Mark Hynes - thoughts on corporate disclosure

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

Wednesday, December 13, 2006

The power of news…and automated trading

Now here’s an announcement to get most people going. Reuters issued a press release this week announcing products that “ will allow its news output to be "read" for the purposes of automated trading for the first time. Both are designed to enable computers to recognize and process key items of information in Reuters news stories, allowing customers to incorporate news into their automated trading strategies.”

This has huge implications for issuers of news, and for news disseminators. The basic idea is that Reuters will tag items of news with a code that allows a computer to make a ‘decision’ to sell or buy a stock, based on a combination of those tags.

So an investor might have set a range of conditions under he would always wish to sell a stock, and when the computer advises that a news story has been written that meets those conditions, the computer will initiate the sale.

There are a range of troubling things about this. Words have can have multiple meanings to which the computer would react. It adds a whole new dimension to the craft of writing a press release. How will the tagging place? Will it be done by Reuters, or will pre-processors such as the news disseminators, do it for companies?

On the other hand, it also presents opportunities; good news or a strong performance is MORE likely to influence the market than it does at the moment.

TM suspects there is much more on this to come, but it is worth watching.

Crystal ball gazing ….again

As is traditional at this time of year, bloggers try to see into the future and predict some trends. As I am out on vacation shortly, I get to go first. So here goes:

The debate on US competitiveness will run and run. This has been caused by a severe fall off in the number of new listings on US exchanges, with losses to European exchanges, notably AIM. Pressure is mounting for SOX particularly to be ‘eased’. I believe this to be unlikely, at least in the short term, within the next year. Too much credibility, lack of evidence of connection between regulation and listing deterrence, and the limited time it has had to bed down, for me preclude any immediate changes. In the longer term now, that’s a different story.

For UK companies, the new Companies Act 2006 will be implemented by degrees. The opportunity to move to electronic annual and other reports will be seized very slowly. Even though there are potential cost savings, issuers – especially the larger ones with most to benefit – will approach this cautiously, concerned with the PR impact. And I doubt that many will be relying on safe harbour protection in the UK, to issue more forward lookinmg information than they already do.

On this second anniversary of the London Stock Exchange being ‘in play’ it is hard to see how change will NOT have happened. Probably the only certain thing in this game is that global consolidation will occur. You can argue the case for a transatlantic triumvirate of NYSE/Euronext, NASDAQ/LSE and Deutsche Boerse/ pan Europe exchange. Whether this makes it easier to attract liquidity is doubtful.

The Transparency Directive will have been implemented by most EU states. The qualification is because there are several even today who are delaying the implementation, due on January 20th 2007, until June or beyond. The good news for issuers is that, in terms of meeting the dissemination requirements, some heavy cavalry is coming the their help. Euronext has strengthened its offerings with the acquisition of Hugin from the Nordic area. OMX has announced its own services, and an alliance with PR Newswire. For its part, PR Newswire has just announced its tie up with Les Echos to offer French listed companies disclosure solutions. And Business Wire is open for business. Together these – and other - providers will be competing to win mandates from issuers. TM considers that quality will tell, and vendors interpreting the new rules literally, and not in compliance with the spirit of the obligations will lose out.

Corporate reporting will be the new theme for 2007. CSR/ SRI, real time reporting, narrative reporting, tagged data…all will be hot topics during 2007.

I must make a note to look at last year’s predictions….

Happy holidays.

Tuesday, December 05, 2006

And the battle on US competitiveness rages on…

2 new developments

First, the private Committee on Capital Markets Regulation has released a report, arguing that regulation, enforcement and litigation have become a weighty burden on the economy. The committee – in its own words “dedicated to improving the competitiveness of the U.S. capital markets by reducing regulation and litigation while enhancing the rights of shareholders” claims evidence that America's capital markets have lost some of their appeal.

The report, rehearsing the regular arguments about competitiveness, warned that the U.S. is losing its dominant role in the launch of new public companies, saying "5 percent of the value of global initial public offerings was raised in the U.S. last year, compared with 50 percent in 2000."

It makes 32 recommendations, including the key “The SEC should adopt a more reasonable materiality standard both for internal controls and financial statements”. This appears to suggest that SOX should be modified. The report also specifically says that the SEC should offer guidance on what information is material (Rule 105-b), and hence should be disclosed.

Meanwhile the change in regulatory structure at NASD and NYSE, could signal a change of heart, leading to a lessening of obligations on listed companies. Under this change, the regulatory oversight of exchange members has been combined into a single organisation. The interesting point about this was that the SEC chaired the press launch of the announcement, showing its support.

Will this lead to a common – and potentially less invasive – regulatory structure for listed companies? There appear to be many who believe it should.

Corporate reporting – back in the news again.

Another month, another batch of surveys and opinions.

The Association of British Insurers has issued an opinion piece on narrative reporting. In its report, the ABI is urging companies to continue improvements in GRI issues, report more in depth on risk issues and provide more forward looking information and KPI’s. ABI investment affairs director Peter Montagnon claimed companies that were already ahead of the curve on these issues tended to have higher share prices than those that did not. It is also worth noting that the ABI is probably aiming its messages at smaller companies. In the FTSE All share, full compliance with ABI standards is achieved by 20% of companies, compared to FTSE 100 where it is 65%.

IRO’s are also not short of advice on how to move beyond basic compliance approaches in dealing with social and environmental issues. AccountAbility has published its own toolkit which allows issuers to work out which sustainability issues are ‘material’ to their underlying performance, and to encourage companies to focus on these issues in their public reporting.

Meanwhile, investment trusts and mutual funds don’t escape the attention of enquirers. Ninety five percent of respondents to a global survey conducted by CREATE (an independent think-tank, specialising in the emerging business models in financial services) and KPMG International on good practice in business governance in investment management, believe that the adoption of sound governance practices in their own businesses is very important in regaining investors’ trust.

This has a background in the mutual fund scandals in the U.S. involving market timing and late trading, which gave rise to the perception that many fund managers did not have sound practices in their own businesses at a time when they were getting ever more involved in the governance of companies in which they invest.

And audit too has its role to play, according the CEO’s of the largest 6 audit firms, who have just published an “essay” with the onerous tile title "Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks". This followed an FT piece that the chief executives of the six biggest accounting firms were set to come out with a plan for a completely new model for reporting corporate financial information, replacing quarterly and annual reporting with a "real-time" model.

In the event, the report seems to be less visionary than inward looking with calls for reduction in liability and governance. However, the report does focus on XBRL – “or perhaps other reporting related technologies". This, it is claimed, will make short term guidance irrelevant, once investors have almost real-time access to financial and other information about companies.

Nonetheless, the central problem with XBRL remains; until other compliance issues such as SOX internal controls, IAS provisions and AS2 are complete, finance directors are unlikely to want to tackle this.

And finally, the Report Leadership Group hopes its project will lead to annual reports that "provide investors with what they want without inundating them with unnecessary detail". Report Leadership is a multi-stakeholder group that aims to challenge established thinking on corporate reporting. To bring its ideas alive the group has demonstrated how these can be applied in extracts from the annual report of a fictitious company, "Generico".

So many reports – so little time.