Boards -what do capital markets think about them? The unfiltered perspective of a credit analyst

Boards -what do capital markets think about them? The unfiltered perspective of a credit analyst Anke Richter CFA, Credit Analyst/Strategist

“What you do when analysing a company is always the same.”

For Anke, there are two steps to analysing a company. First, consider the fundamentals, which include key numbers and valuations. Then, check for any major red flags on the management team or the board. For example, in emerging markets and family-owned conglomerates, the management and board may have everyone with the same last name, creating a classic corporate governance issue. In smaller organisations, there may be a very dominant shareholder, often the founder, who can be a red flag. The management team’s track record is also vital to Anke when she looks at companies, particularly for the most senior leaders.

She does not always ask for a board evaluation, but considers it an area of opportunity for boards and companies. With board evaluations and other investor community guidance statements, firms can articulate their priorities and showcase their good work in various areas of governance and operations.

“We always find that people are sometimes not aware of how certain things are done or how things are perceived.”

Anke continues to be surprised at the knowledge gaps on boards and with management when communicating with the investor community. In capital markets, there’s a certain way things are done. Boards and teams that remain ignorant of how capital markets work and what their investor groups expect of them are at a serious disadvantage.

Anke recommends that boards seek out members with capital markets experience when considering the mix of skills needed and the overall board composition. Someone familiar with how the markets work and the key conversations happening will help guide the investor relations strategy. This also helps ensure that investors recognise the good work being done by the board and the company.

For example, even in very large companies, when there isn’t that capital markets experience, executives and boards can blunder. They may speak only to the debt side, ignoring equity investor concerns. Or, they may fail to understand and address debt issues in investor presentations, causing avoidable losses of confidence by their investors.

“This is something you can, as a company, very easily fix.”

Investor relations issues are something Anke feels companies can very easily fix. Often, it’s not a cost issue—it’s more of a human resources issue, as best practices can take some time to implement and maintain.

For Anke, there are a few must-do items for boards regarding investor relations. They must help investors understand the company and have the critical information readily available. In practice, this means clear messaging, a good website, an investor relations team that is available and responsive, and presentations or road shows with useful information. It sounds basic, but Anke finds that many companies still aren’t doing these things.

In terms of things not to do, Anke has two major items. First, don’t have a different message for the equity and debt sides. The two sides do talk, and the mismatch will be noticed. It’s less common now, but has been a consistent issue over the last 30 years. Then, Anke recommends curtailing combative behaviour and attitudes for the second item. When she meets an investment team or executives who are combative, she feels it undermines the trust needed to invest.

“If I have an opportunity, I always want to meet management, but one also has to be realistic about whether you can assess whether they are good at running the company.”

One of the biggest challenges and nuances Anke finds in her work is that it can be subjective. The pure numbers are one thing. She can do calculations and view whether they are good or bad based on metrics. The people part of the equation is more complex.

Messaging and marketing create perceptions, as do the personalities doing the marketing and making the presentations. At times, teams come across as combative, hostile, or unhelpful, and companies can experience much damage from these kinds of poor impressions. However, Anke is aware that perceptions can be wrong. Enron, for example, was a company that did fabulous presentations, but Enron is also a famous case of a disaster in disguise. Another company she covered had an unhelpful management team, but they were very good at running the business.

So, even as companies work to create good messaging and positive investor relations, analysts like Anke need to take a broader and more careful view. It’s fun to meet teams and make judgments, but surface judgments must be balanced with the numbers and watching the real-world performance over time.

The three top takeaways for effective boards from our conversation are:

• Have somebody on your board with capital market experience.
• Have a unified message for equity and debt investors that syncs with the company’s goals
• Perception is reality. Keep a close watch on whether what you’re planning in the boardroom is being communicated so that your investor community gets your messages and looks at your strategies and actions as you intend them to be viewed.

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