Shareholder engagement strategy: What are the risks in not using shareholder intelligence?

Which departments benefit from an investor targeting strategy and shareholder identification?

The primary user of shareholder intelligence is investor relations, but its value extends across the business. In a corporate, multiple departments can benefit from a complete picture of the shareholder base, each for different reasons and with different consequences when the picture is incomplete. This includes the company secretariat team, the treasury, M&A and corporate finance, ESG, the c-suite and corporate communications.

In the sections below, we examine what each department needs, why it matters and what the risks are when intelligence is missing.

Why does IR need shareholder intelligence as part of their investor targeting strategy?

The IR team is the main recipient of shareholder intelligence, usually through advisors or research. The intelligence will measure the effectiveness of the IR programme, with the ultimate test being whether the targeted investors are buying or selling shares and debt.

Shareholder intelligence will also allow IR teams to understand if:

• The company has attracted the investors it thinks it should have
• Those shareholders are there for the long term or short term
• Those investors are passive or active in both investment style and behaviour

If the company doesn’t know who its investors are, who manages investment decision-making processes at a fund level, or who controls the vote, then investor relations is operating in the dark. This means they don’t know how the shareholder base is evolving, and that they can’t see what’s driving demand for shares. By understanding who your investors are, you can control the narrative to meet shareholder expectations and behaviours.

How can shareholder intelligence protect against investor activist risk?

Shareholder activism is evolving. In addition to full-time activist hedge funds, traditional shareholders are now holding boards accountable through the vote at an AGM or through shareholder resolutions. An activist shareholder could:

• Upend the board
• Discredit the C-suite
• Dent investor confidence
• Undermine market perceptions
• Block the company’s strategy

Boards therefore want to understand the level of activism risk and have the tools in place to defend against a campaign. Shareholder intelligence can determine vulnerability and help mitigate risk by identifying support from shareholders to fend off the activist campaign. Without a clear picture of who your shareholders are, you can’t quantify this support, meaning you will lack an effective defence strategy.

Which other functions can benefit from beneficial ownership identification?

The company secretariat and AGM meetings

By understanding the intentions of shareholders, the CoSec team can determine the likely outcome of resolutions. Additionally, if the team can determine who controls the voting mandate, analysis can be made as to whether they are likely to support the resolution.

Consequence of poor intelligence: Without an accurate picture of the shareholder base, IR cannot identify shareholders who negatively perceive strategy or policy, meaning that warning signs go undetected. For the company secretariat, the consequences of that intelligence gap are significant. Shareholders voting against resolutions and mobilised activists can quickly become a threat to board continuity and company reputation. Risks include:

• Reputational risk
• Re-appointment risk
• Shareholder rebellion
• Activist threat

Corporate transactions

When the M&A department undertakes a corporate action, they need to understand if shareholders will support or reject it should a vote be required. To assess this risk, the M&A team needs to understand shareholder opinion, both from those that make the investment decisions and from those that control the voting mandate. They’ll also need to know who to engage with to consolidate support.

Consequence of poor intelligence: The IR team needs to know how any transaction could alter the shareholder structure. This can include knowing who may vote with their feet and sell their stock, who may become forced sellers for ESG reasons, and who may turn against management and build coalitions to support a change of strategy and become an internal activist. Key risks for the M&A team and IR team include:

• Reputational risk
• Considerable costs
• Shareholder rebellion and the increased activist threat

The treasury and debt issuance / restructuring

The treasury might need to know who debtholders are. For example, if the treasury wanted to restructure its bonds, it needs to know who the debtholders are, and whether they will support this move or reject it.

Consequence of poor intelligence: The IR department should also understand the consequences for the shareholder base. For example, there might be common holders of debt and shares who may rotate out of both. Consequences include:

• Reputational risk
• Debtholder rebellion
• Increased activism threat

ESG policy

The ESG team needs to know if their new ESG policy is aligned to the policies of their shareholders. To do that, they must understand who the shareholders are, what their collective policies are, and what yardstick they use to determine their view of best practice.

Consequence of poor intelligence: IR and ESG need to understand what shareholders’ opinions are of ESG policy and its consequences, covering who is going to leave, which shareholders might begin to build coalitions to effect change and who may put out a request for action (RFA) to an activist. They’ll also need to determine who to engage with to build support and ultimately, who could sway opinion. Key risks to the business include:

• Shareholders rotating out of the stock
• Shareholders becoming an internal activist
• Shareholders employing an activist as a proxy for themselves
• Reputational risk and considerable costs

C-suite commercial direction and remuneration

The C-suite needs to understand whether the owners of a company, the shareholders, agree with their objectives. In this sense, they have the most to lose in not knowing who their shareholders are. By understanding support levels, opposing levels and persuasion potential, boards can reduce commercial and personal risk ahead of planned actions, while building better strategy that gains buy-in from shareholders.

Consequence of poor intelligence: The C-suite relies on IR to translate shareholder intelligence into actionable insight. Without an accurate picture of the shareholder base, IR cannot identify which shareholders are rotating out of the stock, who is building coalitions to drive change, or who may engage an activist as a proxy for their own agenda. This leaves the board without the engagement roadmap they need to consolidate support ahead of critical decisions. Failure to bridge that gap can lead to:

• The board’s removal
• Rejection of their compensation plan
• Reputational damage
• Rotation out of the stock and share price suppression
• Shareholders becoming agents of change (internal activists)
• Shareholders employing an activist as a proxy for themselves
  
  

Why does your shareholder engagement strategy need investor intelligence?

Every function in a business is only as effective as the intelligence it acts on. Shareholder intelligence is the foundation upon which sound corporate decision-making is built — from the IR team managing day-to-day investor relationships, to the C-suite navigating strategic direction. The consequences of operating without it — reputational damage, shareholder scrutiny, activist threats and financial cost — are too significant to leave to chance.

In our next and final article, we turn to the question of what shareholder intelligence is, examining the tools, data sources and analytical frameworks that sit behind it, and what best-in-class intelligence looks like in practice.