Mark Hynes - thoughts on corporate disclosure

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

Tuesday, February 27, 2007

Two contrasting views on US equity ownership of foreign stocks: will it affect IRO’s targeting of US investors?

The key US institutional managers continue to grow in the influence, so why has E*Trade, the trading platform aimed squarely at individual investors, decided to promote non US stocks?

Research is now showing that institutions own more than 61% of US equity and that this number has grown rapidly in recent years, up from 30% in the 80’s, and 50% in 2002. And the same research is showing that ownership of foreign equity is also rising fast. Clearly, as a result, European companies in their new investor targeting have focussed their energies on relevant sectors in this area.

However this week E*Trade made perhaps a surprising announcement: The New York-based company said its new Global Trading Platform will allow E*Trade's individual-investor customers in the U.S. to buy, hold and sell foreign shares in their local currency in six key markets. E*Trade is starting with online trading for stocks in Canada, France, Germany, Hong Kong, Japan and the United Kingdom, but it also is offering broker-assisted trading in additional countries and hopes to eventually include as many as 42 international markets and related currencies in the online system.

Buying foreign equity directly goes beyond more usual ways for individuals to invest overseas, such as buying an internationally-focused mutual fund or the American depositary receipts of a foreign company.

In response, E*Trade cite a recent survey of their brokerage customers, which found that fully two-thirds of those polled are interested in trading on exchanges outside the U.S.

But the expanded access to foreign equity raises questions about access to information. E*Trade notes that their investors will find different standards in areas such as corporate disclosure, accounting, regulation and business customs. Information on foreign companies may not be as easily available as on American companies.

Which suggests that European companies planning their US IR communications should consider using the broadcast media to reach these investors.

Thursday, February 22, 2007

Earnings guidance – the latest thinking from US companies

Every now and again, you get to work with some outstanding people. The Disclosure Advisory Board – on which I sit – is one such occasion. Membership comprises a group of thoroughly experienced and wise investor relations professionals, who have just released a white paper entitled “Guiding Investors & Analysts: How Much Information is Enough?”. The paper, discussing best practices in analyst guidance, comes at an interesting time. As the US Senate and the financial services industry as a whole, considers the implications of making New York once again a financial hub, new practices – and regulations – will emerge.

The Disclosure Advisory Board has examined how issuers should “guide” the market and their recommendations include:

• All companies – large and small - should issue regular guidance. However, guidance is not an all or nothing proposition. One size of guidance does not fit all.
• Guidance should provide clear, consistent communication about an entire business. It should take into account qualitative and quantitative measures and be comprised of both company-specific and industry-specific information.
• Concerns that guidance overemphasizes short-term performance are overblown. The benefits of guidance far out-weigh the perceived risks.
• As financial markets around the world converge, and more companies contemplate listings outside the U.S., robust guidance will provide investors with comparable information with which to evaluate issuers. U.S. companies wishing to compete for global capital may need to consider disclosure that will put them on par with companies based elsewhere.
• The decline in sell-side coverage is creating an opportunity for greater communication from public companies. According to a survey by the National Investor Relations Institute, approximately 35% of NYSE and NASDAQ companies have no analyst coverage.
• Fuller disclosure can combat unwanted hedge fund interest. Companies with concerns about the potential volatility that hedge funds can create may be able to forestall hedge fund behavior with better guidance.
• Appropriate guidance enables companies to benefit from fairer valuations and lower capital costs.
• Over time, good disclosure will bring integrity back to the market.

The Disclosure Advisory Board – learn more at - would love to get any feedback you have on these issues.

Wednesday, February 21, 2007

The rise and rise of the US institutional investor

The role of the US individual investor has always been seen as vital. Back in the fifties, according to Federal Reserve stats, they owned over 90% of US equity. By the 1980’s this had slipped to 70% and by 2000, it was 50/50 with the institutions.

New research by the Conference Board to be published shortly, indicates that the institutions have grown to 61% ownership. In other words, the US is beginning to parallel European markets, where institutional ownership is often over 80% of most companies. This has potentially important consequences for those seeking to raise capital in the US.

Within the small print of the research is confirmation of the rise of the "activist" state and local pension funds who have trebled their percentage share of U.S. equity markets, while private trusteed corporate funds (who rarely participate in corporate governance activism) have declined in their percentage share of U.S. equity markets.

Since the state and local fund investors tend to be very demanding of governance reforms, not only of local companies, but also the (fast increasing) number of foreign firms in which they invest, this change could have a major impact on the IR approach needed.

As we approach road show season for companies with calendar year ends, activist investors are sure to be more and more on the hit list.

Thursday, February 15, 2007

“Empty voting” – is it of concern to you?

Business is booming in the lending of shares. That business has nearly doubled in the past five years, according to one report. And with companies reporting that 40% and beyond of a company’s free float is lent at any one time, the issue is of growing concern to issuers.
A recent story in The Wall Street Journal reports on the phenomenon of “empty voting” in corporate governance in the US financial markets, and credits 2 US university professors with inventing the term. Investors use a simple way to profit from the workings of public companies: Borrow their shares, and then swing the outcomes of their votes.
In some cases, the strategy has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does -- without their ever having to own any stock themselves. Some outside interests have used the strategy to hide their voting power within a company until the last moment. Others of course deny that this practice exists – or at least is commonplace.
Stock lending began as an informal practice among brokers who had insufficient share certificates to settle their sold bargains, often because the owner had mislaid their certificates.
Today, however, securities lending is an important business, whereby securities are temporarily transferred by the lender to the borrower, who is then obliged to return the securities on demand or at the end of the term.
However it highlights 3 issues of concern to issuers.
First, if the lending investor is not aware that their stock is being lent, then they make have problems voting their intentions, and IR’s seeking to build relationships, and with a significant vote coming up, can be misled.
Second, stock being lent in volume is sometimes an indicator that a company’s equity is being shorted, perhaps by a hedge fund. Registrars can often help in identifying patterns which may be stock lending and shorting.
The third issue is whether there may be some element of double counting of votes. For voting effected through Crest, this should not be a problem, as Crest ensures accurate counting. However where the vote is exercised through a proxy form, companies need to ensure that votes are being exercised properly.
What is the regulatory position? The FSA is promising to consult on the wider issue of disclosures of “non material” positions, including stock lending. And one of the largest pension-fund managers, Hermes, is said to have called for regulators to outlaw voting altogether by borrowers of shares.
Meantime, the challenges in identifying and managing voting intentions by investors who have lent their shares, continue.

Wednesday, February 07, 2007

The myth of a “transatlantic” market for equity.

As companies and their Investor relations Officers on both sides of the Atlantic prepare for their road shows, investor days and the like, many will operate under the assumption that the fundamentals of the markets are similar. However a new initiative from the accounting profession is highlighting that corporate governance issues such as disclosure structures, board processes and shareholder interactions are so distinct as to make common messaging in corporate governance compliance very difficult.

Of course corporate governance is a means to an end and not an end in itself. Good corporate governance aims to inspire trust in investors. However if those investors are anticipating different things, how can companies satisfy both communities?

In both systems, boards and institutional investors are therefore mutually responsible for acting in the best interests of a shared beneficiary. However it is application of that responsibility that differs. UK shareholders have the authority to appoint or remove a director, which creates an environment where the use of such power is rarely needed.

In the US by contrast, shareholders can do little to influence boards except to withhold votes, through litigation, or, provided that their portfolios are not index-linked, selling their shares.

Also, in the UK, the domestic regulation supports dialogue between boards and shareholders, allowing them to work together, whilst in the US, they run the risk of falling foul of Regulation Fair Disclosure.

And of course, “disclosure” is achieved through a different approach; the rules based requirements of US companies, allowing investors to make their own minds up, against the UK approach of requiring companies to decide what is material and disclosing it – and to justify that decision afterwards if necessary.

These are just some of the issues to be addressed under the new spirit of ‘competitive’ regulation – as outlined in “Sustaining New York’s and the US’ Global Financial Services Leadership” a report backed by U.S. Senator Charles Schumer and New York Mayor Michael Bloomberg.

Meanwhile, IRO’s on both sides of the Atlantic are operating in different corporate governance climates, which requires a difference of approach to institutional investors – making their task even more unenviable.

Thursday, February 01, 2007

Scratch an IRO and you are likely to find someone who has concerns about CFDs. Wake up to find a significant share stake building is underway – and the IRO knew nothing about it. With limited disclosure obligations for contracts for difference – and other derivatives - this is not an unlikely occurrence. Ask the people over at Photo-me for instance.

2 things have happened which point towards improvement in the transparency of these instruments.

First, an informal consultation is being conducted by the Code Committee of the Takeover Panel, into the effectiveness of the rule, introduced in November 2005, which requires disclosure of stakes above 1% of any class of securities, including therefore CFD’s, during an offer period.

Whilst this consultation does not therefore address the issue of wider disclosure OUTSIDE an offer period, it does present an opportunity for issuers to have their say. The Investor Relations Society is including a question on this in its weekly Bulletin, and issuers have the chance to contribute to the debate in this way.

The second intervention came from the hugely influential Association of British Insurers, representing more than a fifth of the UK listed equity investment. They have called for the regular disclosure of CFD holdings – and not just during a takeover bid.

The ABI was quoted in the Sunday Times as saying “"Through this consultation the Takeover Panel has shown that a modern disclosure system can work, that it doesn't result in an over-burdening of information or loss of liquidity and brings genuine benefits to the market. We hope the FSA (Financial Services Authority) will look closely at adopting this model across the market at all times - not just in bid situations."

And issuers are interested to see the disclosures increasing not only in CFD’s but in stock lending situations as well.

Given the ABI’s influence, these events may give a fillip to the FSA’s work in reviewing the disclosure regime. The FSA indicated that it would consult on the issue in the Spring.

Whether they will be influenced by the recent changes to the listing of investment funds – notably hedge funds – remains to be seen.