Is your company undervalued? Implications for the leadership team.

November 2013 Overture

Early in November Fidelio co-hosted a panel discussion with some of the UK’s leading executives in accessing capital. From the perspective of the CFO, Treasurer, Strategy Director and IR Director, as well as the institutional investor, we looked at the skill sets required to compete for capital on a global stage. We suspect many corporates underestimate the rigour, professionalism and influence skills required to support valuation today. Increased regulation will create new demands of the Board and Executive team.


Accessing capital – the institutional investor 

On 7th November Fidelio and FTI Consulting hosted a panel discussion “Accessing Capital”. Our speakers were Stephen Jones, Chief Financial Officer and Executive Director, Santander UK; Ian Firth, Group Treasurer, TSB Bank; Fergus MacLeod, former Group Head of Strategy and Group Head of Investor Relations, BP plc; Jane Coffey, former Head of Equities, Royal London Asset Management; and Alex Garton, Baring Asset Management. The audience comprised investors and senior corporate executives all with strong views and personal experience of how corporates best engage with investors.

5 steps to great Investor Relations

Fergus MacLeod set out a neat five step analysis of what makes for good shareholder relations, which we elaborate on below.

Firstly, there is real merit in companies understanding the capital markets. This is frequently achieved by incorporating former analysts or investors in the Investor Relations (IR) function. Or by sourcing proven IR expertise with a clear track record of servicing investors well. It is no coincidence that only a tiny minority of IR teams are entirely home grown.

Secondly, a clear vision which is then articulated through extensive and well-orchestrated exposure of the management team to leading investors. IR will also be a key element of this communication. Investors are familiarised with the equity story and senior bench. In return a smart management team learns a great deal from investors.

Thirdly, effective IR must have a voice at the top table. Valuation is not best served by a disconnect between the decision-makers, be it the Board or Executive Committee, and the IR officer speaking to investors.

Fourthly and critically, a clear understanding of the so-called “IR product”. Importantly, the purpose of the IR function is not increasing the share price. Rather it is achieving the best valuation for a given financial and operational performance.

(The job of the IR Director) is to get the best valuation possible for a given level of financial and operational performance.”

– Fergus MacLeod, former Group Head of Strategy and Group Head of IR, BP plc

And fifthly, a clear link between the IR and Strategy functions. Strategy obviously is a key responsibility of the CEO that can only benefit from a keen understanding of the markets and how the market thinks about capital allocation.

Arguably there are a small number of companies globally that bring this degree of clarity and professionalism to IR today. Getting it right means that these five principles are understood in the Board room, the executive team and the IR function.

But the world doesn’t stand still and the bar is being raised. The two institutional investors on our panel described their respective investment processes. Risk aversion remains high and it became clear why many companies are increasingly looking beyond the traditional sources of capital.

Sovereign Wealth Funds, Private Equity and Retail Investors

Our panel and audience concluded pragmatically that corporates would do well to help themselves by ensuring access to diversified pools of capital. This included developing long-term relationships with providers of capital in different geographic markets often over a number of years. Fidelio has previously commented that German corporates have proved most systematic and long-term in achieving this, including in China.

As a natural development of this geographic diversification of the share register, our panel explored engagement with Sovereign Wealth Funds – at one end of the spectrum these investors behave much like institutional investors; at the other they require principal to principal engagement obviously at the most senior level.

Alternative providers of capital also included Private Equity and retail investors. In each of the above instances different communication skills and techniques are required and so an IR function that is narrowly focused on institutional investors will not serve the company well. Board and Executive teams also require the experience and skill sets to coherently link strategy with very different funding and capital models.

Our panel implicitly identified a further critical skill set in accessing capital, which for convenience we term here “regulatory awareness.”

The regulator and the share price

Our two senior panellists from the Financial Services sector demonstrated clearly how a heavy regulatory footprint is re-shaping capital market engagement and communications for banks. One clear skill set that is becoming essential for CFOs and Treasurers is the ability to communicate extremely complex issues, in this instance capital and funding structures, with great clarity and simplicity to diverse audiences.

One key audience is the regulator. Another is internal – the Board of Directors, who must now give comfort to regulators and politicians that they have a firm grasp on the complexity of capital and funding. And last but not least, shareholders who are in effect being asked to make investment decisions against a backdrop of extraordinary regulatory uncertainty.

The board should have a mix and balance of skills so that collectively it can understand the breadth of the business. The PRA expects all board members to develop an understanding of the different areas of the business and the main prudential risks and controls.

– The Prudential Regulation Authority’s approach to banking supervision, April 2013

The strengthening of regulatory resolve will affect all corporates. Our panel and audience discussed for example the implications of regulatory scrutiny of corporate access. This debate has been hi-jacked by the media focussing on hedge funds shelling out many thousands of pounds for CEO time. In the background is a much bigger issue of companies meeting face to face with their shareholders. Corporates may not consider this regulatory scrutiny of importance. But think how much more difficult a nuanced debate with shareholders will be if conducted through the media.

One determinant of valuation is being able to communicate an investment case clearly and directly. Boards and Executive teams that understand this and engage to prevent inadvertent regulation will do much to support their own share price and share register.

Companies looking to increase valuation must pay careful attention to current shareholders, while at the same time securing a stable and supportive capital structure for the future. The focus on shareholders is no longer enough. Stakeholders, in particular regulators, hold increasing sway. A healthy valuation now requires buy in from regulators and other key stakeholders. Accessing capital has become more complex and we expect Board and Executive composition to reflect this.


About Fidelio

Fidelio is a Board Development and Executive Search consultancy. Based in London we work internationally.

We build and develop Boards and Executive teams that increase the valuation of your business.

We do this through our deep understanding of stakeholders, shareholders and valuation.

And we focus on the following functions: finance, communications, strategy and governance.

Finally we deliver our services through Evaluation, Development and Executive Search.

Please contact us with comments or for more information on Fidelio Partners at info@fideliopartners.com

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