Inflation, recession, supply-chain ructions, budget cuts, ESG backlash, new reporting regulations, shareholder activism, all in the wake of post-pandemic disruption – the work of an IRO is about to get even more demanding in the coming year. Alexandra Cain asks leading IROs how they plan to tackle the issues
Just when IROs were confident enough to return to a new ‘normal’ after the pandemic, investors and corporates have been hit with an uncertain economic and geopolitical situation. It’s a difficult and challenging working environment. Suddenly, IROs are thinking less about the shift from virtual to live events for pandemic purposes, and more about budgets.
Equally, many IR professionals undergoing their first real downturn are working out how to communicate with and give guidance to the market when there’s no real clarity on future performance. These are just some of the dynamics with which investor relations is grappling as we head toward a new year.
Cloud data-management business Informatica’s vice president of IR, Victoria Hyde-Dunn, says that from her perspective, IR professionals are grappling with two major challenges.
‘Companies that report on a regular fiscal year reporting cycle will have just published Q3 results and then will report Q4 earnings results at the end of January or early February,’ she says. ‘Everyone will be looking to see what’s going on with the markets.
‘Given the increasing probability of an economic recession in the US in 2023 due to rising inflation and interest rates, it’s not a surprise that we are already seeing consensus estimates for sectors such as tech, consumer and retail starting to be trimmed for 2023.
‘As of June 2022, one sell-side analyst reported that 30 percent of her covered companies proactively lowered estimates for the second half of 2022 given the continued uncertain macro environment. It will be very interesting to see what happens come the January or February earnings call, when companies provide or update 2023 guidance estimates.
‘Will this percentage apply to 2023 as well? Will management teams be ready to discuss a recession, and will that be global or US? Or if it’s just the light use of the ‘R’ word, how long they think it’s going to last? Is it a typical V-shape six to nine-month recession with a bounce back afterwards, or will recovery take a little bit longer, more like a 12 to 18-month cycle?’
Hyde-Dunn says if the economy is tipped into recession, many IROs are going to look to the past for lessons learned from the 2008 US recession and how firms navigated best practices for messaging and reporting business metrics. This is especially true when it comes to guidance.
Will management teams be ready to discuss a recession, and whether that will be global or US?
‘The question teams will need to answer is whether they will continue to provide their regular guidance cadence, add more or provide fewer metrics, or have to pull quarterly or even full-year guidance again as we saw during the pandemic,’ Hyde-Dunn notes. ‘The market will also be looking at whether companies are open to providing preliminary numbers and commentary or preannouncing more than they have in the past. It’s all about managing expectations.’
What investors wantAccording to Hyde-Dunn, the main topics to pique investors’ interest will likely remain unchanged. These include company top-line and bottom-line growth, with a focus on revenue drivers, operating expense control, margin expansion, profitability and what consumer or business demand looks like.
‘Investors want to know whether there is still a healthy demand environment or we are going to continue to see elongated sales cycles and slower customer demand,’ Hyde-Dunn says. ‘It’s taken longer to close enterprise deals now that CFOs and CIOs are reviewing every single contract for IT vendors. Legal and procurement departments are more scrupulous than ever. That’s the economic environment into which we are heading, especially if budgets tighten in 2023.’
She adds that capital return is another hot topic: ‘Investors are very keen to get some insight into whether capital return programs such as share buybacks, convertible debt offerings and quarterly dividend payments are going to continue or be pulled back. We haven’t seen many IPOs this year, either, although it sounds as though firms are looking to next year now, possibly the end of Q1 going into Q2 to schedule floats. So far, we haven’t seen many M&A deals hit the market, unless they’ve been taken out by private equity companies.’
She also notes that more private equity firms have become more involved in M&A, as private company valuations continue to go down, potentially opening the door for investors to become more activist.
‘We could see an increase in shareholder activism and protests from activists, especially if firms are missing guidance expectations due to macro headwinds, sales execution, executive turnover or operational challenges,’ Hyde-Dunn explains. ‘This may prompt more activists to become involved in stocks and ask for change at the C-suite or board level. We're starting to see breadcrumbs of that already.’
When I speak with other IROs, everyone is thinking about how we can enhance our ESG disclosures
The ESG situationHyde-Dunn notes that ESG is here to stay and creates long-term value for all stakeholders, including investors. ‘It really still comes down to the industry you're in,’ she says. ‘If you're in cloud technology like us, for example, your ESG framework is very different from that of a car manufacturer or retailer.’
Juggling reporting obligations against the different reporting frameworks is another challenge, as is lifting ESG reporting standards more generally. ‘When I speak with other IROs, everyone is thinking about how we can enhance our ESG disclosures,’ says Hyde-Dunn. ‘This often happens when there is a catalyst such as an upcoming proxy, shareholder letter, analyst day or public report such as a CSR or ESG report, especially if the firm hasn’t had one historically and is starting to lay the groundwork for it.’
Against this backdrop, the different letters in the ESG acronym mean different things to different investors. ‘If you’re a cloud data management company like us, it’s less about the E because we don’t own physical data centers – it’s more about the S and the G,’ says Hyde-Dunn. ‘For a business operating in the supply chain or direct to consumers, it’s all three.’
She points out that ESG is still more of a focus for international investors than it is for large US investors, unless they have dedicated ESG funds.
‘In Europe and Asia, prospects tend to ask about ESG efforts,’ she explains. ‘The exception is US companies that have an ESG component to them. US investors will still ask about ESG, but it’s more likely to be the last question when a potential investor is looking to invest in your company.
‘International investors bring it up a little bit earlier, but it still seems to be near the last question. There’s just so much information out there, with so many different frameworks and forms that people have to look at, including EcoVadis, SASB, MSCI, CDP, GRI and others. IROs are still wrapping their heads around reporting and surveys.’
A key challenge for IR professionals who are early on in their ESG reporting journey is to determine the right path for the organization.
‘There are just so many different places for people to figure out what to do with ESG and where to start,’ says Hyde-Dunn. ‘If you haven’t started, you need to begin incorporating ESG into your website, investor materials and proxies.
‘You also need to think about how to incorporate it into your earnings calls, depending on the level of comfort you have with the data and also the interest from shareholders in your ESG performance, so it really does vary.
‘It’s a top five topic, I would say, if you’re an international company. But if you’re in the US and you’re a cloud tech business, it’s probably number six in terms of topic priorities.’
Other big concernsWhen it comes to ranking the top issues for investors – ESG aside – Hyde-Dunn says the macroeconomic outlook is top of mind. Number two is guidance and how you think about business drivers next year.
‘The number three topic of conversation is corporate access and the return to in-person investor meetings and conferences,’ Hyde-Dunn says. ‘Every conference we have been invited to and attended this year has been in person, and it’s fantastic to be face to face again and a welcome reprieve from video calls.
‘Non-deal roadshows are still a combination of in-person and virtual meetings, depending on the travel policies of the sell side and buy side. One question IROs will need to answer is what happens if we do go into recession next year and travel budgets tighten. We could then see a stronger push for virtual non-deal roadshows and attending only local conferences.’
This is especially the case given that IROs clearly proved during the pandemic that investor calls, roadshows, M&A deals and even IPOs could be conducted virtually.
‘Virtual meetings and leveraging technology and digital communications worked very well during the pandemic,’ Hyde-Dunn points out. ‘You can meet current shareholders and targets from different countries, and it saves money and travel time. We could see a reversion to this, especially if we hit a recession and companies limit travel budgets. We may see that only key executives or sales people – anyone customer-facing – will be allowed to travel regularly.’
Boom times or bust, Hyde-Dunn says there will still be a place for hybrid meetings, especially next year, even if we go into recession.
‘I think hybrid will stay, especially for roadshows and one-on-one meetings,’ she notes. ‘I think people will look to stretch their IR budget dollars for in-person events such as sell-side conferences, industry conferences and user events. If I’m going to be in New York for a sell-side conference, I’ll get to New York the day before and do a non-deal roadshow, or the day after the conference take the train to Boston for additional meetings seeing as I’m already on the East Coast.
‘It’s always important to maximize your time and your leadership’s time and be more efficient – and I think that’s going to be very important next year. There will be a greater emphasis on how we can continue to be productive, proactive and efficient with investor outreach if we go into a global downturn.’
Doing more with lessIrina Zhurba, Dusseldorf-based head of IR for Mister Spex, has a similar take when it comes to balancing IR department budgets in 2023. ‘I think many of my colleagues will fall into two groups next year,’ she says.
‘The first group will see their budgets cut and management will scale back communication with the investor community. For the other group, it will be more a continuation of the same things they have been doing. I don’t see many companies expanding their IR budget in the coming year, but that certainly doesn’t mean the workload will decrease. In a way, those of us who were not around during the last downturn in 2008 will get a glimpse of what that's like next year.’
Zhurba says that in terms of the investor relations work itself, firms that have recently gone public may struggle to find their voice unless they are proactive in their communication.
‘Investor relations is sometimes an overlooked function,’ she points out. ‘So many of us will spend a lot of time on aligning with management, as well as building out key messages, storylines, LinkedIn posts and interviews and on communicating with market participants. Ultimately, investor relations is a lot more fun when times are good, but it’s a lot more important when times are bad – and we are certainly in the latter period.’
One question IROs will need to answer is what happens if we do go into recession next year and travel budgets tighten
Corporate access challengesPierre Bénaich is head of IR and media for Givaudan, a Swiss multinational manufacturer of flavors, fragrances and active cosmetic ingredients. He says the evolution of corporate access in a post-Covid world is the main challenge facing IROs next year.
‘We are examining how we can best cope with investors’ expectations to keep a certain level of social interaction with our executives and at the same time maximize the use of their time and of technology,’ he explains. ‘An all-virtual pattern has certainly proven its merits – for instance, it makes it much easier to engage with Australian or US West Coast investors when you’re based in Europe.
‘At the same time, working from home has become a norm, even though we all still miss social interaction. Reconciling these realities can be a planning nightmare, be it for roadshows, investor conferences or capital markets days.’
Bénaich says on the corporate side, including in management minds, businesses are not necessarily prepared to go back to the pre-pandemic travel routine. ‘As IROs, coming up with the right balance in each geography will be key to finding the best use of time on both sides and making investors happy,’ he says.
Another area of focus for him is maintaining a high level of investor interest in the stock during a bear market. Targeting the right investors in this environment is also a priority.
‘You must keep the dialogue open with your shareholders and key portfolio managers, no matter what, and keep doing the good things you do,’ Bénaich advises.
‘A less usual challenge will be to identify those investors that have real potential and appetite to buy shares or increase their position in your stock in such an uncertain world. The other related question is whether the sustainability agenda can remain as high as it has been lately with mainstream investors when macroeconomic concerns and focus on profitability become so critical.’
I don’t see many companies expanding their IR budget in the coming year, but that certainly doesn’t mean the workload will decrease
Consider capital market daysLike his colleagues, Pekka Rouhiainen, vice president of investor relations at Espoo, Finland-based Valmet Corporation, says getting the balance right between in-person and site events will be one of the main challenges for IR in the New Year.
‘Site visits returned to IR agendas in 2022 but there is still pent-up demand from owners and analysts after Covid,’ he says. ‘At least in Finland, we have seen a real return to traditional in-person formats. But these events are gatherings more for the institutional side, and we need to make sure our growing number of retail owners are taken into account as well.
‘Extra care is needed during preparations for investor days to make sure events run smoothly. We aim to create content in several channels, such as blogs, YouTube and Instagram for retail owners, so they can develop a deep understanding of the key points outlined at these events.’
Rouhiainen says capital market days need especially careful consideration. ‘We are looking into digital or in-person formats,' he says. ‘You can’t have the best of both worlds; one is always a compromise. The best virtual events are done in a studio setting, which is often not very comfortable for large in-person audiences.
‘If you decide to go in person, thought has to go into the correct location to attract investors because if most investors opt for virtual listening, what’s the point in organizing a traditional capital markets day instead of a fully virtual one? Including a site visit could be an option, for example.’
Similarly, Rouhiainen says he expects roadshows to become a mix of travel and virtual meetings.
‘This creates an opportunity to meet a broader set of investors than prior to the pandemic,’ he explains.
‘We will continue to use our excellent sell-side brokers to organize most of the roadshows but our aim is to complement this with in-house roadshow days, where we can send invitations directly to potential and existing owners using digital platforms.’
He says it will be interesting to see the results: ‘It might take some time for the market to get used to this kind of approach, but in my view it’s something we have to try to add to our toolbox in the future.’
Trying out new tools is a practice many IROs will be undertaking as we move into another year likely to be fraught with uncertainty.
