Discover more from The Roundtable Roundup
A marketer's perspective on investor transparency
And examining the importance of establishing direct channels
The landscape of our capital markets has significantly changed over the past fifty years. This transformation is driven by factors like the increasing complexity of financial tools, stringent regulations, advancements in technology, and evolving investor expectations, and consequently, investor relations have become a crucial strategic component within companies. The primary aim of these efforts is to communicate a company's financial performance and future direction to investors, financial analysts, and financial media, which is becoming progressively challenging. Despite all the changes impacting IROs, Matthew Brusch, the President of the National Investor Relations Institute (NIRI), identifies investor transparency as the most pressing hurdle facing the industry today. In this week's Roundtable Roundup, we delve into the rules and regulations surrounding investor transparency and explore insights from the marketing sector about enhancing enterprise value through direct channels.
The challenge of engaging investors like customers
When an investor chooses to purchase a public stock, they are initiating a process that extends far beyond a simple click of a ‘buy’ button like a traditional consumer. Depending on the investor's regulatory classification, it will influence if, when, and at what cost the company can find out who the investor is and how much stock they have purchased. While the terms ‘institutional’ and ‘retail’ investors are tossed around colloquially, the SEC definition of an institutional investor is an investment manager with portfolios exceeding $100M. By law, these investors must file a Form 13F to disclose their U.S. securities holdings within 45 days of each calendar quarter's end. All other investors or entities that do need meet this threshold are considered retail investors from a transparency perspective, which includes a diverse range of participants from teenagers buying fractional shares on Robin Hood to highly sophisticated hedge fund managers with less than $100M AUM. In many ways, the term ‘retail investor’ is as broad as the term ‘customer’ with every company catering to a unique segment of retail shareholders that have a range of priorities, interests and investment strategies. Globally, 6 out of 10 shares of public companies are held by institutional investors, and therefore IR teams historically have been less focused on understanding and surveilling their retail shareholders, but this is quickly changing as retail volume and influence increases.
Within the retail category, there are three segments of shareholders based on their data accessibility and the ways in which a public company can engage them. When an investor purchases shares from their brokerage account, these shares are held in "street name" by the brokerage firm on behalf of the investor. The actual investor is considered a "beneficial owner" since they are the true owner of the shares, even though they are held in the name of the broker. NOBOs (Non-Objecting Beneficial Owners) are investors who do not object to their brokerage firm disclosing their name, contact information, and securities positions to the companies in which they invest. This is the default investor classification when signing up for a new brokerage account and the SEC estimates that roughly 76% of retail investors are classified as NOBOs. Public companies are currently permitted to: (1) obtain a list of NOBOs from Broadridge (with name, address, and share amount) after paying a regulated fee; and (2) mail certain corporate communications, such as an annual report, directly to them. However, a NOBO list does not provide any actionable information beyond the name and physical address of the brokerage account holder, and companies pay anywhere from $ .10 - .16 per name which can drive up the cost of NOBO lists to hundreds of thousands of dollars.
OBOs on the other hand, are investors who object to their brokerage firm sharing their information with the companies in which they invest and prefer to maintain their anonymity. The SEC estimates that roughly 72% of ‘professional investors’ not regulated under 13F currently classify themselves as OBOs. Communication to OBOs may not be disclosed to a company for any purpose whatsoever and needs to be handled through the broker or intermediary who holds the shares on their behalf, making direct engagement and influencing OBOs very challenging for IR teams.
An investor who wants to directly register securities can do so by purchasing the securities from the company (ex: Disney). If purchased through a broker, the investor can instruct the broker to register the securities in the investor's name directly with the issuer, and the broker will work with the issuer's transfer agent to ensure the securities are properly registered. The extreme volatility seen in meme stocks has brought the Direct Registration System (DRS) into focus as a tool for retail investors to exercise their power as shareholders and put pressure on hedge funds that have shorted their preferred stocks. As seen in the video below, the DRS and transfer agents like ComputerShare have become a part of online conversation because there is a belief that reducing the number of shares available for "street name" registration undermines unethical or illegal practices like naked short selling.
Approaching the investor transparency challenge as a marketer
While the obstacles preventing investor transparency are certainly formidable, marketers have been faced with similar challenges over the last several decades, and as a result, have invested billions of dollars into direct to consumer brands, customer acquisition funnels and transformed the digital brand experience. Picture you're a marketer for a well-known consumer brand, let's say Nike. Your strategy includes selling directly to your consumers via your website/stores, and distributing your through big-box retailers such as Foot Locker. Both channels get your sneakers into the hands of your consumers, but the understanding you have about your consumers and your relationship with them differ significantly. When your product is sold through a larger retailer like Foot Locker, it is akin to how shares are managed within the “street” system in the financial markets - you're aware a sale has occurred at a wholesale level but the identity of the individual consumer remains unknown unless significant efforts are made to obtain and ingest that data from Foot Locker. Now, consider the other scenario where your customer opts to purchase directly from Nike.com. Here, as the company, you have the precise details of who made the purchase, facilitating a more direct relationship, including critical data for increasing loyalty and retention.
Why Direct Engagement Matters
Over the last decade plus, technology has enabled the growth of direct consumer channels and it has significantly enhanced the overall enterprise value of brands. By establishing direct consumer relationships, brands have gained valuable consumer insights, enabling them to better tailor their products and services to customer needs. This strategic move has not only improved customer retention and loyalty, leading to stable and recurring revenues but has also increased the capacity for data-driven decision-making. Brands can now predict consumer behavior, test new product ideas, and make strategic pivots faster than ever before, contributing to greater operational efficiency. Additionally, direct consumer channels have facilitated more controlled brand positioning and messaging, which has further increased brand value. The rise of direct consumer channels has been a game-changer for brands and the challenges of accessing today’s retail shareholder data present a similar opportunity for IR teams willing to leverage innovative technology to unlock the power of direct engagement.
Navigating the complexities of investor relations in today's evolving capital markets is a sophisticated endeavor, requiring an understanding of regulatory frameworks, transparency challenges, and increasingly, an ability to adapt and borrow successful strategies from the marketing domain. It's no secret that in a world driven by information and interconnectivity, direct engagement offers unparalleled insights and valuable relationships, be it between brands and customers or issuers and shareholders. The key to unlocking this potential lies in treating investors with the same dedication and personalized touch as we do customers, a shift that requires innovative solutions and a fresh perspective. Stakeholder Labs is proudly serving at the forefront of this transformation, using digital shareholder verification and loyalty technology to facilitate more direct to investor engagement and drive growth. The transition won't happen overnight, but with a strong commitment to transparency and engagement, companies can truly harness the power of the investor as a customer, contributing to robust business health and a more equitable financial landscape.