Aligning governance and investor expectations

Investors and directors are both committed to businesses thriving, but sometimes opinions can differ on how to get there.

With levels of investor engagement increasing in New Zealand, Chapter Zero, the IoD and the Aotearoa New Zealand Stewardship Code recently hosted a roundtable for leading investors and directors to share their thoughts.

Stewardship is about creating and preserving long-term value for current and future generations by responsibly managing and allocating capital. Stewardship codes give investors a clear framework within which to use their influence to steer the companies they invest in through critical corporate governance issues.

Most of New Zealand’s largest investors are signed up to New Zealand’s Stewardship Code. Where investors think a company could be doing better, the rise in stewardship means investors are more likely to increase their engagement rather than withdraw from the investment.

The 2023 RIAA benchmark report found corporate engagement and shareholder activity to be the leading responsible investing strategy, overtaking negative screens. These trends have several implications for directors which were canvassed at the event, alongside opportunities to minimise any burden this may create.

Look for opportunities

A key area of discussion was the opportunities for companies if they work more closely with investors. In many instances, the long-term goal of both investors and companies is directly aligned: to create and preserve long term value, so it makes sense for them to utilise each other’s expertise as they work towards this goal.

Investors also often have a particularly long-term perspective, and may have learned valuable lessons from working with other companies in similar sectors. Importantly, investors commented that they are happy to provide these insights at any time, however companies often only seek input when facing a challenging situation. Regular engagement with investors may help companies to tap into new sources of wisdom to improve their strategic planning and operations.

Asking the right questions

Attendees discussed some of the challenges and pressures faced by Kiwi companies and how to overcome them. A practical difficulty is that many companies have limited capacity for investor relations. Investors and other stakeholders can help companies use their resources to respond on the most important issues by being consistent in the questions they raise in writing versus in the room. Investors can also help improve engagement by ensuring they identify the root cause of an issue and long-term solutions to it, rather than asking general questions that miss the bigger picture. An example of this might be trying to understand what is driving talent turnover within the wider industry. Aligning with other investors to share questions can also reduce the demand on companies.

 

Send the right people

Ensuring the right representatives from both the company and the investor are involved in any engagements can help focus discussion on the bigger picture from both sides rather than questions being limited by specific subject areas. It’s important that investor representatives have a good grounding in the wider industry and economic context, to fully understand how the company is managing any issues.

 

Relationships first

It was also clear that the increasing level of investor engagement in New Zealand is welcome. But the way these engagements are delivered is important. New Zealand is a small market with two degrees of separation between most investors and companies. This heightens the importance of maintaining strong relationships, and the need to ensure engagements between investors and companies are as constructive as possible.

A constructive approach to engagement is preferred globally, with research from First Sentier finding 96% of companies view shareholder engagements positively, particularly when parties build trust and clearly define success. For example, Bayer has stated that a recent collaborative investor engagement “generates additional input for our internal resource allocation, sharpens our strategy and will result in better impact”.

 

What does this mean for New Zealand directors?

Given the emphasis at this event on increasing alignment in how different investors approach companies, and focusing on the root causes of challenges and their long-term solutions, the Stewardship Code will work to advance some of these points over the coming year. This includes drafting best practice engagement principles for investors and companies to use, and identifying opportunities for investors to more regularly engage with companies and their boards to build relationships and add value.

Both directors and investors agreed that high-quality and meaningful engagements are increasingly important, and they are committed to achieving this.

Increasing investor stewardship in New Zealand is a valuable opportunity for companies to build relationships with investors, overcome risks, realise opportunities and preserve value. Directors are a key part of this and should, alongside their executives, maximise this opportunity.