The art of quiet diplomacy

There has never been a greater time to be at the vanguard of UK shareholder engagement, investment and corporate governance issues, so the country’s Investor Forum is at the heart of an interesting, developing debate. The Conservative government of Theresa May has made corporate governance a key priority, even if the rules presented in August did not equate to the standard previously set by the rhetoric. 

Two of May’s most radical proposals – putting workers on corporate boards and the introduction of annual binding votes on senior management pay– have been dropped. Vince Cable, leader of the opposition Liberal Democrats party, accused the prime minister of a retreat, describing the government’s approach as ‘strong on rhetoric, weak on action’.

In a more measured tone, Andy Griffiths, executive director at the Investor Forum, says: ‘The heightening of this focus is a positive. From a shareholder perspective, strengthening the requirements to discharge those responsibilities is a real advantage. There is a lot of value to be gained from re ecting on how the different stakeholders are treated, how you communicate with them and describe the impact your enterprise has on different stakeholders – that is good business.’

Measured approach

This response is typical of what Griffiths describes as the ‘quiet diplomacy’ approach of the Investor Forum. In the best tradition of diplomacy, it is an approach where issues are quietly and delicately discussed while maintaining a solid stance on what needs to be done. Grif ths comes from a background where discretion is highly prized, given his 20 years’ investment experience at Capital Group and Prudential.

The central aims of the Investor Forum are the essence of an effective investor relations environment: making the argument for long-term investment and ensuring a successful model for effective collective engagement with UK companies.

‘Our role is partly facilitation, partly mediation, and ultimately to bridge the gap in understanding,’ says Griffiths, again emphasizing the diplomatic focus. ‘We haven’t had a facilitator in the UK company/ shareholder relationship before. But what we bring is that different perspective and dispassionate, objective view – which is valuable to both sides.

‘We deal with fairly complex issues. We don’t just want to deal with problem situations – we also want to engage with companies that are successful but perhaps have a few challenges. We don’t always want to be in the [emergency room].’

And although the ongoing debate around how boards are run is very much the political zeitgeist, it does not necessarily follow that this is all good news for the Investor Forum. For example, the debate around senior management remuneration has taken up a great deal of the forum’s available discussion time, which is not something Grif ths thinks has necessarily been a positive thing. ‘Broad, strategic conversations have been replaced with more transactional discussions about remuneration or some sort of proxy issue,’ he explains, adding that those issues can easily crowd out ‘much richer, more strategic conversation.’

Challenging short-term thinking

Regarding the first part of the forum’s mission – to strive for more long-term investment – Griffiths has a stark statement: ‘Companies cannot be managed on a 12-week view.’

On the contrary, he emphasizes the importance of companies taking a long-term perspective. ‘Companies need to spend more time articulating their long-term strategic direction,’ he says. ‘We advocate [the Investor Forum] stewardship and strategy forums where board members discuss how their board works, as strategy is formed and executed. Not many companies talk about the work of the board.’

One of the biggest shortcomings the forum has identified among companies is continued discussion and analysis around a narrow range of nancial information. ‘Whether it is the quarterly update or the latest trading statements, the investment world spends a lot of time looking at short-term targets and assessing progress over very short time frames,’ notes Griffiths. This, he suggests, is something that requires a shift in perspective. ‘The majority of the effort from a company and its communications is nancial,’ he observes. ‘The majority of the value, however, is driven from serving your customers and delivering excellent products and services – and that is why it is important to focus on long-term value.’

And Griffiths has advice for IR professionals on formulating an approach: ‘A lot of investor relations practitioners could really benefit from what enhances the ‘multiple’ of the company they represent and increases confidence over the long term.’

Finding the cause

Equally, when it comes to the engagement process, there are many challenges the forum faces. When it is necessary for it to engage with an organization and investors, it regularly finds a communications and expectations gap, often built up over a period of time. ‘Companies feel under pressure, and investors feel frustrated with the performance of the company,’ explains Griffiths. ‘To break that down we look for the underlying causes. Very often, the investors will be describing the symptoms of the problem, but it is down to us to nd the underlying cause.’

Typically, problems arise around the following issues: capital allocation, execution of the company strategy, succession planning, management information and nancial reporting.

‘Often, expectations get misaligned with what is possible,’ says Griffiths, who admits it comes as a surprise that management information is frequently cited as an issue. ‘The number of times companies have profit warnings … you wonder how that can happen,’ he says. ‘It usually occurs when another part of the business has a different behavior, or another way of doing things, from the core business, such as can happen after a merger. But you wouldn’t think this could happen in the 21st century.’

On other occasions, there can be an acceptance of a problem, but not the full extent of it. ‘Often, when there is a big problem, boards are aware of it, but not always the gravity of it, or the gravity of shareholder concern,’ Griffiths points out.

On these occasions, quiet diplomacy is much needed and Griffiths has a strong recommendation for organization: ‘It is really important that companies and boards understand and recognize when there is shareholder frustration – and the form that this frustration takes – so they can evaluate the company’s response effectively.’

On other occasions, there can be an assertion from companies that they don’t need the intervention of the Investor Forum. ‘Companies will often say, We don’t need your involvement because we talk to shareholders all the time and we are aware of all the issues. They don’t want an intermediary from a company perspective,’ Griffiths explains. Once again, the quiet art of diplomatic engagement is needed.

Digging deep

Summing up the recurring problems he and his organization face, Griffiths says: ‘Friction arises because shareholders have seen the movie before, but the managers think it can’t possibly be them who have the problem. That is always the core ingredient for a communications gap.’

The forum doesn’t just work around its central tenet, however, or on purely theoretical issues. It also gets out to see how things work in practice. One such example was when problems emerged with Sports Direct’s working practices back in 2016, at which point the Investor Forum looked into the workings of warehouse practices in general. ‘We created workshops so investors could learn about different labor practices,’ recalls Griffiths. ‘We visited eight companies and 22 investors took part in one of the trips. This is an example of where there was an issue around a company and investors dug more deeply across the sector.’

As part of the forum’s work this year, issues have been raised with 11 companies, with the forum engaging with six firms where problems needed to be addressed. A similar number were identified in 2016, so the numbers are not huge – a positive rea ection of UK corporate and shareholder engagement culture. Nevertheless, the number of cases tells only part of the story. These are vital interventions that help maintain the reputation of the market as a whole.

Expanding remit

The forum, set up in 2015, has been slowly expanding. Recent new team members have been added with Paul Coombes, chairman at the Centre for Corporate Governance at London Business School, and James Macpherson, deputy chief investment of cer for BlackRock’s fundamental active equities team, joining the board. These appointments take the forum’s team – whose members represent 35 percent of the FTSE 100 – to eight people, who between them have 150 years of investment experience. ‘We have an experienced team that has a lot of respect for investors and companies,’ observes Griffiths.

Over the years there has been an impetus to keep the forum moving and the focus each year has had a tagline representing the challenge to the organization: in 2015 it was ‘Prove it’, in 2016 ‘Build it’, 2017 was ‘Scale it’ and 2018 will be ‘Embed it’.

‘It has been a fascinating journey,’ says Griffiths. ‘We now have an experienced team and we have built a credible platform to do our work effectively.’

Looking to next year, he identifies Mifid II as a major challenge, requiring companies to take responsibility for having open dialogue with their shareholders. ‘It may mean IR teams will need extra resources or use different agents,’ he says. ‘But it is vitally important for companies to take responsibility for their investor insights. Mifid II is the biggest change for asset managers in my investment career.’