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.


  • At 7:49 pm, Blogger CrypticLife said…

    Theoretically, most jurisdictions have exchange requirements for ensuring holders of over 5% (or so) positions need to file a report. Though most of these statutes cite penalties for failing to disclose, I don't think I've seen any examples of these penalties being enforced. Do you know if the mandatory reporting requirements currently in effect have any real teeth?

  • At 8:39 am, Blogger Mark Hynes said…

    I agree totally that enforcement is the key. I am only aware of one enforcement action (Bonnier/Indigo Capital by the FSA in 2004).
    Of course individual companies in some countries have access to legal redress under Section 793 of the UK Companies Act and its equivalents.
    But these rules do not apply to the derivatives used by activists. One can only hope that as the FSA and CESR consider what to do about this, they a) ensure proper disclosure of the underlying beneficialk owner and b) put proper surveillance and sanction processes in place.
    Thanks for the comment!


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