Activism on the rise - Investor relations in the WSB era

The COVID-19 pandemic has seemed to shape the way people use their time: online betting, Netflix and investing in the stock market have grown increasingly popular. With the upswing following the dip in March 2020, stock markets have probably become only more attractive. Personally, I think it is only positive that more people are thinking about which companies’ shares will go up and which companies will be winners in the future. Investing in stocks can be a profitable and educational way to spend your quarantine time and I can’t find any reason to frown upon this kind of hobby.

Case GameStop and stock market volatility has recently sparked lots of discussion around equities and investing. Is it legal, or morally right, to short sell or limit investors’ possibilities to buy shares? Who has the right to give recommendations and who should retail investors listen to?

Here's how the phenomenon looks like from an Investor Relations perspective in a stock-listed company.

Company representatives need to understand what affects the company's valuation

Stock-listed companies are strongly regulated. In Finland, where Cargotec’s shares are listed, regulation comes mainly from the European Securities and Markets Authority (ESMA). During strong movements in the share price, it is common for the Investor Relations team of a stock-listed company to receive questions about why the share price is rising or falling. In addition to reasons related to the company itself, the share price can be affected by e.g. changes in analyst recommendations, peer company performance and especially in the case of cyclical companies, changes in pricing data or external market forecasts. Strong opinions in different media, investment blogs or social media discussions can have an impact on the share price.

In recent years, the media environment for investors has strongly fragmented. For instance in Finland, financial news broadcasts on the main TV channels, a once popular source of information, have been discontinued. In the meanwhile, new securities market regulations have made banks increasingly reluctant to share their analyses publicly - they are offered to customers willing to pay for the service. There are less analysts commenting on company performance and it is common practice for many large investment banks to ask media representatives to leave at the start of their market reviews. As analysts and institutional investors concentrate on paying customers, space has emerged for other thought leaders. Investment bloggers or discussion board celebrities can express their views with significantly more freedom than an investment bank analyst. With this in mind, I think it is important to critically consider whether there is material analysis behind any investment idea.

Investors may of course have other targets besides pursuing profits; they might be primarily motivated by things like feeling part of a community, having an influence, entertaining themselves, revenge or getting attention. Whatever the reason behind investment decisions, intentional manipulating of the markets or inciting others to do so is of course illegal.

Investor activism on the rise

Investor activism has been a rising trend for quite some time globally. In Europe, one example of this is the increasingly popular practice of lobbying management incentive programmes on so called Governance Road Shows. To accelerate ESG matters, shareholders are making more sustainability related initiatives. Certain activists, like Cevian Capital or Elliot Management, buy large enough shares of companies to actively be able to participate in developing them and thus creating shareholder value.

Alongside these more conventional forms of activism, social platforms have also become an integral part of the stock market scene. Discussion threads like Reddit’s Wallstreetbets or large social media groups may be already more significant influencers for many investors than traditional financial media. Is it possible that in addition to sharing investment ideas, social platforms will affect the companies’ fates in the future? There is strength in social media for which Wall Street might not be ready for.

The need for investor relations is higher than ever

Besides filling its legal obligation of regulatory communications, the role of Investor Relations is to also build dialogue between the company and investors. Even by just sharing factual information about the company to channels where investors are present, a company or its representatives can help prevent misconceptions. In 2021, investor communities on social media are to be considered important investor influencers, not just a passing trend.

Likewise, the need for financial education is higher than ever. A recent study by Danske Bank, shows a telling example of this: most Finns believe that the most probable path to prosperity is the national lottery. Investing in stocks can be a profitable hobby, and shareholders have an opportunity to shape the directions of the companies they own. My personal investment recommendation is to start off by reading some literature to build understanding about stocks and investing. Enhancing your knowledge is an asset in all market situations - IR teams and their investor materials are a great source for the information you need to help you get there.