IR in Mid-Caps

As we embark on what is bound to be another roller-coaster of a year, we’d like to take the opportunity to reflect on the role of investor relations in South African corporates and in particular the opportunities it presents within mid-cap companies.

From a fund manager’s point of view the JSE Top 40 must be a fairly dull place to spend one’s days.  The biggest companies on our stock exchange lumber on, occasionally hitting the headlines, gobbling up and joining forces with other companies in an M&A frenzy in a quest to be bigger (though not necessarily better) than their peers and to reduce the size of their cash piles.  They hit spectacular highs, equally spectacular lows and sometimes they even spectacularly fail. Not all of them, of course – some do ordinary things in extraordinary new ways, disrupting old industries and generally shaking things up; others do things pretty much the same way they’ve always done them since they listed twenty years ago.  Collectively, they account for 80% of the JSE’s total market cap, they are the cornerstone constituents of any well-balanced share portfolio and barring a cataclysmic event such as the discovery of a lapse in governance or accounting compliance, they are reassuringly always there. And their shares are, in the words of the Stella Artois advert, reassuringly expensive.  So they must be doing something right. But on the whole, with a few notable exceptions, they are pretty dull. In many ways they are the stock exchange equivalent of one of those animal hide rugs with the head still on that you find in shooting lodges in the Scottish Highlands: they’ve been there for ages, various custodians keep an eye on them in case they shift, they need occasional hoovering and every now and then a bit falls off, leaving those with an interest in them wondering if it might just be time to chuck them out once and for all.

 

Agile IR

 

The role of IR is never an easy one but it can vary hugely when it comes how interesting and challenging it is.  The size of the company, whether it’s dual listed, who and where its shareholders are, the size of the free float and of course its corporate strategy all impact on the scope and responsibilities (and often KPIs) of the IR role.   The challenges for mid-caps are often around liquidity issues, access to capital, lack of analyst coverage and ‘slipping through the cracks’ when it comes to attracting new analysts and investors. But this is where IROs can really make their mark.  Often fleeter of foot, quicker to respond to market sentiment, with more stable management teams, mid-cap companies are often where ambitious IROs develop and hone their skills. For many an analyst or broker, they are a route out of the world of banking and advisory firms and a chance to leverage  their financial skills, capital markets and sector knowledge in a corporate role.

A recent straw-poll of mid-cap IROs reveals some interesting insights into the role and may yield clues as to why the role is often a more dynamic one:  IR roles in mid-caps are often hybrid roles, combining IR responsibilities with a corporate strategy, company secretarial, finance or communications remit.  Teams tend to be leaner in mid-caps and therefore roles are less siloed. There may be more autonomy in the role in a mid-cap company and trusted IROs may find themselves becoming the ‘go to’ person far more quickly than in a more bureaucratic and hierarchical large cap. In this sense, they are well positioned to become the external ‘face’ of the company and to build solid relationships with shareholders, analysts etc.  As long as they’re credible and have deep insight into the company, its key drivers, the sector, peer performance, etc. Mid-caps are often more agile and innovative than large-caps, – representing opportunities to do things differently and to ‘shift the needle’ in the delivery of a proactive, forward-thinking IR programme that takes advantage (budget permitting) of digital content, etc. The more active and multi-skilled mid-cap IROs will have the opportunity to use their broader skillset with more agility as they use their combined communication, corporate affairs or regulatory skills to adapt to more active shareholder programmes brought on by Mifid II, as well as greater market scrutiny due to recent corporate governance scandals.

Whilst there’s a lot to play for in a mid-cap and undoubtedly some ‘quick wins’ for a new IRO, the demands from management can be tricky: IR is often looked to to ‘message a company out of a hole’  – a hole which is often the product of too little communication with shareholders. Good IR plays a critical role in ensuring the hole doesn’t get dug in the first place and an effective investor relations function can provide a very useful tool to enhance strategic decision making.   When companies treat investors like customers, they do a better job of factoring investor goals into the development of corporate strategy – creating alignment with expectations and superior value creation over time. Perhaps it is time to advocate for a better understanding of this need.

Time to Shine

Saudi Arabia’s Capital Markets Authority recently turned a strong spotlight on IR in the region with a call to all listed companies in the region to establish a professional IR function.  Perhaps it’s time for South African regulators to take more of a heavy hand in helping to transform what is a currently a fairly ‘scattergun’ approach to IR amongst South African companies to a more rigorous and strategic function, insisting that listed organisations demonstrate what they are doing in terms of a formal IR strategy and programme.  Companies have to do it when it comes to demonstrating, via their integrated reports, what they are doing in key areas such as corporate governance, sustainability and adoption of King 4 etc. so why not with IR?

In our post-Mifid II world where analyst coverage of small and mid-caps is shrinking and where companies are having to become more pro-active in their interaction with their shareholders and potential investors, the role of the in-house IRO has never been more critical.  This is a golden opportunity for IR to demonstrate its value and for talented IROs to shine. Yet it is remarkable how many sizeable listed corporates do not have someone dedicated to IR – that is, someone sufficiently experienced to formulate and deliver an IR programme, be the face of the company to the markets and a trusted advisor to the management team and Board.   Investor relations should serve as a strategic tool for executive management to enable them to better understand the needs of their shareholders and create alignment of the company’s performance and future fundamentals with that of shareholder expectations.

Mifid II aside, there are plenty of reasons why companies are taking greater control of their investor engagement and for small and mid-cap companies this has never been more important.  Recent research in the UK reveals increased activity around capital markets days, improving corporate websites, engaging specialist IR advisory firms and targeting retail investors – just a few of the   ways in which smaller companies are looking to increase their visibility.*

Conclusion

Faced with low-growth economies, destabilising political landscapes and risk-averse investors, plcs  not just in South Africa but globally are likely to have a challenging year ahead. In many ways, mid-cap companies are better placed to respond to these challenges – if equipped to do so.  It will be down to management teams to recognise the critical role IR must play in the coming months to ensure that their companies are well understood and able to balance the demands of short term investors with long term strategy and vision.  For IROs up for the challenge, it truly is a time to shine.

*Report by Peel Hunt and the Quoted Companies Alliance (QCA)