IR Monitor – 6 September 2023

In this week’s newsletter:

• Matt Levine’s indictment of stakeholder capitalism: “CEOs want to be able to brush off shareholder complaints by saying ‘but think of the employees,’ and brush off employee complaints by saying ‘but think of the community,’ and brush off community complaints by saying ‘but think of the shareholders,’ and just do whatever they want”
• Japanese companies are making big promises to boost their stock prices, reports the WSJ.  Many stocks trade below their book value, which Tokyo’s exchange finds unsatisfactory
• Should companies speak out on social issues? Some findings from IR Magazine’s new report 
• How a happy workforce can boost a company’s profits: research highlighted by the Investor’s Chronicle shows happier employees are more productive
• Wanted, poacher able to lure London firms to New York: the NYSE is advertising for a London-based executive whose main job will be to attract companies to list on Wall Street
• And finally … the new earnings call mot du jour: “reassignment”

This week’s news

Matt Levine’s indictment of stakeholder capitalism

An increasing number of prominent US companies are integrating ESG factors into their executive compensation structures. While this shift towards ESG may seem progressive, investors and their stewardship teams are expressing concerns that these metrics might be manipulated to inflate executive bonuses, writes Matt Levine in this week’s Money Stuff column for Bloomberg. Recent data indicates that 75% of S&P 500 companies now factor in ESG metrics when determining executive pay, up from two thirds in 2021. Scepticism is growing among investors, however, with some highlighting the subjective and potentially manipulable nature of these metrics. For the investor community, the challenge lies in ensuring that ESG metrics are used transparently and effectively to align executive compensation with genuine sustainability efforts rather than serving as a smokescreen for self-serving interests.

Japanese companies are making big promises to boost their stock prices

Japanese companies are making bold promises to boost their stock prices, aiming to change investor perception of their growth potential, governance, and returns. According to The WSJ, this shift comes in response to calls from the Tokyo Stock Exchange, relaying investors’ pleas for companies to pay closer attention to their valuation and shareholder returns while so many Japanese firms trade below their book value. In response, companies like Ajinomoto, Calbee, and Nissan are setting ambitious targets for earnings, dividends, and business model transformation. Meanwhile, investors note that recent corporate governance reforms implemented in the country cannot address the issue of lacklustre valuations. Despite these challenges, Japanese companies are increasingly willing to take action, driven by external peer pressure and a desire to attract investor interest. But more work needs to be done to improve earnings and profitability, according to the article.

Should companies speak out on social issues? IROs give their take

A recent report from IR Magazine delves into the world of corporate social activism and its impact on investors and IROs. A key finding is that a significant majority of both IROs and investors believe it is important for firms to not only demonstrate their corporate social responsibility, but also to actively work towards making a positive impact on societal issues. Overall, seven in 10 investors say employment rights and environmental attitudes would affect their decision, compared with 45 percent saying the same for racial discrimination and just 42 percent for women’s rights. The challenges which arise when balancing corporate social activism with a company’s core mission go to show that each company’s approach must be tailored to its unique circumstances. In essence, the report suggests that meaningful and continuous change will come from companies that authentically integrate ESG into their day-to-day decisions.

Happy workforce, healthy profits? 

Investor’s Chronicle asks whether investors should be factoring workforce satisfaction into their investment decisions, highlighting the positive correlation between happier employees, productivity and profits. A 2015 study of more than 700 people by the University of Warwick found productivity increased by approximately 12% among individuals who were “treated” prior to being assigned a task. Despite this correlation, the latest research from EDHEC Business School suggests that investors are still undervaluing employee satisfaction as a metric since it poses challenges for investors. Much like other intangibles assets, ‘employee satisfaction’ is more difficult to measure, than say, a company’s gender pay gap or CO2 emissions. Perhaps opinions offered on anonymous review websites such as Glassdoor may provide important insights, and this is the approach taken by boutique investment firm Irrational Capital which uses information from the website as well as its own proprietary data, to create its own ‘human capital’ rating. But they seem to form part of a minority and whilst many agree that employee satisfaction is an important metric, it remains largely unclear how investors will include workforce happiness in the investment decision-making process going forward.

Wanted, poacher able to lure London firms to New York

The New York Stock Exchange is reportedly advertising for a London-based executive, whose main role will be to attract companies to list on Wall Street. The Times reports that the NYSE is seeking to “cultivate important relationships” with prospective London-based companies to promote New York “as the ultimate exchange listing destination”. The news comes as concerns are growing over companies delisting from UK capital markets in favour of the US. Arm, the British chip designer, is set to float in New York next month, despite reported attempts to encourage a London listing. However David Schwimmer, CEO of the LSE Group, remains confident in London’s ability to remain a hub for capital markets. Schwimmer noted, “the City has a way of reinventing itself. It has done so over hundreds of years”, adding that London’s AIM market is “the most successful growth market in Europe”. The debate goes on.

And finally … ‘Reassignment’: the hot new earnings call buzzword

As reported in The New York Times, a new earnings call buzzword is emerging: ‘reassignment’. Employers are reportedly “reshuffling” teams to brace for a potential economic downturn or pullback by customers, resulting in workers being told that their roles have been eliminated. Rather than being made redundant, employees in this category are ‘reassigned’ to a new role. However, many of these employees describe being left in limbo, after waking up to an email telling them they aren’t fired, but their role is gone. The WSJ has branded this phenomenon ‘quiet cutting’ – echoing the recent “quiet quitting” phenomenon – and highlighting that, in interviews and online forums, many workers said they worried whether their reassignment meant they would eventually be pushed out the door. Mentions of reassignment during company earnings calls more than tripled between August 2022 and 2023.

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