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More companies should formalise their dividend and investor relations policies, to improve valuations: Opinion

More companies should formalise their dividend and investor relations policies, to improve valuations: Opinion

Source: Business Times
Article Date: 21 Sep 2022
Author: Raphael Lim

The latest SGX Corporate Governance Code disclosure report – produced by KPMG in Singapore – showed low scores for shareholder engagement.

Low liquidity and weak valuations are often cited as reasons why companies delist from the Singapore Exchange (SGX).

Offerors will highlight the thin trading in a company’s shares, and say they are giving shareholders an opportunity to exit at a premium over historical prices when making their privatisation bids.

Shareholders would face the choice of accepting the offer, which might be priced below what they had hoped for, or risk being left holding on to a counter that doesn’t go anywhere.

But is making an offer to take a company private really the best way to help shareholders realise value on their investments?

Factors affecting a company’s valuation and trading activity are varied, and not always within the control of boards and management. But one area that falls under their scope of influence is shareholder engagement.

Findings in the latest study of corporate governance disclosures, released last week, suggest local listed companies could be more deliberate when setting out how they engage shareholders, manage alignment of interest and put themselves at the top of investors’ minds.

With more than 60 per cent of Singapore’s listed companies trading below book value – according to SGX’s stock screener as of Sep 20 – it would be timely for local companies to pay closer attention to this aspect of corporate governance that also materially affects their valuations.

Low marks for shareholder engagement

The latest SGX Code of Corporate Governance (CG Code) disclosure report – produced by KPMG in Singapore – showed relatively low scores for shareholder engagement.

Of the 585 companies studied, just 27 per cent had a formal dividend policy. And only 43 per cent of the companies had an investor relations (IR) policy.

Companies did, however, claim that their actual practices contained elements of what the CG Code calls for.

Some 46 per cent said they had protocols or dedicated teams looking after IR, even though they had no stated policy.

Meanwhile, 70 per cent of the companies said they would still distribute dividends despite not having a formal policy. The study found that 31 per cent of those without a formal policy declared a dividend.

The companies without formalised policies and procedures may argue that their practices relating to shareholder engagement already comply with the spirit of the CG Code.

But given the valuations and liquidity of some local stocks, it is possible that current practices remain inadequate.

Firmer commitment

For shareholders, a formal dividend policy represents a clear commitment from boards and management.

Setting this expectation provides shareholders with greater certainty, and minimises the need for guesswork each year.

Formalising what companies may already do in practice could also help investors decide whether a particular company is the right investment for them.

This may also lead to investors being willing to value a company appropriately.

For example, a high growth company that is tapping new business opportunities or markets may choose not to pay a dividend as it reinvests profits aggressively for growth.

This could make it less attractive to income investors, but might be a positive signal for those who prefer the potential for capital appreciation.

Meanwhile, a company that formalises a constant dividend policy may find income investors taking greater interest in the stock.

A formalised dividend policy could also instil greater discipline when it comes to management’s decision-making, and could help maximise shareholder value in the longer term.

At a broader level, formalising and communicating a dividend policy also ties in with having an IR policy to allow an ongoing exchange of views with shareholders.

Companies may feel that their current approach to engaging shareholders is adequate, but formalising an IR policy would help with identifying gaps and devising new ways to reach out to prospective investors.

Having a broad pool of investors that understand a company is a prerequisite for higher trading liquidity and healthy valuations.

Many small- to mid-cap stocks on the local market are not on any index and are also not household names. This means a conscious effort needs to be made to raise the profile of these stocks.

If companies are able to generate greater shareholder interest in the longer term, the costs of such initiatives would likely pay for themselves in terms of shareholder value created.

Looking ahead

The Corporate Governance Advisory Committee (CGAC) noted last week that the low scoring under shareholder engagement may be due to the fact that some provisions were newly introduced in the 2018 CG Code revision.

It intends to provide practice guidance to help companies improve their disclosures in this area.

Beyond adhering to corporate governance standards, listed companies should recognise that they stand to benefit from a financial standpoint if investors take a greater interest in their companies and boost their valuations.

Formalising a dividend policy or an IR policy is no panacea for low liquidity and lacklustre valuations – given the multi-faceted nature of the issue – but the incremental step of having clearer commitments to shareholders is unlikely to hurt a company.

This is especially true for companies that are already undervalued against their peers and lack any meaningful levels of trading activity.

Delisting may be a good option for some; but for others, taking the smaller step to formalise their shareholder engagement commitments may help rekindle investor interest and confidence in potentially good companies.

Source: Business Times © SPH Media Limited. Permission required for reproduction.

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