Investor relations in companies across Europe report that the rate of growth in sell-side analyst coverage has fallen. While 48 percent of respondents to the fourth annual IR survey conducted by Citigate Dewe Rogerson say analyst coverage had increased over the past year, that represents a sizeable fall from 65 percent in 2011.

The impact is most keenly felt by smaller companies. Only 57 percent of companies with a market value below £500m are happy with the level of coverage they receive, compared to 67 percent last year. This contrasts with 80 percent of companies, with a market value over £5bn, that are happy with the level of coverage.

Interestingly, while smaller companies are concerned about the levels of sell-side coverage fall, around a third of those companies polled with a market value of less than £500 million said that the quality of coverage had improved. This compares to only 15 percent overall.

The firm says the threat from consolidation may have forced small cap analysts to offer better research, although a number of factors make this difficult. According to Sean Bride, author of the report and a consultant in Citigate’s IR practice: “Frequency of reporting and pressures on analysts to cover more stocks, gives them less time for more detailed, insightful analysis. It’s also possible that some stocks were simply over covered, which is certainly the case for the largest companies”.

But just 4 percent of larger companies (more than £10 billion market cap), which can have 30 or more analysts covering them, agreed that there had been an increase in the past year in the quality of research.

In addition, 23 percent of respondents have become more concerned about rumors concerning their company on social media, up from 14 percent last year

The firm sees a growing body of evidence that shows analysts and investors are interrogating new media for new insights. In the pursuit of alpha, investors are starting to scan social media for information from employees, customers and suppliers. Conflicting information from unofficial sources can make life difficult for a company’s official sources.

The percentage of respondents that said they are aware of an increase in communication between investors through non-traditional channels of communication, such as LinkedIn and Twitter, was 39 percent, which was broadly in line with last year. Worryingly, the percentage of respondents that do not know increased from 11 percent to 23 percent. This suggests an increase in uncertainty. As non-traditional channels of communication multiply, there is a risk that IROs are being left behind.

More than half (55 percent) of companies cite lack of engagement from shareholders as a barrier to effective corporate governance, up from 41 percent last year.

The finding challenges a preconception held by many that companies prefer to be left alone by investors to manage the business. European companies are focusing on investor engagement and stewardship as the leading factor to improve corporate governance. Stewardship involves a greater expectation for investors to engage in constructive criticism and the strategic direction of the business and generally become more committed to the company. Lack of engagement from shareholders was the biggest barrier to effective corporate governance for the second year running.

Other major barriers highlighted by the survey were:
• Shareholders outsourcing key decisions cited by 35 percent of respondents(28 percent, 2011)
• Lack of feedback from investors cited by 30 percent of respondents (33 percent, 2011)
• Decline of the long term investor cited by 29 percent of respondents (26 percent, 2011)
• Unnecessary regulation cited by 28 percent of respondents(30 percent, 2011)

Says Bride: “The subject of investor engagement and corporate governance tends to be framed by the views of investors and regulators. This survey asked companies what they thought. While policymakers have been pushing for greater engagement from shareholders, it is interesting to see that more companies share this goal. This is the first time that over half of companies have cited lack of engagement as a barrier to effective corporate governance”.