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There is extraordinary pressure today on boards and management teams to provide unprecedented levels of disclosure. And for a good reason.
Global corporate scandals, usually about fraud, audit or governance failures, have resulted in large-scale value destruction for shareholders. In the SA context, one stark similarity between corporate fraud cases at former blue chips, including Steinhoff, Tongaat and EOH — apart from the tragic consequences of job losses — is the convoluted way financial statements were prepared.
The other similarity is the lack of transparency. Complex corporate structures, shielding off-balance sheet transactions between little-known subsidiary entities (beware of the newly listed vehicle that grows solely by acquisition and with little organic growth to show!) lend themselves to more challenging scrutiny by auditors and investors. It is therefore not surprising that issuers have tightened their listing requirements — making sure only companies that provide adequate public disclosures are given the right to attract retail and institutional capital.
JSE CEO Leila Fourie must be commended for driving the changes necessary to rebuilding trust and transparency in corporate SA. The market understands the importance of the recent guidance notes on environmental, social & governance sustainability disclosures. Executives, for their part, though feeling the onerous governance burden, ultimately appreciate that these initiatives are in the interests of their mutual stakeholders — the shareholders themselves.
Within this context, the investor community needs to assume a certain degree of responsibility for how it evaluates companies. For decades, market participants and business academics have lamented the information gap between management and (usually) shareholders.
Writing in the Harvard Business Review, Justin Fox and Jay Lorsch touched on this dichotomy between management and shareholders (usually a result of information asymmetry) and how boards were stuck in the middle: The path forward for corporate executives and shareholders appears blocked. Executives complain, with justification, that meddling and second-guessing from shareholders are making it ever harder for them to do their jobs effectively. Shareholders complain, with justification, of executives who pocket staggering pay cheques while delivering mediocre results.
This deadlock has its roots in the 1970s, when power began to move in the direction of shareholders after a long period during which managers had called almost all the shots. The shift, although it had political and economic causes, was also enabled by the rise of a philosophy of shareholder dominance that grew out of academic research on the motivations and behaviour of corporate managers. According to that philosophy, shareholders are the centre of the corporate universe. Managers and boards must orbit around them.
The investor community is well aware of the consequences of a disparity in publicly available information. The asymmetries are most commonly found in entities governed by controlling shareholders, with minority shareholders often struggling to make informed decisions. Neither party wants the share to be undervalued. In the case of a smaller cap, a widening discount between the net asset value per share versus the actual share price, coupled with a limited free float and the resulting illiquidity, often leads to a stagnation in the share price and, ultimately, disinterest from the buyside. Often in these scenarios the counter is delisted, and the business is managed privately with limited opportunities to engage the capital markets. A sad outcome indeed.
Anecdotally, I recently accompanied a management team on a post-results investor roadshow. The knowledge gap was clearly evident — and some might say it always will be, as executives are involved in the running of their businesses 24/7 whereas analysts on the buy and sellside, the latter feeling its own resource and cost pressures, might scramble one or two hours in advance of a meeting to skim through the results presentation, review the top line commentary and, if they are fortunate, spend a bit of time interrogating the consolidated income statement and balance sheet. At times it did make for a less-than-fruitful discussion, with management questioning why the counterparty didn’t understand the business, business model or the strategy behind certain initiatives.
Having sat on both sides of the table, and knowing how on the one hand management teams spend inordinate amounts of time meticulously preparing their results packs, and on the other how investors’ resource constraints preclude them from setting aside sufficient time to interrogate the company’s performance, I believe strongly that both need to support the trend to increase disclosures. No-one is suggesting that a company must relinquish its competitive advantage and share internal strategic documentation, but it is incumbent on them to provide enough information to enable the investor to make an informed decision. Naturally, it is up to the investor to take the time to unpack the disclosures and mitigate against any future information imbalances, which may have an adverse effect on how the company is traded.
One could argue that this is precisely why a considered investor relations strategy that includes regular engagement outside of results seasons is a game-changer. It can stem the flow of (inadvertent) misinformation and management can view the engagements as educative and a better route for the investor community to better understand their (complex) businesses.
Investor relations practitioners are integral to ensuring both sides are informed and prepared in advance of said meeting. Whether it’s the formulation of a company fact sheet with key financial and operational indicators or a well-crafted and succinct narrative that explains the company’s investment case and value proposition — it is our role to ensure there is sufficient transparency to mitigate against any misinformation risk. Of course, this doesn’t preclude the investor from doing his or her homework, thereby fostering a more informed and meaningful discussion.
• Silke is associate director: capital markets at Instinctif Partners Africa.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.