Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Saturday, January 22, 2005

If you only read one thing…

Please make it the Price Sensitive Information Guide from the UK Listing Authority.

The PSI Guide is a wonderfully helpful document, in that it does not ADD to the obligations in the Listing Rules, and there is no obligation to follow the guide slavishly, however if the Guide is adhered to in the circumstances foreseen by the Guide, the Listing Authority will view this as compliance.

Picking from among its 43 pages and 27 chapters…

It deals with the concept of ‘materiality’ by highlighting that there is no set quantum of change in a share price that constitutes ‘a substantial movement’. In some continental European countries, where for example an expected change of 5% should trigger a release, create a problem for issuers. How is an issuer expected to read the market as accurately? And absurdly, if an issuers’ results are smack in line with forecasts, and likely therefore NOT to move the market, should they be disclosed?

The Guide also helps on rumours. It points out that having nothng to announce can be price sensitive, and it confirms that issuers are under no obligation to deny wholly unfounded rumours.

Mosaic. The Guide specifically advises against a mosaic approach to allowing price sensitive information to seep into the market. Contrast this with the US, where...

Unexpected events merit specific mentions; the Guide highlights that short delay is acceptable in making the announcement to clarify the situation. However case law suggests that this should be limited to 24/48 hours, and that most have applied to profits warning announcements.

It also offers a lot on analysts relationships and guidance. Again in contrast to the US practices, the Guide highlights that companies are not obliged to correct public forecasts, but should consider correcting major errors, especially those based on underlying, published price sensitive information.

And finally the Guide reminds issuers of the ‘out of hours’ procedures, where the RIS service is closed. Id price sensitive information becomes known during these hours, issuers should send it to 2 UK national newspapers and 2 UK newswire services. This requirement also highlights the distinction of the so called ‘Friday night drop’ where – in the past – companies and their advisors may have been trying to win coverage in the business section of the Sunday newspapers by releasing news under embargo to those newspapers. This has now been specifically outlawed.

In summary, the Guide is useful in providing examples of good and bad practice.

Friday, January 21, 2005

Regulatory Update January 2005

First the good news. No less than 3 sets of regulators recognised the impact of the changed legislation on listed companies in the last month. Charlie McCreevy, the EU's new Financial Services Commissioner, promised a regulatory pause and a focus on implementing those regulations already in the works. The Financial Services Authority has recognised the regulatory load, and promised to do all it can to lighten it, and Chairman (of the SEC) Donaldson weighed in with concerns about the impact on foreign issuers of Sarbanes Oxley’s Section 404 on internal controls reporting. Mr. Donaldson showed readiness consider delaying implementation beyond July 15th.

The bad news of course is that until these best intentions take effect, listed companies and investor relations officers are faced with implementing the rules already passed. Update:

Results under the new IFRS rules – A couple of early trends are emerging: companies – especially larger ones - are producing indicative numbers to IFRS in their 2004 prelims, with balance sheet reconciliation to UK GAAP, rather than waiting for the interims. From the analysts side, we are seeing sector based analysis, with sector estimates of earnings dilution as a result of IFRS. It is however still too early, despite some of the headlines, to predict a pattern. Many companies are still coming to terms with the detail of the changes. One constant however is cash – and many expect discounted cash flow to remain a significant measure in valuations.

Also, look out for a unique survey into the preparedness of investment analysts for the imminent adoption of IFRS by UK quoted companies. The survey has been conducted by Fallon Stewart Limited, in conjunction with Citigate Dewe Rogerson,

This research has revealed that many investment banks have simply not prepared their analysts for the potential impact of the change to accounting standards. The research further highlights that company forecasts, valuations and, potentially, share prices could undergo an intense period of volatility without more work being done by both the companies and analysts.

Transparency Obligations Directive (1). The consultation period for Part 1 of the Transparency Obligations Directive ended on Friday January 28th. The responses can be seen at . The responses, published on Monday January 31st, are broadly in favour of the proposals on dissemination, although with reservations about the administrative impact on mid and small cap companies. Few responses addressed the issue of the Central Storage Mechanism – the “European EDGAR”.

OFR Update. The ASB has issued an Exposure Draft of a Reporting Standard (RED 1) on the Operating and Financial Review (OFR). This follows a Government announcement that, for financial years beginning on or after 1 April 2005, quoted companies in Great Britain will be required to prepare an OFR. The Government has also announced that it intends to specify the ASB in legislation as the body to make the standards for the mandatory OFR.

The proposals in the RED build on the requirements of the OFR Regulations and the ASB's existing 2003 statement of best practice on the OFR, which is already used by many companies. They involve:
  • the specification of a number of principles to apply when preparing an OFR; and
  • the provision of key elements of a disclosure framework to apply in order to meet the requirements of the Regulations
Flint/ Turnbull internal controls. Against a background of serious concerns among US listed companies about their ability to comply with Sarbanes Oxley section 404 on internal controls, the Flint committee published its first review of the Turnbull guidance. It is consulting on the impact of Turnbull, and gathering ideas on how the guidance might be updated.

The paper asks important questions about how organisations understand risk, whether the scope of controls covered by Turnbull should be narrowed to financial control, the role of external auditors and – perhaps most importantly for IRO’s – whether a listed company should have to publish an opinion on whether its system of internal control is “effective” – a word causing major concerns in its definition.

The question NOT asked – but implied – is whether the UK and US systems should be brought into line.

Monday, January 17, 2005

Dealing with the City

The closest single advisor relationship maintained by a listed company in the UK is that of his corporate broker. The role of corporate broker is unique to the UK and dates from the historic Stock Exchange requirement that every listed company appoint a “sponsor” to act as intermediary between the company, its shareholders and the Stock Exchange.

Today, the role centres upon providing advice, insight and expertise through strong, stable relationships with broking clients and their shareholders alike. This advice has historically centred on market related matters, but corporate broking is now recognised as both the market advocate for their clients and as a trusted adviser on all corporate issues. Linked closely to both the equity capital markets and corporate finance arenas, corporate broking operates on the confidential side of the Chinese wall.

The corporate brokers’ role is to give the best possible understanding of the markets and what they are saying and feeling, to help communicate an investment story to the investors, and to help build a high quality investor base. They will also support the issuer in providing appropriate advisory and capital transaction support.

And of course, by being on the inside of the Chinese wall, they can provide feedback as a ‘regular market user’. As part of the market abuse rules in the UK, a regular market user is a key test of whether market distortion, or giving a false or misleading impression has taken place. The corporate broker is a good sounding board of whether a planned information strategy is safe or not.

Who are the investors?

An analysis of the top 20 holders of equity in the UK show how diverse they are becoming. Whereas once their holdings would be almost exclusively centred on UK issuers, the split today is 2/3rds UK, _ US and the balance Europe. 5 of the top 20 are index funds, the others active managers, pursuing a range of investment strategies from growth and value to GARP (growth at a reasonable price), and momentum.

The equity markets have changed significantly in recent years. Fund management and the trading flow picture are changing dramatically – and are getting more complex and less transparent.

UK investors are no longer the marginal buyers of the UK equity market – incremental demand no longer comes from traditional UK blue chip institutions. US investors are amongst the most active in the UK market and are able to take significant stakes in UK companies. Continental European investors are also becoming an ever more important component of UK registers.

In other major changes, hedge fund strategies now account for roughly a quarter of stock market business, and programme trading accounts for around 20% of European trades and is growing fast.

What does all this mean for IRO’s?

Firstly, Investor Relations is now a more global activity than it ever it has been. Maintaining relationships with investors across the globe is standard, as is seeking new ones. Just because a company is listed only on one exchange, in a single country, does not mean that an IRO’s activities stop at that country’s borders. Meeting domestic best practice in, say, the US, is likely to lead to more success in winning investor support.

Second the speed of change implied by the growth of hedge funds and programme trading indicates that active monitoring of the register is essential. Fortunately, the UK regime has more powerful legal tools for identifying the beneficial owners of shares, than almost anywhere else in the world (see Shareholder Disclosures proactive and reactive).

Simple movements in the register are no longer a reliable indicator. The growth of contracts for difference and other derivatives with no voting rights, even though they have less reporting obligations, can still mean major changes to an investor relations programme.