IR Weekly – Monday 20th April

Welcome to FTI Consulting’s Investor Relations Weekly Newsletter

Following a break for the Easter weekend, this week we look at concern among investors that executives are set to profit from coronavirus. Next, we look at what coronavirus could mean for notions of “stakeholder” capitalism. We continue by suggesting that there is light at the end of the tunnel for dividend payments, before presenting the argument that recent quarterly guidance suspensions should lead to their permanent cancellation. We also examine what appears to be a lull in activist investor activity during the outbreak of COVID-19. Finally, we look at the only question CEOs need to be answering on results day.

This week’s news

Are we all in this together? Investors hope so.

Institutional investors have called on boards to ensure that executive pay is reflective of the experience of shareholders, amid mounting concern that chief executives are poised to receive substantial pay-outs when the markets rebound post-coronavirus. Financial Times reported that several asset managers have expressed concern that public companies are granting long-term incentive plans while the market is depressed, which could see executives receive significantly more shares for their salary than they would ordinarily. The head of responsible investment policy at Eden Tree, Neville White, suggested that “directors could make a shed load of money without doing anything to deserve this”. An FT Lex column has warned that this will make executive pay cuts, which are being made in the meantime, look like “tokenism”. Elsewhere, The Times reported that executives have already been making paper profits from emergency capital-raisings.

Activists go quiet

Activist investors have cooled off their activity amid the coronavirus crisis, the Economist reported, giving companies breathing room to focus their attention on survival. In such extraordinary times, the article notes that activist strategies would be tone deaf, with companies unable to meet demands for shrinking balance sheets and growing shareholder returns. The hiatus in activity has provided opportunities for companies to strengthen their position against future attacks, with an exponential uptake in “poison pills” – rights plans which offer newly issued shares to shareholders to dilute the stake of a dominate holder. The relief from activist investors is, however, a temporary measure, with the article concluding that activists will return in a necessary capacity to hold executives to account in the new post-coronavirus world.

Stakeholder capitalism –  a casualty of coronavirus?

City Journal suggested that the corporate response to the outbreak of COVID-19 has served as a timely reminder of the social value of free enterprise, while revealing “stakeholder” capitalism to be a needless luxury. Despite acts of corporate kindness attracting headlines, the crisis has demonstrated that what matters most to society are the fundamentals: jobs and profit. Similarly, it has been the ability of private companies to execute their core functions effectively, rather than their superficial displays of stakeholder solidarity, that have proved vital to the global response to the pandemic. A more conventional account of stakeholder capitalism is offered by Mark Carney in this week’s Economist.

A bright future for dividends?

In the week ending Friday 17 April, 11 companies across the FTSE 350 reviewed dividend policies: payment of one dividend was deferred while 10 dividends were cancelled. Full details available on demand. Meanwhile, a brighter view on the other side of the pond: the New York Times provided an optimistic view of future shareholder pay-outs after a substantial increase in equity dividend futures. Since the start of April, dividend futures for 2021 on the Euro STOXX 500 were up by more than 40%, the article notes, suggesting the beginnings of a growing investor confidence in a strong economic recovery. However, investors could still be hedging their bets, as it is also true that company pay-outs remain a safer bet than buying company shares outright.

The end of quarterly guidance?

Amid the current market turmoil, FCLT Global CEO Sarah Williamson argued in IR Magazine that one good thing may have emerged: the increase in suspending earnings guidance. She suggests that quarterly guidance can be detrimental to companies as it promotes short-termism at the expense of valuable long-term investment opportunities and ultimately increases share price volatility. Citing a survey by Rivel Research Group which concluded that the vast majority of investors do not prioritise quarterly EPS guidance, Williamson notes that omitting earnings guidance would alienate only the transient investor base who pressure companies to neglect long-term opportunities, whilst more committed investors should be undeterred.

And finally… The only question CEOs need to answer on results day

As companies prepare their usual materials for results days, shareholder letters and (virtual) AGMs, an article in Reuters Breakingviews proposed a single question that needs addressing: how long can the company last in this environment? Companies should avoid offering predictions on the course of crisis, the article argues, and should look to industry veterans such as BlackRock and JP Morgan for examples of how to approach talking about the crisis, carefully balancing an acknowledgement of global human suffering with an honest conversation about the company’s finances. Scenario planning and explanations for dividend cuts or buybacks could add much-needed clarity, but companies must be thoughtful in their tone, resisting the temptation to come across as too clever or overconfident in order to remain focused on the basics of survival.