How boards can gain shareholder trust at AGMs

• Ernst & Young makes key recommendations, including listening keenly and incorporating strategy and long-term value creation in performance discussion

The AGM is a golden opportunity for companies to engage shareholders face-to-face, address their concerns and questions, and experience their sentiments in an authentic manner.

Even with the current evolving COVID-19 situation, where social distancing is advised and there are reservations over holding large gatherings, the opportunity to engage with stakeholders is not lost with technology enabling “virtual” AGMs to be held. It is still relevant for boards and management to consider what their priorities are and ultimately, what they would like to achieve at the forthcoming AGM.

Sharing insights beyond the numbers

The annual report is widely used to communicate the company’s financial performance to shareholders. It often contains glossy charts illustrating the organisation’s accomplishments, trending figures and supplementing narratives, as well as financial statements with comprehensive disclosures and notes to accounts, prepared in compliance with the accounting standards. The auditors would have given their stamp of approval with an unqualified opinion or where the opinion is modified, the basis is provided in the audit report.

With such a comprehensive report already made available, what more can companies expect shareholders to ask?

Firstly, at the AGM, it will be useful to provide a detailed management and discussion analysis to offer more clarity on the numbers, the company’s financial fundamentals and management performance. A presentation by the CEO or CFO on the financial numbers will help shareholders better appreciate the financial impact of the company’s activities and the geographical markets and sectors in which it operates.

Shareholders may then ask how the company is performing against the plan or budget — a tricky question that alludes to the board and management’s “report card”. Instead of dismissing the question, companies should acknowledge the relevance of such an interest, and judiciously provide a response that strikes a fine balance between providing a transparent and fair assessment and protecting confidential and competitive information.

Ernst & Young Country Managing Partner Ruwan Fernando commenting stated: “The key is to listen well, distill the underlying issues and respond by linking back to the key points in the management presentation, particularly to the broader company strategy.”

Demystify the value of goodwill and intangibles 

Companies should also take the opportunity to demystify goodwill and intangibles, as the numbers in the financial report may not be telling a complete story of the financial performance and the underlying value of assets.

Take for example the goodwill and intangibles arising from acquisitions, which are recorded as a non-current asset on the balance sheet. While the basis, assumptions and financial estimates are fully disclosed in the notes to accounts to support the carrying value, the foremost question is when and if the asset acquired can generate the expected returns as set out in the board’s investment thesis.

Companies can show their conviction by providing more complexion around corporate transactions, especially significant amounts paid for acquisitions that resulted in the goodwill and intangibles, and more importantly, how the acquisition can add economic value and improve shareholders’ returns in the foreseeable future.

Shareholders will also appreciate more discussions around divestments — be it a strategic exit from a market or an opportunistic move to monetise gains. Many often wonder if the company is cutting losses, needing cash flow or reaping benefits from earlier business decisions.

Shareholders may also expect higher dividend payouts from divestment gains, contrary to the company’s plan to reinvest the gains into the business. The board and management must be ready to explain their decision to win support. That said, losses from divestment will require a completely different discussion and justification, and that too must be dealt with head-on to preserve shareholder trust.

Address the future as much as the past

A substantial part of the annual report and AGM is dedicated to the past performance and achievements of the company. However, there is increasing focus and interest on the future of the company. It is not uncommon for the board and management to shy away from discussing the future in detail for fear of making statements tantamount to providing a forecast. The reality is that this risk is overemphasised as discussions on the company’s future do not have to contain financial numbers.

Shareholders will be keen to know the corporate strategic direction, so that they can determine if the company can achieve sustained profits. Companies should share their priority business segments and markets, as well as their confidence and risk appetites in the markets, products and services.

Shareholders will also want to know how the company is dealing with disruption in the market in which it operates and the business transformations that are taking place, if any. While such a discussion can sometimes bring about more questions than answers, it should not discourage companies from sharing their future plans. If there is no clear strategy, or worse, lack of transparency, shareholders will take flight.

Demonstrate long-term value creation

With increasing sophistication of shareholders, there is a growing focus on how companies are creating longer-term sustainable value. Therefore, this makes articulating the company strategy, as well as nonfinancial data and corroborating sector information relating to the company’s business all the more critical. For instance, improvements in managing the carbon footprint and supply chain integrity, including traceability of products from source, are considerable strengths that are worth highlighting.

Discussing long-term value creation can become too conceptual. The board and management must recognise that while some shareholders appreciate the benefit of a longer-term horizon on yield, questions about the immediate impact and profitability need to be addressed squarely as well.

Listening is key

Many companies spend an inordinate amount of time preparing for the AGM. Preparation is certainly useful, but one can never fully anticipate the entire universe of shareholder questions and script the responses accordingly. Often, the board and management find themselves having to respond swiftly to shareholder questions that can be emotionally charged. The key is to listen well, distill the underlying issues and respond by linking back to the key points in the earlier management presentation, particularly to the broader company strategy.

Listening can be challenging, especially in a large forum with a vocal audience. Yet, fundamentally, the AGM is a platform for shareholders to express themselves and pose questions — no matter how difficult these are perceived to be. Staying true to the purpose of an AGM is important. When shareholders feel that their concerns have had a proper airing with a group of patient listeners, the consequence is usually a positive one for the company.