Shaping Tomorrow’s Dialogues – Bridging Gaps between Companies and Investors

In the dynamic landscape of investment, where change and uncertainty are dominant features, the Investor Forum, has undertaken a comprehensive assessment of the pivotal dialogues between UK listed companies and their institutional investors. The standout finding is that the foundations of the relationships are robust and when companies and their investors have opportunities for meaningful dialogue, they are more likely to realise their common goal of sustainable long-term value creation. 

These insights from the Investor Forum, a non-profit community interest company set up by institutional investors in UK equities, confirm the role that effective communications can have in driving sustainable long term value creation amidst rapidly changing stakeholder interests and market dynamics.

The report, Shaping Tomorrow’s Dialogues; Bridging the Gaps between Companies and Investors is the result of a series of interactive roundtables designed to facilitate informative and open discussions to identify, understand and evaluate the critical exchanges between listed companies and their investment managers, investor relations, sustainability, governance and voting and audit and assurance. While the Investor Forum assessment focused on UK-listed companies and their institutional investors, its findings are relevant for public companies around the world.1 

Building on Strong Foundations

Meaningful and effective dialogue is critical to building trust. Trust forms the bedrock of any successful investor-company relationship. The paper argues that, from this robust foundation, if the quality of discourse between boards and investors is elevated, then they can more effectively work together to address vital challenges and, in so doing, help invigorate UK equity markets. The UK equity market boasts numerous positive attributes. Unparalleled access to companies, transparent information flows, and long-standing investor protections that have proved their worth over decades, and help the market stand out.2

But a ‘reimagining of stewardship’ is required. Companies, asset managers and asset owners face enormous pressures as they strive to reshape business practices to deliver truly sustainable returns. The current system was not designed to cope with the multifaceted demands that have arisen as companies and investors seek to navigate complex societal and environmental issues in addition to creating value.  The changing nature of the ownership of the UK market, the proliferation of collaborative initiatives and the, sometimes, conflicting pressures from global regulators all add further complexity.

Co-Creating an Effective Model for Stewardship

Markets work best when there is a clear alignment of interests between savers, asset owners, asset managers and companies. It is vital that all participants are motivated to re-align the investment chain around a common goal of creating long-term sustainable value. What’s critical now is a clear recognition and mutual understanding of the roles, responsibilities and priorities of all agents in the chain and effective dialogue to nurture strong relationships and facilitate informed decision-making. The assessment identifies, several critical observations which emerge as the cornerstones of resilient partnerships between investors and companies. 

Figure 1: Establishing a common understanding

Characteristics of the relationship: 

• Strong investor-company relationships form the bedrock of quality dialogue and the common imperative of value creation can unite the investment chain.
• Recognising that each investor and company is unique, tailored approaches are necessary for effective communication.
• Dialogue surpasses mere disclosure requests and the exchange of information. Relationships are pivotal in all dialogues. Investors appreciate timely conversations and existing relationships, facilitating quick access when necessary. For companies, its vital to identify the right contact within the investor institution for specific issues. 
• Language is critical, particularly in discussions concerning ESG and sustainability, and clear and aligned communication, with a defined purpose, will help enhance understanding and drive meaningful actions. 

Changes impacting the landscape: 

• Clearer reporting is an ongoing journey rather than a final destination and both companies and investors are grappling with escalating reporting demands. Prioritising what truly matters for a company’s business is essential – the solution is not in the quantity but in the materiality of information.
• Companies have to navigate multiple stakeholders needs, with often diverse and sometimes conflicting interests and priorities. Effective stakeholder management involves prioritising concerns, making trade-offs and transparently communicating decisions and their rationale. Strong relationships with investors are therefore critical to ensure a transparent and timely exchange of information.,
• The rapid evolution of technology and regulation means adaptation is required at an accelerated pace. However, meeting stakeholder needs presents inherent challenges amidst these transformations. A collaborative approach facilitates informed exchange and provides a mutual benefit through sharing knowledge and expertise.

Actions that can make a difference:

• Incremental changes and simple enhancements to communication methods can yield substantial impact over time, reducing friction, improving understanding and breaking down barriers.   
• In a competitive market, best practices are quickly embraced, offering the potential to ensure efficient, effective, and high-quality relationships. It underscores the importance of remaining agile and responsive to industry trends.
• Understanding the purpose of dialogue is crucial for effective communication between investors and companies. Active investors engage in thorough due diligence before investing or divesting. Once invested, dialogue serves various objectives, involves different parties, and takes diverse forms. The key is understanding the “why.”

Focusing on Meaningful Dialogue

The report highlights the need for communication channels used by companies and their investors to evolve alongside ever-shifting market interests, dynamics and objectives. Whilst each of the dialogues is very different in terms of maturity and intensity, ranging from well-established in the case of Investor Relations and Voting & Governance to the more nascent in the case of Sustainability, with Audit & Assurance being the least active dialogue by far. 

Figure 2: Maturity and intensity of relationships

For each of the dialogues the challenges facing companies and investors were captured and practical, actionable steps to reduce friction and strengthen relationships were developed. The goal was to enable companies and investors to focus their efforts on the issue of long-term value creation. 

Investor relations dialogue – Expertise plays a pivotal role in this dialogue, which is well established and well formed, marked by strong relationships. Companies’ investor relations functions build a compelling equity thesis that helps investors to understand their strategy, business model, competitive advantage and growth prospects. Critical to building relationships is recognising and understanding differences in both companies and investors and ensuring tailored approaches that acknowledge the unique characteristics of each company and investor. In addition, understanding the purpose and objectives of dialogue, clearly differentiating the approach between engagements for information and those focused on value creation.

Sustainability dialogue – Navigating complexity is a key theme of this rapidly evolving dialogue. The increasing significance of this dialogue, and a wide variety of views, means a nuanced approach is needed to address the complex mix of shifting regulations, diverse stakeholder expectations and emerging technology. The inherent uncertainty in data quality, capital investment requirements and the extended time horizons necessitate a different style of dialogue to enable a deeper understanding and connection between companies and investors. There is a need to address the overarching burden of reporting while ensuring that discussions on real world impact are not overshadowed. It’s essential that there is a clear focus on the purpose behind sustainability initiatives and an alignment to strategic objectives and that data disclosed to investors is relevant to their decision making.

Governance & Voting dialogue – Consistency is crucial with a dialogue which has traditionally been very clear and focused. Various dynamics including, emerging climate and ESG concerns, pressure from asset owners and the influence of proxy advisors highlight a need to increase the effectiveness of the dialogue between companies and investors to focus on preserving and enhancing long term value. 

Audit & Assurance dialogue – Integrity emerged as the linchpin of this dialogue, underscoring its fundamental role in the audit and assurance processes. This dialogue is much less established but with increasing focus from regulators and wider stakeholders there is a need for further understanding. Neither investors nor companies see value in simply adding another round of meetings to already crowded agendas – the focus needs to be on meaningful, necessary and relevant, not simply routine, dialogues.

Market Practitioners focused on Solving Problems

It was found that each of these dialogues are a means of creating shared agendas. Despite differences, there was a recognition of common goals and foundational strengths and the potential for incremental changes to drive substantial improvements. 

The importance of clear and aligned language in discussions surrounding ESG and sustainability was underscored, both internally within organisations and externally between stakeholders. However, unresolved issues, such as determining financial responsibilities for sustainable transitions, continue to create tensions between investors and companies, highlighting the need for tailored engagement and constructive dialogue. Best practices and key actions were collectively identified for investors and companies to enhance the effectiveness and efficiency of dialogue, which are outlined in detail in the full report.

Shaping Tomorrow’s Dialogue.

Market dynamics are rapidly evolving, requiring continuous re-evaluation and adaption of relationships and dialogues to ensure their effectiveness and efficiency for the future. It is critical for companies and investors to partner through strategic, effective dialogue and engagement to achieve sustainability long-term value creation. 

While the analysis centres on participants in the UK market, the imperative to prioritise exceptional quality connections extends far beyond. This means steering away from a mere tick box culture and instead emphasising a shared dedication to creating value which unites the investment chain.