Small shareholders fed crumbs

By Andy Godfrey

Monday 1st April 2002

Small shareholders complain they don't get a fair deal from New Zealand's listed companies - complaints that are backed up by a recent survey on investor relations. Unlimited has some tips to improve your investor relations strategy.

It's a pretty safe bet that Enron's small shareholders, including a big percentage of its own employees, knew little (if anything) about the partnerships that inflated the collapsed energy trader's profits and hid losses. While the full story is bound to come out after investigations by the US Justice Department, the Securities and Exchange Commission and nine congressional panels, it will be too late to recover the billions of dollars of equity that have been wiped.

Here in New Zealand, new research into the investor relations of 16 listed companies has confirmed the long-held suspicions of small shareholders - companies see them as second-class citizens.

Investor relations is the way corporates communicate with the share market - commonly through press releases, annual reports and briefings. The study, "An Evaluation of Investor Relations in New Zealand", was carried out by Andy Godfrey, a director of the Manukau Business School's international MBA programme. The 16 companies surveyed included small and large businesses; their investor relations performance was then evaluated by members of the local financial community.

Generally, the research shows, companies communicate relatively well with analysts and fund managers, though chief executives were more active at this than boards. (Funnily enough, the companies surveyed thought they were being more interactive than the financial community did.)

Where the corporates fell down was in communicating with small shareholders. A 2001 Sharechat survey on internet use concluded that companies seemed to have no interest in keeping the investing public informed. As one chief executive of an NZSE-40 company said in Godfrey's survey: "90% of the shares are held by 30 institutions with 5000 private investors. Outside of the AGM and the annual report we have, historically, not made much effort with them."

It isn't hard to find home-grown examples of poor communication and disclosure. Take Waste Management's failure to immediately tell shareholders it hadn't won key contracts with the Auckland City Council early last year, or the criticism heaped on Force Corporation chairman Evan Davies in February this year for not adequately informing shareholders about their mandatory convertible notes application money.

Who cares?

Despite Godfrey's research showing most companies are keen to maintain a mix of shareholders to achieve market liquidity, small shareholders are often ignored. A lack of liquidity has a negative impact in many ways: it turns off overseas investors, undervalues shares on the New Zealand market, distorts the price for small parcel transactions and causes problems for companies aspiring to dual-listing on Australian stock market indices.

One investor relations manager surveyed said, "There is a general tendency for companies to think that small shareholders do not matter. Actually, they increasingly make up a large proportion of the volume of the market and you ignore them at your peril." Trouble is, small shareholders are quite hard to reach in practice, meaning most investor relations departments focus on relationships with institutional investors and brokers.

Internationally, shareholder activism has driven improved corporate governance. New Zealand, with its limited share market liquidity, has always been faced with shareholder apathy. Bruce Sheppard, chairman of newly formed shareholders' pressure group the New Zealand Shareholders' Association, hopes to force companies to improve their investor relations, particularly with small shareholders. "We don't have too many runs on the board yet but it would be fair to say most corporates are at least aware we exist," he says.

Carrots, sticks and tips

Sheppard says there are two ways small shareholders can deal with being on the receiving end of poor investor relations: the carrot and the stick. You can use the "carrot" technique by persuading companies that good communication can have an impact on the share price. For example, in 2000 the undervaluation of Tower Corporation was seen by managing director James Boonzaier as a failure of communication with shareholders. Alternatively, you can use the "stick", by kicking up a fuss with whoever will listen if the company won't fully disclose what is going on.

The debacle of the 2000 Contact Energy annual general meeting where small shareholders felt largely ignored, exacerbated by Contact's poor annual report and weak shareholder communication, was a major catalyst for the formation of the shareholders' association.

Godfrey suggests seven ways for companies to improve their investor relations:

1. Recognise small shareholders: The analyst/fund manager group is important, but they generally have their own ways of getting information. Devise strategies to improve communication, directly and indirectly, with your diverse small shareholder group. Use websites, shareholder profiles and email databases, shareholders' letters or fact sheets. Provide lots of information at annual meetings and offer company visits.

2. Investor feedback: Survey your shareholders. Ask them about the effectiveness of the annual report and the annual meeting. Set up shareholder focus groups and consult members of the financial community, such as financial journalists.

3. Board support: Make sure your board overtly supports its investor relations function. Directors can use their networking skills for informal activities with small shareholders.

4. Open up: Review whether all that information labelled commercially confidential really has to be so secret. Go past the minimum disclosure requirements and international disclosure standards. Make your annual reports easy to read and provide financial disclosure details to fully explain the figures and results. Explain the company's strategic direction in the context of industry and business conditions.

5. Use the web: Make the investor relations bit of your website accessible, well structured, up to date, comprehensive and interactive. Put material from press releases, briefings, presentations and conference calls on the site immediately. And throw on annual reports, annual meeting speeches, fact sheets, shareholder letters and other investor information.

6. Annual meeting: Respect the rights of small shareholders at your annual meeting. The more they're told during the year, the less rowdy they'll be at the annual meeting. Use your website and review the timing and location of the annual meeting to enable a wide and diverse audience to be involved. Use senior executives to answer particular questions and include a presentation highlighting a particular development or strategic theme to make the meeting more meaningful for shareholders.

7. No PR: Have a direct relationship with small shareholders and the financial community as much as possible. Avoid using public relations consultants to get your investor message across, as Advantage Group was widely criticised for doing last year.

Contact Andy Godfrey at godfreya@manukau.ac.nz

Shareholders scorecard

Since its set up a year ago, the New Zealand Shareholders' Association's membership has risen from 120 members to 280 (paying $80 a year). Around 40 members are involved in research, and about eight are able to front up on a one-to-one basis with the government, stock exchange, Securities Commission or with companies. "This reporting season will be the true test, as our infrastructure was not really functioning in the last season. We now have the platform of resources and the activists out there," says chairman of the Shareholders' Association Bruce Sheppard.

The association's runs on the board so far? It complained at IT Capital's annual meeting last year that US-based executive Jeff Dittus was overpaid and had delivered a bad result. He left soon after with a year still to run on his contract. It also criticised a lack of disclosure by CDL, the country's largest hotel chain, and raised concerns about Sanford's forex trading losses. Not that many, Sheppard admits, but there have not been many faux pas, either.

Andy Godfrey

Comments from our readers

No comments yet