Mark Hynes - thoughts on corporate disclosure

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

Thursday, March 29, 2007

From US, to EU, to Hong Kong, to retail sales of hedge funds, and to empty voting.

Back from holiday, to find lots going on.

In the EU, the Commission (finally!) published the rules on the Transparency Directive. In mid March – nearly 2 months after the live date of January 20th - the Commission posted the final rules on its website. Extracting sections of relevance to the means of meeting disclosure:

" The mere availability of information, which means that investors must actively seek it out, is therefore not sufficient for the purposes of that Directive. Accordingly, dissemination should involve the active distribution of information from the issuers to the media, with a view to reaching investors. "

"Additionally, by way of minimum standards, regulated information should be disseminated in a way that ensures the widest possible public access, and where possible reaching the public simultaneously inside and outside the issuer’s home Member State."
And the new rules also require competition in the provision of services to issuers.

Pretty clear then. Unfortunately, in Hong Kong the Exchange has taken a retrograde step. In ending – from June 2007 - the obligation to publish an advertisement, it has obliged companies instead to use an exchange-mandated system for delivery of news to the exchange, who then publish it. Just like the bad old days of pre-TOD monopolies.

Meanwhile over in the US, the SEC adopted its new rules (see posting on January 11th) for deregistration by foreign companies as adopted by the Commission March 21, 2007. By eliminating conditions that had been considered a barrier to entry, the amended rules will encourage participation in U.S. markets and increase investor choice.

Also in the US, NIRI held a webcast on empty voting, the phenomenon where long investors can (sometimes unknowingly) lend their securities to hedge funds and others to vote. This issue will run and run in my view, and we may well see action from the SEC. To access the webcast and here views from Professor Black of the University of Texas (and author of a key report on the matter), the CIO of Lord Abbett and yours truly, please visit

And finally the Financial Services Authority has proposed rules allowing retail investment in funds of hedge funds and other alternative investments sold by firms authorised in the UK.

Under the rules, the new vehicles will be able to invest in any offshore funds, allowing the creation of funds of private equity or property funds as well as hedge funds. Managers will be required to carry out proper due diligence on their investments and be sure there are "robust" valuation practices.

And there’s the rub. Valuation is one of the key concerns of regulators and investors because of the potential conflict of interest when managers both calculate the value of assets and are paid according to increases in value. However, hedge funds in which the new vehicles invest will not be required to have independent valuations, which will cause some concerns.

Very fast round up of what’s going on in corporate transparency this week.

Thursday, March 15, 2007

Private equity – greater transparency on the way?

It has been a big, high profile month for private equity. And as the size of the industry grows, it is coming under increasing scrutiny – in a way that perhaps stock exchange listed companies have been over recent years.

First the politics. Against a background of emotive words such as “asset stripping” and 'casino capitalism' from some politicians, others have been springing to the defence of private equity. The Shadow Chancellor hailed the sector as a “beacon of excellence” in a recent speech to the British Venture Capital Association (BVCA). He noted that the real winners from private equity were the millions of people with pension funds invested in the sector.

The stakes have been raised as private equity has made increasingly high profile incursions into listed companies. Household names like Birds Eye and the AA, and very recently Sainsbury and Boots, now either belong to or are the targets of private equity. And in the US, the property sector has seen huge activity in recent months including at Trizec, Bedford Property Investors, Gable Residential Trust and Centerpoint Properties.

However, as the profile of the industry grows, so does concern about its transparency. The days of secrecy need to be ended.

So many have welcomed the announcement last week by the BVCA that it will form a working group under the chairmanship of Sir David Walker to examine ways in which levels of disclosure in companies backed by the UK private equity industry could be improved.

The areas it will explore will be very familiar to listed companies.
Ø Appropriate levels of narrative and financial reporting.
Ø The extent to which private equity companies should increase the level of reporting.
Ø The timing of any increased reporting for PE-backed companies.
Ø Clarity and consistency of practice with regard to valuation methodology, its verification and disclosure to investors of returns and fees.

Whilst not quite a mirror of the FSA’s new Transparency Rules covering listed companies, many will find it more of a level playing field. The new proposed guidelines will be published in the autumn.

Meanwhile on the other side of the Atlantic, more consistency and transparency in private equity valuations is promised. The Private Equity Industry Guidelines Group has updated its U.S. Private Equity Valuation Guidelines. "Private Equity Investments by their nature are difficult to monitor," said PEIGG member Kevin Delbridge. "To evaluate manager performance on an interim basis, to make manager selections and to make asset allocation decisions, we need results reported on a common basis. Fair Value as outlined in the Guidelines, provides that consistent basis."

So progress in achieving more transparency. But still a long way from the compliance required from a listed company.

Thursday, March 08, 2007

At cross purposes on TV – we needed “guidance”.

When a business TV station takes an interest in a subject normally reserved for debate among IRO’s, you sit up and take notice. So it is this week with “guidance”.

Wikipedia, the encyclopedia says “guidance is a publicly traded corporation's official prediction of its own near-future profit or loss, stated as an amount of money per share. Guidance is usually given in a quarterly report to forecast the corporation's performance in the next quarter. Guidance is an aid to financial analysts and the stock market in valuing the corporation, and helps prevent overvaluation.”

Last Tuesday March 6th ,CNBC invited Dean W. Krehmeyer the Executive Director of the Business Roundtable Institute for Corporate Ethics and me to discuss the issue live on air.

This is against a background of new research coming shortly from the US Chambers of Commerce, and earlier work from the Business Roundtable, National Bureau of Economic Research, CFA Institute, McKinsey and others. Most of these researchers conclude that “guidance” is a BAD THING – with huge consequences for the share price, management focus and all the rest of it.

However, there is a dissenting voice. The Disclosure Advisory Board – which I chair – believes that guidance should be modified, not banned. The arguments go like this.

Guidance is not an on/off switch. One size of guidance does not fit all. Every public company has to fit its communications strategy to its own needs, and not be bullied into thinking that short term guidance is always “bad”. For most companies, communicating a longer term picture of goals, strategies, acquisitions, business sector and geographic metrics, is essential – and probably a legal obligation.

The Board believes that this is the new guidance; helping skilled analysts reach their own conclusions and valuations of the business. This will allow analysts with particular insight and understanding to distinguish themselves from their peers, and hence be more effective for their clients.

The Board also believes that this longer term guidance lies at the heart of the IRO’s skills; building a picture and providing progress reports against that picture will guide analysts to a fair valuation, WITHOUT creating the negative consequences so feared by the distinguished researching organisations.

It is also worth noting that for some companies short term guidance absolutely WILL be appropriate. Newer companies, the (unfortunately) growing list of companies with no analyst coverage, and even for companies lacking liquidity, seeking a better mix of short and long term investors, providing short term guidance offers a solution.

So please join our campaign – Redefining Guidance. Lets start with a changed Wiki – and maybe the next TV interview will record the transformation in the market’s understanding of public companies businesses.