IR Monitor – 25 September 2024

In this week’s newsletter:

• Harvard Business Review says it’s time to unbundle ESG: It has come to represent a broad and inchoate aspiration for what businesses should do beyond maximising shareholder value
• How should you lie in an IPO? asks Bloomberg. The strange case of Zymergen
• Governance professionals expect LSE delistings: the Financial Conduct Authority’s reforms to London listing rules do not fill business leaders with confidence
• Experiment in shareholder democracy finds investors prefer to defer: the Financial Timesreports that nearly half the participants in Vanguard’s pilot programme who were allowed to vote their shares chose, instead, to let the asset manager do it for them
• UK boards are worried about cyber-risks – what can IROs do? IR Magazine investigates
• And finally … better fly commercial on the next roadshow: investors crack down on private jet perks. Starbucks’ new deal has shone a spotlight on corporate planes

This week’s news

It’s time to unbundle ESG – HBR

Aaron K. Chatterji and Michael W. Toffel from the Harvard Business Review explore the downfall of ESG in light of the Blackrock CEO’s decision to no longer use the term to describe the company’s approach to investing. Despite the popularity of ESG over the past two decades, the term’s increasingly broad scope and its overlap with impact investing has led to confusion around its purpose and impact. According to the authors, for improved clarity, the E, S and G should be unbundled into their own separate categories and companies should adopt “a two-pronged approach”, similar to so called double materiality, to identify the issues most important to their business strategy. The first step of this approach is to focus on the sustainability issues with the biggest impact on companies’ finances. The second part is to identify and address the most material negative impacts the business has on society. 

How should you lie in an IPO? 

Matt Levine from Bloomberg proposes an interesting thought experiment: you want to raise a lot of money from public investors at a high valuation for your tech startup, and you are willing to lie to do it. How should you lie? You could fake your financial statements, but reputable accounting firms will need to audit your accounts and as a tech startup, investors are more concerned about your future projections rather than your historical results. Faking your financial projections and distributing them through connected research analysts would be best, as future projections are not audited and are more closely linked to your valuation. Zymergen, a biotech based in California did exactly this. By inflating future financial projections, it raised approximately $530 million through its IPO in April 2021 and then filed for bankruptcy in 2023, paying a $30m civil penalty in the process. According to Levine, this shines a light on the problem of IPO prospectus regulations, which ban the inclusion of future projections while research analysts can echo a company’s own financial projections provided during meetings. 

Governance professionals expect London Stock Exchange de-listings

Gavin Hinks from Board Agenda writes that recent changes to UK listing rules have done little to address the core issue of liquidity in UK markets. According to governance experts, the FCA’s reforms have done nothing to attract new listings or address the issue of companies seeking private equity capital. These criticisms follow a recent survey conducted by The Chartered Governance Institute UK & Ireland, which found that 53% of those polled expect net de-listings from the LSE to continue over the next five years. The FCA has defended the reforms, highlighting that the changes come as part of a broader effort to “encourage companies to list and raise capital in the UK, increase opportunities for investors and support national growth.”

Experiment in shareholder democracy: investors prefer to defer

An experiment conducted by Vanguard has revealed that almost half of investors are happy to have their asset manager vote their shares on their behalf, the FT writes. As index firms such as Vanguard pick up scrutiny for the level of control they have over US companies via their voting rights, the investment advisor opted to offer individual investors the opportunity to vote their shares. Investors in the funds with more than $100bn in combined assets could select blanket voting options such as to abstain, vote with an ESG focus, vote alongside the company’s board or allow Vanguard to vote their shares. Participation in the programme was voluntary. As it happened, nearly 45% chose to let Vanguard continue voting on their behalf. John Galloway, Global Head of Investment Stewardship said that it’s “gratifying to see” that Vanguard’s own investment policy is trusted by shareholders. 

UK boards are worried about cyber-risks – what can IROs do? 

IR Magazine unpacks data exploring the biggest perceived risks faced by companies today, and what IR professionals can do to stay ahead of them. Perhaps unsurprisingly, cyber risks come out on top. According to data collected by the Chartered Governance Institute UK & Ireland for its annual Boardroom Bellwether report, which surveyed FTSE 350 company boards on what they were most concerned about in 2024, almost 75% of executives expect the risks posed by cyber-related issues – including AI, hackers & data breaches – to grow over the next year. In contrast, only 14% of companies expect UK economic conditions to worsen over the next 12 months, while 22% expect the state of the world economy to deteriorate. For IROs, it reiterates the importance of being aware of their organization’s vulnerabilities & overall risk profile and keeping investors better informed.

And finally… investors crack down on private jets (apologies to the Proclaimers)

‘Cause I would fly 500 miles and I would fly 500 more, just to be the man who flew 1,000 miles to run a coffee store.’ The new Starbucks CEO Brian Niccol may just spoil the fun for all jet-setting execs as investors crack down on the extravagant ‘corporate plane’ perk, Financial News reports. Niccol received a sign-on package worth more than $100m, alongside use of a corporate jet to travel roughly 1,000 miles from his home in Newport Beach, California, to Starbucks’ headquarters in Seattle. LGIM, which oversees £1.2tn in assets, has been calling for the companies in which it holds a majority stake to remove corporate jets as a benefit. “Aviation is a high emitter of carbon emissions and at present, there is insufficient supply of alternative fuels to reduce these emissions,” LGIM said in a statement. LGIM is a top 20 shareholder in Starbucks, but declined to comment on how it would vote at the coffee chain’s next annual meeting. 

To be added to the distribution list for the IR Monitor, or for further information on the dedicated investor relations team at FTI Consulting, please contact [email protected].