Rebel shareholders are able to ambush even the largest companies. But working hard to keep investors onside in good times and bad can pay big rewards

As shareholders wield more power than ever before, solid investor relations has become a crucial part of any corporate strategy. Get it wrong and the results can be costly—plunging share prices, negative publicity and, more alarmingly, a loss of market position that may take years to recover. But companies that create an honest dialogue with investors can benefit hugely, especially as economic uncertainty mounts.

Last summer, the issue was highlighted when a disgruntled shareholder forced a general meeting at Millwall Football Club's holding company. Property developer Graham Ferguson Lacey used powers under the Companies Act 2006 that allow holders of at least 10 per cent of paid-up capital to force a general meeting and raise matters of concern. Lacey, who was at loggerheads with the board over redevelopment plans for land around the club, lost the vote, but the showdown cost Millwall more than £50,000. And more importantly, it sent a warning signal to other directors about the potential trouble that unhappy investors can cause.

"It's a weapon which more shareholders may choose to use in the future," says Peter Weiss, a partner at Davenport Lyons, the law firm that advises Millwall.

Add that to the slump in stock markets, with the consequent fall in investor returns, and there is a combustible mixture where investors may choose to use new powers to harass directors they feel aren't delivering. No wonder wise directors of quoted companies are urgently reviewing the scope and effectiveness of their investor relations.

"In a rising market, some of the issues that a company has to face are not as clearly highlighted as they are when the market is more depressed," says Michael Mitchell, general manager of the Investor Relations Society (IR Society). "In those circumstances, it becomes more important for companies to explain to investors and stakeholders exactly what their strategy is."

Shareholders, who won't always be moaning about poor dividends or a collapsed share price, can catch even famous companies off-guard. Last June, celebrity chef Hugh Fearnley-Whittingstall embarrassed Tesco by forcing it to debate a motion on chicken welfare at its agm.

But it is smaller and medium-sized quoted companies, such as Millwall FC, which are likely to run into difficulties, partly because they have fewer resources to devote to investor relations. Yet investor relations isn't only about avoiding trouble. It's also about creating a climate in which investors understand a company's strategy and potential in a way that makes it an attractive investment.

"Certainly a listed company which is pro-active in good times as well as bad is more likely to maintain a healthy interest from fund managers, institutional stockbrokers, market makers and other investors," says Ronel Lehmann, chief executive of Lehmann Communications, which specialises in investor relations.

One business that recognised the value of investor relations from the outset is AIM-listed Synchronica, whose market cap is around £11.6m. Like other small-cap companies, Synchronica has limited resources for investor relations so Nicole Meissner, chief marketing officer, takes the task under her wing.

Smaller resources don't prevent the business communicating regularly with both its institutional investors, who own two-thirds of the shares, and private shareholders. It puts out an investor newsletter and holds "webinars" four or five times a year, where investors can log on and ask the board questions about developments at the company.

"Investor relations takes up a lot of time, but it's worth it," admits Meissner. "If you want to be a successful listed company you have to maintain your activity."

One particular focus of Synchronica's investor relations is making sure that people understand clearly what the company does. It's a high-tech business providing services to the mobile-phone market and Meissner says it has had to work diligently to ensure people don't think that it's actually making the phone handsets. Meissner also reckons it's important to keep sector analysts up-to-speed with company developments. She organises monthly update calls for analysts with key directors, such as chief executive Carsten Brinkschulte and chief financial officer Angus Dent. And the strategy seems to be paying rewards. Synchronica's share price has been performing ahead of the industry average.

There will always be companies that manage to stay ahead of the pack. But for many, 2009 is going to be about combating negative thinking by investors. It's not easy to buck such sentiment when it affects a whole industry, says Chris Matthews, managing partner at investor relations advisory firm the Hogarth Partnership. "What you can do is make sure your investors understand the differentiating factors between you and the rest of the sector, which may give you a better rating (albeit depressed by sector factors)," he explains. "If the negative sentiment sticks to you and you alone, you have to find out what's behind it—these things don't happen by chance."

Mitchell at the IR Society agrees that it's difficult to swim against an industry-wide negative feeling. "I've always said it's very difficult to push water up hill."

He argues that the way to avoid being singled out for especially negative investor vibes is to operate a "two-way conduit" for information between the company and its investors. In that way, the business gets early warnings of problems ahead and can take action to tackle them.
The difficulty for large and small companies alike is that the bust-up in the world's financial system has undermined trust at every level.

"Investors will take a long time to trust again so they will need to be sure that they have all the relevant information before they commit cash," says Andrew Nicolls, a senior partner at PR consultancy Penrose Financial.
 Matthews adds: "If the outlook is worse in 2009 than 2008, it's about having a cool, clear head, a solid strategy for dealing with awful, real-world market conditions and being neither a Dr 'all is for the best' Pangloss or, indeed, a Private 'we're doomed' Frazer."

Meanwhile, at Millwall FC, with the rebel shareholders defeated and the club vying for promotion from League One, all the action is back on the pitch.

10 steps to win shareholders' backing

Fund manager Hermes has developed the Hermes Principles—10 standards that define how to build a good relationship between a company and its shareholders. Grouped under four headings—communication, financial, strategic and social, ethical and environmental, they are:

1. Companies should "seek an honest, open and ongoing dialogue with shareholders". They should tell shareholders what their plans are and the implications for those strategies on the company's finances and other activities.
2. Appropriate measures and systems should be put in place so that the company knows how it maximises shareholder value.
3. Investment plans must be "honestly and critically tested".
4. Companies should grow core businesses rather than chase after "unrelated diversification".
5. Incentives for managers should be in place to create long-term shareholder value.
6. An efficient capital structure should be aimed at "minimising the long-term cost of capital".     
7. Coherent strategies must be drawn up to assess the market need for each company unit.
8. Directors must explain why they are the "best parent" of businesses under their control.
9. Sound relationships need to be created with employees, suppliers and customers.
10. Companies should reduce any bad impact of their activities on the world around them.