Although communicating with all stakeholders is enshrined in the King IV Code of Corporate Governance, there has been some spectacular bungling by companies of their communication with the investment community. In a world where confidence in the corporate sector has been eroded by dramatic failures there is clearly the need to create an understanding of a company’s affairs by investors.
In 2003 Nedcor’s reputation suffered an enormous dent and a plummeting share price. After touching giddy highs of R150.00 in 2002, Nedcor shares tumbled to the R60 level in 2004. A bonus scheme focusing on short-term performance saw bonuses of R18m paid to directors in 2002, in respect of the 2001 financial year – a year in which the group earned net profits of only R13m. A press exposé saw heads roll. Rob Rose summed it up in Business Day (9 Dec 2003): “New CEO Tom Boardman will take over the reins today and attempt to restore the bank to prosperity after a traumatic year, in which its share price dropped 40% amid a slump in its earnings and reputation.”
When BP’s Deepwater Horizon oil rig exploded in Gulf of Mexico on 20 April 2010 causing an oil spill, BP's share price was 648.20p (GB). At first, CEO Tony Hayward tried to downplay the impact of the disaster on both the company and the environment, stating that the impact will be “very, very modest”.
By 30 May, Hayward had reached a nadir in his media engagement stating: “I’d like my life back.” From this point, there would be no going back for him. By 29 June, the price had collapsed to 298p. Throughout the crisis, Hayward seemed overly defensive and revealed little. It came as no surprise when his resignation was announced on 27 July, in spite of the leak being successfully capped earlier in July. The share price never really rose above 500p after the incident, in spite of the then booming oil price and a subsequent collapse in oil has seen the share price slide to below 350p.
And who can forget the rout that Pinnacle Holdings experienced in March 2014? After peaking at over R26.00 in August 2013, the share price drifted to around R23.00 towards the end of February 2014. The arrest of an executive director for alleged bribery in March 2014, saw the share close at R13.90 on 30 March 2014 and by mid-August, the share was trading below R10.00. In the two days after the announcement, Pinnacle’s market cap fell to R1.95bn, from R3.4bn — a total loss of R1.5bn.
But the issue was not so much the arrest – the charges were subsequently dropped – as the communication vacuum in which it took place. It took Pinnacle 20 days to announce the arrest, during which time several directors sold Pinnacle shares equivalent to about 1% of the company. And even once the announcement was made, management seemed reluctant to have much interaction with the media. In spite of an uptick following the charges being dropping, Pinnacle’s share price continues to languish in the R11.00 to R14.00 range.
By contrast, the handling of the Pick ‘n Pay poison scare in 2003 resulted in a relatively small impact on both the share price and company sales, in spite of a decision to keep silent on the matter for seven weeks. Once the company went public, CEO Sean Summers handled media attention with aplomb: always available, always proving information and keeping the public informed. Shareholders rewarded the strategy with a share price that held its own, only dipping 3.6% in the week after the announcement, after reaching an all-time high the previous week. Not only that, but some customers were actually going out of their way to shop at Pick ‘n Pay as a means to support the group: in a survey at the time, 87% of all respondents polled indicated that they would support Pick ‘n Pay and would make a point of shopping there.
What is clear from these case studies is that investor sentiment plays an enormous role in determining share prices. An open channel of communication with investors is essential to keep them well informed and able to base investment decisions on facts rather than speculation and it behooves a company to undertake sound investor relations.
It is in a company’s interests to maintain a share price that is consistent with an accurate view of its performance as well as its future prospects: too low and the company is an easy target for a takeover while making fund raising expensive and inhibiting its ability to purchase other entities; too high and the risk of shorting and lack of appeal for new share options hamper the company.
Engaging with shareholders may be a JSE listing requirement and important from a governance perspective, but it is equally important for keeping shareholders well informed and in the best position possible to make investment decisions.
*This article first appeared in "Directorship", the official publication of the Institute of Directors Southern Africa
In an article last month in WSJ Blogs on the Four Ways Asia Can Avoid the ‘Middle-Income Trap’, Martin Vaughan notes the IMF's suggestions for the rapidly-growing Asian economies that are at risk of falling victim to the middle-income trap (MIT).
The MIT is a situation where rapid economic growth results in rising wages and a manufacturing industry that is no longer competitive on the global stage. These countries lag the developed economies, but have limited opportunities of extricating themselves from the situation. Wikipedia describes the typical characteristics of countries trapped in middle-income status as:
(1) low investment ratios; (2) slow manufacturing growth; (3) limited industrial diversification; and (4) poor labour market conditions
South Africa is a perfect example of a country that has succumbed to the MIT, so I found the WSJ Blog both interesting and useful from a South African perspective. How can we benefit from these suggestions?:
Although South Africa has recognised this as a critical factor in advancing the economy, progress to date has been notably limited. We saw a massive spurt ahead of the 2012 Soccer World Cup, as we raced to complete the stadia and a few other projects on time, but we seem to have stalled since then. Speak to anyone in the construction industry, from quantity surveyors to builders, and the story is the same: the anticipated government infrastructure spending is failing to materialise.
"2. Guard against excessive capital inflows. Money flows from abroad can
There are essentially two types of foreign investment into a country: portfolio investment (buying equities and bonds as a passive investor) and foreign direct investment (FDI) (buying at least 10% of a company - a strategic stake - and playing a more participative role in that investment). Portfolio investment is less desirable, as explained by the IMF, investors often withdraw their assets "in a hurry"; FDI, by contrast, is more prized given that it is less volatile. But, there are problems with FDI too: income on those assets leaves the country as "income payments" on the current account and can intensify a current account deficit. So South Africa needs to assess the capital flows and their potential impact carefully.
"3. Boost spending on research and development and post-secondary education.
Improving ALL education is critical for South Africa's potential to succeed. There are numerous surveys and rankings which reveal SA's complete inadequacy in literacy and numeracy. And in SA this is not restricted to the tertiary phase, but it goes all the way to the foundation phase. I would suggest that this is the single most significant step that SA could take to avoid the middle-income trap.
"4. Get more women into the workforce and raise the retirement age. Aging
While South Africa does not have the same problem of an aging population, our population growth rate has shrunk to below 1% p.a. In addition, South Africa has bucked global trends by reducing the age for men to receive a state old age pension from 65 to 60, in line with that for women, putting us in danger of rising dependency ratios. Worryingly, it will be extremely difficult to reverse this move, even in the medium term.