‘Don’t shoot the messenger’ – the growing need for IROs to seek out bad news and how not to damage your career prospects when delivering it to the board.

Investor relations is usually associated with conveying a company’s investment proposition to external audiences, but its role in providing feedback from investors to executives is equally important. A number of topics around investor engagement have become more prominent and highlight the communication challenges involved in conveying feedback to senior management.

This year, a number of debates have come to the fore that emphasise the importance of seeking and feeding back investor perceptions to management. At the Investor Relations Society conference, Sir David Walker highlighted a growing agency problem, which has been driven by, among other things, the dispersion of the shareholder base and reduced involvement by domestic life and pension funds. He argues that this can make boards unclear about what owners want creating uncertainty and leading them to pursue short-term strategies. At the same conference, Xavier Rolet, the chief executive of the London Stock Exchange, attacked shareholders who outsource their decisions on corporate governance to external agencies. This goes to the heart of UK corporate governance’s principle of ‘comply or explain’ which only works if shareholders apply proper scrutiny to the decisions taken by management. The Stewardship Code, launched by the Financial Reporting Council, aims to assert the UK’s ‘comply or explain’ approach and an EU Green Paper on the governance of banks goes further and outlines the case for making engagement and intervention a legal responsibility. The Institute of Chartered Secretaries and Administrators has also argued that annual reviews of board effectiveness are not working as well as they should because too many assessments are cosy and internal and lack an objective outside view.

The case for providing feedback is made, but IROs do not always find this an easy role, especially when they have to deliver bad news. It is not uncommon for executives delivering bad news to feel they are disempowering themselves and will be less likely to be listened to in the future. Behavioural finance, which draws on the principles of cognitive psychology, sheds light on why this is the case and why communication should take into account cognitive biases. These arise from the way our brains process information and make sense of the world and can hinder effective communication.

When communicating feedback to senior executives, social biases often exist. They are sometimes misinterpreted as office politics, but in reality are a product of human nature and hardwired into our minds. Social biases arise from a desire for harmony over conflict. The most well known is group think, where there is a greater need among the group to get along and agree with one another than seek out and critically assess alternative views. Sunflower management is closely related and is the tendency for groups to align with the views of their leaders whether expressed or assumed. A strong corporate culture with a dominant chief executive and incentives to conform will compound tendencies towards group think and sunflower management. Group think has been recognised as a contributing factor in a number of company failures and the banking crisis. Sir David Walker admits to have been sceptical of the theory initially, but has since spoken about the importance he attached to it.

Changing company culture or taming a domineering chief executive would of course be an impossible task for even the most seasoned IRO. Taming a chief executive, it should be added, is not necessarily desirable, and swapping qualities associated with single minded leadership for leaders that rely solely on consensus would merely swap one simplistic stereotype for another. It is more important to recognise social biases and deal with them. Given that IROs have a duty to feed back the views of investors, and particularly when some forms of corporate governance can seem inadequate, there are a number of steps they can take to make their life a little easier.

Most IROs talk about the need to anticipate problems and identify small issues and head them off before they become major problems. Regular feedback from investors helps IROs surface emerging issues, but regular pre and post results feedback gives IROs the opportunity to organise feedback around a formal event making it easier for them to return to the issue again between results if necessary. The alternative, which is bringing particular problems to management’s attention as they arise, can appear as an inconsistent ‘drip feed’ of bad news, which management is more likely to resist and associate with the messenger. Regular perception studies carried out independently annually or bi-annually can relieve IROs of some of the burden involved in providing investor feedback, and research of this kind is already endorsed by the Combined Code on Corporate Governance as a vehicle for ‘the board to keep in touch with shareholder opinion in whatever ways are most practical and efficient’. Both approaches support an important function while helping to relieve the IRO of the negative associations involved in providing feedback.

Written by

Sean Bride
Direct Tel: +44 20 7282 1044
sean.bride@citigatedr.co.uk 

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