Mark Hynes - thoughts on corporate disclosure

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

Tuesday, June 21, 2005

IR Trends to 2010

Very rarely does one get the chance to get out the crystal ball, so I am very grateful to for the chance to offer some predictions and trends on regulations affecting investor relations in 2010 Also, since I sincerely hope to be retired by then, everyone can say I was wrong, without it concerning me!

However, before we look at the future, lets just take a moment to examine the past. Five years ago, few would have foreseen the extent of the regulatory change that has been introduced into Europe. Until the Lisbon agreement in 2002, the financial services reforms were stuck in committees, with little prospect of progress. Today, with 42 new Directives, a real transformation in the way companies raise capital in Europe is under way. Regulators have changed their focus from creating new regulations to implementation of the recent 42 Directives.

However these new Directives have come at a considerable cost to issuers. Compliance costs for companies of the new rules are increasing all the time. Companies feel they are knee-deep in regulation and losing sight of precisely what sparked the onslaught of legislation. Small wonder, then, that senior figures want to know, if stakeholders require full transparency in one sector of business, why should that transparency not apply to all equally? So my first prediction is that this focus will include both issuers AND investors.

Prediction # 1 – increased disclosure by share owners as well as share issuers.

Many believe that investors should come under the same sort of transparency rules, particularly where they are hiding behind borrowed shares or other financial instruments disguise. Some people in companies are fed up with hedge funds pushing them into places they don't want to be. Achieving transparency from the owners of shares would certainly be complicated to achieve, but it has the power of logic and common sense behind it.

There has been a missed opportunity in the creation of the Transparency Directive. There was a proposal in the early stages of its development that it should include the legal right for every company listed in the EU to demand from the nominees holding equity, the disclosure of the beneficial owner of the equity and the voting rights. If you think how much time and money issuers spend in researching their equity ownership profile, and achieving perhaps 65% in most cases? – this was indeed a missed opportunity. So, as I said, my first prediction is that the regulatory burden will start to include the share owners as well as the share issuers.

And speaking of investors, the new Pensions Directive looks set to change the nature of the European pension funds with which companies deal today. At the moment there are no single pan European financial services products. This is likely to change, and will create some super-large scale investors in Europe. This will change how IRO’s think about Europe, and will have an effect on the time European IRO’s devote to these major funds. Communications policies will change to become more pan European, influencing the views and perceptions of the managers of these major funds.

Prediction # 2 – increased focus for Investor Relations Officers on Europe.

Also, as we see in the US, some of the major pension funds will become leaders in the corporate governance movement, driving forward standards of corporate communication, and other standards.

And of course corporate governance – which the major US pension funds have been driving for some years – will itself change. The recent establishment of a European task force on corporate governance will, I believe, be seen by many as the start of a common regulatory – as opposed to the guidance - framework for all EU issuers. Whether this will be welcome by all issuers, is doubtful.

Prediction # 3 – more regulation in corporate governance in Europe.

Which leads to another area which I believe will see massive change: bridging the regulatory gap between the EU and the US. Today in 2005, we see companies withdrawing from dual or secondary listing on another market, for reasons of compliance (and not just the costs of that compliance). I believe that those barriers will be bridged, and we will see for example mutual acceptance – or even full convergence - of the IAS and US GAAP accounting standards. In addition, the harmonization of the principles of Sarbanes Oxley into European legislation is already underway.

Prediction # 4 – growing convergence between US and EU regulations, making it simpler for investor relations officers with listings in both EU and the US.

So lets move from the grand themes of legislation and address some of the practical issues with which many of us in investor relations are so concerned.

First, filing of documents and news, and its availability to investors is much on the minds of regulators. In the Transparency Obligations Directive, the European Parliament has proposed what you might call a European EDGAR. The concept is that issuers would ‘file’ an electronic copy of their annual and half yearly reports, prospectuses and circulars with their national regulator. The regulator would then store those, and make those available through a network, which links with the storage systems of other countries. Together they would be delivered through the internet to investors and to added value news distributors.

This has been discussed in the working group at CESR of which I am a member, and progress is being made.

Prediction # 5 – the filing of documents by companies will become faster and more pan European.

One of the drivers behind changes in filing, is that Investors – and those who advise them such as sell side analysts – need access to data in a standard format, which allows for easy processing. A common standard is emerging in the form of XBRL.

Xbrl is an emerging language for the electronic communication of business and financial data. Instead of creating a press release which reaches investors and analysts in plain text, all parties - the issuer, the news disseminators, the media, the investors and analysts - will have agreed to support the new xbrl standard. Instead of treating financial information as a block of text it provides an identifying tag for each individual item of data. This is computer readable, and permits automatic processing.

During the earnings period, sell-side analysts are just as pressed for time as the listed companies that are issuing news releases. It is critical that they get their updated models and revised forecasts out to their clients as quickly as possible. Timing is of the essence and in today’s financial world, updating a complex earnings model can take hours. With XBRL, a company’s numbers are extracted automatically and loaded into the analyst’s earnings model, providing the analyst with the necessary time to review the results with confidence.

XBRL-enabled releases are also ideal for business reporters and institutional investors who can benefit from XBRL’s automated data extraction and its ability to enable the comparison of results from previous quarters and industry peers. Further, XBRL-formatted earnings releases can be distributed easily to a company’s key stakeholders as a link through a traditional news release.

Commercial newswires, like PR Newswire, play a critical role in helping companies communicate their messages, both financial and non-financial, to the online media used by institutional and individual investors worldwide. XBRL adds hugely to the useability of the data when it gets there.

Regulators across Europe – and the US – are starting to mandate that reporting will be in an XBRL format. Examples include Committee of European Banking Supervisors (CEBS), U.S. Securities and Exchange Commission (SEC), where a number of companies have now completed their mandatory EDGAR filings in xbrl, National Bank of Spain, the Dutch Government, and the UK Financial Services Authority.

Prediction # 6 – xbrl will be widely adopted as a format for financial data.

For more detail I would encourage us all to visit This will – I believe – impact the way we file data, and the format in which we distribute inside information to the market through news vendors such as Reuters, Bloomberg and others.

Reputation and value. And financial reporting – the numerical data in press releases and communications – is at the moment the core of what we tell investors. However, I believe that non financial measures will continue to increase in importance. Research shows that investors say that information about a company’s reputation is increasingly important to them. These measures include leadership, governance, communication, transparency, brand equity, intellectual capital, innovation. We are also seeing discussion on items such as Employees, and risks such as Environmental and Social and community issues.

Prediction # 7 - communication of these non financial data by companies will increase, because the shareholder value model has changed and non-financial performance of companies has become increasingly important to investors.

And finally, retail investors will continue to grow in importance – at least in the minds of regulators. Even though most European companies have less than 20% ownership by individual investors, compared to 50% in the US, regulators will continue to protect their rights to equal and simultaneous access to information with institutional investors. One aspect of this will be the way in which dissemination is increasingly regulated.

Regulators have already laid down rules on how inside information is disseminated, and they will insist on the continuing and growing use of traditional media such as newspapers as part of the news dissemination for compliance of disclosure. Getting to newspapers – as well as financial news services and issuers’ own web sites – will be increasingly legally required. The implementation of the Transparency Directive in different member states should be complete within the next 2 years,

And of course, at PR Newswire, I would argue that media plays an essential role in building and maintaining a reputation. So my final prediction:

Prediction # 8 – using the media to communicate broadly with investors will be increasingly regulated and used by issuers.

Ladies and gentlemen, these remarks could carry on for a long time, and mention CSR, and other macro trends, however in my allotted time, I would leave you with one final thought. In Britain in 1889. a rail ways investor – not an issuer – agreed that “while government regulation sounds well it is not a good idea to give power over business to a bare majority of un-expert and un-conscientious politicians”. Sadly for some, that investor would find today’s world and that of 2010 – very much changed. Thank you.

Newspapers as a dissemination point for TOD

A major change is quietly underway in the Transparency Obligations Directive. This change will require listed companies to ensure that their news reaches certain specific destinations such as financial news services, web sites serving individual investors and “newspapers”.

TOD has come a long way since the Commission’s original ideas back in 2002. They proposed that posting sensitive news to an issuer’s website would be enough to ensure that all investors received it at the same time. However, TOD (as passed by the European Parliament) now requires companies to have a much wider distribution than just their own website.

The detailed rules being devised by CESR are likely to have a major effect on how far companies have to send their price sensitive (inside) news.

A major discussion point has been the role of newspapers in reaching individual investors. It is self evident that newspapers are a key source of information for investors. Survey after survey shows the crucial role they play. However what’s the best role for them in financial disclosure?

In the past, in many countries an advertisement in a national newspaper has been mandatory. And the newspaper lobby has been keen to ensure that this role is maintained. They argue that newspapers are key to making sure that retail investors are actively informed.

However the question remains whether a paid advertisement is the only way to ensure that the newspapers receive news.

For many years, the newspapers have subscribed to a national wire service, such as the Press Association in the UK, Belga in Belgium, ANP in Holland and so forth. The wire service typically contains 2 sets of news – general news written by journalists employed by the wire service, and ‘commercial’ news sent by companies seeking the attention of the journalists.

The wire service is delivered to a computer screen used by the journalists, ensuring that they can use the story to create the newspaper. Obviously, there is a distinction between the different types of market news put out companies. A small announcement of a director’s dealing will have less impact than its financial results. They key is to ensure that journalists – especially at the major financial newspapers across Europe – have fast access to these announcements so that they can make a judgement about which news will be of interest to their readers.

This is a very different process from requiring the purchase of an advertisement. It also ensures that news is sent in a ‘fast and secure’ manner as required by TOD.

So watch out for the requirement to include newspapers in your mandatory news dissemination.