Mark Hynes - thoughts on corporate disclosure

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

Wednesday, July 18, 2007

And so to the beach…

Time to take Mrs H to some sun and sea.

Meanwhile lots to look forward to on the return. The Walker review published this week, remains open for consultation on disclosure by the private equity industry. The EU continues to ponder one share one vote. And what will the FSA conclude in its deliberations on CFD’s?

And what will best practice Interim Management Statements look like? Lots of variation in the early examples, mostly retailers.

Meanwhile, at end of a busy first half year in the US, the SEC is looking for great things from its corporate reporting committee. And whether some of the ‘hints’ from Chairman Cox’s remarks come to pass will be interesting to watch. An end to soft dollaring (which it seems many would welcome), and the interesting idea of encouraging investors to debate (anonymously) issues with company through a blog.

Will some of these be clarified during the coming months?

Lots to consider on my deck chair.

Thursday, July 12, 2007

FSA concerns on disclosure controls.

Just checking on the FSA website for something yesterday, and up pops a rather extraordinary letter, sent this week by the FSA– or rather the UK Listing Authority. It notes that there have been “several high-profile examples of potential problems in the ongoing financial reporting processes in the non-FTSE 350 constituency”.

It goes on to remind issuers of Listing Principle 2 which requires companies to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations.

Clearly there must have been problems, although they have not been very obvious in terms of censure or sanctions.

Deciding on the information to disclose is one of the more difficult parts of an IRO’s job. It is a theme that occupies a great deal of time in the Investor Relations Society compliance course that I moderate. IR professionals on the course find it useful to discuss how they reach those decisions.

The old Price Sensitive Information Guide provided guidance to IRO’s in making this decision. Today, IRO’s must rely on the rules themselves and on List!, which clearly says at the bottom of every page that its contents do not constitute ‘guidance’.

Indeed the whole thrust of the Disclosure and Transparency rules is to place the decisions on inside information on companies. After all, argues the FSA, who is better placed to make the decision, given the unique circumstances that apply.

Creating the ‘command structure’ to make that decision is by no means easy. Which is why, in context of the IRS Compliance course we have created a starting point – the Internal Rules Guide. Clearly this needs to be adapted to your own situations, but it provides a framework in which to consider the approach.

This aims to help companies in the ‘processes’ of identifying inside information, how to control it, the mechanics of distribution, and limits on speaking to outsiders such as analysts and the media. If you would like a copy of this Guide, please don’t hesitate to contact me.

And by the way, issues and concerns are not limited to companies outside the FTSE 350!

Wednesday, July 04, 2007

Changes in soft dollaring will change companies’ analyst relationships

One of the key focus points for most IR professionals is relationships with their sell side analysts. Research and morning notes from these analysts can sway investors and affect share prices. So what to make of the latest reviews and commentary on the way of life of the sell side?

SEC Chairman Cox – in testimony this week to the House – commented “the SEC has intensified its focus on “soft dollars” that brokers receive from mutual funds”. In other words they are thinking of regulating. This is against a background of years of attempts by regulators on both sides of the Atlantic to end the practice of “soft dollaring”, or at least to ensure that the independence of the research (by separating it from the banks’ corporate finance activities) is protected.

Under soft dollaring, investment banks generate research and provide it to institutional investors. This research is supposed to be paid for by commission income, however the amount of commission spent by the buy side on sell side research is falling fast. And with institutions– especially long investors - increasing their spending on in house research, the value proposition for the sell side in producing the research is getting worse. Add in the compliance challenges for companies in dealing with the sell side as compared to the buy side, and on the surface, sell side research is doomed.

However many believe that however it is paid for, there will be a role for outside research in order to blow fresh air through the thinking at institutional fund managers. And emerging evidence suggests that independent research – certainly outside the US, where EPS guidance is almost non existent - is better at earnings forecasting.

So how does this changing world impact IRO’s? What could / should they be doing to address this brave new world?

The change needs to be recognised. Communications processes and relationships built up over years will need to be re-thought. As the influence of boutique research shops – paid in cash by institutional fund managers to produce innovative research – widens, resources at companies will need to be invested in identifying the influential boutiques and building new relationships. This at the same time as continuing to support the traditional sell side analysts.

There are – at least – 2 positives to come out of this situation.

First, the quality of research should get better. Investors paying hard – rather than soft – dollars for the research will demand quality.

And second, the knotty problem of coverage of smaller companies may be addressed. Independent analysts will not be hamstrung by the need only to cover the most high volume stocks to earn commission. Rather the reverse, they will be encouraged to identify winners outside the usual suspects. In fact, the numbers of analysts covering larger companies could even go down.

Is this purely a US phenomenon? By no means. Even though it is the SEC that has kicked the ball into play again, the transatlantic nature of the investment banking world will create a common standard.