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Ellen Haramalis

The value of the independent adviser 

Decisions by various central banks to raise interest rates have dominated column inches in recent months, from recession and recovery predictions, to rising mortgage repayments and debt servicing costs. But something about looking back at the extraordinary period of near-zero interest rates has captured my attention, and the knock-on effects affects across the world of business. One such effect that has been thrown into focus is governance, where it fell short and how this greatly contributed to catastrophic losses. To paraphrase Warren Buffet, I believe it is only when rates go up that we see who has been growing without proper governance.  

There has been a pattern of similar stories over the last few years that have grabbed headlines, and most have had the same type of company at their heart; a rapid growth disruptor. These companies have tended to progress through infancy to achieving unicorn status in a miraculously short time period, often bypassing the necessary steps needed to sustainably build and run a company of this size. The main reason for this is simple; a near-zero interest rate environment has led to investors valuing growth as the most important metric, and cheap money inflating the valuation of anything demonstrating growth.  

Granted, this day-trader investment style has awarded investors significant returns over the last two decades. However, in some cases the fear of missing out prevented robust oversight by forgoing the proper due diligence, leading to the implosion of some of the investor community’s favourite businesses.  

Growth vs Governance 

Due diligence has always been a cornerstone of the financial industry. Handling other peoples’ money comes with the fiduciary responsibility to ensure the risk profile matches that of your investment criteria, including ensuring there are solid corporate governance structures.  

The problem with due diligence is that it is time intensive, and can be seen as an impediment to those chasing momentum in a bull market. However, it is a necessity in the identifying and protecting of long-term successes. Set against my own living memory (which is admittedly reasonably short), when it comes to companies which claim to have the ability to change entire industries, to lose time has been to lose growth opportunity. 

These companies in question were founded on disruptive ideas coupled with engaging stories that convinced those they were pitching of fast and furious growth. This lethal combination meant investors were willing to cut corners to get a piece of the action, resulting in not enough attention being paid to the devils in the detail, neglecting oversight of corporate governance and risk. A quirky founder with a strong personality and an idea became a new form of tradeable currency.  

When the tide goes out 

Examples of this are abundant, just look at the failings of WeWork and Bulb. Or perhaps think of Elizabeth Holmes and Theranos, a company built on empty promises and non-existent medical technology which investors failed to uncover for years. 

FTX is arguably the ultimate culmination of this investor approach, so much so that John Ray III, the new CEO of FTX hired to manage the company through bankruptcy proceedings, commented he had never “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information”. Having dominated headlines in recent weeks, rehashing its failings seem redundant. However, one anecdote worth mentioning is when an investor asked FTX to consider a two page list of recommendations as part of their due diligence, the response they received was a simple: “Go f*** yourself”.  

So, what safeguards can we put in place to prevent this risk, even when it is incentivised by economic factors? 

It would be fair to argue that investors should take more responsibility to understand the financial risks of their investments, including from a corporate governance perspective, rather than jumping on a popular bandwagon backed by other recognisable names.  

However, it also highlights the necessity of external consultants. Issues such as these could have been prevented by having a strong bench of independent and experienced advisers in place. 

Advisers provide balance 

Focus on growth at all costs has a tendency to centralise power around charismatic founders and create blind spots around unit economics. This ultimately creates long-tail risk for high-growth companies.  

Advisers should be more than just enablers of growth stories: they need to provide counsel that grounds companies in the real world. Investors need to be responsible stewards for their clients as well as generating returns. Advisers need to consider the long-term health of companies they work with, not just chase short-term fees. 

Governance is essential and advisers who don’t give adequate advice on this can and should be held accountable. They should support boards and management teams to ensure companies are governed by a comprehensive system of checks and balances. Most importantly, these advisers bring a wealth of sector specific knowledge and experience: their function is to call out the risks before anyone external has a chance to.  

To steal another Buffet quote, we know how long it takes to build a reputation and how quickly it can be ruined. As strategic communications consultant, we see the consequences of poor governance and the far-reaching reputational impacts it can have. We exist to elevate profile and performance through a clear, consistent narrative and ask the uncomfortable questions before others do. Stories about these rapid growth disruptors built on shaky foundations show how imperative it is to weigh reputational risk in equal measure against investment risk in order to achieve long-term success. 

 

Written by George Peele

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CDR’s 14th Global IR Survey reveals widespread investor apathy as volatile market conditions distract from fundamental analysis

Following more than two years of restricted interaction with the investment community, reinforcing existing and building new relationships is the main priority for companies over the next 12 months. Companies are accelerating efforts to increase engagement with a broader investor base and are striving to refine their story and tell it through wider ranging channels. This is reflected in greater engagement with passive and retail investors, the continued popularity of Capital Markets Days, and the increased willingness to travel for investor meetings.

However, against the current market backdrop, effectiveness of such initiatives is far from guaranteed. In addition to making expectation management more challenging, the volatile external environment has proved a significant distraction for investors, prompting fund managers to adopt a top-down approach while navigating challenging macroeconomic and geopolitical events and conditions. 37% of companies report difficulties in gaining traction with their desired targets while, despite increased desire for in-person meetings, two thirds of companies continue to conduct more than 50% of their investor meetings virtually.

As market conditions continue to evolve, investment narratives too need to be adapted in response – 45% of our survey respondents plan to refine their investment case over the coming 12 months to reinforce differentiation. This exercise is likely to consider greater integration of ESG themes into the overall narrative given the growing practice of referencing non-financial achievements across results materials and ongoing news flow.

Despite the continued rise in the number of companies with a dedicated sustainability committee at board level, from 37% in 2019 to 57% in 2022, half of boards still do not have members with specific experience of managing sustainability issues. The connection between the ESG commitments companies make and how management teams are remunerated also remains weak. Three out of four of the companies surveyed have less than 10% of executive remuneration linked to ESG targets and of this, 42% have 0% of executive pay linked to ESG targets.

Slow progress in addressing this issue may be partly due to a lack of awareness regarding investment decisions taken based on ESG factors, with 95% of IR teams unaware of any divestments based on unsatisfactory ESG performance. Investor feedback and greater transparency regarding investment decision making could go a long way in accelerating change in this respect.

With so much noise in the market, it may seem like no one is paying attention, but the reputational risks of abandoning clear, consistent and authentic communications have never been higher.

CDR’s 14th Annual IR Survey incorporates feedback from 282 Investor Relations Officers (IROs) at leading companies across the world. Click here for full highlights from our report and the download archive.

 

By Sandra Novakov, Head of Investor Relations, London

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