Mark Hynes - thoughts on corporate disclosure

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

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.


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