Investor Relations and the Value of Human Intelligence
In reading Ambassador Henry Crumpton’s The Art of Intelligence: Lessons from a Life in the CIA’s Clandestine Service, I was struck by the premium America’s national security apparatus places on collecting and analyzing human intelligence, and the painstaking detail that goes into that process.
People like Ambassador Crumpton, who now leads a successful private sector intelligence-based advisory firm, and his former colleagues in the CIA are very effective in their jobs because they do not rely on a single piece of information to make a decision. Intelligence officers rely on a variety of sources ranging from electronic communications to personal interactions to psychological profiles to assess a situation. Just as important, they take a critical and open view of themselves. Ambassador Crumpton writes, “Those who realize what they don’t know acquire the best intelligence. This is key. If an intelligence officer does not appreciate his own lack of knowledge, how can he know the gaps that need filling?”
With the increasing activism of the public generally and institutional investors specifically it is more important than ever for the leaders of companies to take a proactive and honest effort to understand how public audiences view the operations and management of the organization.
A recent Ernst & Young study indicated that an increasing number of companies are engaging in a dialogue with public audiences, especially shareholders. According to Ernst & Young, in the 2013 proxy season, 55 percent of companies disclosed “engagement with investors.”
While many companies deserve credit for their proactive approach to shareholders they must appreciate that some institutional investors may not be spending sufficient time and resources to fully understand the companies in which they invest. For some companies, that lack of understanding is having a significant adverse impact on shareholder value.
Recently, David Larcker, Allan McCall and Gaizka Ormazabul published a paper entitled, “Outsourcing Shareholder Voting to Proxy Advisory Firms.” The paper examined the “economic consequences of institutional investors outsourcing research and voting decisions…to proxy advisory firms” such Institutional Shareholder Services (ISS) and Glass Lewis (GL) on issues such as “Say on Pay.”
The two most striking observations of the paper are that, first, institutional investors rely far too much on the opinions of ISS and GL and not enough on their own intelligence gathering and, second, that trend has led to proxy advisory firms inducing boards into making decisions that often decrease shareholder value.
In other words, institutional investors and corporate management are making significant, yet harmful, decisions based on a single piece of intelligence that does not provide an accurate and complete picture of the company.
I am by no means advocating corporate management or investors engage in clandestine operations in their approach to investment and governance decisions. Rather, both sides simply need to more effectively communicate with each other.
In that process corporate executives must take to heart Ambassador Crumpton’s observations. They must not rely on a single source of information and instead seek insights from a variety of means, especially human intelligence derived from human interaction, and explore analytical judgments including those that challenge the status quo. Good intelligence can inform good decisions. That means a two-way dialogue with public audiences, which can be achieved through a variety of sources ranging from one-on-one conversations to survey research.
BlackRock, one of the most successful investment management funds in the world, has made clear that it expects an open engagement with the leadership of its investments. Notably, on Jan. 17, 2012, Laurence Fink, the co-founder and current chief executive of BlackRock, sent a letter to nearly every one of the firm’s investments in which he made clear companies should not rely heavily on proxy advisory firms: “Companies that focus only on gaining the support of proxy advisory firms risk forgoing valuable and necessary engagements directly with shareholders.” The letter went on to note: “We reach our voting decisions independently of proxy advisory firms on the basis of guidelines that reflect our perspective as a fiduciary investor with responsibilities to protect the economic interests of our clients.”
A critical component to this engagement process is corporate transparency. Research by Hill+Knowlton Strategies revealed that 84 percent of Americans have a higher level of trust in companies that regularly report on governance initiatives compared to those that report very little. By providing investors and other public audiences with meaningful and timely insights into a company’s vision and performance, executives can build a level of trust that they are governing their company in a manner that rewards shareholders and ensures reputational strength over the long term.
Robert Ludke is the head of the Hill+Knowlton Strategies Governance+Sustainability Practice. He provides senior counsel to a variety of clients — from major retailers to health care companies to private equity firms — regarding communications surrounding their sustainability efforts so as to gain a reputational advantage. He can be reached at robert.ludke@hkstrategies.