Mark Hynes - thoughts on corporate disclosure

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

Wednesday, July 26, 2006

Is best practice on guidance by US companies heading towards a “UK model”?

This week’s well publicised research from a hugely prestigious group led by the CFA, will make encouraging reading for IRO’s on this side of the pond.

9 months of consideration by this US-based group has been given to the issue of short-termism – corporate and investment decision making based on short term earnings expectations, versus long-term value creation for all stakeholders. A cross-functional group of issuers, analysts, institutional fund managers and retail investors have created a series of recommendations.

Top of these is the need to reform earnings guidance practice. This follows research by NIRI reporting on the decline of quarterly earnings guidance. (see blog post May 9th). However as the NIRI research indicates, those who give up provision of quarterly earnings guidance, often increase the quantitative and qualitative information they do provide to assist analysts and investors.

Which has echoes of best practice in the UK. Far sighted mainstream UK companies already take the approach of providing some general guidance on divisions' growth rates, and the specified value drivers (eg volumes, unit revenues, margins) to help the market get close to a reasonable set of numbers through a textual approach, accompanied by conversations about consensus.

This systematic approach to guiding the market on each division, all the while avoiding any individual price sensitive remarks or any discussion of overall company operating profit and eps outlook, will also allow skilled analysts to differentiate themselves.

The real value for in-house IR people here is not in deciding on whether to publish formal eps guidance – which they often cannot sway for their company, but rather in striking the balance between equitable public disclosure of inside/ material information and providing useful non-price sensitive guidance in one-on-one meetings to create as informed a market for their shares as possible.

As the companies in the US wrestle with this issue, they could do a lot worse than to look at this model.

Tuesday, July 18, 2006

Death of traditional soft dollaring? 2 new initiatives making an impact.

There are many reports of the death of sell side research. However 2 initiatives, one recent and one making progress, suggest that this is, like Mark Twain’s, “greatly exaggerated”.

Firstly, in a changed model and aiming to win more customers, Lehman Brothers has asked some analysts to stop writing and distributing research reports, and focus on discussing stock picks and strategies directly with select clients such as hedge funds and the brokerage firm's traders. This is being watched by other Wall Street firms, many of which are grappling with ways to make their stock research more effective -- and more profitable.

This decision comes amid intense discussion on Wall Street about the future of equity research. New regulations came in 2003 from regulators concerned that firms were publishing optimistic research in a bid to win more lucrative investment-banking business. This has limited how firms pay their analysts and created a new bureaucracy of compliance and disclosure.

In consequence, research staffs have shrunk and many analysts have moved to hedge funds and mutual funds, where the compliance is less. The number of research analysts on Wall Street has dropped almost 30% since 2001 to 995 at the end of 2005, according to the National Research Exchange. Earlier this year, Morgan Stanley cut about 7% of its equity research positions in the U.S. and Europe.

However, Morgan Stanley also said it will curtail some less essential research and emphasize higher-value reports. Which leads therefore to the impact of the second initiative from the Independent Research Network, an independent company formed in mid last year by Nasdaq and Reuters to help under-covered companies obtain analyst coverage. Its objective is to facilitate equity research coverage for under-covered companies, promoting a greater knowledge of the investment community's understanding of a company's fundamental prospects.

IRN announced last month several milestones in the growth and development of its business, including signing contracts with 30 research providers and the signing of IRN's first client contract.

According to IRN, approximately 33% of all US public companies with analyst coverage have two or fewer analysts covering them and approximately 42% of all public companies have no analyst coverage, and according to Reuters Estimates, since January 2002, 703 companies have lost analyst coverage representing over 18% of the entire universe of public companies with analyst coverage.

What the impact of these 2 initiatives on the traditional model of soft dollared research will be, we can only wait and see. What it clearly DOES mean, is that IRO’s need to look ever more widely for potential coverage and communication channels

Wednesday, July 05, 2006

Just when you need a good hook…along come 2

Part of the fun of blogging is trying to find a hook around which to build a story. When Nancy Humphries was named as CEO-Elect at NIRI, she named “hedge funds, and their ownership of public companies” as one of the issues that she needed to get on top of. And for those listening to the hedge fund panel at last month’s NIRI conference, you can understand why.
The chair of session affirmed that 47% of the equity of his company was owned by hedge funds, and a show of hands indicated that this was not unusual. So surely such a pervasive industry should be regulated, with benefits including increased transparency? Not at all, said the hedge fund panellists; we believe that self regulation is best.
This view has won support in the EU. A group of banks has advised the European Union against increased regulation of hedge funds but suggested a minimum investment threshold designed to keep smaller investors from participating in the high risk industry. Experts from banks including Citigroup, Goldman Sachs, and Deutsche Bank said additional rules would not provide additional investor protections and were "likely to fail."
The group said a minimum investment limit should be set at about $64,000 to "prevent access to hedge funds by investors for whom such investments are not suitable." The recommendations come after U.S. regulation of hedge funds is in disarray. The Securities and Exchange Commission was recently stopped from regulating funds, and at a recent government hearing, a former SEC lawyer accused the industry of widespread illegal activity.
The European panel said that funds required "unrestricted" investment freedom and said current regulations have worked to create a solid foundation. Instead of more rules, the panel advocated for a reduction in barriers to cross border investment. The report said, "The group calls on European regulatory authorities to adopt a policy of enlightened self-interest. This would recognize that attempts to further regulate this evolving industry will drive the business and its investors offshore or lead to the packaging of hedge fund-based investments in other forms."
However, the report’s conclusions are not representative of the Commission's views and the Commission will release its own conclusions later this year.
Separately, the European Central Bank warned last month that hedge funds were a major risk for global financial stability as they tended to invest along similar lines and large losses could hit the entire industry very hard. However the banks’ report rejected this, saying hedge funds often take alternative market views and changed their portfolios much more frequently than traditional funds.Meanwhile, the U.S. Congress is also targeting the $2.4 trillion hedge fund industry. The Senate Judiciary Committee held a hedge fund hearing last week, with its star witness Gary Aguirre, a former Securities and Exchange Commission investigator who said superiors quashed a probe into insider trading.