Listen: IR in Focus | Episode 8: Evolution of Shareholder Engagement

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Carmen Lilly

I am thrilled to welcome 2 esteemed guests today from the Edison Group. Edison Group provides equity research, global distribution and intent data that drives investor relationships. With me today is Neil Shah, the Executive Director of Content & Strategy; Patrick Yau, Managing Director of Strategic Investor Relations. And in the next 20 minutes, we'll unpack the evolution of shareholder composition, how this has impacted IR programs and strategies and investor communication and targeting strategies. Welcome Neil and Patrick.

Neil Shah

Thanks very much for having us...

Patrick Yau

Hello, Carmen.

Carmen Lilly

Thank you so much for joining. Now before we get started, let me properly intro both of you for our listeners. Neil has been at Edison for the last 20 years, leading the analyst teams as Executive Director of Content & Strategy and establishing the firm as a leading issuer-sponsored research firm. He has also led the firm's thought leadership on the equity research market. Patrick joined as Managing Director, Investor Relations in November 2021. He has worked at several [indiscernible] bracket and mid-cap broking houses, including Credit Suisse, Nomura and Peel Hunt. In 2013, he became Head of IR at Entertainment One until its acquisition in 2019 and was most recently Director of IR at Ceres Power.

I'm so excited to have both of you on the podcast today, and there is so much to cover, so let's dive right in. Both of you have been in various positions across the capital markets ecosystem. I would like to open with your thoughts on the evolution of the IR program over the years from your perspective.

Neil Shah

Let me start with the regulatory side and just how we've seen that change, then perhaps we can bring Patrick in as an IR practitioner. If you cast your eye back to maybe 40 years ago, there are statistics that the U.K. is currently highlighting that in the 1960s, 50% of stock ownership was actually in retail hands. Today, that's dwindled down to 12%. That's true in other markets as well. Markets are never static, and they do respond to regulatory change.

Probably one of the biggest regulatory changes that we've seen is in this pension arena where under the bonnet, regulators want people to get a decent return for their money, and it's driven providers towards lower-cost products. So you've seen the growth in particular, passive on the register against active institutions. But we're also starting to see much more diversification in the sort of makeup of the shareholder base.

One, you're seeing more sort of family office and wealth managers starting to turn up onto the share register and those constituents continue to gather assets. And then particularly post the pandemic, you've seen a little bit of a resurgence in terms of the retail investor returning and also starting to participate on shareholders -- shareholder registers. And we can get into the details. But if your IR strategy is just about targeting institutional investors, you are missing large swathes of capital.

And the other complication is that it used to be much easier to access international investors. MiFID II, in particular, has made that a little bit more tricky. So you need to distinguish between your domestic institutions and your international investors.

Patrick Yau

I would say that -- I'd echo those thoughts. And on the IR side, I grew up in the environment not quite 40 years ago, but not far from it, where retail investors were being encouraged to be active participants in the markets. So I grew up in a time of privatization of the British gas industry, the British telecoms industry, utilities and so on. And there was a huge drive towards encouraging the retail part of the market through broad government advertising campaigns to be participants. And I think in the intervening time, the representation of retail has steadily declined, I think, because quite often, they're seen as the poor relations in the investment cycle.

Now as Neil points out, as we went through COVID and as means of getting access to information and means of speaking to companies, arguably, became easier in a digital world in some respects. There has been a resurgence in the retail end of the market. And we can talk, I'm sure we will in a little bit, about why that's important. But where we are now? I think the retail market is poised for even more of a voice around the investment table and companies need to be aware of that. And in fact, that voice represents a huge opportunity for them.

Carmen Lilly

Those are great observations and comments there. So let's unpack that a little bit more in terms of what you've seen in the changes of composition of ownership for corporate issuers. We mentioned COVID. So obviously, that impacted a lot of how investors interact with corporations, but what other sort of market conditions or industry trends have influenced the evolution of shareholder composition.

Neil Shah

So COVID was a big one. I think 2 things happened as a result of COVID. Number one was that companies who had to talk about their outlooks were facing a once-in-a-lifetime type event. And so there's a high level of uncertainty in terms of what was going to happen to that business for 2020, 2021 and how they were dealing with it, particularly in those businesses that were impacted by COVID.

And I think the response that we typically saw out of the corporates was to really up their game in terms of making sure that they communicate more with the market about all the uncertainties so that people were aware of them. The other thing we saw was that we had really accelerated digital communications. So the old way of having a conference call or an in-person results briefing was transformed into Zoom and Teams meetings. More and more people were accustomed to talking to a wider audience over a channel like Zoom or a webinar. And I think that's probably one of the most pronounced changes we've seen in terms of how companies have changed in terms of interacting with investors.

As they did that, they suddenly started to get aware of -- it just so happened that at the same time, you saw quite a big pickup in retail engagement in the stock market. And so you also found channels of communication to start tackling that particular audience as well.

Patrick Yau

My view is that with the audience being there, companies and their advisers have had to think quite hard on how to innovate their communication strategy to be able to tap into those various pools of interest for some parts of the market, producing long research notes with lots of detail in them and financial modeling and so on is absolutely the right way to get interest, particularly in amongst the conventional institutional investors.

However, some of the retail investors are on different platforms. They may be on social media. They may be on share platforms or there may be on direct mailing lists from people who operate websites and so on. So how do you tap into those pockets of interest with arguably different and more engaging types of content.

And those are the areas where we spent quite a lot of our time concentrating to make sure that as well as providing the core institutional style research product that we do and the high levels of content there. Are there other means of engaging with shorter-form content, perhaps snappier messaging a different type of language even and a different approach to tap into an audience with very different dynamics in the conventional institutional marketplace?

That's where we are today, where the means of communication has become a lot easier. People have become media pluralist in a way, one second jumping from e-mail into social media, into LinkedIn, into platforms and others. And as communication advisers and specialists are looking for ways to make sure that the messages from our corporates cuts through in the right way on the right platform to the right investor.

Carmen Lilly

Right. So you're really adjusting your communication strategy is dependent on who you really want to talk to. And I like your term of being a media pluralist. It's like you have TikTok like you said, you need the little snackable bites. You need to keep them engaged or you may have something like blogs or Reddit. And speaking of Reddit, I'm not sure if you guys saw, but there was a new movie release called Dumb Money. And it covers the GameStop and fiasco that happened 2 years ago.

I mean I for one, I can't believe that was already 2 years ago. It feels like yesterday when I was watching this happen. But let's talk a little bit more about the rise of the retail investor for a little bit. What sort of changes have you observed in the behavior or the preferences of retail investors in recent years?

Neil Shah

Let me start, then Patrick could add into that. I haven't watched the movie, but I'm clearly aware of the episodes around the meme stocks. And what I would say that I would characterize those as an extreme of what we would typically characterize as the typical retail investor, I think that, that situation underlying, firstly, a broader theme, which is that liquidity is at a premium right now. So markets are much better today than they were maybe 15 years ago and 20 years ago.

And in part, that is because there's less capital been deployed in the market making operations of banks, and they're prepared to carry less risk. As a result, what you're finding is that institutional investors because of compliance reasons for their own risk management have typically moved further up the market cap scale.

And so you do see these particularly on the smaller stocks, you can see that retail can be a dominant force and shift price in a way that they might not have been able to -- and tying into Patrick's point around platforms, they also have today's tools, which allows them to give themselves a voice. So a platform like Reddit or WhatsApp groups or YouTube channels are giving a voice to those retail investors.

However, the vast majority of retail investors, I would say, are -- tend to be much more long term in their nature and outlook in terms of where they're investing. We have seen a pickup in retail investors participating in equities as a result of the pandemic. They have savings which they're looking to deploy. They were discovering names on the market. And I heard from a number of ECM counterparts that a lot of the IPOs that got away in 2020 and 2021, wouldn't have got away had it not been for the retail tranches that were allocated to them. and that helped complete the book build and allow companies to raise sort of target levels of capital.

So my sense is that retail is a resurging force and it's something that companies need to deal with. 20 years ago, it used to be considered as not a great thing because they tend to introduce volatility in their share price. I would say that the converse is true today, which is that they participate in stocks, they're generating liquidity in the stock. And actually that's valuable. So it's a constituent, which I think is worth addressing. But hopefully, you're not in the extreme end of a GameStop or one of the other meme stocks when you're addressing it.

Patrick Yau

I think there have been some really interesting changes in behavior amongst the retail marketplace. And I think now is a very exciting time to be a retail investor. When I first started out in broking and what seems like a million years ago now, but it wasn't that long ago, I started working out a private client brokerage and the retail investors who made up the client base would be relatively sit back in their attitude. They would listen to their brokers telling them about what they should or shouldn't be invested in or how their portfolio should be structured and they will discuss risk factors and the types of things that they liked and didn't like and so on. But they were really happy to sit back and take advice.

I think these days, we've seen the retail guys become much, much more active. I think information has become easier to come by. They're being serviced by a number of platforms and content producers like ourselves with information in the format that they like and they find engaging. And they now have a genuine seat at the table when it comes to influencing a company's stock price performance.

In my first role, only about 5% of the shareholder base was in retail. And it struck me that, okay, if you look at our shareholder list, you've got some big institutions at the top end of the share register who have absorbed maybe 50% or 60% of the company's liquidity. So those big guys who everybody chases and wants on their register, they're there, but they've made their bets and they're happy just to sit there and wait for the performance of the company to come through.

In that scenario, there's not a huge amount of liquidity there for the day-to-day trading, and that's where the retail guys are so important. They do provide that liquidity. And when you provide liquidity, you also provide direction and momentum to a stock price in both directions.

So I think now is a great time to be that retail investor because you can access information so easily. Companies are keen to speak to you because companies now appreciate the benefits of having a reasonable chunk of the register in retail hands. And to me, it seems like a win-win situation.

Carmen Lilly

That's really interesting. I never really thought about viewing the retail investor as the one that helps drive the momentum of the stock, whether it's up or down. We saw at GameStop like they shot through the roof, even though the fundamentals haven't changed at all, but it was just crazy to watch how high that price went in one day. Then just thinking about retail investors and them harnessing a little bit more power when it comes to influence, what have you seen in terms of increased interest on impact investing or need for transparency on climate risk and those sort of sustainability issues.

Neil Shah

It's one of the things that we've observed as the sort of resurgence and retail investors has happened is that you're bringing in a different demographic to the one that used to participate. If we used to characterize our audience as late 40s, mid-50s and looking after sort of savings [ parts ] in terms of the investment profile.

We've seen more younger investors starting to appear. And one, there's a need for education and handholding. But this is a group of investors who care about the sustainability agenda and do look for information on the water company is doing in terms of its net zero targets, what it's doing from an ESG perspective. I don't think they are expert, sustainability experts, I think it's a high level on how is this company actually improving itself from a sustainability perspective or an ESG perspective.

Patrick Yau

I would add to that, that it's -- for some investors, the way they invest reflects the way they live their lives. And Neil is right is that the younger investors we're seeing coming through now, the millennials, and even some of the older Gen Z-ers or Gen Zs, they care about their environment. They care about sustainability and these issues.

And where they work -- they want the companies they work for to have similar values to those and who they bank with and who they invest with, also need to be consistent with their own values as people these days. And that's becoming much, much more important. So our challenge and our mandate is to reach those people and educate them and bring investment stories to them that are in line with what their own values are, and that's part and parcel of what we do every day.

Carmen Lilly

Exactly. In the last episode, I interviewed a Gen Z-er, who is an analyst at Ball Corp. Her name is Miranda Villavicencio, and she echoed the exact same comments. I asked her, when you think about how you spend your time or how you spend your money, how does climate risk or human rights, how does that play into your decisions on how to spend your time and money? And she said, very much has to align with her core values, right? Is my time being spent, is my money being spent on things that really align with what I want to see reflected in the larger world.

So I thought that was interesting, and you guys are spot on. And again, coming from -- directly from Gen Z saying about how they spend their investments. And so tying all this together, how does the shift in these investor behaviors? You have increased pressure for regulatory requirements. How does that change the way -- how IR group should think about investor engagement?

Patrick Yau

Let me take this one first. I think there is a fundamental shift going on at the moment in that if you're a company and you choose to ignore this part of the market and you don't want to go for the retailer and you still choose to focus on the larger investors, then you can't miss out on quite a big opportunity. We've talked about liquidity. We've talked about momentum and direction.

I would recommend that investors in the broader spectrum should be considered. And there are different investor types that will be relevant and important to companies at different stages of their development as well. So that needs to be thought about. The regulatory environment is shifting very much towards making more information available in the right way to investors.

I mean we haven't really talked about the U.K. investment research review, but that's all geared towards that provision of information. So I think as a company, you ignore that at your peril because you can be missing out quite large chunks of the investment marketplace. And those people you're missing out on may well be very interested in your particular story.

Neil Shah

And to add to that, I think that there are threads developing, which is that to address that constituent is just seen as part of good governance and companies, all companies want to continue improving their governance. We see extremes in terms of approach. So there are still companies who will only make their management team available to their top 20 shareholders or the top 30 institutional shareholders.

And at the other extreme, you do have companies who are thinking about, look, how do I engage with my retail constituent. They make the fireside chats with their CEO available on their websites. They find other platforms to communicate with those retail investors. A lot of companies today will do the analyst briefing, but we'll do a separate retail briefing that a lot of companies also do. And you're starting to see a sort of change in behavior. I think IROs need to start thinking about that constituent of their audience and how they make sure that they stay informed with what the company is doing.

Carmen Lilly

Great. Thank you guys so much. I'm running short on a little bit of time here. So I just wanted to close out this podcast with one final word from our experts. What is one piece of advice you would give our listeners when it comes to investor management?

Neil Shah

Patrick, do you want to start with that?

Patrick Yau

Yes, I would echo what I said just a few moments ago and say ignore this retail investor group at your peril as a company, they are an important component to the market. And if you're not sure or if you need to support them, how to communicate most effectively with them then we're here to help assist you.

Neil Shah

And I would say that based on my 20 years of working in this business, don't remain static. The market is always changing and evolving, and there are always new trends, both in terms of how we communicate, but also the audience that we're communicating to. So don't get trapped in terms of keeping with a static program, always look to challenge and think about how you can improve that for the very different world that we're going to face tomorrow.

Carmen Lilly

World is always changing. Thank you to our special guest, Patrick Yau and Neil Shah. It was a pleasure to have your insights and point of view. I hope our listeners gain some actual insights on shareholder composition and communication in order to better engage with your investors. If you like this content, please subscribe and until next month. Take care.