The value of corporate engagement

Corporate engagement creates value for the target company, and for the investor, that goes way beyond financial benefits, research commissioned by the PRI has found.

The PRI commissioned two pieces of research about corporate engagements. One piece, conducted by the London School of Economics, found that the return on equity of a target firm increased by 1 per cent three to four years after a successful engagement.

Further, it showed that the lead investor increased its shareholdings after a successful engagement.

Xi Li, associate professor of accounting at the London School of Economics, looked at the best practices for impactful co-ordinated engagements. The research used a quantitative methodology to examine 31 unique projects from 2007-17, which included 1671 dialogues with 964 target companies from 63 countries. It involved 225 investors, including asset owners and managers, from 24 countries with $23 trillion.

The research found that successful engagement had a couple of common characteristics and Li recommended that investors try to include in their own engagement activities. These include finding a lead investor with high assets under management and a big holding in the target, from the same geographic location as the target company. This should be supported by other investors with broad influence across foreign countries, preferably with high AUM and a big holding in the target. It also recommended that investors engage with corporations with high institutional investor holdings.

While the increase in the return on equity of a corporation is a key gain, another study found that financial value creation is not the only benefit of investor engagement.

In the second piece of research, Jean-Pascal Gond, professor of corporate social responsibility at Cass Business School, conducted interviews with 52 actors in charge of handling environmental, social and governance requests from 36 corporations.

It found that engagement creates value for corporations through multiple mechanisms – communicative dynamics, learning dynamics and political dynamics.

“Engagement helps corporations clarify expectations and accountability, and helps manage impressions. It also helps corporations develop a knowledge of ESG issues,” Gond said. “A lot of corporations said they loved engagement because it was free consulting. There are a lot of political dynamics going on in this process, and engagement helped to enhance the loyalty of long-term investors.

“Interesting for us to find out that the corporations were quite proactive and could understand the benefits of this engagement with investors. These investors will speak to other investors and enhance loyalty.”

These value creation mechanisms also apply on the investor side, he said.

Gond encouraged investors to broaden the definition of success beyond just financial value creation. He also said investors shouldn’t delegate all engagement, and that they would get more from engaging strategically.

“Investors should understand what corporations could get from engagement and communicate with them about what [they] expect from the engagement,” he said.