There’s a lot to keep up with in Investor Relations for 2018. Extensive new regulatory requirements will bring change while new technologies will present opportunities as they seek to improve the accuracy and efficiency of IR programs. To get a better understanding of this year’s trends impacting the IR space, we caught up with industry experts including: Gary A. LaBranche, NIRI President and CEO, Darrell Heaps, CEO at Q4 Inc., Ben Ashwell, Digital Editor at IR Magazine, Amit Sanghvi, Senior Director International Advisor at Q4 Inc. and Adam Frederick, SVP Intelligence at Q4 Inc. and asked: what do you see as the big trends in IR for 2018?
Trend #1: MiFID II will bring sweeping changes
Amit Sanghvi (AS): The expectations are already well known: progressive shrinking of the European sell-side analyst pool, improved quality of research and an increased burden on European IROs to connect directly with the buy-side. But beyond that, I suspect MiFID II will start to be felt globally. My guess is that buy-side firms and their clients who, in theory, will benefit from better quality equity research and enjoy tighter spending control will demand the same from the sell-side the world over.
Gary A. LaBranche (GL): While the SEC has given a 30-month reprieve to brokers, we still expect to see a continuation of the erosion of sell-side research coverage for small and mid-cap U.S. companies, which will pose significant challenges for their IR teams. We expect that some companies will increase their investment in IR and expand their investor outreach efforts to help offset a decrease in coverage.
Darrell Heaps (DH): Certainly MIFID II is a massive trend for 2018. Although the impact in non-European markets may take longer to disrupt things, the trend and impact to the sell-side, buy-side and corporates seems very clear to me. For a large number of corporates, there is now an increased need to understand their current shareholders and proactively target new investors into the stock. The world of relying solely on the bank to take you out is quickly disappearing for most corporates. In demand companies will still have the sell-side reaching out, but even these popular firms will need to manage direct inbound requests for meetings from the buy-side, who are increasingly building their own internal corporate access departments. IR departments of all sizes are going to need to take matters into their own hands, in terms of marketing, targeting and meeting with investors from all markets.
Trend #2: Investors will continue to seek greater transparency
GL: Most U.S. companies will be making their first disclosures under the SEC’s CEO pay ratio rule during the 2018 proxy season. We expect that many IROs will take an active role in advising their management teams on how to address the concerns of investors, employees, the news media, and other stakeholders over this new disclosure. U.S. companies also are facing increased demands from governance activists to improve board diversity, while the rise of passive investing strategies likely will mean that IROs will face more governance-related inquiries in 2018.
Ben Ashwell (BA): During last year’s proxy season we saw that investors were willing to side with activists on an unprecedented scale (at Arconic it cost the CEO their job) and were willing to vote against companies on climate-related proposals (at Exxon Mobil, Occidental and PPL Corporation) and against the nomination of certain board directors. As investors make greater efforts to connect the dots between their portfolio managers and investor stewardship teams, ESG will come into sharp focus. If IR is to be taken seriously by the Street, it should be able to answer questions relating to board diversity and composition, executive compensation, environmental risk and disclosure, political lobbying and a range of other ESG issues. Consulting investor’s voting guidelines is a good way to get briefed on their positions on ESG issues, as is reviewing the various governance frameworks that have come into effect.
Trend #3: Passive investment strategies continue to gain popularity
AS: We will see continued flow of funds from active to passive strategies. However, I believe the line between what is passive and active investment is set to be blurred with the advent of roboinvesting. Suddenly, like passive funds, active strategies will be dependent more heavily on data (and algorithms) rather than traditional stock picking by humans. What remains to be seen is how the IR community will adapt to this both in terms of managing any perception gaps created by algorithms and soliciting votes.
DH: 2018 will see no slow-down in the flow of funds from active to passive strategies. Algorithms will form the basis of investing decisions. For IROs looking to adapt to the rise in passive investing, survival lies in the ability to leverage data to tell a story and intelligence to interpret what the “machines” are doing. Unlike the active investor, machines don’t care about your qualitative story. It will be the job of the IRO to understand the underlying algorithms and leverage data in the required format.
Trend #4: AI & machine learning finally become mainstream.
AS: For too long – forever even – IROs have had to put up with intel that lacks in terms of quality and quantity when compared to what investors have access to. I think 2018 is the year when firms like Q4 will arm IROs with tools powered by artificial intelligence that truly help each IRO fight for capital with a focused plan.
Adam Frederick (AF): Artificial intelligence has gone from a buzzword to a real solution and will no doubt play a critical role in the evolution of the IR workflow. While we have already seen applications of these technologies put into play, 2018 will be the year its leveraged at scale in the IR world. These technologies will allow IRO’s to increase targeting efficiency, track investor engagement, analyze investor behaviour and improve corporate access.
Trend #5: The rise of Cryptocurrencies continues
DH: It is impossible for anyone who has access to the internet to not have heard about Bitcoin, the most popular cryptocurrency in the world. Although not a trend for IR in 2018, I do think it’s one of the most important trends for anyone connected to the capital markets to understand. My reason is not bitcoin per say, but the underlying technology called “blockchain” and the explosion of “Initial Coin Offerings” or more recently ‘Initial Token Offerings” and Ethereum, which utilize the concept of “smart contracts” programmed into the blockchain. These smart contracts have the ability to function like a share certificate with a built in shareholders agreement and have the potential to be highly disruptive to the capital markets as we know them today. The impact of this is still a few years out, but for those in IR, it’s important to understand the tectonic shifts that are upon us.
Conor White is currently hustling in the Marketing team at Q4, and a passionate contributor to the Q4 Blog.
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