Mark Hynes - thoughts on corporate disclosure

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

Tuesday, September 23, 2008

Short selling bans - the answer or scapegoat?

In normal times, the ability for an investor to sell a stock short is a legitimate tactic, and most often part of a hedging strategy. Short selling creates much needed liquidity.

However these are far from normal times, and the ban on short selling is to be welcomed. With the twin evils of alleged market abuse, as rumours sweep the market achieving the very result that short sellers want, and leverage of banking assets for short selling and other purposes, regulators have had very little option but to suspend this activity. Most seem to be opting for a 120 day period. Whether that is sufficient for confidence to be restored remains to be seen. And is short selling the true cause of the turmoil, or does it simply provides a wonderfully convenient political target?

2 other issues remain. First, the connection between the repeal of the US Glass Steagal Act - which separated deposit taking (and holding) banking from the securities business. It was passed (in 1933) in the aftermath of the last major crisis. If you Google Glass Steagal you get.."At the time, improper banking activity, or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash." Sound familiar?

When it was repealed (only) 8 years ago, it opened the potential for banks to do exactly what has caused the problems of today. And with these same banks being global institutions, the repeal can be seen to have had international repercussions.

Second what will the banning of short selling do to the stock lending industry? It is tempting to believe - as most commentators I have heard seem to - that stock lending is all about short selling. In fact this is far from true. Aside from the original purpose of stock lending (to help settlement where the investor had lost a certificate), stock lending fuels dividend washing, and many other legitimate processes.

So a global temporary short selling ban was an inevitable consequence; is it likely to be a long term panacea? Absolutely not.

Thursday, September 18, 2008

SWF’s to the rescue?

With the financial world in various levels of financial meltdown, the search is already on for solutions. Regulators are inevitably reaching for their rulebooks, others are looking to sources of capital.

Sovereign funds have already proved their value to the world economic system by helping to recapitalise the US banking system over the past year. And the shape and size of their available assets represent a substantial potential opportunity for other banks. But there is still suspicion of SWF's motives and governance structures, and concern that they have the potential to tilt the playing field in global markets.

However the world's main sovereign wealth funds have now agreed to a voluntary code of conduct and to consider establishing a standing committee to represent them in international policy debates. The decisions reached during a two-day summit hosted by the International Working Group of Sovereign Wealth Funds in Chile, come in the middle of the gloom about the sustainability of the global financial system and heightened attention to the role of these state-owned funds.

The 24 “Santiago Principles” will be published in October, but are likely to focus on the areas emerging from the survey – released today. The survey recognises that public disclosure by SWFs varies significantly.

One SWF publishes extensive information describing the objectives of the fund, its institutional framework, agency arrangements, investment policy (including a broad discussion of the implementation of ethical guidelines), risk management framework, audited financial statements and accounting policies, actual portfolio composition (including a complete list of all assets held by the fund and the manner in which it has exercised its voting rights), and performance data. However the survey acknowledges that this is not typical, and whether this will be the 'standard' for all SWF's remains to be seen.

The International Working Group of Sovereign Wealth Funds have had to bridge significant differences between funds with different histories, domestic political environments and mandates.

Some signs of a stabilising – and well governed - force on the horizon?

Thursday, September 11, 2008

Stable performers and a clear story – what investors want?

It is ironic that in good times, it is the stable performers that have problems attracting capital. Unable to generate the kind of returns that get the market going, they risk being dismissed as being dull and boring; a useful part of a portfolio, but not to actively encourage. They have a sound business model, and are likely to have top class governance and transparency, but nothing to set the pulses racing.

By contrast during good times, those with new ideas, innovative plans and products, the potential for new investment seems limitless. Such companies seem to skim over the surface of the challenges faced by “ordinary” companies.

However with the latest bubble having burst (why is it always a “bubble” – from South Sea, to dot com and sub prime – we rely on the same noun), investors’ attention is being refocused on the fundamentals. Those with a clear equity story and old fashioned virtues of stability, continuity, experience and sound management, are being sought after. So how should companies approach this new world?

A recent survey from knowledge@wharton is interesting in 2 ways. First, it highlights what investors are actually looking for in companies’ communications. And since the field work is still going on, it is thoroughly current and topical. Second is the role of the Enhanced Business Reporting Consortium - EBR 360.

Their aim is to persuade market participants to communicate through the Enhanced Business Reporting framework which “makes it possible to create useful classifications, i.e., taxonomies for value drivers, non-financial performance measures and qualitative information. Specifically, an EBR framework enables a more robust use of XBRL taxonomies.”

To those (still relatively few) who are familiar with XBRL, the association is with financial data. Now we see the potential emergence of a structured format for non financial data.

The aim of course is to make our equity story easier to use by (buy AND sell side) analysts. Oh boy, yet another great opportunity whose time is yet to come.