A roundup of academic research from the world of IR studies
Your firm just released quarterly earnings. An influential investor has taken to Twitter with accusations of earnings management. All else being equal, should you use your Twitter account to:
• Directly address the criticism with a public explanation?
• Actively attempt to redirect investors’ attention to more favorable information?
• Ignore it?
‘In most cases, being present and active on social media provides the most benefits,’ says Nicole Cade, a newly minted PhD at the University of Pittsburgh. Using data from two experiments, Cade’s dissertation tests the effectiveness of each investor perception management strategy. She found that taking the direct approach did the best job of restoring both a firm’s reputation and attractiveness as an investment in the wake of third-party criticism of a financial disclosure.
Curiously, the ‘redirection’ gambit works almost as well. ‘You can even redirect attention to alternative pieces of the disclosure without actually addressing that negative criticism – or opening yourself up to [engagement in a specific conversation],’ notes Cade, pondering parallels in the psychology of contemporary political discourse. ‘I thought people would punish the firm for not addressing the criticism. Instead, they actually seem to like just having a presence.’
Even unfounded criticism can cause real harm to investors’ perceptions if it gets reposted a meaningful number of times. ‘Social media can’t be ignored,’ Cade says. ‘Firms, especially less well-known ones, can benefit from an active social media strategy.’
It would seem, moreover, that the strategy need not include a genuine two-way communication channel. Ultimately, in this case, it matters less how a firm responds, and more that it responds at all.
Information underload
When it comes to the reporting of ESG metrics, however, how a firm responds is an issue most definitely of concern to investors. This fact is underlined by a recent survey of Canadian institutional investors that uncovers a wide gap between the ESG information companies are providing, and what Canadian investors want to know.
‘The kind of information investors are getting about ESG issues isn’t doing the trick right now,’ says Catherine Gordon, president of Toronto-based communications consultant SimpleLogic. ‘They don’t want a long CSR report that talks about all the wonderful things the company is doing. What they want is to see a clear link between the most pertinent ESG issues and the company’s strategy, risk management and operations.’
The study finds that while almost two thirds of the 24 investors polled ‘often or always’ consider environmental and social issues for all investments, less than a third report getting ESG information from firms sufficient to help them assess materiality to a company’s business.
Session panelists at CIRI’s recent annual meeting echoed the survey’s consensus. ‘The link to strategy is so important because you want to know the company is focusing on issues that will drive value and have a business impact,’ remarked Jennifer Coulson, senior manager for ESG integration at British Columbia Investment Management Corporation. ‘Unfortunately, what is material to the business is what is often missing.’
Gordon calls on Canadian investors to demand more contextualized ESG data from issuers. ‘There’s good evidence that ESG issues affect financial performance and Canadian investors are waking up to that fact,’ she says. ‘The question now is how to report on these issues.’
This article appeared in the Fall 2016 issue of IR Magazine
