1.3 IR Projects of Strategic Relevance

1.3.6 Strategic Relevance of Sustainability for IR

Sustainability in the Context of Leadership and Communication
Sustainability is increasingly being integrated into corporate strategy, driven by regulatory requirements and state climate goals. ESG (Environmental, Social, and Governance) should be considered a central component of corporate development and communication. Governance, in particular, plays a crucial role in strategic business success concerning ecological and social factors. Shareholder communication should demonstrate how sustainable business practices create opportunities and contribute to value creation. Reporting models such as TCFD, TNFD, and ISSB offer helpful approaches to integrating sustainability into corporate strategy.

Materiality and Stakeholder Engagement in Focus for IR
The sheer number of sustainability metrics is overwhelming. 53% of Swiss issuers and 56% of institutional investors report that collecting these data requires significant resources. At the same time, 69% of institutional shareholders do not have a good understanding of relevant ESG factors. This is where Investor Relations comes into play, making essential topics and data understandable. The SASB materiality matrix can serve as a starting point to explain measures and capital allocations. However, ESG data are constantly evolving and often conflict with financial goals. Therefore, communication by management and IR must provide clarity and regularly inform stakeholders. Evidence from a survey by SWIPRA Services from 2022 shows that ESG engagements help institutional shareholders understand key factors and their strategic integration.

Transparent IR Communication Creates Understanding for Sustainability Investments
Sustainability investments compete with short-term returns. A clear understanding and trust in corporate leadership lead investors to be more willing to forgo short-term profits in favor of long-term sustainability goals. Less than 10% of asset managers and 30% of asset owners consider a reduction in short-term profits due to sustainability investments unacceptable. For 66% of those willing to forgo short-term returns, the reduction depends on the company’s transparency. At the same time, only about a third of institutional investors understand the sustainability considerations behind companies’ capital allocations. Transformation processes should therefore be accompanied by increased transparency and improved leadership reputation. Quantitative evidence for the value contribution of ESG is inconsistent, but there is consensus on the higher profitability of sustainable products. Sustainability efforts also improve access to capital markets. Transparency about ESG efforts and their strategic goals can positively impact both financing and revenue. IR plays a crucial role in conveying these messages.

Concluding Remarks
ESG efforts must be embedded in corporate communication. This requires a forward-looking, long-term strategic discussion that goes beyond short-term capital market communication. ESG topics affect a broad group of stakeholders and require a consistent message across all communication channels. IR plays a key role in promoting dialogue and supporting the board and management team.

Authors of chapter 1.3.6: Barbara A. Heller, Managing Partner, SWIPRA Services; Dr. Christoph Wenk Bernasconi, Senior Partner, SWIPRA Services

Investor Relations has to be taken seriously in the day-to-day business, even if it is a less than spectacular topic.

The standard measures and the duties of communication are described in ➔ Chapter 6 and ➔ 8. IR issues can very suddenly take on strategic relevance and rise to the very top of the list of priorities of the board of directors and the management on account of extraordinary company situations. A selection of situations of this kind is described below.

1.3.1 Listing/Spin-off

For the vast majority of companies, a listing is the trigger and starting point for establishing or professionalizing Investor Relations. From the perspective of institutional investors, who almost always form the most important target group during an initial public offering (IPO), a listing is a clearly defined process that involves valuing a company, making an investment decision, sounding out the supply and demand in cooperation with the syndicate banks, and defining a suitable price for a share package. Companies and the media may have an interest in magnifying the significance of this rational process and stirring up emotions for a variety of reasons. They do this through the media positioning of the company and its management. The tasks and processes involved in a listing, also those from a communication perspective, are presented in detail in the IPO Guide published by SIX, see ➔ Going public with the Swiss Stock Exchange | SIX

IPO as the Basis for IR
For that reason, we mention only briefly here that the listing lays the foundation for any kinds of IR activity. The cornerstone is laid in the IPO both in terms of all contents, specifically in the prospectus and the roadshow presentation (see ➔ Chapter 2 for more on this) and in terms of the investor or shareholder structure (➔ Chapter 4). Furthermore, continual IR activities lay down in the first year after the listing how transparently and how frequently a company communicates its strategy, what it has achieved and what it is planning (see ➔ Chapter 2 and ➔ 3  on this). It is recommended that this be done on the basis of a concept and not on the spur of the moment (ad hoc).

1.3.2 Mergers and Acquisitions

Mergers and acquisitions, M&A for short, are a concrete element of strategy at many companies. This includes processes in connection with ownership rights in companies, including the restructuring of corporations, mergers, the financing of company acquisitions, the formation of joint ventures, and the takeover of companies.

The variety of premises involved in M&A activities is reflected in the different objectives and relevance of communications. The most frequent transactions are those in which the two parties come to a discreet agreement and set a joint course for the merger or acquisition. In addition to making preparations for dealing with any leaks of information, a coherent justification for the merger and the financing, and a technically flawless announcement and processing of the transaction, the task of IR consists primarily in being equipped to handle any criticism from individual shareholders. The announcement of the transaction forms the high point of the communication concept. As far as the communication with investors is concerned, it is followed by the processing as stipulated by the Swiss Takeover Board or the ad hoc rules.

Bidding Wars
The IR tasks are more complex in the case of controversial transactions. As important as the initial announcement is in such cases – who says what and in which tone? – there if often just as little certainty over the course that takeover bids, hostile takeovers, and bidding wars will take. Success is critically dependent here on the communication following the initial announcement. The financial community wants to be persuaded by valid arguments and good communications. In addition to the basic instruments specified above, the news service, i.e. a comprehensive and up-to-date analysis of the opinions of investors, analysts and journalists, takes on increased importance here, not least in order to become swiftly familiar with statements made by the opposite side. The more time available to draw up one’s own position, the better. The advent of the Internet and social media has shortened the previous daily news cycle to an hourly cycle. 

There is no doubt that good communications make an M&A project easier for an acquiring company, even if investors ultimately make their decisions on the basis of hard figures, i.e. the amount and form of the purchase price. Companies that have a good understanding of their own shareholders, however, increase their chances of implementing a transaction at a good price. They reduce the probability that shareholders of one or both companies in question will offer resistance.

Hostile Takeover Bids
Similarly, good communications will mean that a company confronted by a hostile takeover bid has better potential of realizing a higher price than the one first offered. Note that this is also the most frequent objective when a binding takeover bid is on the table; it is rare to maintain independence. Consequently, in a hostile takeover, the communication of the target company focuses mainly on the elements that suggest a higher valuation. Moreover, legal disputes – between the two companies or between shareholders and companies – have become the rule rather than the exception and part of the negotiating tactics in controversial transactions. The consequence of this is that all formulations, whether in press releases or presentations, have to be carefully weighted by the attorneys.

1.3.3 Protection Against Hostile Takeovers

Hostile takeovers come frequently, although not always, as a surprise. There is consequently little time to make decisions and to prepare the necessary measures. Companies that are confronted with an undervaluation are therefore urged to make appropriate preparations. Not just legal preparations, but communication preparations, too. Moreover, it is important to clearly define the organization of any defense team that is set up.

Takeover battles are generally decided by the purchase price or the premium. The best defense is therefore the management of the share price. It should diverge as little as possible from the value of the company, which is based primarily on the profits and cash flows expected in the future. When an undervaluation is suspected, it is advisable to conduct a general review of the IR strategy and the equity story. This review will generally end in intensifying the IR program and precisely monitoring changes in the shareholder base.

Team of Specialists
A potential bidder can build up an equity position, make informal con- tact with the board of directors, or enter into discussions with the target company. At all events, it is advisable to mandate a qualified legal advisor, a bank and a communication consultant with the objective of assessing the legal options, while at the same time determining which criteria should be used or are necessary for public communications.

There are also cases in which the board of directors has learned through reports from a news agency that a bidder – with or without pre-announcement – has published a public takeover offer. Legally, the board of directors is not required to comment publicly on a pre-announcement or a takeover bid immediately. Nevertheless, it can be advisable to respond swiftly with a public statement in the form of an ad hoc announcement  (see ➔ Chapter 8.6) and  accompanying  PR  and  IR measures. A lot of companies have prepared defense measures for this purpose, which can include drafts for media releases and other communication and IR instruments.

Report of the Board of Directors
The board of directors is required to publish a report no later than the 15th trading day after the offer has been published. The report has to state clearly and with valid reasons whether the board of directors accepts or rejects the offer or abstains from making a recommendation. Other time limits are noted in the following presentation.

Timetable in the Event of a Takeover Bid

1.3.4 Activist Shareholders

An activist shareholder acquires a share in the company with the aim of exerting pressure on the board of directors and of increasing the enter- prise value through its intervention.

Activists analyze the target company closely before initiating contact with the board of directors or launching a media campaign. The most frequent points of attack are the below-average performance of the company’s share price, inefficient capital investments (strategic errors, operational missteps), and inadequate corporate governance or pro- nounced weaknesses in the area of sustainable business management. Excessive management compensation can also be a point of attack, especially during a media campaign.

The majority of institutional investors welcome the increase in activist shareholders that has been observed in Europe and also in Switzerland over the past few years. Even if they do not necessarily agree with the specific demands made by these shareholders, they support the general- ly higher pressure on the company to adjust better and faster to chang- ing market conditions and to operate in an “investor-friendly” way.

If the House Is in Excellent Shape…

The best defense, when there is a threat that an activist shareholder will get on board, is having as few open flanks as possible: the clearer the corporate strategy, the firmer its implementation, and the more disci- plined the capital investments and use of funds, the better. Maintaining close relations with institutional investors also helps.

The second-best defense is a good IR and communication program. It starts with sound analysis. What strengths and weaknesses does the company have from an investor’s perspective? Which potential argu- ments of an activist make sense in principle and ought to be taken into more detailed consideration in the strategy or the organization? How can that happen specifically? Which arguments would have to be coun- tered, which facts could be used to underpin the counterarguments? Organizational in addition to strategic questions also have to be answered. How would the board of directors and management get organized if an activist emerges on the scene? Who would talk to them? Which advisors would have to be consulted?

Tight-Knit Management of the Communication

The specific IR measures are similar to those used to defend against a hostile takeover bid: a review of the IR strategy and equity story, gener- ally followed by an intensification of the IR program and of the relation- ship management with analysts and investors. Also valuable is good knowledge of how the most important investors see the company, where they identify weak points in the strategy, and what they think about the dividend policy or the allocation of capital. Particularly careful attention has to be paid to the need to comply with all legal (communication) requirements in order not to expose additional areas to attack.

If an activist makes their presence felt, their track record and also their conduct towards earlier targets have to be examined. A decision has to be made on this basis on whether to seek direct contact and how this should be organized. As with any major shareholder, direct contact of this kind is generally, but not always, constructive. The situation is the exact opposite when it comes to the media: it is generally not sensible to escalate the conflict with an activist through the media to begin with.

1.3.5 Communication in Crises

Serious company crises also involve IR. Financial problems, sudden changes in management, loss of data, product recalls, accidents – crises can have many causes, that is why there is no standard formula for what the specific IR strategy has to look like in each individual case.

A characteristic of the majority of corporate crises, however, is that the different information requirements of the individual target groups are accentuated. Even more so than in the day-to-day busi- ness, customers, employees, crisis and investors have to be pro- vided with information specific to the target group but where the core messages are consistent at the same time. The same principle also applies within IR, as in a crisis shareholders, bondholders, and lending banks turn their attention to various key financial indicators and strategic aspects.

Despite the many differences, the following principles have stood the test of time:

1.3.6    Strategische Relevanz der Nachhaltigkeit für die IR

Sustainability in the Context of Leadership and Communication
Sustainability is increasingly being integrated into corporate strategy, driven by regulatory requirements and state climate goals. ESG (Environmental, Social, and Governance) should be considered a central component of corporate development and communication. Governance, in particular, plays a crucial role in strategic business success concerning ecological and social factors. Shareholder communication should demonstrate how sustainable business practices create opportunities and contribute to value creation. Reporting models such as TCFD, TNFD, and ISSB offer helpful approaches to integrating sustainability into corporate strategy.

Materiality and Stakeholder Engagement in Focus for IR
The sheer number of sustainability metrics is overwhelming. 53% of Swiss issuers and 56% of institutional investors report that collecting these data requires significant resources. At the same time, 69% of institutional shareholders do not have a good understanding of relevant ESG factors. This is where Investor Relations comes into play, making essential topics and data understandable. The SASB materiality matrix can serve as a starting point to explain measures and capital allocations. However, ESG data are constantly evolving and often conflict with financial goals. Therefore, communication by management and IR must provide clarity and regularly inform stakeholders. Evidence from a survey by SWIPRA Services from 2022 shows that ESG engagements help institutional shareholders understand key factors and their strategic integration.

Transparent IR Communication Creates Understanding for Sustainability Investments
Sustainability investments compete with short-term returns. A clear understanding and trust in corporate leadership lead investors to be more willing to forgo short-term profits in favor of long-term sustainability goals. Less than 10% of asset managers and 30% of asset owners consider a reduction in short-term profits due to sustainability investments unacceptable. For 66% of those willing to forgo short-term returns, the reduction depends on the company’s transparency. At the same time, only about a third of institutional investors understand the sustainability considerations behind companies’ capital allocations. Transformation processes should therefore be accompanied by increased transparency and improved leadership reputation. Quantitative evidence for the value contribution of ESG is inconsistent, but there is consensus on the higher profitability of sustainable products. Sustainability efforts also improve access to capital markets. Transparency about ESG efforts and their strategic goals can positively impact both financing and revenue. IR plays a crucial role in conveying these messages.

Concluding Remarks
ESG efforts must be embedded in corporate communication. This requires a forward-looking, long-term strategic discussion that goes beyond short-term capital market communication. ESG topics affect a broad group of stakeholders and require a consistent message across all communication channels. IR plays a key role in promoting dialogue and supporting the board and management team.

Authors:
Barbara A. Heller, Managing Partner, SWIPRA Services 
Dr. Christoph Wenk Bernasconi, Senior Partner, SWIPRA Services