Entry into the S&P/ASX 300, S&P/ASX 200, S&P/ASX 100, S&P/ASX 50 and other benchmarks is a milestone in a listed company’s life, bringing additional investor interest and scrutiny.
Companies are often aware when they approach this point – but they may not always be prepared for the additional requirements and scrutiny imposed on them.
Here, we explore how to successfully get ready to enter an index and take advantage of the momentum and
publicity generated by this event.
Alan Deans, moderator, Listed@ASX: What are the key determinants for entry into benchmark indices?
Jana Jevcakova, director corporate governance, Morrow Sodali: There are two.
One is market capitalisation and the other is liquidity.
Listed companies need to meet these thresholds to get there.
There’s also much more required from listed companies in terms of environmental and social governance aspects, and from an engagement point of view as well.
The relevance, importance and the allocation of resources changes significantly when you enter the index.
Daniel Moore, portfolio manager, Investors Mutual: To raise liquidity, you need more interest in your company.
It needs to be a good business, run by good management. But then you need all the softer things, and that’s when good ESG practices and transparency help.
Listed@ASX: How well do companies nearing entry to an index seriously consider these issues?
Daniel: They become more important as they get closer to index inclusion.
The more investor interest they receive, the more engagement there is with shareholders, which creates more liquidity.
As they get more institutional investors, their questions become more vigorous and management has to allocate more time to them.
Things change not just on entering the ASX 300, but also on entry to higher indices such as the ASX 100.
Listed@ASX: So, index entry requires a strategic planning approach – you can’t just let it happen?
Iris Davila, director, product specialist, BlackRock: Planning and strategy is part of getting to the next step.
Once you get into an index, institutional stakeholders like BlackRock play a significant role because we are large, index investors.
If you come into our view, mostly we want to engage with you. There’s a little more leniency as companies are growing intothe index, but the scrutiny becomes a lot higher as you progress through the ranks.
So companies need to be prepared in their forward thinking and strategic planning.
We always start with governance.
It’s first and foremost in our engagement with listed businesses.
Board composition and strong governance are the most important ESG factors.
Institutional investors are not necessarily going to let you have a free pass just because you’re new.
Listed@ASX: Are there any common issues that arise when a company gets into the index?
Jana: One of the main ones is the level of engagement they have with investors.
When you enter the index, institutional shareholders prevail.
They want to know what’s going on, on a regular basis, and not just on financial matters and share price performance.
It’s all about ESG considerations, allocation of resources and your business strategy.
Daniel: Management becomes more accountable.
Institutions are going to require more of management’s and the board’s time.
At this point companies need to think about investor relations as an internal or external resource and they need to plan for that.
Iris: We become irked when we have those conversations time and again.
It comes down to accountability.
At a certain time companies will be held accountable.
They are expected to perform and conform to certain standards.
Listed@ASX: Is there a difference depending on whether a company is entering the ASX 300, ASX 200 or ASX 100?
Iris: No. I meet with ASX 300 companies and with those in the ASX 200, although I’m more patient in my conversations with an ASX 300 company.
But, two years down the road, if they’re still in that same position, the conversation starts to change.
Jana: There’s a big difference between the ASX 200 and ASX 300, and that hundred in between.
There’s volatility in the number of companies that jump in and out on a quarterly basis.
So, there’s more tolerance if they don’t have all the practices and policies in line with best market practice.
But, for a company in the ASX 100, if they still don’t have measurable diversity objectives, for instance, then that’s a massive problem.
But if a company between the ASX 200 and ASX 300 has an issue and doesn’t do anything about it, it will have a huge problem.
“Once you get into an index, institutional stakeholders like BlackRock play a significant role because we are large, index investors.”
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