Communication Breakdown

Opening the channels of corporate responsibility communication can maximize share value.

By Karin Kane

Corporate responsibility (CR) has become a major concern of corporations and their shareholders, as a recent Thomson Financial survey of investor relations officers (IROs) and investors shows. The survey, which considered CR to include governance trends as well as social issues, found that over 82 percent of investors consider CR criteria when evaluating their investments. The survey, conducted in March, also shows that nearly 73 percent of shareholders and 59 percent of IROs believe CR impacts share price.

The high percentage of investors focusing on corporate responsibility, and the importance of CR to those investors, is not unexpected. Most industry followers would argue that at least some aspects of a corporate focus on responsibility, including risk management and talent attraction, are beneficial to investors. However, the survey also shows that many IROs do not believe their shareholders are concerned with CR issues. So, though over 97 percent of IROs feel that CR is important to their firm, and over 78 percent of shareholders feel that CR is important to their investment decision, little information on this topic is actually communicated between the two groups.

Some of the miscommunication stems from a difference in focus. Though the top concern of both groups remains governance and ethics (80 percent of IROs and nearly 70 percent of investors rated corporate governance as a top concern), half of IROs also felt that community development issues were of concern to their company. Only a third of investors rate this area as important. IROs are notably more concerned about equal employment opportunity and environmental impact than their shareholders, while investors tend to be more concerned with product safety and labor standards than their corporate contacts. Notably, 44 percent of investors admit to concerns of general responsibility; most agree that poor corporate responsibility introduces risk factors that should be included in an investment analysis.

Investors do generally reach out to the company for the CR information they seek. Seventy-one percent turn to the IR department or senior management team for this data. Interestingly, despite the high percentage of investors seeking information, less than a third of IROs feel responsible for CR communications. This lack of IRO concern can perhaps be explained by the relatively few shareholder questions IROs receive that are related to corporate responsibility and governance. Nearly 60 percent of IROs note they receive shareholder questions on CR issues rarely or never.

Certainly, many firms do include CR and governance updates and information on the IR or corporate website or in annual and interim reports, eliminating the need for shareholders to communicate directly with the IR department. However, the lack of investor questions appears to be mainly due to a lack of available time. Only 33 percent of investors have a separate team of analysts focusing on CR issues; the remainder must evaluate CR along with the rest of their investment decision and must include CR information alongside their financial analysis. For the same reason, investors also request that CR information be readily available, transparent, material and relevant.

Indeed, corporations find that much of the difficulty in communicating CR data to investors arises from the diversity of the information and the difficulty of collecting it. Currently, only 3 percent of IROs confirm that they do use a system to track CR information; the remaining 97 percent did not or else were unsure of their companies’ practices.

Finding an adequate budget to address CR concerns is also an issue at many firms. Slightly over 60 percent of firms spend less than $50,000 a year on CR issues, including salaries and all communications. One area that costs are not begrudged is communication with the board of directors, which many firms see as a substitute for shareholder communications. IROs do communicate CR information to their board regularly and in a variety of ways, including briefings at board or committee meetings, scheduled reports, copies of scorecards and internal meeting minutes, and information kits.
This high level of communication to the board of directors has clearly paid More than 72 percent of respondents believe their board of directors is now appropriately concerned about corporate responsibility, and more than 82 percent confirm that their management team is appropriately concerned. In addition, while not all corporations are focused on CR practices, over 70 percent feel that their company is sincerely committed to corporate responsibility practices and standards for the long term. Unfortunately, because of a lack of communication, this devotion goes unrecognized by shareholders and may not be contributing fully to share value.

To maximize the value of a good corporate responsibility program, consider the following steps:

• Recognize that, despite their lack of questions on the topic, shareholders are focused on CR issues.
• Proactively reach out to top shareholders to identify their main CR concerns.
• Add CR information to the investor relations or corporate website. Include details on:

• governance policies and practices
• product safety standards
• labor standards and employment practices, including those of vendors
• corporate guidelines and codes of conduct
• any other concerns mentioned by your shareholders,
• contact details for additional information.

• Consider adding a slide or two on corporate responsibility practices to analyst day presentations. Include any information that may have a material impact on share price.
• Brief all corporate officers, including the IRO, CEO, CFO and operating heads, on corporate responsibility practices at least once a quarter.
• Actively communicate all relevant and material information to the board of directors.

Karin Kane is a contributor to Thomson Financial’s Strategic Research Group.