Investor Communication – What Constitutes Best Practice?

In November 2023, Diageo Plc, the company venerated for brands like Johnnie Walker, Guinness, etc, issued a profit warning driven by challenges in Latin America. This came as a complete surprise to the market, and the stock dropped significantly.  Soon thereafter, in a rejig, the CFO also left. Closer home, a newly listed consumer company announced it had issues in channel stocks, and the stocks fell nearly 35% in a week.  In both these cases, investors were left with significant losses on their shareholding.  India has seen a significant number of IPOs in the recent past such IPOs necessitating a huge number of investor roadshows and communication.  

So, what are some of the best practices in investor communication?  

There are broadly four classes of investors on the cap table of a company. The first ones are the Promoters and any PE funds that have been invested in the company before the IPO.  Then you have the Domestic Institutional Investors and the Foreign Institutional Investors, and finally the Retail Investors. 

The first principle is consistency in communication between the different classes of investors. The promoters are clearly closest to the details since they are also managing the company. It then becomes their obligation to ensure that they communicate transparently with the investors. 

The next principle is counterintuitive.  Don’t keep an eye on the share price. The share price is an outcome of the performance of the company. The share price is not a target. This is not well understood by many promoters and management. Managing with an eye on the share price can result in short-term actions that may not be in the best interests of the company. 

Quarterly investor presentations and investor calls, and road shows are the primary ways in which companies engage. A high-quality investor presentation, which lays out the Macro context, the company's strategies and execution, and the results with KPIs in an easy way to understand, is important. Clear P&L, Balance sheet, and Cash flow disclosures are critical in all of this. 

A good research coverage is a significant aid.  The sell-side research offers an independent view of the company to the investors. The sell-side analysts are a critical path to the investors, especially the DIIs and FIIs. These analysts also help in organising non-deal roadshows between quarters. 

Non-deal roadshows each quarter are an important way to ensure continual communication with investors. Internationally, companies typically cover the key locations of Singapore, HK, London, and New York. But NDRs done in newer locations like Australia, Tokyo, European continent can bring in newer investors into the cap table. 

Is guidance important? 

This is an important question. When companies guide, they will be judged by the guidance. If you don’t guide, they will be judged by the results and the investor communication.  I think companies have an obligation to discuss industry trends that can impact the company. But it is okay for companies not to provide specific guidance. 

Guidance, interestingly, may be more important in smaller companies, which have smaller volumes of trade. Smaller volumes of trade make it difficult for institutional investors to enter or exit, due to illiquidity. Also, any such entry or exit can result in large swings in share price. Good communication and timely guidance can minimise volatility. 

Is PR good? 

Some companies resort to an extensive PR program. A good PR program supplements investor communication well. However, my advice is that this should not be overdone. 

Senior management holding stocks and ESOP Plans is usually an excellent sign for companies. This sends a strong message of alignment of management interest with the shareholder interest. 

Having a great set of long-only investors on the cap table is desirable. This reflects the trust between the company management and the investors, who implicitly trust the strategies, execution, and communication from the management.  It must also be realised that investors don’t necessarily like to churn stocks in their portfolios often. Long only investors are happy to ride the cycles and stay with management, even if there are shorter-term performance challenges. 

Newer factors like sustainability are gradually gaining importance. Many investors are increasingly using the Integration principles in investing, where they integrate ESG risks and opportunities into the regular financial analysis. Active ownership principles are also emerging, where investors like to actively engage with their companies. Investors like BlackRock disclose in their annual report the number of times they may have met their portfolio companies during the year. 

Proxy voting principles have also resulted in large investors like BlackRock disclosing transparently the principles they adopt when voting on shareholder resolutions. For instance, CEO compensation is one area where investors specify that they expect a significant proportion of their compensation to be based on longer-term KPIs, ESG metrics, and the like. 

Who should be communicating with the investors? 

Here I want to emphasise that it is not just the promoter or the CEO, but the CFO’s role in effective communication and engagement is key. Investors like to speak to CFOs to get their perspective. 

Authenticity matters in investor communication – the Say-Do principle. Company management must be able to demonstrate that they do as they say. This leads to a no-surprise culture, which investors like. Ultimately, boring, predictable performance is what investors seek.