IR Monitor – 31 July 2024

In this week’s newsletter:

• The London market discount is about performance, not geography, suggests the Lex column. The truth may hurt, but lower average profitability seems to explain much of UK companies’ valuation discount versus US peers
• Will a new face in the US presidential election race change the prevailing mood on ESG? Companies have shied away from sustainability initiatives but the tide could turn, suggests IR Magazine
• Bill Ackman on IPO tactics: the private letter which accidentally went public is reviewed by Matt Levine’s newsletter
• CrowdStrike marks the latest big company to gauge the willingness of investors to move past an unforeseen, value-destroying catastrophe. Others have crafted a roadmap but, sadly, not all roads lead back to rehabilitation. Breakingviews on the corporate klutz club
• We listened to the Unhedged podcast: will a major revision of listing rules in the UK work?
• And finally … narcissistic executives often take riskier moves. Fortune on how CEOs manipulate the board to get their way

This week’s news

The London market discount is about performance, not geography 

The truth may hurt but it is lower average profitability which explains much of why UK companies trade at lower multiples than their US peers, explains the Financial Times’s Lex column. The article highlights a well-known two-fold problem with the LSE: companies are de-listing, and not enough new ones are being floated. Low multiple stocks, such as resources and banks, dominate the FTSE 100, with slim pickings available for more highly-rated technology stocks. Despite a potential uptick in listings as the interest rates environment stabilises, the market’s required discount has not changed: the FTSE All-Share index trades nearly 40 per cent below the rest of the developed world’s stock markets, largely owing to the AI-driven US stock boom. Still, Lex argues that the problem sits with management teams rather than the market. The UK’s “excessive focus” on dividends over growth, and the resultant risk aversion, must be addressed if UK equity markets wish to compete with the world’s most popular stock markets. 

Will a new face in the US presidential election race change the prevailing mood on ESG? 

Companies have shied away from sustainability initiatives but the tide could turn. IR Magazine reports how political and investor influences in the US are shaping corporate attitudes toward sustainability, and not necessarily in a negative way. Many U.S. companies are indeed moving away from integrating ESG criteria into executive compensation, partly due to pressure from conservative shareholders and anti-ESG advocates like Strive Asset Manager, founded by Donald Trump in 2022. However, interest in sustainability remains strong, evidenced by the upcoming launch of the Green Impact Exchange, a new stock exchange in New York that will list only companies committed to rigorous sustainability goals, while aiming to attract investors who prioritise genuine environmental commitments. This article suggests that the possibility of Kamala Harris appearing in the White House later this year could potentially amplify the pro-ESG voices in the capital markets. Only a few months left to see how this will pan out.

Bill Ackman on IPO tactics: the private letter which accidentally went public

There is a generally-accepted marketing narrative for all IPOs, Matt Levine writes for Bloomberg. You market to long-term fundamental investors on the strength of the IPO prospectus, and you market to marginal investors on the promise that the stock will trade up in the aftermarket. This process involves a little bit of unspoken sales sorcery, creating a sense of scarcity regardless of the current state of the presale – with emphasis on the word “unspoken”. Just like how a joke isn’t funny once you have to explain it, reverse psychology sales sorcery is far less effective when you know it’s happening to you. It is unfortunate, then, that a private letter, intended only for the top circle of “illustrious” investors in Bill Ackman’s Pershing Square Holdco and explicitly setting out these very tactics, ended up in the securities filing for the IPO. As Levine puts it: “I have never read an IPO prospectus that winked before, but I think this one might.”

The corporate klutz club, or how CrowdStrike gauged the willingness of investors to move past an unforeseen, value-destroying catastrophe. 

“Not all roads lead back to rehabilitation.” That is the view of John Foley at Reuters on the recent CrowdStrike kerfuffle, which left roughly 8.5 million devices stuck on the blue screen of death and doubtlessly interfered with some of our readers’ (and writers’!) weekend travel plans. Foley notes that the 20% loss in market capitalisation incurred since then is standard for a company in crisis. And the easier it is for customers to get what they want elsewhere, the harder it is for a company to recover. However, despite the size of the cybersecurity market, of which CrowdStrike took $3.1 billion in revenue last year, changing cybersecurity systems is hard. Foley argues that there are winners (shares up around 10% after 250 days post-incident) and losers (shares down around 15% in the same period) amidst crisis-racked companies. This largely depends on how well the crisis has been managed, as recovery is likely to imply both a hit to revenue and higher costs, as well as convincing shareholders that the mistake was a genuine one-off. We’ll have to check back on 26th March 2025 to see whether CrowdStrike emerges a winner or loser from this crisis.

Will a major revision of listing rules in the UK work?

Following on from an article describing the FCA’s proposed changes to document issuing, the Financial Times’ Unhedged podcast questions the UK’s proposed overhaul of stock market listing rules, aimed at boosting their appeal to international investors and preventing the London Stock Exchange from suffering a widening valuation gap. Katie Martin discusses the issue with Michael O’Dwyer, and the pair reflect on the pride that the LSE has traditionally held, which stands in contrast to the battering it has been receiving as of late. O’Dwyer then argues that the reason behind the premium which the LSE has historically held itself to is good governance, and this very reputation is at risk of being diluted in an effort to compete on an international stage. Critics worry that these changes, intended to attract more business, could undermine shareholder rights and ultimately harm the market’s integrity. Is London about to lose the golden goose?

And finally … narcissistic executives often take riskier moves 

CEOs with narcissistic tendencies often manipulate their boards of directors to embrace riskier strategies. That’s what Fortune tells us, and that is allegedly thanks to inflated self-confidence and persuasive abilities. A study detailed in the Stress Management Journal analysed board meeting transcripts from 88 public firms and 197 CEOs over two decades, finding that narcissistic leaders—identified by the prominence of their name, photo, and compensation—are more likely to drive discussions towards risk-taking. These CEOs tend to prioritise potential gains over losses and often surround themselves with agreeable or easily influenced board members to maintain a positive outlook. Their influence is further amplified if they also hold the position of board chair, allowing them to control meeting agendas and sway decisions more effectively. Cameron J. Borgholthaus, one of the researchers behind the study, states: “It can be a good thing, but at the same time a lot of government reforms were done to put more responsibility on the board to ensure they wouldn’t be manipulated.”

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