mslgroup global institutional investors insight report 2014

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MSLGROUP.COMMSLGROUP’s Global Institutional Investor Insight Report, December 2014

Global Institutional Investors Insight Report

MSLGROUP’s Global Institutional Investor Insight Report, December 2014

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MSLGROUP.COM

The Financial Practice at MSLGROUP

CNC is an experienced international strategic consultancy which helps clients solve business problems through communications. When communication matters, companies, institutions and individuals use CNC’s unrivalled expertise to advise on communications affecting decisions, valuation, change and reputation. CNC works in corporate and financial communications, public affairs, crisis support and change management, underpinned by a strong understanding of the rapidly evolving digital media environment. In November, CNC and Capital MSL announced that the two operations intend to merge in January 2015. Visit: www.cnc-communications.com

Kekst and Company has long been the leading corporate, financial and strategic communications advisor to senior management teams and boards of directors on their most serious business and communications issues. Headquartered in New York City, Kekst’s professionals are highly experienced and possess a deep understanding of the business world, the capital markets and the media. Most importantly, they excel at helping clients articulate and effectively communicate key messages to their most important stakeholder groups. The company’s engagements typically involve: investor relations, crisis communications, mergers & acquisitions, bankruptcies and restructurings, litigation support, and corporate governance issues. Additionally, the firm has long been a leader in advising private equity firms and hedge funds, representing nearly 50 entities today. Visit: www.kekst.com

A top-five player in France’s M&A league tables, Publicis Consultants’ Financial team also regularly advises investment banks, private equity firms, asset managers and listed companies on their communications strategies. The company’s objective is to develop and protect its clients’ financial image for each of their key targets: investors, journalists, influencers, employees. Publicis Consultants supports clients around a number of delicate communications challenges, including: crisis communications, annual results and Investor Day presentations, financial advertising campaigns, hostile take-over bids, IPO projects, Say on Pay for Annual Shareholders meetings, as well as rumors on Twitter and social networks more generally. Visit: www.publicis-consultants.fr

JKL is a leading Nordic consultancy specialising in strategic communication and stakeholder engagement. Clients turn to JKL for support in building their reputation, understanding perceptions or issues across multiple stakeholder groups, and devising and implementing efficient communication strategies. With more than 25 years’ experience in strategic communication, JKL offers its clients a profound understanding of the Nordic capital markets, business environment and media. JKL has a hub office in Stockholm and consultants in Norway, Denmark, Finland and Brussels. Visit: www.jklgroup.com

A top-three group globally, the global Financial Practice at MSLGROUP offers specialized, best-in-class strategic communications advisory and other services to more than 500 corporate and institutional clients across major financial and business markets on three continents around the world. The group consists of CNC in 8 markets; Kekst and Company in New York; JKL in the Nordic region, Publicis Consultants in France as well as dedicated Financial hubs in Italy, Poland and Asia. Visit: www.mslgroup.com

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About this research

MSLGROUP’s Global Institutional Investors Insight Report is a landmark piece of research. The survey is one of the first of its kind to examine the tangible and intangible factors that influence the decision-making process of institutional investors and sell-side analysts around the world. The report also sheds new light on this group’s motivations and offers perspective on how investor behaviour may evolve in the near future.

Among the first to cover a global investor base…

Whereas past studies of market participants have focused almost exclusively on the U.S. and European markets, MSLGROUP’s is among the first to include the Asian investment perspective. The findings are compiled from a total of 500 direct telephone interviews with institutional investors and sell-side analysts in Europe (France, UK, Germany, Switzerland, Luxembourg), North America (the U.S. and Canada), and Asia (Singapore, China, Hong Kong, Australia and Japan). The study demonstrates that while these financial professionals have many similarities in approach and perspectives, important nuances do exist among these regions.

Decision-making and corporate influence…

The survey, conducted during August and September 2014, provides detailed insights and spotlights how investment decision-making and future investor behaviour might change. The research shows how both financial and non-financial factors play a role in decision making and highlights the extent to which the information required to make these decisions can be influenced by corporate disclosures and investor relations activities.

Continued growth in activism…

In the research, we have also taken one of the first global looks at investor views on shareholder activism, seeking to understand how far investors around the world believe that this approach will develop beyond the U.S. and its early stages in the UK. We also examine global investor views of the benefits that such engagement may, or may not, bring.

A more complete picture…

Throughout this report, we have highlighted notable global trends in investor opinion, balanced with regional differences (where available). What emerges is a more complete picture of the global investor base, which illustrates why this important corporate audience should not be regarded as an homogenous group.


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MSLGROUP.COM

Executive summary

Global capital markets overtook bank lending as the leading source of long-term finance in 20091 as the fall-out from the 2008 financial crisis lowered risk appetite within banks considerably. The effective functioning of these markets is more important to society’s economic progress than ever before.

But the views of institutional investors, those who channel the largest assets, are still rarely captured on a global basis. As a group, they are hard-to-reach. But, in this inaugural study, we have successfully tracked investor behaviour, attitudes and beliefs across the three largest regions (by value): Asia, Europe and the United States. Estimates place institutional investor assets under management in these three regions at $58 trillion.

The insights we present, therefore, should make for instructive reading. Our findings will inform the investor engagement strategies of listed companies around the world, but might also be considered as a useful input to corporate decision-making, vis-à-vis both primary and secondary capital markets. Those who get the balance of their market engagement right can expect to maintain a ready market for future financing, lower their cost of capital as well as cultivate a supportive investor base for corporate actions.

The good news is that two thirds of investors globally believe that investor communications have improved overall. But, this is no time to rest on our laurels. Listed companies are navigating ever-more global capital markets; one where the competition for capital has never been more intense.

So what are the key take-aways from the study? The regional variance of investor behaviour and attitudes is highly notable.

From region-to-region, our findings show a stark difference in the number of stocks investors hold in their portfolio. Furthermore, average holding periods can also vary significantly. These distinctions can obviously translate into a very different set of investor needs.

On average, European investors cover a universe twice the size of their U.S. and Asian counterparts. As a result, European investors seem to place a greater value on the quality of a company’s own communications. This is cited as a very important driver of corporate valuation. European investors are also among the keenest to see a clear alignment of interests; placing great store in the linkage between director compensation and company performance.

U.S. investors might be viewed, according to our findings, as the most long-term group. A higher proportion of their portfolio is held constant for five years than in any other region surveyed. This, in a region best known for its investor intervention. One might presume that the loyalty of U.S. investors is, therefore, heavily associated with long-term value creation. Should this goal be threatened, they are more pre-disposed to act, but even in the U.S. a majority of our sample question the long-term benefit of high-profile shareholder activism, as a general rule.

by Roland KleinGlobal leader of MSLGROUP’s Financial practice, and CNC Partner.

1 Lena Komileva for Financial Times, 16 September, 2009

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Asia represents a clear contrast to the mature western markets in our study. While portfolios are currently more concentrated in Asia than in any other region, its fast-paced markets mean that investors have developed a shorter time horizon. Here, investors reported holding an average of just 46% of their portfolio for more than a year; over a five year period this fell on average to as little as 17% of their portfolio - half that of other regions. This means that stocks held for more than a year by investors in Asia can be the exception, rather than the rule. What’s more, two in three investors in the region readily expect to be managing more stocks in the next three years. These factors will pose even more challenges for investor relations professionals and may alter the aftermarket dynamic of a rising number of Asia-led public offerings.

For as long as I can remember the debate over the contribution intangibles make to market valuation has rumbled on. The processes by which an estimate of a business’ economic value is arrived at are generally accepted, but the precise effect of so-called non-financial factors is still unclear. So we asked our sample for their views.

What is clear is that, not unreasonably, investors place greatest store in knowing where a company is going and that their expectations will be delivered upon. Worldwide, our investor sample want to understand the corporate strategy, to feel confident in the quality of executive management and to be sure that the company has been open and honest in its disclosures. In my experience, it is not the bumps in the road of any company’s life which frustrate investors, but those bumps which were neither foreseen, nor disclosed, nor discussed.

Pre-crisis, environmental, social and governance (ESG) factors were a much discussed topic, particularly in Europe. The turbulence of financial markets and extremes of the last seven years may well have focused attention on the short or medium rather than long-term, but ESG is cited by a significant number of investors in each region as being a ‘somewhat important’ determinant of valuation. It might surprise some of our readers to learn that the country with the largest proportion of investors citing ESG behaviour as very important at present was China.

And so, the age-old tension between long-term performance and short-term gain is ever present.

Capital markets, by their very nature, are designed to be long-term sources of finance. When a company seeks to access primary capital markets, the purpose is typically to invest and thereby, ultimately, to increase profits. It can take many months or years before the investment pays back its cost.

We would do well to remember that investors in any region need a clear roadmap for company development, both when they invest and while they remain invested. All good stories should have a solid beginning, a middle and an end.

As capital markets and

shareholder bases have

become more globalized,

companies are faced with an

issue of regionalism when

it comes to interpreting

their corporate messaging,

and while this may sound

somewhat paradoxical -

globalism leading to more

regionalism - there is a clear

opportunity for companies

to strengthen and increase

their shareholder bases if they

understand these important

regional nuances and adjust

course accordingly. As a

truly global communications

company, rich in local

expertise, and with a proven

track record in corporate,

strategic and financial

communications, MSLGROUP

and its agencies help clients

understand such nuances,

and navigate complex

environments

Roland KleinGlobal leader of the Financial practice, and CNC Partner.


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MSLGROUP.COM

Critical factors driving investor decision making

SECTION I

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There are multiple factors that impact how institutional investors make investment decisions about which companies to invest in, which companies to continue to hold and which companies to liquidate from a portfolio. In this study, we have drawn a distinction between financial and non-financial factors and then discuss what a company can do to improve its perception among these market participants. We have also analysed the influence of different sources of information used by financial professionals around the globe as part of their research into companies and industry sectors.

What is clear is that no matter where in the world an investor might be located, the decision whether to invest or not is based upon a combination of both fact and instinct; and both financial and non-financial factors.

A logical approach to understanding the findings is to analyse the data in two ways: First, what are the factors that investors look for when making an investment decision? Second, what can companies do to positively influence investor perception?

There are a number of common top-line points in this section, with some striking differences among the different geographic regions and depending upon whether one is a buy-side investor or sell-side analyst.

100%50%

More Important Less Important Same Don't Know

A good track record onmeeting earnings expectations

A clearly articulated equity story

A clear link betweenDirector's remuneration and

company performance

A dedicated and informedinvestor relations function

Management one-on-ones

A relevant, timely and supportivedigital or social media footprint

Management visibility atindustry sell-side conferences

Supportive coveragein the financial media

Sufficient sell-sideresearch coverage

65% 10% 21% 4%

58% 15% 23% 4%

54% 20% 21% 5%

51% 20% 26% 3%

45% 23% 23% 9%

39% 36% 20% 5%

39% 31% 25% 5%

35% 35% 25% 5%

33% 37% 26% 4%

FIGURE 1

Investors: Which of the following factors have become more or less important to understanding a company’s investment story over the past few years?

A logical approach to understanding the findings is to analyse the data in two ways: First, what are the factors that investors look for when making an investment decision? Second, what can companies do to positively influence investor perception?

Fact plus instinct, financial plus non-financial factors...


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Across the three geographic regions, four factors emerge as key elements in helping buy-side investors more fully understand a company’s investment story:

√ A good track record in meeting earnings expectations (65%)

√ A clearly articulated equity story (58%)

√ A clear link between a Director’s remuneration and company performance (54%)

√ A dedicated and informed investor relations department (51%)

When asked to assess the importance of specific factors to understanding a company’s equity story, there are three notable areas where the response of “less relevant” matches or even exceeds that given by the sample for “more relevant”.

One of these areas, “sufficient sell-side research” (37% less relevant versus 33% more relevant), is illustrative of the increasing importance placed upon internally-generated, buy-side research (a subject that we cover later in this report).

In contrast, global sell-side respondents in the survey hold a different view as to what has become more important in recent years. Several elements scored a majority vote among this audience, including sell-side research and attendance at sell-side conferences:

√ A good track record in meeting earnings expectations (79%)

√ A clearly articulated equity story (72%)

√ A dedicated and informed investor relations department (67%)

√ Management one-on-ones (57%)

√ Sufficient sell-side coverage (57%)

√ Management visibility at industry sell-side conferences (55%)

√ A clear link between a Director’s remuneration and company performance (52%)

The factors that have become more important…

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While there are clear takeaways as to the critical factors that are driving investment decision-making among financial professionals on a global basis, there are also subtle differences in the importance that U.S., European and Asian investors place on various elements. Communications professionals and CFOs would be well served to understand these nuances when evaluating their shareholder bases and planning their investor relations activities.

Significant regional variations…


80%

40%

8%28%10%54% 2%21%7%70% 0%10%13%77%

U.S. Europe Asia

For the United States, it was notable that between one quarter and one third of the sample said that there had been no change in importance for any of the factors, with the exception of digital footprint. Only when discussing a company’s track record on earnings (54%) and the importance of a clearly articulated equity story (54%) did a majority of the respondents identify that these factors had become more important to their investment decisions.

FIGURE 2

Investors: To what extent has a good track record on meeting earnings expectations become more or less important to fully understand a company’s investment story?

While there are clear takeaways as to the critical factors that are driving the investment decision-making process among financial professionals on a global basis, there are also subtle differences in the importance that U.S., European and Asian investors place on various elements.


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MSLGROUP.COM


70%

35%

8%27%11%54% 5%26%13%56% 1%9%24%66%

U.S. Europe Asia

Europe occupied a middle ground on this issue with some striking differences in opinion among the various countries. Compared to the U.S., in Europe there is significantly more attention being paid to the link between a Director’s remuneration and performance (62% compared to 42% in U.S.), and to the earnings track record (70% compared to 54% in U.S.). While the overall European sample noted that a clearly articulated equity story had become more important to their decisions (57%), which was on a par with the U.S., the individual country responses show that German institutions take this factor even more seriously (79%). A significant percentage of German and Swiss investors (38% and 49% respectively) were also among those who viewed supportive financial media coverage as being more important.

The UK differed significantly from the European whole on just one factor; with 63% of the UK sample citing one-on-ones with company management as more important to their investment decisions (versus Europe overall at 44%).

The results from Asia likewise present a meaningfully different picture, consistent with a developing institutional investment sector in this high-growth region. In Asia, the percentage responding that the surveyed factors have become “more important” to investment decision-making is greater than the global average for every element. In many instances this difference runs into the double-digits. The most impressive variances relate to the importance of sufficient sell-side research (62% compared to 33% globally), management visibility at

FIGURE 3

Investors: To what extent has a clearly articulated equity story become more important to fully understanding a company’s investment story in the last few years?

While the overall European sample noted that a clearly articulated equity story had become more important to their decisions (57%), which was on a par with the U.S., the individual country responses show that German institutions take this factor even more seriously (79%).

sell-side events (56% vs. 39% globally), a dedicated IR function (67% vs. 51% globally), management one-to-ones (61% vs. 45% globally), as well as the digital footprint (54% vs. 39% globally).

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The core drivers of corporate valuation…

Non-financial factors, or what are commonly referred to as “extra-financials,” have become more prominent in the investment landscape in recent years as financial markets, corporations and intermediaries have become more sophisticated in assessing intangible factors that may affect a company’s future profitability, but which are not presented in the financial statements. To uncover insights, respondents were asked to rate the importance of extra-financial factors in terms of driving a company’s valuation today.

Overall, buy-side participants place much importance on extra-financials, with 95% of participants stating that a company’s corporate strategy and the quality of its executive management are either

very or somewhat important to driving a company’s valuation. Notably, 79% indicated that a company’s corporate strategy is very important, and 70% echoed the same sentiment for the quality of the executive management team. The transparency of a company’s investor disclosures is viewed as either very or somewhat important by 91% of buy-siders, with 63% citing this factor as very important.

The next three extra-financial factors to be rated as very or somewhat important in driving a company’s valuation include the quality of the company’s investor communications (86%), a company’s market share (83%) and environmental, social and governance (ESG) behaviour (72%).

The wider media image of a company was noted as very or somewhat important by 66% of investors, while a company’s digital and social media presence was similarly cited by 52%.

The sell-side holds a broadly similar view here for a company’s corporate strategy (98%), quality of its executive management (87%), transparency of investor disclosures (89%) and the quality of investor communications (86%). When it comes to the remaining extra-financial factors, the sell-side places more emphasis on four areas: company market share (92% vs. 83%), ESG (87% vs. 72%), media image of the company (83% vs. 66%) and a digital and social media presence (63% vs. 52%).

Very important Somewhat important Not important Don't know

The company's corporate strategy

The company's digital and social media presence

Media image of the company

Environmental, Social & Governance behaviour of the company

The company's market share

Quality of the company's investor communications

The transparency of the company's investor disclosures

Quality of executive management at the company

100%50%

79% 16% 3% 2%

70% 25% 3% 2%

63% 28% 7% 2%

38% 48% 11% 3%

38% 45% 14% 3%

24% 48% 25% 3%

19% 47% 32% 2%

13% 39% 44% 4%

FIGURE 4

Investors: Non-financial factors considered very important to driving a company’s valuation today

Overall, buy-side participants place much more importance on extra-financials, with 95% of participants stating that a company’s corporate strategy and the quality of its executive management are either very important or somewhat important to driving a company’s valuation.


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MSLGROUP.COM

More significant regional differences…

This area of the research provided us with some intriguing differences of opinion among investors in the three regions surveyed that, added with the factors highlighted above, draw attention to some tangible differences in investor decision-making in the more mature investor centres of the U.S. and Europe, versus the emerging investor centres of Asia.

The widest range of opinion among investors could be seen in several questions:

√ ESG was viewed globally by 72% of buy-side participants as a very or somewhat important non-financial factor. Interestingly, 85% of Asian participants are in agreement compared to 65% for the U.S. and 73% for European investors.

√ Market share was viewed globally by 83% of buy-side participants as a very or somewhat important non-financial factor. Only 72% of European financial professionals concurred with this view compared to 89% for both the U.S. and Asia.

√ Media image was viewed globally by 66% of buy-side participants as a very or somewhat important non-financial factor. Only 54% of Europeans hold this same level of sentiment when it comes to media image compared to 66% for the U.S. - but both contrast with the 86% result for Asia.

√ Digital and social media presence was viewed globally by 52% of buy-side participants as a very or somewhat important non-financial factor. Financial professionals in Asia place a significantly higher level of importance on this extra-financial factor (77%) compared to their European (40%) and American (49%) counterparts.

Very important Somewhat important Not important Don't know

8%

41%

46

%5

%

6%

34%

55

%5

%

34%

43%

20

%3%

U.S. Europe Asia

of investors in Asia consider a

company’s media image to be an

important extra-financial factor

86%

FIGURE 5

Investors: To what extent is a company’s digital and social media presence very important, somewhat important, or not important to driving a company’s valuation today?

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A letter from Europe: Business value, much more than a sum of the parts

As Warren Buffett would say, buying a company is about more than just price. Traditional methods of determining economic value may have changed significantly in recent times, but the impact intangibles can have on corporate valuations continues to divide opinion.

Academics assert that up to half of a company’s value lies not on its balance sheet, but in its non-financial assets: the skills of management, the business model, governance, a strong environmental story, the role of the company in society, brand and market share.

MSLGROUP’s research findings would suggest investors do indeed place considerable store in these extra-financials. Some 58% of investors say a clear equity story has become critical to investment decision making. This premise has long been a clear tenet for successful primary offers, but can often become overlooked in the day-to-day of secondary market trading.

It is clear that investors around the world want to understand a company’s strategy. They want to understand a company’s vision for the future, with 79% of investors placing this first in the most important non-financial factors driving valuation. Second in our survey is an ability to judge the quality of company management.

This may all sound rather simplistic, but as Mr. Buffett would also agree, there are no bonus points for complicated investments that no-one understands.

The sustainability of a business’ bottom line, i.e. the ability to foresee change and adapt, has become the watchword for quality. So, a company has to tell both the short-term and long-term equity story.

European investors, in particular, place great value on the quality of a company’s communications, citing it as a far greater driver of corporate valuation than something like market share. European investors are also among the keenest to see an alignment of interests. They place great store in a clear link between directors’ pay and company performance. The UK shareholder spring of 2012, a reaction to perceived excessive pay in the context of poor company performance, with some highly coordinated and very high-profile shareholder action certainly exposed some executive weakness in this regard. The end result was several high-profile CEO scalps and a clear signal companies would do well not to forget.

This places even more emphasis on the openness and transparency with which companies approach their public disclosures and the way in which they live up to investor expectations for the business. Indeed, third in the list of priority inputs to valuation is the transparency of a company’s investor disclosures.

And yet, according to our research, a number of European and U.S. investors are finding limited value in earnings calls with management, or simply do not participate in them. While just one illustration of a company’s engagement with investors, this is clearly a valuable opportunity that is being missed. In spite of the hours of preparation that can go into these calls, it would appear that they are falling short of their potential and this has major consequences for investor relations teams and their communications. Companies would be well served to review, not only the depth of the information they provide on earnings calls, but how they deliver it.

by Claire MaloneyPartner, CNC*

It is clear that investors around

the world want to understand

a company’s strategy.... This

may sound rather simplistic,

but as Mr. Buffett would

also agree, there are no

bonus points for complicated

investments that no-one

understands.


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MSLGROUP.COM

There is little doubt that investors tend to prefer well-run companies, that deliver on their earnings expectations and can articulate a more medium to long-term future.

Investors’ favoured information sources vary extensively by region. However, perhaps unsurprisingly, Bloomberg, Financial Times and the Wall Street Journal are cited by a significant proportion of our sample as the most influential business media. It would seem that Bloomberg is winning the online war, particularly in Asia.

The digital age has certainly changed the level of attention that listed companies can get and has disintermediated traditional sources of company information such as the sell-side. A company’s overall reputation matters more now than it has in decades. In a less deferential society, companies with reputation problems are more susceptible to public scrutiny. More and more, investors recognise this risk. Anecdotally, one fund manager we know well remarked recently that reputation has gone to the top of the list of risk factors that they consider before making an investment.

In Europe, our survey found that a positive media image is viewed as having become more important to investment decision making than sell-side analysis. This third-party “endorsement” is viewed as very or somewhat important as a driver of corporate valuation by 66% of US investors, 54% of European investors and 86% of Asian investors.

While a supportive media image of companies is still viewed as an important validator of a company’s license to

operate, in the next three years our sample anticipates that social media presence will rise in importance. This poses an entirely new conundrum for investor relations professionals.

The usefulness of social media from an investor relations perspective continues to be the subject of much debate. The U.S. Securities & Exchange Commission stated in 2013 that a public company’s use of social media platforms to announce material information would now be considered compliant with Regulation Fair Disclosure (Reg FD). To date, the rush to use social platforms as a primary material news channel has yet to start.

Of course, the appropriate degree of social media engagement will vary from company to company. Some companies may decide not to engage actively with their audiences on social media, others will seek competitive advantage in active and early adoption.

Are those companies which ignore social media entirely missing a trick?

Social media certainly can be an important component of risk and issues management protocols and planning. Like it or not, your company may well be the subject of debate in investor forums and blogs. Being aware of this through active listening can already be immensely helpful, particularly in the context of corporate actions.

With that said, it will be action—not spin or distribution channels —that builds supportive investor sentiment. Expectations and reputations need to be deftly managed, but without delivery they can be hollow promises indeed.

*Claire is currently a Managing Director of Capital MSL. She will take on the title of Partner, CNC, in January 2015 following the merger of the two businesses.

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Investor engagement under the microscope

SECTION II


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MSLGROUP.COM

The positive news is that there is a broad consensus that publicly listed companies have improved their communications with investors in recent years. Two-thirds of investors globally and more than three-quarters of sell-side analysts surveyed are in agreement with this view, with no clear difference across the market areas surveyed.

In addition to the importance placed on basic disclosure and communication highlighted earlier, one of the principal methods for companies to update the markets is through the earnings call. The findings of our survey question whether companies are making the most of this investor engagement opportunity.

We asked our respondents whether they found earnings calls useful in developing an investment thesis about particular stocks. The answer is affirmative for a

Companies are becoming better communicators…

majority, but not significantly so.Earnings calls were most valued in Asia (85% valuable: 27% very, 58% somewhat) and by the sell-side (82% valuable: 28% very, 54% somewhat).

As expected, investors draw data from a range of sources when looking at an existing or potential investment. Broadly speaking these data come from three distinct sources:

√ Information provided by the company itself either though filings, meetings or calls

√ Research conducted within the investor’s own institution

√ Data from third parties including sell-side reports, wire services and traditional media

Very valuable Somewhat valuable Not very valuable Not valuable at all I rarely participate in earnings calls

U.S.

12%

41%

28

%

10%

9%

Europe

18%

46

%

16%

12%

8%

Asia

14%

58

%

27% 1%

FIGURE 6

How valuable do you consider earnings calls with regard developing and/or confirming your investment thesis on a company?

The positive news is that there is a broad consensus that publicly listed companies have improved their communications with investors in recent years.

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When it comes to detailing the role that the newswires and other media have in informing investors, there are two publications that dominate reading lists worldwide and one global newswire service that is the go-to source for information.

√ Perhaps unsurprisingly, investors and the sell-side read the Wall Street Journal (WSJ) and the Financial Times (FT). The WSJ is most widely read in the U.S. and Asia, the FT in Europe. Almost half of our sample reads these titles both in print and online. The other half is split between their use of the print and online editions, with age being a clear differentiator.

√ Bloomberg is the clear global leader as an electronic news source, with more than three times the mentions of any other outlet (40% of global investor sample).

Activist or engaged investor?

Activist investors have become high-profile capital market participants in recent years, and this survey has drilled down into institutional investor views around the benefits and costs that they see in activism.

The results of this section show that a significant majority of the investors surveyed (77%) expect to see overall levels of activism increasing in the next three years and there is a clear view that activism will no longer be confined to the U.S.

Although half of the investors surveyed felt that activism was currently mostly a U.S. trend (only in the UK, which has seen a considerable number of activist approaches, was there clear disagreement with this statement), three in four (76%) feel that activism will become more prevalent worldwide. Interestingly, U.S. investors, who are more accustomed to activist activities, are among those most convinced of the trend towards globalisation.

Investors also believe that a high investor profile is not a pre-requisite for a successful activist approach. Although just over one-third of investors agree that “only the most well-known activists are consistently successful at achieving their goals,” almost half of the sample disagree. Interestingly, Asian investors are the only group where half believe that profile supports success.

surveyed expect to see activism

increase in the next three years

77%of investors


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MSLGROUP.COM

One of the more striking findings from the research is in terms of how investors evaluate the benefits of activism. In summary, they are more likely to view the benefits as short, rather than long-term. Also a significant majority believe that any short-term gains might actually come at the expense of longer-term value creation.

There is a strongly held view among investors (72%) that activism can create short-term value. Opinion is less clear-cut on long-term value creation. Globally, the percentage saying activism creates long-term value falls to 64%. More interesting is the trade-off between short and longer-term benefits. Four investors in five (81%) believe that short-term gains achieved by activists can come at

Where do the benefits of activism lie?

the expense of long-term value creation. There is very clear agreement with this statement in all of the countries surveyed, with the strongest agreement of all being seen in the country that actually has the most experience of activism, the U.S. (85% agree). These survey results are contextualized in our essay on the “Basics of Activism.”

Exactly half of the investor sample believes that many of the world’s largest companies would benefit from the attention of an activist investor, a viewpoint that is held consistently across markets.

Strongly agree Somewhat agree Somewhat disagree Strongly disagree Neither agree/disagree

U.S. Europe Asia

42%

6%

6%3%

43%

40%

10%

6% 4%

40%

41%

15%

9%

9%

26%

FIGURE 7

To what extent do you agree that short-term gains achieved by activists can come at the expense of longer-term value creation?

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When it comes to deflecting the attention of an activist, investors see both management and investor relations as the first line of defence. Some 80% of those surveyed felt that the board of directors could make a real difference and 75% felt the same way about investor relations. Interestingly, while this balance was consistent between the U.S. and Europe, investors in Asia felt that more could be achieved by the investor relations team.

One thing is for sure: Institutional investors around the world expect activists to continue to develop their toolbox in the coming years with a common belief (70%) that use of social media by activists will only increase as a way of mobilising collective action; presenting yet another challenge for potential targets.

Agree Disagree Neither or Don't know

100%50%

81% 15% 4%Short-term gains achieved by activists can come at theexpense of longer-term value creation

80% 13% 7%A board of directors that is engaged with shareholders is the best defence against activism

77% 14% 9%Overall activism levels will rise over the next three years

75% 18% 7%A strong, engaged investor relations functioncan be an effective tool against activism

70% 18% 12%Use of social media by activists will become anincreasingly effective tactic over the next three years

72% 23% 5%Activism can create short-term value

76% 15% 9%Activism will become more of a globalphenomenon over the next three years

52% 37% 11%Activism is mostly a U.S. trend

50% 41% 9%Many of the world's largest companies would benefitfrom more activist shareholder attention

37% 48% 15%Only the most well-known activists areconsistently successful at achieving their goals

64% 30% 6%Activism can create long-term value

FIGURE 8

To what extent do you agree with the following statements ?


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A letter from the U.S.: the basics of activism

[Preface: The purpose of this commentary is to provide a concise, high-level overview of shareholder activism that includes a summary of the current landscape, key findings from the investor survey and a primer on the importance of shareholder communications. This document is not intended to serve as legal advice, which should be obtained from counsel.]

Shareholder activists tend to target companies that are perceived to be underperforming, to be sitting on too much cash, to have ill-fitting strategies and/or to have ineffectual management teams. Many of these “extra-financial” factors, which are outlined elsewhere in our analysis, have also become elements of the decision-making processes of institutional investors more broadly.

In the U.S., and increasingly in parts of Europe, investor activism continues to create pressure and drive change at companies. Over the past decade, publicly disclosed long positions controlled by activists have grown by more than $150 billion to $176.1 billion as of the end of June 2014, according to Novus, a research firm that provides data to investment managers and investors.

There has also been a recent shift in the types of companies that activists are willing to target. Whereas activists once tended to focus their efforts on small, underperforming

companies, today many activists have turned their attention to some of the most well-known and respected brand names in Corporate America. Indeed, so far in 2014, activists have launched more campaigns at S&P 500 member companies than in any year prior, according to SharkWatch data, and prominent large-cap U.S. companies such as Amgen Inc., Apple Inc., and eBay Inc., among others, became targets.

Given the volume and decibel level of these campaigns, even a passive filing with the U.S. Securities & Exchange Commission by a well-known activist, with no other public commentary, will often be sufficient to generate media interest and market activity. Furthermore, the regulatory filings of activists and the ensuing media coverage also stimulate interest from other institutions, which can create a snowball effect of pressure on corporations.

The leading activists fully understand the importance of the public relations component of their campaigns and, like many U.S. corporations, they have begun to assemble their own teams of advisors including investments banks, law firms, proxy solicitors and public relations counsellors to assist in their efforts. Likewise, it is important for corporations that are under attack from an activist (or those that are vulnerable to an attack) to engage the appropriate advisory team to assist them with the necessary preparatory and inoculation activities.

Activism: Accelerating pace and global focus

MSLGROUP’s first global survey of institutional investors shows that those investors expect the pace of activism to grow over the coming three years (77% of those surveyed). And while activism has predominantly been a U.S. phenomenon, with some forays in Western Europe,

roughly 75% of those surveyed believe activism will become more global in nature. In the UK, the high-profile shareholder activism of 2012—known locally as the Shareholder Spring—centred primarily on pay and performance issues, exposing executive weaknesses with highly targeted and coordinated action. This new level of engagement by institutional investors in the UK resulted in the departure of several high-profile CEOs.

Corporations outside of the U.S. and the UK would be well-served to heed the lessons from the activist campaigns launched in these two markets over recent years. This includes understanding the important role that the proxy advisory firms such as ISS, Glass Lewis and others continue to play in providing third-party governance research to institutional investors far beyond the borders of the U.S. and UK.

Influential activists

Activist fund managers such as Elliott Management Corporation; Greenlight Capital, Inc.; Icahn Associates Corp.; Jana Partners LLC; Pershing Square Capital Management LP; Sandell Asset Management Corp.; The Children’s Investment Fund Management (UK) LLP; Third Point LLC; Trian Fund Management, LP; and ValueAct Capital Management LP, are included in a group of the 50 most prominent activists monitored by SharkWatch, and clearly they command significant media attention.

According to MSLGROUP’s proprietary research, however, almost 50% of investors surveyed believe that being well-known is not a prerequisite for a successful activist campaign. While interesting, it may very well be that a bifurcation develops where lesser-known activists focus more on obscure, smaller companies while

by Tom DaviesSenior Vice President, Kekst and Company

19


the major activists continue to shift their attention toward mega-cap companies—where a greater critical mass among investors is many times needed to achieve an activist’s goals.

The benefits of activism: Short vs. long term

The question remains: Do activist shareholders contribute to value creation? The evidence is mixed. MSLGROUP’s research shows that investors believe activists are more adept at creating short-term value (72%) rather than long-term value (64%). And 81% of the global institutional investor sample (85% in the U.S.) maintain that short-term gains achieved by activists may actually come at the expense of long-term shareholder value.

Nevertheless, the general attitude reflected in the survey does not necessarily signal how investors will act in any given situation. When faced with an activist campaign, shareholders will evaluate a proposal based on its merits and the company’s prospects and plans. All things being equal, however, it is reasonable to expect that many shareholders will favour a short-term opportunity over the potential for an undetermined reward further down the road.

Avoiding communications missteps

There is no single, universally effective response to activist investors. Every company is unique, with its own executive management team, board of directors and business performance, challenges and opportunities; and activist investors themselves come in many varieties. Ultimately, a tailored communications approach should be developed for each situation.

That said, there are a number of communication missteps that contribute to suboptimal outcomes in activist campaigns for corporations:

√ Failure to articulate how value will be generated

√ Reinforcement of perceptions that the board of directors or executive management team is entrenched

√ Divergent voices speaking for the Company, potentially creating a perception of divisions between management and board of directors and/or among members of the board

√ Personal attacks against an activist investor or appearing combative in the public arena about the situation

√ Assumption that the validity of your position will be heard and understood

√ Pursuit of actions that are inconsistent with a company’s strategic plan and those that appear designed to simply placate a particular activist

Engagement and preparation is necessary

In today’s environment of heightened institutional activism, corporations must be actively engaged in a dialogue with their investors and, in many situations, this involves undertaking a board-level assessment of potential vulnerabilities before an activist appears. When an activist does in fact emerge, the board and management team should: (1) be united, (2) examine their corporate strategy and performance through the activist’s lens, (3) continually educate shareholders on the corporate strategy and how it will deliver the value shareholders expect, (4) communicate personally—shareholders need to know that management and the board of directors are listening and that they understand there are no “sacred

cows” at the company and (5) cultivate relationships with key reporters and educate them on the merits of your position.

There is also a core set of communications principles that are relevant for most corporations dealing with an activist situation:

√ Demonstrate that the board of directors and executive management are committed to the best interests of all stockholders

√ Ensure consistent messaging that is focused and fact based

√ Candour can enhance credibility; where appropriate, acknowledge performance challenges

√ Communicate openness to constructive ideas and input from all shareholders (this does not mean accepting every idea)

√ Anticipate activist tactics and prepare potential responses

√ Reach out to largest investors, sell-side analysts, media, employees and customers to ensure understanding of Company strategy and key messages

As the responses of the survey group and the views of a range of experts make clear, public company directors and executives need to be mindful in all of their key business decisions of the potential for shareholder activism. And, at the same time, they need to consider how best to communicate effectively with key constituents to ensure ongoing understanding and support. A tailored communications approach that adheres to these aforementioned principles represents a good starting point for many companies in this highly fluid activist environment.


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The changing nature of investor behaviour

SECTION III

21


While the benefits of portfolio diversification are generally accepted, opinion on whether a correlation can be found between portfolio concentration and performance remains divided. But, for investor relations professionals and executives alike, an understanding of time horizons and their company’s place in an investor’s portfolio are important in evaluating the level of engagement to expect.

The portfolios of the investors surveyed ranged in size from 20 to hundreds of stocks. Some 16% of those participating in the survey represented the sell-side and here, as would be expected, there was less divergence in the number of stocks covered.

To identify and assess trends in global portfolio management, we have looked at four key elements:

√ Regional patterns of portfolio structure

√ Trends in trading behaviour post the financial crisis

√ Expectations of trends in portfolio structure over the next three years

√ Investment performance vs local benchmarks

On average, our investor sample each managed a portfolio of slightly over 100 stocks. Portfolios in the U.S. were, on average, about this size, with the greatest differential between Europe (where the average was around 140) and Asia (around 50). Across the board, the sell-side respondents on average currently covered around 56 individual companies.

Less than 25 25-50 51-75 More than 75

2%10%25%63%

U.S. Asia

18%42%30%10%

14%26%33%27%

Europe

FIGURE 9

What approximate percentage of your total portfolio have you held for more than one year?

For investor relations professionals and executives alike, an understanding of time horizons and their company’s place in an investor’s portfolio are important in evaluating the level of engagement to expect.

European investors appear to be

typically holding twice the number

of stock than their U.S. or Asian

counterparts

2x


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Trading and portfolio structure

To give an indication of how actively or aggressively investors manage their portfolios, we sought to identify the number of individual stocks in each portfolio that had been held for one year, since 2013, and for a five-year period, since the financial crisis.

In total, some 60% of individual stocks have remained in an investor’s portfolio for the past year - in other words, an average of 60 of the 100 stocks in a sample portfolio. To look at this from the other side, 40 of the 100 shares now being held will not have been among the fund’s investments a year ago.

There is an even more striking finding from a portfolio five years ago. On average only one-third of the stocks held in 2009 are still held today.

1. Interestingly, portfolio size does not appear to be closely connected with portfolio turnover. The 60% figure is broadly consistent from the most concentrated to the most diverse portfolio.

2. U.S. portfolio managers surveyed appear to be more content with the structure of their portfolios over the past twelve months than their counterparts in Europe and particularly Asia. While, 63% of U.S. investors have more than three-quarters of the same stocks today that they had in 2013, slightly less than a third of European investors and one in ten of those in Asia say that they have continued to hold 75% of their portfolios.

3. All regions have seen far greater portfolio churn over the five-year period. For the average U.S. portfolio, some 39% of stocks remain, and in Europe it is roughly the same percentage at 36%. Asia offers a different perspective entirely, perhaps reflecting its relative newness as an investment centre, with very few stocks having been held five years ago (17% on average).

Less than 25 25-50 51-75 More than 75

31%40%22%

7%

U.S. Europe

43%31%12%14%

Asia

86%12%2%0%

4. Investors surveyed tend to benchmark their performance against different indices, i.e., S&P in the U.S., MSCI and Dow Jones in Europe, Hang Seng and other local benchmarks in Asia. Interestingly, given the relative stability in their portfolios, more U.S. investors acknowledged they had not beaten their own benchmark during 2013 than did any of the other regions. Having said that, respondents in the other two regions were twice as likely to say that they “didn’t know” how their portfolio had performed or just chose not to provide a response.

Looking forward to the next three years, we can expect to see an increase in the average number of stocks owned by institutional investors. Around half say that they expect their portfolio to have a similar construction in terms of the number of equities held, however, more than one in three expect to have more companies represented in their portfolio, a percentage that is broadly consistent across all portfolio sizes.

FIGURE 10

What approximate percentage of your total portfolio have you held for more than five years?

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A letter from Asia: The privilege of rapid growth is not without challenge

It is not hard to see why the 21st century has been coined the “Asian Century” as the region continues its upward march. Concentrated population growth, increasing educational levels and the rapid advance of urbanisation are all driving GDP expansion. According to the World Bank, Asia is the engine driving global economic growth—far more than any other region in the world—contributing upwards of 40% of the growth1 worldwide. This in turn is creating a growing pool of home-grown institutional and highly affluent retail investors.

In 2014, Asia is expected to surpass North America as home to the greatest number of people with investable assets valued at over $1 million, according to a report by Capgemini and RBC Wealth Management2. The combined wealth of Asia-Pacific’s millionaires currently stands at about $14.2 trillion.

Alongside that, as of October 2014, equity market capitalization across Asia totals more than $20 trillion—more than Europe, Middle-East and Africa (EMEA) combined (nearly $13 trillion); although less than the Americas, which is more than $30 trillion. In 2012, the region saw $198 billion in new capital raised by initial public offerings in Asia, compared to $102 billion across EMEA combined and $234 billion in the Americas.3

by Glenn OsakiPresident, Asia, MSLGROUP

While this may look like bonanza territory for corporate boards eyeing Asia’s stock markets for growth funding, the reality is that accessing this capital and retaining investors over the long term may not be as easy as it has been in the past.

Companies seeking to tap into Asian capital markets can no longer rely on being able to simply ride the coattails of economic growth. Today, there is strong competition for investor funds, with 24,200 companies now listed on Asia’s stock markets - nearly the same as the rest of the world combined - with 10,292 in the Americas and 9,723 in EMEA (as of October 2014)4, all competing for the attention of institutional and retail investors who are much more sophisticated and discerning than in the past.

What’s more, MSLGROUP’s survey indicates that institutional investors in Asia have higher portfolio churn than other regions, with 60% of those interviewed holding less than half of their portfolio for more than a year. These results suggest that these investors appear to have a shorter-term horizon and if they are unhappy with a company’s performance they may be more open to liquidating an investment.

Investors in Asia are more

demanding and have a greater

choice of investments than

ever before.

1 World Bank East Asia and Pacific Economic Update, October 2013, World Bank 2 World Wealth Report 2014 from Capgemini and RBC Wealth Management3 IMF: Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons? By Fabian Lipinsky

and Li Lian Ong, February 20144 World Federation of Exchanges members, October 2014 Monthly Report


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Taken together, these results, i.e., the high portfolio turnover rates observed and the fact that investors in Asia have a far greater choice of investments today, suggest that investors in the region can be more selective where and for how long they allocate their investor capital.

While the majority of respondents in all geographies were in agreement that investor communications have improved over the last five years, respondents to MSLGROUP’s study in Asia were less convinced, with investors in China far more likely to believe that investor communication has worsened.

The survey results suggest that there are a number of areas that have become more important to investors in Asia in terms of influencing their investment decision-making process. Among these is a clearly articulated equity story.

Companies must be able to do a good job of telling their equity story—no surprise. Perhaps more interesting, however, is the importance investors in Asia appear to place in media, whether that be traditional or digital. The vast majority, 86% of the institutional investors surveyed in Asia, consider a strong media image to be an important non-financial factor in driving a company’s valuation. Companies that take the time to extend their awareness through an appropriate media relations strategy have the opportunity to benefit from a greater share of mind among investors.

Beyond the equity story, there also appears to be a clear appetite for companies that take their environmental, social and governance (ESG) behaviour seriously. The results of our survey indicate that investors in Asia are also looking for more sustainable growth, suggesting that those companies that embrace ESG and incorporate a sustainable approach into the fabric of their businesses will have the chance to benefit from access to a broader group of investors. Taking the time to clearly report ESG performance is likely to grow in importance as we start to see increasing regulatory requirements such as those the Hong Kong Stock Exchange is looking to bring into effect in 2015. The proposed regulations will require companies to either report on a set of core criteria in terms of their ESG commitments, or if the decision is taken not to report, management will have to provide an explanation as to why the company is not reporting.

The opportunity of a burgeoning pool of funds available for investment does not come without challenge. In such fast-paced markets, there will of course be a tension between short-term performance and long-term growth. It is imperative that corporate executives meet the needs of Asian investors when it comes to communicating both in form and content, if they are to achieve a balanced shareholder base that includes investors from the region, and, most importantly, a fair market valuation.

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Methodology

This survey was conducted by Clarus, an MSLGROUP agency. Between August and September 2014, 500 institutional investors and financial analysts were interviewed by telephone. The countries covered were the U.S., Canada, UK, France, Switzerland, Luxembourg, Singapore, China, Hong Kong, Australia, and Japan. The sample was randomly drawn from a database of active buy-side investors and sell-side analysts. Interviews were conducted in each country’s native language or English, depending on the respondent’s preference.

The breakdown of the survey by region was as follows:

500 interviews worldwide, including:√ 175 in Europe (France, UK, Germany,

Switzerland, Luxembourg)√ 175 interviews in North America (U.S.

and Canada)√ 150 interviews in Asia (Singapore, Hong

Kong, Australia, Japan)


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MSLGROUP.COM

If you would like to find out more about how MSLGROUP’s

global Financial practice and its experts can help you,

please contact one of the team below:

In London:

[email protected]

In New York:

[email protected]

In Paris:

[email protected]

In Shanghai:

[email protected]

In Stockholm:

[email protected]

In Tokyo:

[email protected]

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