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More than 80 percent of firms globally say off-season engagement results in stronger relationship with investors, according to new research
Just over half of US companies – 52 percent – say their off-season engagement activities translate into increased support when it comes to the proxy vote, according to the latest research from IR Magazine.
The Off-Season Governance report shows that almost two thirds of IR teams have a program of activities relating to governance issues outside of the proxy season, with a majority of companies globally saying this strengthens the investor relationship, and a notable minority (43 percent) globally saying it results in greater support come the proxy vote.
Regionally, US companies are most likely to see off-season engagement as a boost for the ballot, at 52 percent, compared with just 36 percent in Europe and 38 percent in Asia.
Across the cap sizes, largely the same percentage of companies believe this to be a benefit of off-season engagement (ranging from 37 percent to 41 percent), though a massive 72 percent of mega-cap companies say engagement outside of proxy season translates into increased proxy backing.
The more widely held view is that such engagement strengthens the company relationship with investors – something that, globally, more than 80 percent of companies agree with.
This opinion is held most strongly in Asia, where nine in 10 companies believe engaging with investors outside the proxy season builds a stronger relationship – an opinion shared by just 75 percent of companies in Europe, with the US falling between the two. There is little difference across the cap sizes.
Thomas Heinzen, vice president of corporate development at Cryoport – a company specializing in cold chain logistics solutions for temperature-sensitive life sciences material covering IVF, biopharma and animal health products – says there really is no ‘off-season’.
‘After we report our financial results each quarter, we line up calls with all of our analysts as well as our top 15 shareholders,’ he tells IR Magazine. We typically follow up with non-deal roadshows and one-on-one calls with new investors that are not yet familiar with our company. Beyond that we usually attend about 10 investor-based conferences each year. We have a constant cadence with investors throughout the year, so we really don’t have an off-season.’
Cryoport is a fast-growing company, going from less than $100 mn in market cap five years ago to more than $2 bn now. It also operates in and supports markets that evolve rapidly, something Heinzen says ‘makes it even more important to keep in touch with the financial community.’
For him, the key benefit of continuous communication is that investors and potential investors are familiar with the company story and stay up to date with the ‘significant changes’ that are rapidly taking place.
‘In the past couple of years, we have raised capital and made major strategic acquisitions,’ he says. ‘It really helps to have informed investors when you go to raise capital or announce acquisitions. If we have done our job ahead of time and communicated our mission and goals effectively, the investors are much more receptive and generally supportive of the actions we take.’
All virtual
IR Magazine’s report – which is based on the IR Magazine Global Investor Survey, conducted in Q4 2019 and the IR Magazine Global IR Survey in Q1 2020 – finds that governance roadshows and shareholder forums are the most common governance-related activities undertaken by companies outside of proxy season. Jeffrey Goldberger, managing partner at KCSA Strategic Communications, says non-deal roadshows must be ‘at the core’ of the consistent engagement required by companies but adds that the ‘new normal’ has opened up new virtual options, too.
‘We’re finding that during the era of Covid-19, the number and quality of meetings we are able to secure virtually for our clients has increased dramatically as it appears that portfolio managers and analysts have more time to explore new ideas because they are no longer commuting or traveling to meet companies or attend conferences,’ he tells IR Magazine.
Heinzen says this is the biggest change brought about by the pandemic in terms of engagement. ‘All the conferences we would normally attend in person have become virtual,’ he says. ‘Virtual conferences have some benefits: no travel costs, more efficient use of time, the ability to attend more conferences. But we do feel you miss an element of building a relationship with investors when you can’t sit across a table from them.’
How should companies engage with this group?
This year has been an unprecedented one in a myriad ways, not least the volatility and performance of the US stock market. In March 2020 the Dow Jones Industrial Average saw one of its fastest declines on record and the Chicago Board Options Exchange’s Volatility Index, which measures the stock market’s expectation of volatility, hit an all-time high. Even more remarkable was the subsequent market rebound, which over the span of five months saw the stock market retrace lost ground against a tide of record unemployment and widespread economic uncertainty.
Against this backdrop, the rise of the retail investor has generated sufficient impact that Wall Street and corporate issuers have taken notice. According to Bloomberg Intelligence, individual stock trading is at a 10-year high, with retail trades currently estimated at 19.5 percent of all US order flow (through June 2020), up from 10.1 percent in 2010 and 14.9 percent in 2019. Similarly, Citadel Securities, the top retail US equity market-maker, executing 40 percent of all US-listed retail volume, reports that individual market activity accounts for 20 percent of overall market activity on some days and up to 25 percent on days of heavy volume.
The surge in retail activity has been driven by a perfect storm of a bull market, pandemic-induced lockdowns and extensive stimulus measures. These conditions created an ideal outlet for individuals bored at home when indoor activities, sports and other entertainment and social options were put largely on hold due to the pandemic. Facilitating this boom in interest is the fact that the stock market has never been more accessible to individual investors. The brokerage business, driven by intense competition, has paved the way for the ‘democratization’ of investing for years. In a race to capture new accounts, major online brokerages such as Schwab, Fidelity and E*Trade have steadily reduced barriers to trade, culminating in 2019 when Schwab announced $0 commissions – and competitors quickly followed suit. At the same time, the rise in popularity of millennial-friendly trading apps such as Robinhood and tastyworks found appeal among a whole new generation of investors.
Robinhood, whose tagline is ‘investing for everyone’, has become a poster child of retail investing, highlighting the ease with which novice investors can enter the investing fray. The firm, which first emerged in 2013, has grown rapidly, with the company disclosing in May that it had added 3 mn new accounts, year to date, reaching a total of 13 mn users. By comparison, Fidelity and Schwab reported 30.8 mn and 12.3 mn active brokerage accounts, respectively, in 2019.
The Robinhood app allows investors to quickly open an account and offers no minimum balance requirement, no commissions on trades and the ability to purchase fractional shares. According to the company and CNBC, more than half of Robinhood’s new customers (median age 31) are opening their first brokerage account. As retail trading in general spiked this year, the media has fixated on Robinhood members whose day-trading tendencies and enthusiasm for complex trades have exhibited significant market influence at times. Debates are active regarding the potential pitfalls for many of these new investors, particularly the young, whose use of these platforms often represents their first foray into the stock market.
While Robinhood investors have received the bulk of media attention this summer, it is prudent to keep in mind that the retail investor community is a diverse group – with varied strategies, horizons and risk-tolerance profiles. Collectively, however, this cohort has become increasingly active, sophisticated and educated, and it is likely it will remain an influential driver of market activity.
WHAT DOES THIS MEAN FOR PUBLIC COMPANIES, PARTICULARLY SMALLER-CAP ISSUERS?
Smaller-cap companies, which are generally characterized by lower per-share prices and higher volatility than their large-cap counterparts, are inherently more attractive and accessible to retail investors, who tend to view these attributes as providing greater prospects for generating outsized returns. Furthermore, due simply to their smaller size, these companies can be more susceptible to the collective impact of retail trading, which may comprise a larger percentage of their overall shareholder base. Companies may experience some or all of the following:
– Volatility can increase. Lately, it has been known as the ‘Robinhood effect’, meaning irrational movements in stocks driven by rapid-fire retail investing. These younger investors appear to thrive on the unpredictable and are therefore less likely to adopt a buy-and-hold strategy (although evidence suggests the inverse can be true for the broader retail investing community). Data has shown these investors are active participants in options trading and short-sales that can produce volatility in price and volume
– Share price can move on information that is not factual, regulated or sanctioned by the company. While plenty of individual investors pay close attention to earnings announcements, SEC filings, research reports and other official sources of information, others ignore this type of information and instead act on tips, trends and discussions they encounter on social media feeds and forums. These outlets encourage a herd mentality that is often informed more by speculation and rumors than business fundamentals
– Certain sectors may be more impacted than others. Novice investors tend to gravitate to products and services familiar to them, such as tech, gaming and cannabis. Speculators seeking outsized gains have also been observed trading in the shares of financially distressed companies, with Hertz being a recent well-known example. After filing for Chapter 11 bankruptcy in May 2020, the company’s share price dramatically seesawed in the ensuing months, driven by Robinhood day traders. Their influence was so profound that the number of Robinhood holders had an inverse relationship to the shrinking Hertz share price, as reported by the Wall Street Journal and Robintrack.net.
There has been a decided shift toward size amid the uncertainty, and the pandemic may have accelerated the adoption of a new economy defined by contactless commerce, a greater dependency on remote access and more at-home entertainment options; these emerging societal norms are manifest in large-cap technology stocks. The proliferation of ETFs has also influenced market dynamics by absorbing a larger percentage of the investing public’s dollars and mindshare. These ETFs, like mutual funds, have helped portion and package large securities into easily investable buckets that deliver varying rates of return. In addition, the significant growth rate of a handful of large-cap technology stocks certainly has had a disproportionate effect.
SO WHAT, IF ANYTHING, CAN COMPANIES DO TO ENGAGE THIS COHORT?
Although it may seem like there is little a company can do to influence the diverse group of individuals that make up the retail investor community (and perhaps it does not seem worth the time and effort to do so), we argue that companies can achieve a great deal, particularly by using online resources and accessibility to constructively engage this group. For example:
– Ensure your website remains an easy and reliable source of information. The value of a well-designed and well-populated website cannot be overstated. A company’s website is the base line resource for providing investors with the tools for information, interaction and engagement. Ensure the company’s website provides easy navigation to standard information such as company news and quarterly earnings announcements. An investor presentation should also be readily accessible to provide online visitors with an efficient overview of the company’s core business, strategy and financial data. Information should be kept up to date, and content should be simple enough to easily tell the company’s story without overwhelming readers. To the extent that the company maintains a social media presence, monitor these outlets to have a sense of how the company is being perceived and discussed online to help tailor future messaging.
It is also important that the website is mobile-friendly as younger investors may conduct investment research and execute trades from beginning to end on their mobile phones. Finally, make it easy for investors to stay engaged by providing options to subscribe to news alerts, submit questions via email or call an IR representative (a specific person, rather than a general number, is preferred)
– Engage creatively with (younger) investors. After confirming that the company’s website provides standard and expected information, focus on ways to creatively engage with your audiences, particularly a younger set of investors. Consider expanding beyond the traditional financial media outlets such as CNBC or the WSJ, to investment-oriented newsletters, respected financial bloggers, and other media outlets to capture a wider audience. Younger generations are also more comfortable, and may even prefer, receiving content in video format. Informational interviews with key executives, or a short video providing an overview of the company and its story can communicate information that may not otherwise be sought out (ie, read) by certain potential investors. Additionally, making investor presentation webcasts available to all investors is helpful and demonstrates a company’s commitment to transparency
– Maintain solid ties with RIAs and brokers. Registered investment advisers (RIAs) and brokers also play an important role as a conduit between the company and retail investors. According to the Investment Adviser Association and National Regulatory Services, there are nearly 13,000 SEC-registered investment advisers who reported serving approximately 43 mn advisory clients in 2019. The Financial Industry Regulatory Authority reports 3,500 registered broker and broker/dealer firms in the US in 2019. By actively engaging with these professionals – including making information easily accessible, answering questions and hosting informational calls and meetings – it is much more likely that a positive and accurate image of your company is conveyed to a significant number of potential investors
– Do not overlook individual investors who reach out. Individual investors may reach out for reasons as benign as requests for the annual report or questions about the business, or, in other cases, to express unhappiness with the recent performance of the company or its shares. While it may be tempting to dismiss these inquiries and feedback, companies should develop a strategy to address these investors efficiently and competently. Preparing scripted responses to current topics and maintaining a detailed FAQ section on the website to address standard inquiries are two such methods that companies should consider. From an investor and public relations perspective, the concern is that in this era where news spreads rapidly, compounded by social media, misunderstandings can go viral in an instant, potentially resulting in negative publicity and causing material damage to a company’s reputation.
WHAT IS THE LONG-TERM PROGNOSIS?
Looking ahead to a post-Covid-19 world and a return to more normal times, it is difficult to predict whether the activity level, interest and behavior of individual investors, particularly the Robinhood cohort, will lessen or perhaps shift in other ways. Trading innovation and information flow will only improve over time, however, and these forces are likely to drive further retail participation. It is also clear that a new generation of retail investors is on the horizon. Companies should proactively develop a game plan to understand and engage with this community in an efficient and positive way.