Corporate Governance f o r M a i n M a r k e t a n d a i M C o M pa n i e s

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In today’s world of dynamic capital markets andfast-paced media, effective financialcommunications and investor relations play keyroles in forging an understanding between a publiccompany’s directors and its shareholders. In orderto succeed over the long term, forward-lookingcompanies should put in place a strategic plan thataddresses the following:

l establishing sound corporate governanceprogrammes

l working with trusted communicationspartners

l communicating to manage corporatereputations

l integrating business, financial and non-financial reporting

l keeping stakeholders informed andengaged.

Establishing sound corporate governanceprogrammesThe quality of corporate governance is animportant driver of shareholder value, and publiccompanies that score highly in this area generallyoutperform their peers. A thorough governanceframework should provide strategic direction forthe company, and ensure the effective monitoringof management by the board of directors and theaccountability of management and directors toshareholders.

Best practices for boards generally includeestablishing major policies and goals for theorganisation, which should involve oversight andguidance of the company’s strategic plan, annualbusiness plan and budget. Leadership planning —including selection, evaluation and compensation

of the top executives — should be taken intoaccount, as should chief executive successionplanning. A solid corporate governance programmewill also monitor the effectiveness of managementdecisions, evaluate the company’s quarterly,annual and long-term performance, and includelong-range planning.

Public companies should also consider additionalsteps to ensure that their boards function at a highlevel. One of these steps may be to recruitdirectors with expertise in a variety of areas, with amajority being independent but still committed tothe company’s strategy and culture. In addition, itis important to establish proper board leadership— for example, by designating a lead director —as well as to maintain the board at a manageablesize. Good corporate governance requires frequentboard meetings of half-day or all-day duration, withan agenda and background materials supplied wellin advance. Independent directors should beencouraged to meet privately — in other words,without the chief executive or senior managementbeing present — during appropriate portions ofboard meetings.

Working with trusted communications partnersIn order to achieve long-term success, publiccompanies must give their communicationsadvisers a seat at the table, integrating them intothe team along with advisers from the legal,accounting, management consulting andinvestment banking fields. Experiencedcommunications professionals provide value to a company by ensuring that messages andstrategies for financial communications, investorrelations and media relations are aligned, givingthe company one voice.

22. The relationship between directors and shareholders: financial communications and investor relations

Claire Koeneman and Robert Ludke, Hill+Knowlton Strategies

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Page 170 The relationship between directors and shareholders: financial communications and investor relations

Financial communications and investorrelationsA high-performing financial communications teamhelps a company enhance shareholder value byeffectively managing its relationships with theinvestment community and the financial media.This includes providing consistent, accurateinformation and appropriate access to companymanagement in order to build relationships withthe media that influence opinion in the City ofLondon, on Wall Street and in other financialcommunities.

These efforts can bring bottom-line as well asreputational benefits: “Fundamentally, the remit of investor relations is not only to create anawareness and understanding of your companyamongst the investment community … Enteringinto a dialogue and developing relationships withthe investment community over time so that itsparticipants become cognisant with the companyand its investment proposition is generally seen as a worthwhile exercise when trying to achieveefficient, cost-effective access to capital.”(‘Investor Relations: A Practical Guide’, LondonStock Exchange, March 2010)

A financial communications team will providesupport for all of the key elements of an investorrelations programme — including messagedevelopment, issues management and materialsdevelopment (for example, annual reports andearnings announcements) — and can also leadstudies of investor perceptions to establish abenchmark and identify key issues and influenceattitudes. Additional tactics include outreach tosell-side and industry analysts, institutionaltargeting of ‘buy and hold’ investors, and co-ordination of key investor conferences.

External financial communications professionalsshould also work closely with senior managementand the company’s in-house investor relations (IR)team when organising and preparing for IR events

such as earnings announcements, investor daysand shareholder meetings. In addition, theseexternal professionals should help ensure that themessages delivered to investors are clear, conciseand compelling, while providing seasonedexecution support in the following ways:

l contacting investors, analysts and the mediaon behalf of a company

l co-ordinating conference calls, webcasts andinvestor meetings

l developing the press release, presentation,conference call script, Q&A document andother materials for financial announcements

l carrying out a dry run with companyspokespeople to ensure they are comfortablewith the script and Q&A

l following up on the event to handle anyresulting investor or media inquiries

l providing feedback to the chief executive andsenior management.

Media relationsWhether a company is seeking to enhance orpreserve its reputation, increase market share,respond to competitors, shape public policy ormanage a crisis, local and national news media arecritical channels through which to engage keystakeholders and affirm or change publicperceptions and behaviour. At the heart ofeffective media relations are five principles:

l a concise, compelling and relevant messagel the right people delivering the messagel strict adherence to the messagel respect for the media’s rolel a deep understanding of how the media

actually works.

External communications experts can help acompany with its message development and mediarelations, often serving as the de facto newsbureau for client companies and providing a firstpoint of contact for media inquiries. The team will

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identify the relevant company spokespeople, co-ordinate strategy with them, build relationships,develop talking points, and ensure timely mediafollow-up of messages and announcements.

Integrating PR and investor relationsIf public companies are increasingly focused oncorporate reputation and public trust, that ispartly because social media and digital PR areincreasingly influencing how the public perceivesthem. As a recent PwC report noted, thesignificance of this trend is appreciated all theway up to the top of the corporate hierarchy:“The social media phenomenon has made theleap from the consumer world to the boardroom.Directors are faced with sorting out how socialmedia impacts the firms that they oversee andtheir own roles on Boards.”(‘Social media — The new business reality forboard directors’, PwC, 2012)

As a result of the free and very public airing ofopinions, detrimental as well as favourable,companies now need to speak to more peoplemore of the time. And that means integratingcorporate and financial communications so thatmessages take into consideration all keystakeholders:

l shareholders and other investorsl board membersl employeesl business partnersl customersl regulators and political leadersl the media.

Communicating to manage corporatereputationsThe greatest fear among many companies isreporting bad news. This worry often spreads,infecting communications professionals, seniormanagement and members of the board ofdirectors. While we do not want to minimise the

risk that is sometimes posed by full and opendisclosure, our perspective is somewhat different.

The vast majority of people view the process offinancial and non-financial reporting as a journey.As long as they are brought along on the journey ina transparent and genuine manner (and given theopportunity to provide input), they usually accepttemporary setbacks and missed opportunities.Companies seen as leaders in stakeholderrelations — such as General Electric, Marks &Spencer, Aviva Investors and Philips Electronics —work with their audiences in an effort to be moresustainable and transparent in their publicdisclosures.

Establishing an open dialogue with the public is, infact, one of the most effective approaches acompany can take in improving governance andrisk management. Rather than being surprised bythe demands of their audience, companiesemploying a disclosure process that includesmeasures such as materiality assessments(discussed towards the end of this chapter), anongoing dialogue and regular reporting will allowthe companies to know what is expected of themand what steps must be achieved to meet thoseexpectations. By failing to engage the publicregularly, it is likely a company will never learn ofreputational risks until the damage is done. Rather,such a company is perpetually doomed to finditself reacting to risk.

Companies must also view reporting onfinancial and non-financial performance as aprocess, not a product. An integrated process— one that addresses the concerns of allstakeholders by placing a company’s strategyand performance in a social, environmental andeconomic context — will lead to the productionof a report whose “predominant value lies in thepreparation: the selection of metrics, thescrutiny and analysis of the business impactsand risks, the resultant insights, and the

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subsequent adjustments to operations and evenstrategy. Additionally, a properly designed setof performance measures reported on as partof regular financial management gives theincentive and ability to improve performance.”(‘Integrated Reporting: A better view?’, Deloitte,2011)

Beyond risk management, there is a growing bodyof evidence to show that making andcommunicating efforts to become a moresustainable company generates a higher rate ofreturn for investors. In May 2012, professorsRobert Eccles and George Serafeim of HarvardBusiness School and Ioannis Ioannou of the LondonBusiness School published a working paper entitled‘The Impact of a Corporate Culture of Sustainabilityon Corporate Behavior and Performance’.

The authors looked at 180 companies, evenlydivided between ‘high sustainability’ and ‘lowsustainability’, and compared the rate of return forinvestors. They found that a portfolio of firms inthe first group — organisations with a long andconsistent track record of making and disclosingefforts to operate with economic, social andgovernance policies in mind — would have faroutperformed a portfolio of firms following moretraditional corporate policies (see chart).

Stephen Dubner, the journalist and authorfamed for co-writing the book ‘Freakonomics: ARogue Economist Explores the Hidden Side ofEverything’, was quoted on his reaction to thestudy: “It may be that being a good corporatecitizen is good for business in the long run — orit may be that the kind of company that’s morelikely to be a good citizen in the first place isalso more likely to be a profitable company.Whichever direction the arrow was pointing,however, which we don’t really know yet, itdoes look like at least one truism in thebusiness world is actually true, which is thatyou really can do well by doing good.”

(American Public Media, Marketplace, April 18, 2012)

We propose one caveat to his astuteobservation: if a company wants to do well bydoing good, and gain the reputational credit fordoing so, it must bring the public along on itsjourney through an effective and honestcommunications effort that encompasses bothfinancial and non-financial reporting.

Sustainable performance delivers a

high return on investment

US$1 US$1

US$22.60

US$15.40

When the rate of return on investment in 90 so-called‘high sustainability’ companies was matched to therate of return for their 90 ‘low sustainability’ peers,‘The Impact of a Corporate Culture of Sustainabilityon Corporate Behavior and Performance’ found that:l Investing US$1 at the beginning of 1993 in a

portfolio of firms with a focus on sustainableoperations would have grown to US$22.60 bythe end of 2010

l Investing US$1 at the beginning of 1993 in aportfolio of traditional firms that paid littleattention to long-term sustainability would havegrown to US$15.40 by the end of 2010.

High-sustainabilitycompanies

Low-sustainabilitycompanies

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Integrating business, financial and non-financial reportingCorporate reporting practices are in flux now, andnew requirements will have lasting implications forhow companies disclose performance andcommunicate with the public. This trend isillustrated by the Johannesburg Stock Exchange’srequirement from March 1, 2010 that all listedcompanies produce an integrated report in whichthe companies tie together their financial and non-financial performance, or explain why they havenot done so.

Such changes in reporting requirements, however,present many opportunities for strengtheningreputation, managing risk and generating astronger return on investment.

Most publicly traded companies around the worldhave long placed a premium on communicatingwith their investors, and with social media’s rapidgrowth in recent years, those communicationstechniques have become more sophisticated.Public companies must also actively engage withregulators — both in government and in thevarious exchanges around the world — as theyseek to remain in accordance with applicable rulesand laws.

An emerging theme in corporate communicationsand investor relations is the effort made bycompanies to demonstrate broad-based valuecreation that goes beyond profits and losses toencompass the various economic, social andgovernance (ESG) initiatives that they undertake inorder to act in a more sustainable and responsiblemanner. Many companies hope that the path theymap out to a sustainable future will generatenumerous other benefits — including strongerprofits, higher returns on investment, increasedbrand awareness and reputational goodwill.

The importance of demonstrating sustainable valuecreation is driven by a myriad of public forces. For

example, customers and consumers are holdingcorporations to an ever-increasing set ofexpectations that they act in a responsible andethical manner, while regulators — mostprominently in continental Europe and the UK, andincreasingly in the US — are calling for greaterdisclosure on a variety of ESG performancemetrics such as labour practices and carbonemissions. Perhaps the most powerful forces in themove to greater transparency are institutionalinvestors, which want a detailed account of how acompany’s ESG efforts affect bottom-lineperformance and reputational value.

In other words, publicly traded corporations can nolonger expect platitudes about corporatecitizenship and ‘feel good’ reports on corporatesocial responsibility (CSR) to be taken at facevalue. In an article about the importance ofintegrating financial and non-financial performancewhen discussing responsible corporate behaviour,Professor Eccles said: “If you really think that howyou’re managing environmental, social andgovernance issues is at the core of what you do, ifthose things are core to how you create value, youneed to explain [those efforts]. It’s not, ‘here’s myfinancial report and here’s my green strategy’. Or,‘here’s my financial report and here are my humanrights policies’. Integrated means that you’re notthinking of these larger efforts as simply anappendage, but in terms of how they support thecompany’s value creation strategy.” (‘Get Ready: Mandated Integrated Reporting Isthe Future of Corporate Reporting’, MIT SloanManagement Review, March 13, 2012)

Thus, to demonstrate value creation effectivelyand persuasively, companies must look to expandand enhance their communications and disclosureefforts. They cannot rely on static reports placedon their websites accompanied by a basic pressrelease to satisfy the demands of shareholders orbroader public audiences. Moreover, leadingcompanies such as Philips Electronics, Novo

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Nordisk, United Technologies, Natura Cosméticosand Pepsi are raising the bar not only forcommunicating about their financial and non-financial performance, but also for using thosecommunications to establish a dialogue with thepublic and gain positive reputational credit fordoing so.

Keeping stakeholders informed and engagedCompanies listed on stock exchanges are requiredto disclose their financial performance on anannual basis along with a variety of indicators. Butwhile fulfilling the obligations for financial reportingcontinues to be a relatively straightforwardprocess — based on a set of accounting standardsthat define what information needs to bepresented —the growing demand for ESGreporting has created a paradox.

As the journalist and environmental writer EricRoston observed: “If non-financial data, such asgreenhouse gas emissions per dollar of revenue, isincluded in a financial report for investors, how canit still be called non-financial? Institutionalinvestors and companies aren’t yet making theleap to calling greenhouse gas emissions,percentage of female executives or other ESGmetrics ‘financial’. But they are increasinglyconsidering them to be material.” (Eric Roston, ‘Non-Financial Data is Material:the Sustainability Paradox’, Bloomberg, April 13, 2012)

To help companies not only disclose non-financialdata but, perhaps more fundamentally, assesswhat is and what is not material reporting,frameworks such as the Global ReportingInitiative (GRI) and the Carbon DisclosureProject (CDP) have gained prominence.Although these do not have statutory orregulatory authority, they are additionalmechanisms that companies should considerusing when reporting on their various activities.

Frameworks such as GRI and CDP are alsorepresentative of another important trend: thegrowing inability of country- or region-specificreporting structures to fully account for all of theactivities of global corporations. As a result, amarket-driven model is coming into greater use,where public audiences such as NGOs areincreasingly using social media and thedemocratisation of information facilitated by theinternet to police corporate behaviour.

The outcome is a shift in how companies report ontheir activities. As the Deloitte paper, ‘IntegratedReporting: A better view?’, asserted: “Byaccepting that business sustainability is about howa company creates value, rather than just abouthow it achieves compliance or avoids harmfuleffects from its activities, a different perspectiveof sustainable value creation emerges, along with adifferent perspective on how companies shouldreport on value creation and protection.”

Regardless of the framework that companies useto assess or disclose financial and non-financialperformance, they must solve the paradox of whatinformation is material to the public. And the onlyway a company can find this out is to talk to thepublic — and listen to their responses. This meansthat an internally focused process whose outcomeis a static report produced once a year must bereplaced with one in which public audiences aregiven the opportunity to weigh in at any time onwhat is important.

Perhaps the most significant point is that themindset around sustainability efforts is graduallychanging. Companies are moving away fromseeing sustainability communications as amarketing tool primarily used to bolster corporatereputations. Rather, the approach is evolving toone where reports simply lay out the facts with aminimum of interpretation so that, in the words ofJim Nail of the analyst Verdantix, “stakeholderscan make their own judgments” (Jim Nail, ‘Plan

Page 175The relationship between directors and shareholders: financial communications and investor relations

Sustainability Communications, Not GreenMarketing’, Environmental Management & EnergyNews, November 16, 2010).

In other words, companies are required on aregular basis to disclose information aboutoperations to regulators, policymakers and otheraudiences. But the process of determining whatinformation must be disclosed, and how, involvescommunicating with the public.

This communication can take many different forms,ranging from an interactive website, to a survey ofkey audiences asking a series of questions aboutmaterial issues, to one-on-one meetings. Manycompanies must also do a better jobcommunicating internally. We often encountersituations where sustainability work remains thepurview of a relatively siloed team with littleinsight into — let alone an ability to influence —decisions affecting global operations.

Effective reporting of financial and non-financialperformance requires collaboration among a myriadof departments, including communications, investorrelations, legal, accounting, sustainability and thosemore focused on company operations. Given thesharpening focus of regulatory bodies on non-financial reporting, there is a need for some kind offormal validation to be given to the report, and thisis most often done through an auditing firm.

Even starting the process to determine whatinformation is material can be daunting.Companies are increasingly turning to a processcalled a materiality assessment, in which therelevant internal and external audiences arebrought together to decide collectively on whatissues are relevant and must be disclosed. Suchan assessment will help prioritise a company’sattention and resources so that it can beconfident it is communicating the informationthat the public wants.

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Hill + Knowlton Strategies222 Merchandise Mart Plaza, Suite 275,Chicago, Illinois 60654, USATel +1 312 255 3129Web www.hkstrategies.com

Other offices 85 offices in 46 countries

Claire KoenemanExecutive Vice President, ChicagoEmail Claire.Koeneman@hkstrategies.comClaire Koeneman has focused her career on helpingpublic and private companies achieve theirstrategic, financial and business goals. She is knownfor her sophisticated c-suite advice, refined peopleskills, deep expertise in investor relations, andfinancial and corporate communications.Additionally, she is a leading spokesperson for theindustry, quoted frequently in the financial and tradepress.Ms Koeneman brings nearly 20 years’ expertise

to Hill & Knowlton. She serves as a strategic adviserto chief executives and boards of directors on alltypes of capital markets issues, including corporatepositioning, shareholder activist challenges, crisiscommunications and management changes. Throughout her career, she has counselled dozens

of companies facing difficult situations, and workedto craft proactive stakeholder communications.

Hill + Knowlton Strategies607 14th Street, NW Suite 300, Washington DC20005, USATel +1 202 333 7400 Web www.hkstrategies.com

Robert LudkeSenior Vice President, Washington DCEmail Robert.Ludke@hkstrategies.comRobert Ludke provides strategic public affairs,media relations and messaging counsel for a varietyof national and international clients in financialservices, energy, international trade, sustainabilityand other areas. Mr Ludke’s recent work on behalf of the firm’s

clients includes: working with industry experts todevelop and implement ‘best in class’ practices tohelp clients operate in a more sustainable mannerwhile strategically communicating information aboutkey performance metrics to public audiences;leading the public affairs efforts on a number ofmajor domestic and internationmergers andacquisitions; and assisting a variety of clients inexpanding their relationships with environmental,public health and corporate governanceorganisations. He also is the leader of the team that provides

strategic communications counsel to one of theworld’s most prominent and successful preciousmetal investors, successfully securing profiles inmedia outlets such as The Wall Street Journal,Bloomberg BusinessWeek and Forbes.

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Published by White Page Ltd, in association with the London Stock Exchange, ‘CorporateGovernance for Main Market and AIM Companies’ aims to encourage companies and executivesto consider corporate governance in the widest sense, including board efficiency, transparency,reporting requirements, investor communications and sustainability.The wealth of expert insightsfrom professionals in this publication’s 27 chapters is therefore an invaluable resource.

The information in this publication is not offered as advice on any particular matter and must not be treated as asubstitute for specific advice. In particular, information in this publication does not constitute legal, professional,financial or investment advice. Advice from a suitably qualified professional should always be sought in relation to anyparticular matter or circumstances. The chapters provided by the contributors are not the opinions of the London StockExchange plc or any of its group undertakings (‘group undertakings’ shall be construed in accordance with Section 1161of the United Kingdom Companies Act 2006). This publication is provided for information and educational purposesonly. While all information contained herein is obtained from sources believed to be accurate and reliable, neither theLondon Stock Exchange plc nor any of its group undertakings accepts responsibility for any errors, omissions, orinaccurate information. All information in this document is provided ‘as is’ without warranty of any kind. Neither theLondon Stock Exchange nor any of its group undertakings make any representations and disclaims all express, impliedand statutory warranties of any kind in relation to this publication, including warranties as to accuracy, timeliness,completeness, performance or fitness for a particular purpose.

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