Reflections on IR in Russia
The importance of IR for Russian companies
After one cold week in Moscow (- 20 degrees on average) I left Domodedovo to head back to Dubai, and spent the flight thinking how fascinating Russia is. Jim O’Neill, Chairman of Goldman Sachs Asset Management, and inventor of the BRIC acronym, is said to have been told on numerous occasions that Russia should not be included in BRIC due to its demographic, transparency, and governance issues.
In spite of the skepticism, Russia is part of the BRICs (or BRIC group of countries) and the prospects for the country’s growth and expansion look very bright. Reflecting on the aforementioned issues of transparency and governance, both are linked to the field of Investor Relations (IR) and how Russia, and Russian companies, portray themselves to Investors, be they institutional or retail, global or local.
In this article, I will endeavor to give an outside perspective of investor relations in Russia, how it compares with other emerging and more developed markets, as well as the opportunities and challenges the profession is facing.
IR in Russia is evolving with the development of best practices in capital markets. Whereas some time ago, investor relations was seen as meaningful purely for Initial Public Offerings (IPO) and corporate actions, companies now understand the importance of ongoing Investor Relations and outreach activities. Thomson Reuters’ Extel Survey from 2011 shows that One-on-One meetings are vital:
- Over 92 percent of Buy Side and 78 percent of Sell Side want CEO/CFO meetings;
- It’s not about quantity – it’s about quality.
Russia Vs Emerging and Developed Markets
Russian companies are not that much different from the ones I meet on my travels in India, the Middle East, Africa, or other emerging and frontier markets. Although many companies within these regions might exhibit better financial fundamentals than their peers from developed markets, they are nevertheless very often traded at a discount because of a perceived lack of transparency and access to information and/or management. Developing best practices in Investor Relations can bridge that Gap!
The companies the Buy Side and Sell Side consistently rate as the best performers in their Investor Relations activities in general share the same attributes.
First, their Investor Relations Department has the buy-in from Senior Management and the Board. It is often underestimated how important that buy-in is. After all, the IR Department is often the voice of the CEO or CFO, who are there to run the business. So management buy-in is of utmost importance.
Secondly, the highly-rated companies understand that despite their limited free-float (as it is the case in most emerging markets where big government or individual stakes still exist), proactive Investor Relations is the only way to unlock the value of the proportion of shares that is floating and liquid.
Finally, the highly-rated companies are usually the ones with international listings, whether through the form of Depositary Receipts (DRs), or through listings on international Stock Exchanges. Since they compete for capital with companies used to IR best practices, it is easy to understand why they have had to raise the bar themselves, which is then reflected in their higher ratings.
To illustrate this, in the 30+ industry sectors every year, half of the companies rated highly for IR quality have over performed in relative stock price over a period of 12 months. Each year in Extel, over 1500 companies receive nominations for excellence in IR, but only nine companies have been first/second in their sector each and every year between 2007-2011. Those top 9 - the Extel IR All-Stars - outperform their peers on average by 24 percent. With a decade of IR rankings, Thomson Reuters has conducted this analysis three times - and each time the IR All Stars outperform. Long-term excellence in IR will only add to this performance.
What are the Europe All Stars doing better?
- Greater awareness of key trends - sustainability, divisional directors access, and using social media;
- Effective use of executive time to meet prospective and former investors;
- Openness to regular feedback on IR program;
- Efficient spending strategy to t spend more wisely on investor days and less on AGM;
- Bonus distribution at a higher proportion of salary.
The Investors are always right!
Across BRIC and frontier markets, in every conference I attend, the most desirables speakers from an issuer point of view are the investors. Having founded the Middle East IR Society in Dubai, and still sitting on the board today, our goal was to connect the issuers with the investors – after all they are the ones that more or less dictate the way a company’s IR strategy is shaped. By polling the community, Thomson Reuters Extel gives a snapshot of what the Buy Side wants:
- Sustainability important to 24 percent of Europe’s PMs;
- Meeting divisional directors matters for 68 percent of Europe’s buyside - and for 37 percent in Russia;
- Debt concerns have dropped across Europe and Nordics from 42 percent of investors in 2009 to 18 percent today;
- Trust and transparency from IR and the IR team - vital for 89 percent of Europe.
And the Sell Side:
- 22 percent of Europe’s companies see recommendations as vital – 53 percent of Russian firms do;
- Sector research is very valuable for 52 percent of Europe - and for 76 percent of Russia ;
- Company reports matter greatly for 94 percent of Europe;
- Only 7 percent of companies in Europe have sell side at their PM meetings.
So I am always pleased to connect with ARFI in Russia, and its chairwoman Olga Rynk, to discuss the importance of implementing IR best practices for Russian companies. One element of course is training and certification, and we hope all of you will join some of the exciting events and courses planned by ARFI this year.
The future looks bright for Russia
Personally, I am very bullish on Russia and the development of IR best practices as well as capital markets in general for several reasons. With the government objective of making Moscow a top 10 Financial Center by 2020, coupled with privatization plans, it means a great emphasis will be put on international best practices in transparency and corporate governance; that will ultimately benefit the IR profession. Also, in the next six years, Russia will be host to two of the most prestigious global sporting events: the Winter Olympic Games and the Football World Cup. Although far away from Investor Relations, one cannot underestimate the impact these events will have for the country as a whole. For example, China’s 2008 Olympic Games had a significant impact on the Chinese economy, and perhaps more importantly, changed the perception of the world towards the country.
To conclude, the concept of perception is maybe the most important point that Russian IR professionals need to work on while the country is in a phase of evolution. When I think of Russia today, I am often reminded of the author Voltaire corresponding with Catherine the Great who wanted to understand about the new world coming into life in the 18th century. In a similar way, the emergence of a new Russia today needs to show itself to the world.
Alex Menage is Head of Corporate Services for Rapidly Developing Economies (RDEs) at Thomson Reuters. He is also founder and board member of the Middle East Investor Relations Society. You can reach Alex on firstname.lastname@example.org.