The Autocorrect - Weekly Investor Relations Newsletter
So, for those of you we haven't met, welcome to The Autocorrect!
We're a weekly (Friday) digest covering any news you might have
missed during the week that is relevant to the investor relations
profession - including a bit of our own commentary on why it's
important and how best to act on it. We'd bet those of you with
higher-than-average thumb dexterity can pick up the highlights
below without taking more than a couple minutes out of your day,
and you'll likely find the stories we link to worth a deeper
Oh, yeah, the name. We were inspired by having to help so many of our clients figure out how to type "IHS" into their various Microsoft / Google / Apple products without it autocorrecting to "HIS" …and we're hoping The Autocorrect will have at least the same impact on saving you some time each and every week.
Week Ending 14 June
Turns out our theme for this week doesn't stray far beyond last
week's on alternative data - below we'll see uses of supply chain
and "green revenue" data as well as machine learning tools that use
alternative data in the investment process. We'll also see two
different sets of shareholder activist tactics to watch out for.
And, cats and dogs, plus a one picture of a sloth.
So - here's the latest news in the IR world:
- Machine learning is starting to have an impact on the IR
community, both from investors using its capabilities as well as
tools from providers that have truly adopted it. We'd consider
Cliff Asness' AQR Capital Management an authority on
machine learning - as it's the business of the quant shop to turn
technology into alpha - so we'd trust AQR to give an effective view
of what ML is capable of, as opposed to just headline-grabbing
hype. AQR's paperCan Machines Learn
Finance? serves as a brief overview of machine learning tools
and their applicability to investment decisions; the upshot is that
machine learning is really just starting to make useful
strides in assisting the investment process, but the gains to be
seen are "evolutionary, not revolutionary."
Machine learning methods work best when there's a large and discrete data set to work with, and finance causes some hurdles here - financial markets often provide a very low "signal to noise" ratio, often have very limited sample sizes of valid data available, and the market itself has the ability to shift over time. The authors use an accessible machine learning problem showing a picture of a sloth and asking "is this a cat?" - machine learning tools are very efficient at learning to recognize a picture of a cat, after seeing a few million pictures of cats. However, the metaphor for the finance industry might be training a machine learning model with 10,000 pictures of "not cat" and only 100 of "cat," and as the authors state, "cats [that] begin morphing into dogs once the algorithm becomes good at cat recognition." Either way, this piece is a good background to help understand where the passive / quant world is headed using your financial or non-financial data, and maybe a good reminder that there are limits to its capability. (Hat tip to P&I for its summary as well).
IR Best Practices
- Kai Liekefett, a partner who chairs Sidley
Austin's shareholder activism practice, published a
piecewhose title clearly broke
the firm's record for most exclamation points in a client memo.
Help! I Settled With an Activist! focuses on shareholder
activism, covering the next steps and potential
down-the-road repercussions of settling with the activist
fund. While settling with a shareholder activist could
provide some short-term relief, there are many examples where
trouble occurs after a standstill period. Liekefett notes that
"while companies are lured by the prospect of a quick end to the
public side of an activist campaign, settlement agreements often
invite new disruptions inside the boardroom and interrupt a board's
ability to concentrate on executing a long-term strategy."
One of the strategies the activist fund may receive is leverage called "replacement rights," which allows the fund to replace any of its designated board members. It creates the good cop/bad cop structure, where the more forceful replacement will push harder on the agenda for the activist investor. Many times that agenda leads to the departure of the CEO, which allows more leeway for the investor to push its agenda, or choose amenable replacement CEO.
In closing, the author suggests boards should not give up on proxy fights until they've done due diligence, especially with more victorious proxy contests on behalf of the board. As Liekefett explains,"If your company is one of those with a good case for itself, then your company may be better off facing the activist head-on and dispensing with its campaign sooner rather than later."(David Farkas)
-IR Magazine picks up research by PwC's strategy consulting business, the cleverly-namedStrategy&, on CEO succession and the transition process. 17.5% of CEO's at the worlds largest companies stepped down in 2018, a record level that increased from 14.5% in the year prior. The research notes that just 12 percent of CEOs left their roles due to scheduled successions. Further, last year, more CEOs left the role due to "ethical lapses" (39%) than financial performance (35%), leaving many of these transitions as sudden events that put trust at risk. Most large issuers have well-developed "activist wargame" plans on the shelf and ready to go - but not everyone has the succession playbook dusted off. This might serve as a reminder that no matter who sits in the corner office, IR needs to be prepared to help communicate a transition that can come for any reason, including the most negative.
- In light of the crush of questions coming from analysts about supply chain exposure and the risks inherent in a trade war, we liked this article from Factset that looks at how multilayer supply chain relationship data can drive an investor's view of a company. Investors will have the basic information available to them from your disclosures of partners, vendors, and suppliers, but will also have the ability to mesh them to show the "second-order" impact of each of your suppliers' suppliers, for example. It's not that different than the counterparty risk exercise that your company does internally, but the investment community is, of course, doing this research with incomplete information; the article measures "Amazon's exposure to China" through measuring the count of suppliers / partners / vendors that are based in China (25 out of 786), relative to the supply chains of those 786 (493 companies based in China out of 4,908). Disclosing supply chain information is always fraught with competitive concerns - but this should give you some useful context as to some of the data tools investors are using today, and it may color how you think about communicating your supply chain exposure in the future.
- This WSJ piece gives an overview of the expansion of climate-change sensitivity into portfolios of all kinds, including sovereign wealth funds, hedge funds, and pension funds. The article cites both large managers the size of Abu Dhabi Investment Authority (ADIA), BlackRock, and Varma pension fund as well as some smaller names such as WHEB Asset Management that are making security selection choices based on either geographic exposure to climate change (the negative screen) or revenues generated from climate-friendly products (the positive screen). There are numerous sources out there that dig deeper than the high-level ESG metrics to evaluate company revenue streams on their impact on emissions and climate - this should be a good reminder that if your business produces such "green revenue", even as a small percentage of the total, there's a built-in investment constituency for it, and the potential for an expanded shareholder base may help justify investment in this space.
- In the January 18 Autocorrect we noted that JANA
Partners had made headlines in announcing that it would raise
capital to launch a Jana Impact Capital fund that would
engage companies on social activism. (Some dedicated
Autocorrect readers may remember that the singer Sting was
a board member of the venture, as well as noting our affinity for
Police references). This week, Barrons reportsthat JANA is delaying
the launch of this fund, and it may be changing tack to a
co-investment model for its social-focused efforts, in
which JANA and an outside investor such as a pension fund would
jointly invest in a company and engage with management to affect
change, then share in the profit and loss directly instead of
through a stake in the fund net of fees. That said, don't assume
that corporates are off the hook; the article cites people familiar
with the firm saying that JANA has selected between three
and five target companies for these social impact co-investments
already. Having no direct track record in impact investing
appears to have hurt the firm's capital-raising process - but
obviously that could change if the upcoming co-investments bear
Questions? Comments? Considering quitting your job and driving around in a van with a Great Dane solving mysteries instead? Reach out to your IHS Markit team, or email@example.com.
- Inverting the alternative data pyramid
- Muni Monthly Summary - August 2019
- Response to ESMA consultation on consolidated tape
- Decomposition of August HY returns
- IBOR transition: Term Risk Free Rates (TRFRs) and industry actions
- Corporate Bond Pricing Data, August 2019 Recap
- IBORs, New Benchmarks Series – Case Study: SOFR and FRTB
- Meeting Multi-Regime Reporting Requirements