The recent changes in the political environment have raised the stakes for IROs. Gillian Karran-Cumberlege and Emily Baker offer practical tips.
Clearly, best practice IR must take account of compliance and regulation. As we conduct searches for IR directors, compliance remains a key responsibility. But turbulent developments of recent months, with the Brexit referendum outcome in the UK and the Trump election result in the US, suggest profound changes are underway. This creates enormous uncertainty for companies and their shareholders – not least because the popular mood, which has disrupted politics, also has strong anti-business undercurrents. Against this backdrop we suggest that best practice IR has to go beyond box-ticking; increasingly good IR underpins the licence to operate.
Of course a key skill for the IR director is understanding the regulatory framework of engagement with shareholders and the market. IR clearly also has a major role to play in compliance with those regulations. It is perhaps ironic, given the Brexit vote, that much of the key regulation currently being introduced in the UK is being driven by Europe. The MiFID Directives in particular have impacted IR best practice – reshaping how investors engage with the sell-side and indeed with corporates. MiFID has now been implemented and from January 2018 MiFID II will apply, extending the principles of open and transparent trading to further asset classes, across all EU states.
The status quo may be clear but the future is not and UK IR directors are faced with the same dilemma as the City – a lack of visibility about future regulation. Hard Brexit or soft Brexit will dictate the UK’s relationship with EU regulation but, suffice it to say, there is a high probability that IR directors will be subject to an EU regulatory agenda for months and years to come.
Communication with the markets
Since the Brexit vote we have seen the majority of corporates communicate carefully and responsibly, in particular on personnel issues. This is prudent risk management and the right thing to do. The IR director is part of the leadership team and it is incumbent on them to be extremely sensitive in communicating with the market – not only because of the regulatory regime but also because of the impact that loosely formulated wording on relocation issues, for example, can have on employees.
More specifically, best practice IR in communicating with the market can be broken down into the following:
In such an uncertain environment, best practice IR entails consistent and considered communication with the market. Guidance must be handled with caution as visibility is so low. We are seeing IR directors share thinking about scenarios planning and sensitivity analyses. Both enable investors and analysts with modelling the future. A wise IR director will resist being boxed in by confirming or denying hard numbers.
Best practice is not just about content. In turbulent times investors will have frequent interaction with the market. If the IR director is visibly stressed and shaken, investors will pick this up from tone of voice and body language. For the head of the team, best practice IR is also assuming a leadership role and contributing to a calmer, more reasoned, debate.
Evidently, shareholders are most interested in engaging with the CEO where possible. Here there are three elements to best practice IR:
• Making best use of the CEO’s time – the IR director should enhance the efficiency and reach of the CEO and CFO and this will include drawing upon their time judiciously.
• Communicating – in times of crisis, management frequently want to bury heads in the sand. This is not an option and the IR director must also have the authority and judgment to advise when communication with the market is non-negotiable.
• Feedback and briefing – best practice IR certainly comprises briefing management thoroughly and ensuring that management is well prepared. This briefing extends more broadly to ensuring that both management and the board are well advised as to what the market is saying and thinking. There will be times when the IR director will need to navigate the corridors of power internally with direct, highly sensitive feedback to the chairman for example.
The levels of uncertainty generated by Brexit and an unexpected result in the US Presidential election has made markets jittery. Strong communications skills, and good stakeholder management become all the more important. Business will face challenging questions, particularly with respect to relocation.
Good communications will take into account the interest of internal stakeholders, as well as external, and manage communications responsibly; remaining sensitive to the implications for employees.
Best practice governance recognises the importance of diversity from a social justice perspective but also because diverse perspectives lead to better decision making. Such diversity is a topic that is increasingly on the agenda of both boards and investors, and therefore is a key consideration for the IR director.
Diversity certainly underpins best practice, and in the Brexit and Trump era diverse perspectives will also better enable companies to navigate uncertainty and complexity.
We have been pleased to see investors ask robust questions on diversity and succession planning; where there is a lack of progress or a lack of engagement, UK investors such as LGIM are prepared to withhold support for the board at the AGM. This is an additional and important field where the IRO must come up to speed quickly and become a diversity advocate and change agent internally and externally.
If diversity matters for shareholders, it must also matter for IR. One element of IR best practice is being up to speed on good governance including on important societal issues such as diversity in its broadest sense. But IR must also practise what is preaches. IR directors should think carefully about their own teams. Is the IR team diverse or is it drawing on too narrow a range of experience and background?
Equally important for best practice IR, IROs should not be shy about their own career expectations and development. The profession will benefit if IROs succeed to the top table. IR is a relatively diverse profession and can contribute to the pipeline of future executive and non-executive directors. This requires both a willingness to keep developing in the IR role as well as self-confidence. Fidelio argues these are both attributes of best practice IR.
IR and the board
Increasingly, best practice IR extends to the boardroom. Whereas previously IR was considered an executive function, shareholder engagement is now rising on the board agenda.
The IR director has a clear role to play here by keeping up to speed on governance issues. The IR director must ensure that the board is well prepared for shareholder engagement. Communication with the market needs to be well co-ordinated and the IR director can support the chairman and CEO in ensuring that the board as a whole is well aware of the restrictions applying to communication with the markets. Additionally, the IR director should ensure that the board understands what has been communicated to the market and what the official company line is. In the Brexit / Trump uncertainty there will be much speculation. The IR director has a role to play in ensuring that the board does not – advertently or inadvertently – stoke the flames of speculation.
Secondly, the IR director must ensure that the board is well informed of what the market is thinking including on uncomfortable topics such as executive pay or investor assessment of the management team. This can take the IR director into difficult territory but this is where IR leadership comes into its own.
IR certainly has a technical and compliance component. But in this article we argue best practice IR is much more. The IR director is a leadership role and, as such, should contribute to responsible and effective communication. This is both IR’s regular interaction with the market but, importantly, best practice IR also influences and shapes how the board and management team engage with shareholders and the markets more broadly.
Best practice IR also contributes to diversity within the IR team and as part of the pipeline to the board. Based on our work with boards and IR teams, we certainly don’t underestimate the complexity of the IR role. But equally we firmly believe that best practice IR has just become very much more interesting.
Published: 22 December, 2016