrusts auditors into the spotlight. Questions are now being asked about whether SVB’s auditors should have flagged the inconsistency or encouraged the bank to keep risk disclosures intact. Whether this would have changed the fate of SVB is less clear. But it represents a stark lesson in the importance of clear financial disclosure and transparent IR.

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