The perceived divergence of priorities between bondholders and shareholders has led some to believe that these investors cannot engage with companies on the same issues. Some – remarkably - even question the legitimacy of bondholders (or other creditors) engaging with companies in the first place. However, given their financial stakes in a company, both types of investors not only have legitimate cause to engage, but also a professional duty to do so. So say, Mitch Reznick, Co-Head of Credit, and Dr. Hans Christoph-Hirt, Head of Hermes EOS, in We Can All Get Along, a new report dispelling myths surrounding joint company engagements between bondholders and long-term shareholders.
Writing in the paper, the authors argue that the difference in the payoff profile of equities and bonds is sometimes cited as a reason that bondholders focus less on long-term factors, while shareholders want to see growth. However, there are strategic issues which the pair highlight as being relevant to a company’s current and likely future health and value creation, including the management of ESG (environmental, social and governance) factors.
Arguing that although the cash flows from bonds held to maturity will not alter unless operating cash flows are substantially impaired, the authors highlight that unmitigated risks can weaken a company’s ability to fulfil its debt-service obligations.