IR Monitor – 30 August 2023

In this week’s newsletter:

• Despite a resilient economy and buoyant stocks, equity listings are still thin on the ground. The Economist hopes that Arm’s flotation could revive the market for IPOs
• BlackRock’s support for climate and social resolutions falls sharply, reports the Financial Times. The asset manager blames proposals that are ‘overreaching’ or ‘simply redundant’
• Communicating to investors how short-term events impact long-term plans: an interview with the former Vanguard CEO on the benefits & challenges of integrated long-term planning
• Lack of co-ordination is harming investor engagement – so says IR Magazine
• Talking the talk: CEOs extol benefits of AI on earnings calls but not in official filings
• And finally … Throwing in the towel: When analysts’ recommendations go wrong

This week’s news

Arm’s flotation could revive the market for Initial Public Offerings

After a booming 2021, when $600 billion flooded equity capital markets globally, the IPO hangover persists into its second year due to lingering inflation, policy shifts, and heightened market volatility, according to The Economist. Stock markets have shown signs of recovery, encouraging private companies to consider the IPO route – first and foremost the British chip designer Arm, valued around $60-70 billion – and suggesting a potential revival of primary markets. Investment bankers confirm this trend, hinting that their teams are becoming increasingly busy. However, the article also stresses that a successful IPO resurgence depends on a stable interest rates environment, a confident economic outlook, and adept pricing strategies. And the next wave of IPOs is likely to prioritise safer candidates with more defensive qualities. While a full return to pre-2021 activity is unlikely, a reasonable number of firms could then pursue IPOs in 2024, with attention focused on Arm’s performance.

BlackRock’s support for climate and social resolutions falls sharply

BlackRock has significantly reduced its support for shareholder proposals on environmental and social issues for the second year in a row, according to a report by The FT. The company backed just 7% of such proposals in the past year, a sharp decline from 22% the previous year and 47% in 2021. It attributed this drop to its perception that many proposals were excessive or lacked economic substance. BlackRock’s move aligns with a wider decline in institutional investor support for these resolutions, with median backing falling from 32% in 2021 to 15% in 2023. This broader shift comes amidst increased political scrutiny, regulatory changes, and a record number of shareholder proposals on ESG matters – up from 300 to 340 in the US according to ISS. 

Short-term events vs long-term plans

During a CEO Roundtable organised by Chief Executives for Corporate Purpose (CECP), Bill McNabb and Daryl Brewster delved into the challenge of balancing short-term demands with long-term planning. Participating CEOs and boards stressed the need to explain how short-term issues align with long-term objectives to attract committed long-term investors. They emphasised the importance of communicating how emerging trends affect a company’s long-term strategy, underscoring the need for strategic flexibility. The Corporate Secretary article also makes reference to sustainability reporting’s complexity, and the call to seamlessly integrate sustainability practices into a company’s strategy to ensure a unified approach to successful operations.

Lack of co-ordination is harming investor engagement, finds survey 

Last week, Schroders surveyed over 350 investee companies across 45 countries to gain insight into their views on investor engagement practices. IR Magazine  reports that the single highest proportion of respondents identified co-ordination issues at investment firms to be the number one barrier to successful investor engagement, followed by confidentiality issues and a focus on non-material topics. A separate part of the survey posed an open-ended question about the challenges and opportunities. Here, nearly a third (29 per cent) cited concerns around ESG disclosure and how third-party ESG data is collected and used. As ESG data collection becomes increasingly automated and driven by AI, companies expressed concerns about different potential blind spots and shortcomings, which may explain broader concerns around confidentiality and co-ordination between portfolio managers and ESG teams.

CEOs extol benefits of AI on earnings calls but not in official filings

We all know that AI is the talk of the town, but have corporate mentions of the emerging technology materialised to anything more than just mentions? Not really, according to the FT which reports that, despite recent analysis showing that almost 40% of companies in the blue-chip S&P 500 index mentioned AI or related terms in their earnings calls during the last quarter, just 16% went on to mention the topic in their corresponding regulatory filings. The recent stock price boom enjoyed by key AI-linked companies, such as chipmaker Nvidia, serves as clear motivation for company executives to join in the AI conversation. This has sparked discussion even in industries generally unrelated to technological innovation, with fashion brands and fast-food chains heralding AI as a tool that will improve the efficiency of their operations. The scarce mentions of AI in regulatory filings does, however, reveal the difficulties faced by investors in separating the hype around AI from its real, concrete impact. Indeed, it may be some time before we get a clear picture from executives of just how important a role AI is going to play in the future of companies.

And finally … Throwing in the towel: When  analysts’ recommendations go wrong?

Research published recently in Contemporary Accounting Research explores the practices of analysts confronted with a failing recommendation. Kenneth Lee, Mark Aleksanyan, Elaine Harris and Melina Manochin use empirical evidence gathered from interviews with sell-side analysts and others (including IR officers) to uncover new insights. Principally, the research argues that what an analyst does when faced with a failing recommendation does not always look entirely logical. Rather, the likelihood or reluctance of analysts to capitulate and “throw in the towel” depends on several variables, including the causes of the failure, how long the rating has been held, the “franchise intensity” (i.e. the importance of the stock to the analyst’s reputation), the level of client interest in the stock and lastly the recommendation’s “boldness”. Echoing the concept of behavioural biases, the research therefore notes that the recommendation process cannot be deemed fully predictable and rational.

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