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Trust Matters When Investing in Companies

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Trust is a very important factor to 67% of institutional investors when selecting a company to invest in, according to a newly released Edelman Trust Barometer Special Report: Institutional Investors. Trust superseded other key factors, such as current valuation vs. peer companies, ability to meet financial guidance, and providing forward-looking financial guidelines, all of which 63% of investors cited as very important.

Further, with almost half of those surveyed believing the bull market will end in the next year and 98% believing public companies are “urgently” obligated to address one or more societal issues, such as cybersecurity, income inequality or workplace diversity, companies need to step up their social responsibility to gain investor trust, the survey found.

In fact, 89% of the 500 portfolio managers, chief investment officers and analysts surveyed from the United States, Canada, the United Kingdom, Germany and Japan stated their firm has changed its voting and/or engagement to be more attuned to ESG risks, with 63% stating the change was made in the last year.

Also, the importance of corporate governance has caught up to environmental and social issues. Of those surveyed, 58% found corporate governance “very important” to their trust, vs. 58% environmental and 64% social. Interestingly, various countries have hot buttons: 73% of German investors surveyed found environmental factors most important, 72% of Canadian investors believed social responsibility was most important, while 74% of Japanese investors thought governance was most important.

Overall, 95% of institutional investors stated that maintaining a healthy corporate culture has an impact on their investment decisions, while 65% of those said it has a “great deal of impact.” Likewise, enforcing the corporate code of conduct at all levels has an impact on 95% of investors, with 65% stating it has a “great deal of impact” on investment decisions.

Other factors that affect trust include the long-term outlook of a company, beginning with 42% supporting a shift from quarterly to bi-annual earnings disclosures. Ninety-six percent stated that the long-term outlook of a company impacts their decisions, with 66% stating it has a “great deal of impact” on their trust.

Another key finding was that 87% of investors globally said their firm would “consider investing with a lower rate of return if [the investment] included sustainable or impact investing conditions.”

The study also found that the top 10 corporate practices that “greatly impact trust” by a majority of investors are:

  • Aligning executive compensation with investor interest
  • Having a separate chairman and CEO
  • Providing equal voting rights to all shareholders
  • Actively engaging the investment community on corporate governance matters, which 60% of global investors surveyed said has a “great deal of impact”
  • Aligning executive compensation with corporate peers
  • Frequently refreshing the board of directors
  • Executive board stock ownership
  • Diversity within the board of directors and executive team
  • Proxy access
  • Having a staggered (classified) board

Political Issues

Globally, 88% of the firms stated the current political environment was affecting firms’ investment strategies, while 89% stated that trade risks were changing their firm’s trading strategies. Eighty-five percent believe companies are not prepared for new risks to their business that come from the new political climate.

Nor are companies ready to deal with activist investors, according to 87% of those surveyed. Also, 92% stated they would support a reputable activist investor if they believed change was necessary at a company they are invested in.

Finally, companies should be aware that social media is an important factor in investor research. In fact, 86% of investors surveyed consult a company’s or executive’s social media when determining an investment. A slight majority use LinkedIn and Facebook, followed by YouTube and Twitter.

The findings were based on an online quantitative survey of 500 institutional investors who manage assets ranging from less than $500 million to more than $50 billion.

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