Stakeholder expectations have changed. It was only a few years ago when investors would mainly look at financial performance and capital allocation, while other stakeholders would zone in on compliance-related risks, says Mark Lam CPA, Head of Investor Relations and Corporate Sustainability at Hongkong Land Limited. “But now, stakeholders are looking beyond the financials in order to better understand a business’ long-term plans, especially around environmental, social and governance (ESG). Investors are also much more data-driven in their analysis of the market, company financials, and ESG performance.”
The current economic environment is also prompting investors to question a company’s long-term performance. “The interest rate today is more than double that of what it was two years ago. Rising inflation also has an impact. These uncertainties are forcing investors to question how their investments are performing and what companies are really doing with their money,” highlights Michael Chan FCPA, Managing Director, MTR Lab Company Limited, and Chairman of the Institute’s Professional Accountants in Business Committee.
This has led to increased demand for investor relations (IR) professionals to effectively disclose a company’s performance to allay investors’ concerns. They serve as a key communication channel between a company’s management and stakeholders, keeping relevant parties updated on company affairs and assisting them in making informed investment decisions pertaining to the company. “IR professionals have to be able to explain to investors the company’s framework and methodologies, especially on how they would react to changes in the market, together with their principles and the rationale behind those decisions,” Michael Chan adds.
Stakeholder engagement is a process that companies follow in order to listen to, collaborate with, or inform their existing stakeholders. It involves identifying, mapping and prioritizing stakeholders to determine the best methods for effective communication. Stakeholder engagement essentially helps businesses to develop or refine corporate strategies that recognize the needs and wishes of their employees, management, investors, customers, suppliers, vendors, communities and government. When done well, stakeholder engagement can mitigate potential risks and conflicts with stakeholder groups.
Changing stakeholders’ expectations are not unique to Hong Kong, but suggest a global trend, according to the EY Long-Term Value and Corporate Governance Survey, an EY report issued in February. The study found that 86 percent of business leaders want to see an added focus on ESG, as well as sustainable and inclusive growth, noting that they are critical to building trust with stakeholders in today’s business environment. The figure is an increase from 78 percent in 2021, according to the survey, which polled 200 senior leaders from 15 European countries and 25 industries. A further 83 percent of respondents noted that companies that maintained their focus on ESG and long-term value will be more resilient in the face of increasing disruption and volatility.
More institutional investors are using ESG as a yardstick to measure a company’s long-term viability and investment returns, according to 2022 Institutional Outlook Executive Overview, a study by investment banking company Natixis, which surveyed 500 institutional investors in 29 countries. It found that 75 percent of institutional investors believed that ESG is integral to sound investing, with half of them noting that investing in companies with better ESG will lead to greater returns on their investment.
New priorities, new pressures
Increasing demands from investors have added new layers of complexity to the IR role in the stakeholder engagement process, notes Lam. “Investors now expect more interactions than in the past, as well as more in-depth and frank discussions,” he says. This, Lam adds, sees IR professionals playing the critical role of facilitating communications between management and stakeholders. “We need to effectively relay messages from the board and senior management teams, while also reflecting feedback from investors.”
“Investors now expect more interactions than in the past, as well as more in-depth and frank discussions.”
It is also becoming more commonplace to see IR professionals taking on customer-related tasks, notes Eva Chan FCPA, Chairman of Hong Kong Investor Relations Association. “Say a customer isn’t happy and a company receives a complaint letter. Back then, a company might disregard the complaint and note that ‘it is just one customer.’ But nowadays, we have to understand the root of a customer’s dissatisfaction,” she says. Previously, she adds, it was mainly the public relations department handling such enquiries and complaints. “But now, more IR professionals have to look at whether there are underlying issues the company has to improve upon to avoid these sorts of complaints.”
Ignoring customer or employee complaints can quickly and easily lead to reputational damage for companies, Eva Chan points out. “If you have unhappy employees, it only takes minutes for negative news or messages to spread through social media or messaging apps,” she says. To avoid situations like this, she says it is vital for IR professionals to speak to customers or employees at the outset of the complaint to understand their side of the story and find ways to ratify the issue.
Stakeholders differ in each organization, making it important for companies to first determine who their key stakeholders are in order to meet their needs. Companies can better visualize who their stakeholders are and their roles by building a stakeholder map, notes Michael Chan.
Stakeholder mapping is the visual process of laying out all the stakeholders of a company’s products, services, projects or ideas on one map. It allows companies to holistically analyse who their stakeholders are and categorizes them in terms of their level of influence and interest in a particular product or project. “Stakeholder mapping is a very useful tool that helps companies to identify which stakeholders to engage with and how to advocate a certain message with them. It is a key tool that we use too,” he says.
In setting up a stakeholder engagement plan, Lam says it is vital to first receive buy-in and support from the C-suite and senior management team. “This is crucial, as is gaining the trust of all operational colleagues internally. It’s also important to work closely with your corporate communications colleagues because there is often significant overlap in terms of the audience being targeted,” he says. “Internal consultation between the C-suite, senior management, operational teams and IR professionals is important – a proper process in this regard helps to make sure important stakeholders are not neglected.”
Once a company’s key stakeholders have been identified, businesses should have internal policies in place to ensure frequent and meaningful engagement with them, notes Eva Chan. “An internal policy is needed so that key individuals and management are aware of the regular communication and engagement that needs to take place between them and stakeholders, and procedures to follow in the event of a crisis,” she says.
Companies would also benefit from keeping investor communication records, notes Danita On CPA, Senior Director of Investor Relations and Corporate Communications at Chow Tai Fook Jewellery. “We can retrieve those records anytime, look back at previous questions investors may have, and view their fund interest,” she says, noting that keeping investor communications records can help to align the goals of the management and IR teams, and assist them in anticipating the questions investors might ask and prepare for them. On says the records are especially useful during roadshows, which are a series of presentations companies make in various locations leading up to an initial public offering.
The most effective way to get a message across is still to meet key stakeholders in person, Lam notes. “While we have had to adopt a raft of online tools to connect due to COVID-related restrictions, realistically, nothing replaces face-to-face discussions to connect and effectively communicate – and to receive honest feedback,” he says. “Ultimately, the setting needs to be professional, but should also allow the attendees to feel comfortable – avoid scheduling a formal boardroom meeting with too many people present, for example.”
It is key for management and IR professionals to fully understand what their stakeholders want the company to achieve, notes Michael Chan. “C-suites and IR individuals need to be able to put themselves in the shoes of stakeholders; it’s our job to see things from our stakeholders’ perspective, illustrate and explain our suggestions well to them,” he says. While it can be difficult striking this balance, he adds, IR professionals need to know how to carefully articulate their purpose, while also taking into account the interests of stakeholders. “You have to respect stakeholders’ views and understand where they are coming from in order to build trust. These are all important elements in striking a meaningful engagement with stakeholders.”
Synergy through ESG
The Hong Kong Stock Exchange (HKEX) announced enhanced ESG reporting requirements in December 2019, making it mandatory for all listed companies to issue an ESG report for financial years commencing on or after 1 July 2020. In December 2021, the HKEX issued further amendments to its Main Board Listing Rules, requiring companies to provide targets and timelines for achieving gender diversity at board level, introduce a shareholder communication policy to include channels for two-way communication, and shorten the publication timeframe of ESG reports to be aligned with annual reports, among other requirements.
The rise in prominence of ESG has prompted investors and financial institutions to become increasingly critical of company-level ESG data, Lam notes. “The majority of investors largely used to rely on third party ESG ratings,” he says. This isn’t the case anymore, he says, adding that many investors are now deploying their own in-house ESG teams in their key operating regions alongside their traditional investment teams to scrutinize a company’s ESG reports.
Companies with lacklustre ESG reports that fail to properly and regularly communicate ESG-related data to investors may land themselves in unfavourable positions with stakeholders. “Simply put, if ESG reporting – and, by extension, engagement with investor ESG teams – is not done right, it may reduce the pool of potential capital available for investment in a particular company’s securities. It would also affect equity or bond values,” Lam says.
Bond investors, Lam adds, may avoid subscribing to a company’s bond issuance as a result of being unhappy with its decarbonization plans or disclosures, even if the company has met financial metrics such as its business outlook, net operating cash flows and interest coverage. “If investors are dissatisfied with the quality of their ESG reporting, which is how they judge performance, they may exclude a particular company from their ‘investable universe,’” he says.
On agrees, noting that a company’s ESG initiatives and disclosures are important amid more ESG funds now available in the market. ESG funds are equities or bonds where ESG factors have been integrated into the investment process. “When fund managers buy investment products like ESG funds, it’s important that these funds meet minimum ESG requirements. The evolution of these products is in response to market demand,” she explains, highlighting that investors generally view companies with better ESG initiatives to perform better in the long run. “As part of the due diligence process, investors want to be satisfied with a corporate’s ESG strategies and initiatives before they choose to invest.”
Investors and other stakeholders are also looking beyond a company’s commitment to run-of-the-mill energy savings disclosures and questioning their diversity, equality and inclusion (DEI) initiatives, says Michael Chan. With investors asking more questions about hiring policies and equality in the workplace, companies should consider taking a step back to scrutinize their own levels of DEI to identify which areas they can improve on and come up with a feasible timeline for any enhancements. “Companies have to question whether they are nurturing a diverse workplace in which people of different genders, ethnicities and socioeconomic backgrounds feel comfortable, respected, supported, and valued,” he says.
The company’s impact on the community is also being examined, adds Michael Chan. Previously, companies could simply donate money to charities or get involved with volunteering work, but now investors want to see more concrete results from their efforts. “A growing number of investors expect that some of the money they put into a corporation goes back into the community and contributes to sustainable growth,” he says.
Eva Chan agrees, noting that companies should not only focus on reducing their carbon footprint, but also on the “social” and “governance” aspects of ESG, and make a conscious effort to clearly communicate their progress and aspirations to stakeholders. “It’s important that companies fulfill all aspects of ESG – from the social aspects such as employee relations, whether customers and suppliers are happy, and their investment in the community, as well as governance, so whether the company is being run ethically and governed well. These are sorts of areas that investors question these days,” she says.
To better engage with stakeholders on ESG matters, Eva Chan adds that companies should have a plan to outline engagement activities for the year ahead. “It could include engagement activities and tasks to be done with different stakeholders and the best communication channels for doing so. It should also contain their follow up requests and enquiries after each meeting activity,” she says.
Managing the different expectations of stakeholders can be challenging for IR professionals and management, adds Eva Chan. “For example, employees may want a raise, while investors want the company to cut cost. So sometimes there can be a conflict in expectations,” she says. “Finding a way to balance the different expectations of stakeholders while maximizing the company value is an art.”
A need for talent
Despite IR being a relatively new specialization, the evolving investment landscape has led to increased demand for professionals, notes Eva Chan. “IR is quite a new profession in Hong Kong; most listed companies didn’t have IR positions before, so we’ve only seen IR professionals come about in the last 15 to 20 years,” she says, adding that another factor contributing to more demand is the rise in institutional investors. Most investors back then were retail investors who bought a company’s stock but didn’t do much analysis, adds Eva Chan. “But institutional investors are different. They are more vocal in voicing out their demands and won’t hesitate to provide financial, ESG or corporate social responsibility suggestions to the company. We need people like IR professionals to communicate with them.”
The demand for IR professionals presents an ocean of opportunity for CPAs, who are ideal candidates for the IR role, as the job requires trustworthy professionals who have a high level of integrity to provide expert insight derived from a company’s financials, notes On. “Investors also focus a lot on financial statements, key ratios and operations. These are all reflected in different financial key performance indicators or disclosures. An IR professional needs to have a good understanding of this to answer any questions,” she says.
One of the biggest advantages CPAs have is a solid understanding of numbers, and the reasons behind a company’s financial figures. “Though investors are also interested in a company’s strategy and outlook of a company, at the end of the day, the figures mean the most,” emphasizes Eva Chan. “Investors need these numbers to do their own analyses to ensure they will have a satisfactory return on their investment. So when investors ask about a company’s financials, or question its figures, CPAs are able to provide them with proper feedback right away.” On agrees, noting that CPAs also have to understand the implications and movement behind these numbers and find correlations. She adds that IR specialists are also involved in the preparation of a company’s annual report, a crucial task in which accounting skills are highly beneficial.
“The global trend for IR is moving towards placing CPAs with prior experience in senior or external facing roles in IR positions.”
With their firm grasp of the financials, CPAs can help to tell a more accurate story about the company to stakeholders, Michael Chan says. “CPAs have a huge role to play when it comes to helping or guiding a corporation to disclose information in both a meaningful and factual manner; we help corporates to tell their story,” he says. “We’re able to turn insights into information.”
On that note, IR professionals need to be more proactive in today’s business environment, says On, as being more involved with the business can help them to provide better advice to members of management, gain a clearer view of the market, and identify any strategies that the company could use in times of uncertainty. “They have to work closely with senior management and operations teams to get good feel of how the business is developing and whether current strategies can help to overcome challenges,” she says.
While it may be tempting for IR specialists to meet with stakeholders only during times of good performance, this would paint an inaccurate picture of the company. “This is something they have to avoid,” Eva Chan stresses. “It’s better that they explain to investors and stakeholders why they aren’t able to meet financial or ESG targets, and then if applicable, present them with a new plan to meet them.”
Trust is paramount in the stakeholder engagement journey, Michael Chan says, and IR professionals should aim to build confidence from the start. “Companies should make it clear to investors that they are open, transparent, and committed to them,” he says, noting that doing so will allow IR experts to manage investors and stakeholders’ expectations in the long run and lead to a better relationship with them.
Ultimately, CPAs who work in IR should apply their technical and soft skills to the best of their ability to drive a company’s stakeholder engagement and ESG initiatives, Lam adds. “CPAs should develop their skills and feel comfortable speaking about topics outside of finance such as business strategy, industry trends, ESG trends and performance. They need to ‘walk the talk’ by having the knowledge to bring insights to the broader business,” he says. “IR is an area ripe for CPAs to further develop their careers. The global trend for IR is moving towards placing CPAs with prior experience in senior or external facing roles in IR positions. Senior IR roles are also increasingly becoming a stepping stone to more senior executive positions.”
EY Long-Term Value and Corporate Governance Survey, an EY report issued in February, found that 86 percent of business leaders want to see an added focus on environmental, social and governance, as well as sustainable and inclusive growth, noting that they are critical to building trust with stakeholders in today’s business environment.