Mark Hynes - thoughts on corporate disclosure

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

Thursday, September 27, 2007

To engage or not to engage?

IR is full of challenges; last week, I wrote about valuing intangibles and said that many regarded it as one of the trickiest parts of IR. However some would argue that engagement with activist investors is another major challenge.

And yet according to a new alert from NIRI – the institute for IR professionals in the US – less than a quarter of (US) companies who identify an activist investor on their register, will move proactively to contact them. The vast majority wait for an approach. And the picture is likely the same in other markets.

An important word is “identify” – given the increasing use of derivatives, and the absence of mandatory disclosures by investors holding them, many companies are simply unaware of activists’ involvement. That however is another story.

The odds of IRO’s finding an activist holding their stock are shortening all the time, as the number of activist attacks has risen sharply. More dissenting resolutions and more senior executive resignations are traceable to clashes with their sponsors. And it is not likely to lessen any time soon, with hedge funds and pension funds taking an ever closer interest in earnings performance, greater accounting transparency, and use of more sophisticated earnings measures.

With changes in the sell side, and reduction in their resources, there is a growing reluctance to rely on reassurances of the sell side. Another factor are the new communication channels, which allow disgruntled shareholders to consult and coordinate action more effectively. And these often include lobby groups and charities using shareholdings to sway policy on social and environmental issues.

So what to do? NIRI identifies 2 groups. The ‘reactive’ group suggests research and preparation for attacks. The 'proactive' group notes that a good communications and engagement policy makes it much harder for activists with divisive motivations. This blog always sides with the latter group; transparency is all.

So on that assumption, what else can an IRO do? Some suggestions: meet the activist, and work out what they want – but don’t invite them to meet the whole board, as they’ll try to divide it. Sound out other institutional shareholders with votes necessary to defeat the activist and tell them of the activist’s proposals along with an explanation of why you believe they’re misguided.

The ‘other side’ of course paints a rather different picture. They note that while activists invest for profit like anyone else, they can often be long-term shareholders. Indeed, the "short-term" versus "long-term" distinction is often in their opinion, a screen for poor performance from managers who have failed to deliver results over either horizon. Activists claim to seek to cause the stock price to reflect a company's true value, which is in the best interest of supposed "short-term" and "long-term" investors alike.

So as always, I will argue for transparency – good and frequent communications will lessen undesirable position taking.

Wednesday, September 19, 2007

IR is all about valuations.

If investor relations is all about valuations, then valuations is all about assessing correctly the worth of intangible assets.

Intangibles are vitally important corporate assets and value drivers in a knowledge-based economy. While estimates vary, the proportion of corporate value associated with intangibles is widely considered to be over fifty per cent of a company's value.

For example, the most valuable assets of an innovative company today, such as intellectual property, software investments, staff and managerial expertise, research and development, advertising and market research, and business processes -- have no natural place on the balance sheet. And as the nature of doing business has changed, the list has grown.

They can be recorded as expenses or sometimes, in the case of intellectual property, as liabilities, however frequently they do not make their way onto the books at all.

Each company therefore makes its own valuation of intangibles, guided only by very general accounting standards. Yet today's investors are focussing greatly on intangibles, and a growing number of companies are scrambling to find the methods that will help them better use, develop and communicate about them. In particular, investors have been looking at how social and environmental issues translate directly to market value.

There is no standard, internationally recognised way of making that valuation. None of the existing approaches such the triple bottom line, or the balanced scorecard (used according to Bain and Co by about 57 percent of international companies) have been adopted as a standard by the official financial accounting bodies. But it is perhaps only a matter of time until they are.

Meanwhile, communicating the half of a company’s value proposition that cannot be accurately measured remains an IR challenge.

Wednesday, September 12, 2007

Not blogging tomorrow…the Compliance Briefing beckons

Its Wednesday evening and I sit here finalising the materials for a Compliance course I am moderating for the UK Investor Relations Society tomorrow. Since it is a full day event, I will not blog tomorrow, as I normally do.

This course runs every 3 or 4 months, and many of the attendees are planning to take the IRS’s excellent Certificate in Investor Relations examination. Which is a thorough test of candidates knowledge of the regulations surrounding IR.

Which brings me – not before time I hear you cry – to the point. Every time we run this course, it needs to be fundamentally re-crafted. Such is the slew of new rules, new case studies, new interpretations, studies into best practices and the rest that, in this case, the materials from the May event are useless.

Pity the poor IR professional trying to keep on top of it all. Now where’s that Powerpoint….

Wednesday, September 05, 2007

Power to the people ….Web 2.0 and IRO’s

Last week we saw a community stand up and demand change. The students who rebelled against the bank charges at HSBC using their Facebook connections showed how web communities can influence even mighty forces.

And web 2.0 is all about communities, and increasingly communities of investors. For example, there is an emerging breed of investor trading platforms which allow the users to share trading experiences. Some of these online brokers are using social networking as a building block of their services.

Even though they differ in many ways, platforms like TradeKing, Zecco (Zero Commission Costs) and thinkorswim are all developing their businesses in ways that offer more than just trading. Members – who are carefully screened before they join – can share their investment strategies, key stocks they track, and recent transactions. Some platforms allow blogs about trading conditions, and chat rooms.

A key to this is that investors no longer want to be just on the receiving end of news and materials, rather they want to expand their reach as communities, as web 2.0 encourages, and to influence share prices.

So of course the challenge – especially for those companies with substantial numbers of retail investors – is how to keep track of what’s being said, and in how to counter it where necessary.

Few investor relations officers ‘get’ the phenomenon, although there are events out there that aim to share with PR and IR professionals, the different types of communities that are springing up.

Yet another skill set for the beleaguered IRO’s to master.