Now is not the time to backpedal on investor engagement

This article was first published in the May 2020 UK edition of Accounting and Business magazine.

With so many pressing issues swamping management’s inbox in these historic times, revisiting investor communication strategies may seem a low priority. However, given that many companies will likely need to tap either the equity or debt market in the coming years, this is not the time to backpedal on investor engagement.

Guides to help management with their investor engagement at this time are understandably few and far between. A rare exception is the useful infographic, ‘Reporting in times of uncertainty’, from the UK’s Financial Reporting Council’s Lab.

To get behind the headlines, AB has been talking to analysts around the world. One message has come through loud and clear: don’t wait until a formal reporting period to engage with the investment community. This is a rapidly changing situation. Consider providing briefings through conference calls or webinars. Keep the website up to date with an easy-to-find Covid-19 section. Above all, keep lines of communication open.

As you might expect in such an unusual situation, there are a number of urgent questions that investors need management to address. Corporate survival is top of the list – and that means talking about cash and debt. How and where is the company generating cash? Covenants, the ability to repatriate cash, hidden debt, debt factoring – it’s time to get back to basics and provide detail on the current level of resources and the opportunities to plug any likely funding gaps. Are dividends at risk?

Aside from cash and debt, the message is simple: the more detail, the better. For example, think about geography. The impact of the pandemic differs from country to country, and the response by governments also varies widely. The policies of different administrations will have implications for both the short and long-term success of the corporate sector.

Investors want to understand these structural differences in order to get a picture, territory by territory, of how a company’s business units are faring. Is the company eligible for government assistance in any of the territories in which it operates? If so, will management accept this funding? Many of these programmes come with onerous conditions. In the US, for example, at the time of writing, listed companies that accept a government loan will be barred from stock buybacks and dividend payments for the duration of the loan plus an additional year. Explain how the covenants on such funding might constrain management’s action in the future.

Investors are keen to understand whether there is any flexibility in the cost base. Which costs are fixed over the coming months and years? Which can be reduced or eliminated?

Is there a risk that revenue has been overstated, or that inventory or assets will need to be written down? If a company has hedges or has sold forward, when will those contracts expire, and what does that mean for the performance of specific operations? Make visible all the key assumptions that underpin the numbers reported by management and, where possible, allow investors to get an idea of the sensitivity of those numbers to changes in those estimates.

It is not surprising that, as investors are all too aware of the volatility in the capital accounts, the funding of pension plans is also front of mind.

But it is not just financial risks that concern investment professionals. Shareholders want detail on the operational impacts that companies are experiencing. What challenges do they face at a local level, and how do they see those difficulties panning out over time? How will the crisis impact capital projects or product development timelines? And what has happened to headcount at key locations?

Investors are already discussing the longer-term impact of the pandemic on capital markets and companies. The Covid-19 crisis represents a fundamental shock to the operations of most businesses. Might this impact the business model of key segments?

Most companies have been forced to change how they operate. Many have implemented remote-working arrangements for the first time. Some have changed how they interact with their customers. Could this change how they create value in the long term?

Supply chain issues have been hitting the headlines from the start. Does management perceive this to be a short-term blip to the sourcing strategy? Or is a fundamental shift in the use of offshore suppliers under consideration?

Finally, a number of investors have expressed concerns about the governance of companies in these challenging times. Are sufficient processes and controls in place? How does management monitor operations when physical contact is limited? And finally, what will this mean for the audit? Will there be a change in its scope?

Silence is not golden

Some business won’t have the information needed to address many of these questions and may argue that silence is safer than confusing the market with speculation. In my experience, the opposite is true. In times of uncertainty, it is the companies who are open about their approach to tackling the challenges who build long-term trust with investors. As businesses increasingly look to the capital markets to provide funds, such trust may soon become a valuable commodity.

Alison Thomas is a consultant.