/124_prnewswire_paper_ir_0811 by Interbrand

White Paper

The long and the short of telling the equity story to all audiences

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ENGAGE OPPORTUNITY EVERYWHERE

White Paper

The long and the short of telling the equity story to all audiences The disconnect between the long-term owners of stock and those who manage and trade the same stock is forcing IR professionals to recalibrate their communications strategies to account for long-term context, short-term impact and the resulting broader audience.

Pick up any financial daily these days, and you will find headlines like “Shorttermism on the rise” or “Fears for long-term investment grow.” Investors, we are told, hold stock for less than a year on average, compared to more than five years a decade or so ago. As a result, regulators are pressuring investors to play more of a “stewardship” role in the companies whose shares they hold. At the same time, the audience for company financial news is becoming ever more complex. The pension funds that own stock, for example, have interests which conflict with those who manage, allocate and vote the stock. And retail investor audiences are also changing with the rise of short-term day-trading strategies and technologies. These changes have major consequences for investor relations teams and their communications. Both short-term company updates and the long-term context for the company’s ongoing success need to be communicated to these diverse audiences. In this paper, PR Newswire looks at the dynamics of these changes and offers suggestions for structuring the long-term equity story – and ensuring that this story is received by the aforementioned audiences.

Investors holding stock for shorter terms Ten years ago, investors held stocks for five to eight years on average; today, according to research by Towers Watson and John Bogle (founder and retired CEO of The Vanguard Group), the average is less than a year. How has this come about? Copyright © 2011 PR Newswire Association LLC. All Rights Reserved.

Investment management is a young discipline. As recently as the 1950s, institutions held less than 10% of the stocks traded on the New York Stock Exchange, compared to over 70% today. As the industry has evolved, the “ownership” of equity has become divorced from the “management” of equity, with each having differing time perspectives.

Decreasing ownership periods (months) 60 50 40 30 20 10 0

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White Paper Telling the equity story

The principal objective of long-term holders, such as pension fund investments, is to generate and Source: John Bogle “Restoring Faith in Capital Markets,” WSJ 2010, and Towers Watson secure returns that enable the fund to fulfill its pension obligations. They do this by making the assets outperform the liabilities over the long term. 1980

2000

2009

However, between the pension funds, mutual funds, insurance companies – with their long-term obligations – and the investee company lies a chain of intermediaries who can influence the company and its valuation in different ways through asset strategy, stock selection, voting and trading. These intermediaries often have different motivations from those who appoint them.

The communications target is... ? Retail investors

Institutional investors Pension funds

Direct equity ownership

Insurance companies

Mutual funds

appoint

Brokers ETFs Self-managed

Fund Managers - asset allocation - stock picking

Targeting - orientation - style - FUM - turnover

Proxy Agencies - outsourced voting on governance issues

Trading strategies - hedge funds - brokers

Take, for example, actively managed stock funds versus passive funds. Active investors seek “alpha” – in other words, they aim to “beat the market.” They generally charge fees of over 1% each year to pay for the research and salaries that go into beating the market.

Custodians - investment accounting - stocklending - nominee names

On the other hand, passive investors, such as index funds, benefit longer term from the overall performance of the market, but generally only charge a fraction of 1%. Let that gap in fees compound for a few years and index funds inevitably come out on top – which is indeed what all the performance data shows.

Academics have proven this. Passive investment companies’ marketers have gotten the message out. The industry has produced new indexed products, such as exchange-traded funds or enhanced indexes, which are based on factors such as earnings or dividends or market value.

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White Paper Telling the equity story

Yet actively managed funds still dominate. By the end of 2008, only about 13% of equity mutual funds in the U.S. were passive, according to the Investment Company Institute. Outside the U.S., intermediaries are less aware of the evidence in favor of indexing and continue to resist the idea because it means their clients cannot beat the market. Many active investment managers’ mandates have success criteria based on short-term, relative performance of the share price. Therefore, these investment managers frequently focus on delivering short-term returns, often by pressuring investee companies to maximize near-term profits. One of the effects of these misaligned horizons has been the increase of portfolio turnover, hence shortening the average stock holding period. The consequence is that the beneficial owners of equity find their shares being bought and sold on a short-term basis despite their long-term interests.

Investors have “duties” as well as rights, say regulators It is widely held that one of the contributing factors to the financial crisis was that investors took an excessively short-term approach to their portfolios. Regulators around the world are reacting to this issue. In the U.S., the Securities and Exchange Commission (SEC) has moved to empower investors in voting on say-on-pay. They are also imposing limits on high frequency trading – the ultimate short-term ownership. Meanwhile, outside the U.S., the European Union, in its recent discussion paper on governance, argues that shareholders should engage more fully with the companies in which they invest and make their role and activity more visible. “The purpose of this consultation is to find ways to encourage the presence of a critical mass of shareholders willing to take their engagement responsibilities seriously,” it says.

The U.K. Stewardship Code The launch of the Stewardship Code by the Financial Reporting Council (FRC) regulators in the U.K. is aimed at improving investor engagement. The stated aim of the Code is to "enhance the quality of the dialogue" with companies by imposing obligations on investors

to say how they have monitored their portfolio companies and disclose their voting records. At the time of writing, the Code had been signed by 147 of the largest investors. Many questions about the Code have arisen. Can it be effective applying only to long-term

investors when other shareholders are active on the short side? How likely is it that hedge funds will go beyond superficial explanations of their business model? Regulators around the world are watching and waiting as the answers to such questions evolve.

How should IR respond? 1. Make sure that the short-term updates are complemented by the long-term picture. 2. Use non-financial information to create the context for the company’s short-term performance. 3. Provide a continuum of news – all of which fits together. 4. Ensure that investors needing ‘stewardship’ support can receive it. 5. Make sure that asset owners and asset managers receive the story. 6. Use every available channel to deliver the news.

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White Paper Telling the equity story

They are not alone in making this argument. Angel Gurría, Secretary-General of the Organization for Economic Co-operation and Development (OECD), recently commented that, “Our institutional investors are being labelled as ‘short-term,’ with investment holding periods declining, low asset allocation to longterm investments (such as infrastructure) and rising exposure to shorter-term trading vehicles.” Efforts are underway by regulators in Canada, France, the Netherlands and other markets to see the way forward. The U.K. model of the Stewardship Code (see page 4) is being watched carefully by international regulators. If it succeeds, they are likely to encourage – even require – investors to engage similarly with their investee companies. As a result, companies will feel the pressure to support this engagement process with more, and more accessible, information.

Creating the context – the longer-term value creation story It has long been a truism that more than 50% of the value of a company lies not on its balance sheet, but in non-financial assets: the skills of management, the business model, patents owned, well-known brands and market share. And in today’s world, add to this list the governance story, the benefits of a strong environmental story and the role of the company in society, and the art of those aiming to place a “fair” valuation on a company is sorely tested. Given the imperative for the company’s communications to tell both the short-term and long-term equity story, as well as describe the “soft” assets, what are the key elements of the story that should be told? Our recommendations include:

> Communicate the company’s strategy. This is what we do, this is why we do it, these are our goals and this is what we’ve achieved. Identify divisional strategies/ priorities – and link them back to group strategy. Discuss whether and why the strategy is sustainable and how it has changed in response to market conditions. > Provide a detailed view of the key challenges and opportunities in the sector/ industry. Include trends in key markets, with external verification or supporting evidence. Discuss the impact of changing economic times, existing competitive threats and regulatory impact, as appropriate. > Describe major risks and the opportunities that these risks present. Discuss how these risks are being managed and the potential impact on company value/ performance. Also, shed light on the governance culture of the board in regard to challenges on risk. Copyright © 2011 PR Newswire Association LLC. All Rights Reserved.

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White Paper Telling the equity story

> Detailed discussion of environmental, social and governance matters. Discuss their impacts and why they are important to the company, clearly linked to overall business performance. > Employees. Companies regularly note that “employees are our greatest asset,” yet few describe that asset or what they are doing to enhance it.

Don’t just comply, communicate As should be clear, effectively communicating the stories suggested by the preceding section calls for IR to go far beyond merely compliant corporate communications. The 10-K alone doesn’t do it, despite the fact that, in the aggregate, it costs publicly traded companies more than $3.1 billion to prepare Form 10-K (the most extensive – and expensive – document required of them by the SEC).

Both the size of typical 10-Ks and the amount of time and money spent on them have ballooned over the past several years.

Both the size of typical 10-Ks and the amount of time and money spent on them have ballooned over the past several years, driven by legal mandates such as Sarbanes-Oxley, greater disclosure demands by the standardssetting Financial Accounting Standards Board and the ever-growing need to disclose more risk information. And yet 10-Ks are as opaque as ever. They are rarely helpful in communicating, as legal qualifications end up masking the true story. In the opinion of many, investors are no more informed than they were before.

What do the different classes of investors need to know? To do the job right, information must be provided in a continuum, but balanced for the different audiences. Trading updates and quarterly results should be mixed with market analysis. Market growth statistics can be interpreted for impact on the company. A change in strategy is an opportunity to provide updates on an evolving business model or a board change on the governance culture.

> The long-term owners have long-term obligations to meet, and they need to know their asset follows their chosen risk profile. > Fund managers helping set the asset allocation strategy need to understand economic forces affecting a sector or industry. > Stock pickers need to have a shorter view, but also need “limiters” to set top and bottom parameters within an expected performance range. > Proxy voting agencies and investors’ governance specialists need to understand the governance issues, not only to assess compliance with their standards, but also to obtain a broader view of the “culture” of the board and how it works. Investors want to know what good governance means to the company, the board’s level Copyright © 2011 PR Newswire Association LLC. All Rights Reserved.

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White Paper Telling the equity story

of effectiveness and whether the culture of the board is open and welcoming to effective debate/contribution from all members. How well aligned is the governance culture with the company’s policies and procedures?

> Those who trade the stock – hedge funds and brokers – need to fine-tune their strategies and calibrate their algorithms. > The sell-side needs a holistic view of the company and the market within which it operates. Business drivers also drive analysts’ valuation models.

How to get the story to market? Technologies that maximize the availability of the story Identifying individual fund holders is a well-known problem for IR – especially in the U.S. So telling your story to all, through multiple broadcast channels, remains the best option. Your target audience expects to engage with your organization online – through interactive Web sites, multimedia news releases and webcasts, just to name a few of the many communications outlets available to you. It is also recommended that you utilize social media and search engine optimization (SEO) tools to complement and expand your outreach.

Interactive Web sites The SEC has embraced the Internet as a primary means of investor communication, but only on certain conditions. Making it “a recognized channel of distribution” requires investment in organizing critical information for investors, analysts and media while maximizing your online presence. And make sure the investor pages are up-to-date with real-time information; investors, analysts and media want information about stock prices, corporate earnings and other material news as it breaks.

> Send real-time notifications via e-mail and RSS feeds > Post press releases on your Web site > Make sure audiences have quick access to archives of annual reports, SEC filings, financial information and webcasts in one easy-to-access location > Ensure target audiences can find your content in all major search engines by optimizing your site with SEO tools

Visibility to all elements of the capital markets To spread your news to all of the target audiences we have discussed, IR teams should combine pinpoint targeting solutions with far-reaching broadcast distribution through the various media used by investors, which include:

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White Paper Telling the equity story

> The essential financial news services, such as Reuters, Bloomberg and Dow Jones > Financial media, Web sites and selected bloggers > Professional-level social media services (Seeking Alpha, Alacra Pulse, Stocktwits) > Specialist investment modeling services, including FactSet and Capital IQ

Direct investor targeting Personalized delivery to named individuals is crucial. In addition to lists maintained by the IR team, best practice requires distribution to named buy-side analysts and portfolio managers who either cover or hold your industry and peers. Similarly, focus on named sellside analysts covering your sector, industry and geography.

Reach new, potential investors Deliver directly to the institutional investors most compatible with your company.

Deliver directly to the institutional investors most compatible with your company who don’t currently own your stock and whose investment preferences match your company’s profile. Aim to match your equity story with potential investors by industry, market cap, trading volume, sales and earnings growth, P/E, leverage, momentum, beta, ROIC, ROE and dividend yield, among other factors.

Multimedia news releases Tell your story through video, high-resolution photos, hyperlinks to your Web site and downloadable, interactive PDFs. These can all help build a more comprehensive picture of non-financial assets than pure text alone.

Webcasting Webcasting makes your calls and events available to anybody, anywhere there is a PC and an Internet connection. Webcasting generates publicity, gives public companies a high-tech image, enhances investor engagement and is less expensive than satellite broadcasting. Many Investor Relations professionals have already begun using webcasting for annual meetings and conferences, investor messages, earnings calls and other events that impact stakeholders.

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White Paper Telling the equity story

Social media IR’s steady pace of adopting the social media tools used by colleagues in product marketing helps in many ways. Look for social media tools that enable simple and instant sharing of your news release with contacts on Facebook, Twitter and other social networking platforms. Use social media monitoring; to be forewarned is forearmed. Where investors gather, they chat about you and your story. Tapping into that chat – whether on financial chat rooms, securities trading sites or simply on Facebook, YouTube and Twitter – allows companysourced information, trusted above all others, to temper the rumors in circulation.

Virtual investor conferences Both logistically and economically, investors want online participation in the events.

Despite the migration from retail to institutional, retail investors still own almost one-third of companies’ equity. Traditional wisdom is that Web sites and the news media are their preferred channels. And many companies participate in the mainstream retail investor shows.

However, in uncertain times, both logistically and economically, investors want online participation in the events. The availability of online conferences series, where companies can present their equity story tailored to large audiences of active retail investors, offers yet another opportunity to tell the story.

Conclusion The disconnect between the long-term owners of stock and those who manage and trade the same stock is forcing IR professionals to recalibrate their communications strategies. Telling the equity story now requires a discussion of both long-term context and short-term impact. This widens the audience considerably, both demographically and geographically. To tell the story, companies are turning to multiple media, from the traditional – yet effective – press release to social media and Web technologies, including Web video. Combined, this recognition of changing audiences and changing media allow the engagement and stewardship philosophies promoted by regulators around the world to become reality.

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White Paper Telling the equity story

About PR Newswire In today’s age of information transparency and 24/7 availability, the need and opportunity for IROs is to go much further than disclosing information. It is to more broadly, globally and actively engage with shareholders and stakeholders. Offering both compliance and communications services, PR Newswire’s solutions help IROs embrace the changes described in this white paper to create long-term shareholder value and engage opportunity everywhere it exists.

> PR Newswire’s Web site creation and hosting tool, IR Room, helps your company organize critical information for investors, analysts and media while maximizing your online presence. > PR Newswire’s Capital Markets Visibility Package combines pinpoint targeting solutions with far-reaching broadcast distribution through the various media used by investors. > Multimedia News Releases (MNRs) from PR Newswire tell your story in all the formats that maximize impact (including photos, videos and related documents.) > PR Newswire’s IR Webcasts offer quality control and eliminate the need for inhouse expertise because they are produced by MultiVu™, our broadcast and multimedia production company. Your executives focus on the message. PR Newswire focuses on the delivery. > Interactive Annual Reports from PR Newswire allow you to turn any companybranded PDF into an interactive document with an e-book feel, providing a truly engaging report for today’s digital investor. > PR Newswire’s Online Investor Tours give you the opportunity to set up virtual meetings with key shareholders or analysts via a live Web conference. > PR Newswire, in partnership with BetterInvesting and MUNCmedia, has established an innovative online conference series where companies can present their equity story, tailored to retail investors, to audiences of tens of thousands of active retail participants, from their own offices. PR Newswire (www.prnewswire.com) serves tens of thousands of clients from offices in the Americas, Europe, the Middle East, Africa and the Asia-Pacific region. It is a UBM plc company.

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