Msmws - Arvid Hoffmann

Welcome

Shareholder Activism and the Role of Marketing: A Framework for Analyzing and Managing Investor Relations

to Maastricht University

Arvid O. I. Hoffmann & Joost M. E. Pennings

Faculty of Economics and Business Administration

Outline of Today’s Presentation

• Introduction of the Research Team

• Motivation and Background of Project

• Framework and Illustration

• How to Proceed from Here: Preliminary Research Design Faculty of Economics and Business Administration

Research Team

•

Arvid Hoffmann: Assistant Professor of Finance. [email protected]

•

Joost Pennings: ALEX Investment bank Professor of Finance and Marketing. [email protected]

•

Simone Wies: M-F Student, future PhD candidate. – Thesis topic: How do company-investor relationship characteristics influence share price volatility and shareholder activism level? [email protected]

Faculty of Economics and Business Administration

Motivation: Headlines from The Economist

• “Upheaval at VNU is yet another example of increasing shareholder activism in Europe.” • “Activist shareholders are getting tough with boards and managers.” • “Investors are making life uncomfortable for boards in America.” • “Keeping shareholders in their place: Bosses around the world celebrate a series of victories over activist shareholders.”

Faculty of Economics and Business Administration

Importance of Investor Relations

• There is a growing importance of investor relations, – but not all firms are always successful in managing the relationship with their shareholders…

• This is regrettable, – as firms can gain from successful investor relations programs…

Faculty of Economics and Business Administration

Benefits of Investor Relations

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A well-organized investor relations program can: –

Improve corporate image (Gregory, 1997),

–

Increase investors’ willingness to invest in a company (Craven and Marston, 1997; Carter, 2006: Fombrun and Shanley, 1990),

–

Reduce risk perception of investors, lowering firm’s cost of capital (Srivastava et al., 1997).

Faculty of Economics and Business Administration

What is Investor Relations?

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Investor Relations (NIRI 2008) is: –

a strategic management responsibility,

–

that integrates finance, communication, and marketing.

Faculty of Economics and Business Administration

What is missing in Investor Relations?

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Existing literature, however, perceives IR as: –

the financial end of the communications function, or

–

the communications end of the financial function.

 The role of marketing in IR is underexposed.

Faculty of Economics and Business Administration

What is missing in Investor Relations?

•

Marketing’s underexposure is unfortunate: –

marketing literature offers many valuable insights for IR,

–

marketers possess skills relevant to manage interactions with investors (cf. Lovett and MacDonald 2005).

Faculty of Economics and Business Administration

What is needed to successfully manage Investor Relations?

•

To successfully analyze and manage IR: –

existing IR literature needs to be completed with insights from the marketing literature.



Take a Relationship Marketing perspective on IR.



Investor Relationships as Market-Based Assets.

Faculty of Economics and Business Administration

The Role of Marketing for Analyzing and Managing Investor Relations Market-Based Assets

Market Performance

Shareholder Value

Customer Relationships

Enhance corporate image

Accelerate Cash Flows

Partner Relationships

Increase favorability of stock

Enhance Cash Flows

Investor Relationships

Stimulate demand of stock

Reduce Volatility and

Reduce perceived risk of stock

Vulnerability of Cash

Reduce costs of activism

Flows Enhance Residual Value

The Role of Marketing for Analyzing and Managing Investor Relations Identify possible mismatch between desired state and current state of relationship

Desired state from shareholders’ perspective:

Desired state from company’s perspective:

Time Horizon

Time Horizon

Risk Attitude and Risk Perception

Risk Attitude and Risk Perception

Relationship Orientation

Relationship Orientation

Relationship Evaluation Mode

Relationship Evaluation Mode

Trust

Trust

Commitment

Commitment

Reciprocity

Reciprocity

Faculty of Economics and Business Administration

Initiate actions to reduce mismatch between desired state and current state of relationship

The Role of Marketing for Analyzing and Managing Investor Relations

•

•

Key dimensions of relation between the firm and investors: 1.

Time horizon

2.

Risk Attitude and Risk Perception

3.

Relationship Orientation

4.

Relationship Evaluation Mode

5.

Trust

6.

Commitment

7.

Reciprocity

Proposition: congruence on key dimensions improves quality of investor relations and reduces (costs of) shareholder activism.

Faculty of Economics and Business Administration

The Role of Marketing for Analyzing and Managing Investor Relations

Faculty of Economics and Business Administration

Research Design

•

Objectives of empirical study: –

Analyze relationship between quality of investor relations and congruency on relational factors between investors and firm.

–

Analyze interactions between different relational factors (e.g., between time horizon and trust).

Faculty of Economics and Business Administration

Research Design •

Step 1: Measurement Instrument •

•

Dependent variable: quality of investor relations –

Incidents of shareholder activism

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Perceptions of firm/investors (e.g., corporate image)

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Capacity to raise new capital (debt/equity reinvestments)

–

S&P credit ratings (bonds)

Independent variables: key relational factors.

Faculty of Economics and Business Administration

Research Design •

Step 1: Measurement Instrument (Continued) •

•

Control variables: –

company size

–

ownership nationality proportions

–

free float

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institutional investor proportion

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industry effects

–

…

New measures will be developed using an iterative approach combining depth interviews and test surveys.

Faculty of Economics and Business Administration

Research Design

•

Step 2: Data Collection –

Descriptive approach

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Combining surveys and experiments with financial data.

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Scope: Euronext 100 (NYSE Euronext).

Faculty of Economics and Business Administration

Research Design •

Step 2: Data Collection (Continued) –

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Relational factors and perceived quality of investor relations: •

Large scale survey with firms and investors

•

Depth interviews and experiments with firms and investors

Shareholder activism and control factors:

•

Thomson ONE Banker: holdings of large shareholders.

•

Financial Data on activism (proxy votes, proposals, etc.).

Faculty of Economics and Business Administration

Research Design

•

Step 3: Analyses –

Relate quality of investor relations with congruency on relational factors between investors and firm.

–

Controlling for company size, ownership nationality proportions, free float, institutional investor proportion, industry effects, etc.

Faculty of Economics and Business Administration

Research Design

•

Step 4: Possible Managerial Implications –

“Traditional”: bring congruence in key relational dimensions: •

Employ formal risk management systems

•

Reduce information asymmetries

•

Show commitment to investors’ goals

•

...

Faculty of Economics and Business Administration

Research Design

•

Step 4: Possible Managerial Implications (Continued) –

“Radical”: actively change composition of investor population: •

Some firms actively target specific segments of investors known for high commitment and low turnover.



A firm’s market-based assets may not be those it needs (cf. Srivastava et al., 1998)

Faculty of Economics and Business Administration

Questions, Suggestions, and Advice on the Project

Faculty of Economics and Business Administration