Mark Hynes - thoughts on corporate disclosure

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

Thursday, January 29, 2009

Has the FSA made the disclosure task tougher?

The recent FSA actions on delayed disclosure have cut to the heart of what IR should be able to do for companies. It highlights the raw dilemma facing companies as they suffer from the - highly unpredicatable - business climate. A renewed FSA focus on the disclosure of inside information is the last thing Directors, IR managers, and their advisers need.

The FSA disclosure rules are themselves not prescriptive. Much is left to the judgement of companies and their advisors – and largely we like it that way. Light touch rather than bright lines. And available help – as per the FSA’s UKLA List! – carries a warning that the contents do NOT constitute FSA Guidance. So knowing the definition and making a judgment on what constitutes PSI are two different matters. What kind of judgements must be made?

Timing. What did the company know and when ? Could they have disclosed the bad news more quickly? And why didn’t the board – and the IR team - hear about the problems sooner? Too fast risks providing inaccurate information, and too slow risks FSA action.

‘Estimating’ the likely market reaction. By definition IR teams are not market traders. And as always, the evaluation of the degrees to which news is positive or negative, is a function of an efficient market. Would losing a factory or having a minor product recall constitute a price sensitive event if they were insured losses? Is one positive event a trade off against another, negative, event?

In this instance, it is easy – with hindsight - to paint an 18% drop in share price as proof that this was price sensitive and that they should have known better, but the share price over the following month (during which there was no significant newsflow) recovered to the same level it was at previously and shows flat performance against the market and its sector.

Isn’t the vital test that of knowing whether the company will make the markets’ forecast, rather a fall/rise on a given day? Is a single piece of news on its own likely to serve to confuse or inform the market? Are we expecting the market as a whole – professionals and retail – to build a mosaic of a company’s news? Indeed in some markets, the ‘mosaic’ rule exists to avoid precisely that.

A key test in many markets of whether a disclosure fault was made lies in examining prior practice. If the company has systematically informed the market of individual contracts, or other news, then departure from that habit is not good practice. In this case it seems that reporting won contracts was not its practice. Consequently to have told the market only the ‘negative news’ would have been to mislead the market, who would potentially have marked down its forecasts.

A feature of the Wolfson judgement was its emphasis on the advice received from their IR advisory firm, and delaying seeking input from their corporate broker. It leads to a couple of observations; if as experienced an advisor as Wolfson’s is unable accurately to identify inside information, there must be something wrong with the guidance available. Hence are we heading inexorably towards a situation where advice must be received from a registered advisor?

Was the FSA “proportionate”? There is no implication from any of this that management attempted to make use of a false market for insider trading activities. In that context, this was a large fine for 16 days’ inadvertent non-disclosure, especially given that the share price recovered ground so quickly.

A consistent theme of the FSA ‘guidance’ is that one size does not fit all. Each company, says the FSA, must make its mind up as to its own circumstances. Which is fine, until combined with a 20/20 retrospective view. So, at the end, this may be more a case of poor communications than market abuse.

Wednesday, January 21, 2009

The Return of the Rights Issue

Capital raising has recently been a highly technical business, mostly involving lines of credit and debt issuance. Between the advisors, Treasury and the finance team, prospectuses were created, and contact made with banks and debt investors.

However in these days of expensive credit – where it is available – companies are likely to return in greater numbers to the distinctly untrendy rights issue. This in turn will require IR people to dust off (or learn) some forgotten skills.

There are 2 interesting aspects of this, one structural and one on communication.

The rights issue process itself was designed in a pre-internet, Talisman-settlement era. Rules built in to the FSA Handbook and into the Companies Act require a 39 day sequence of events. However in late November the HM Treasury’s Rights Issue Review Group recommended a much abbreviated process. The FSA is now in its turn consulting on a change in its rules.

Under the FSA proposal, companies could allow as little as 14 days, or 10 business days, for investors to decide to take up an offer of shares. At present, rights issues must remain open for at least 21 days. That delay can leave the shares of the issuing company below the price of the new shares, increase the risk for underwriters of the issue, and create a market instability – as we famously saw last year.

Last week, the ABI weighed in with proposed a change to its guidelines, under which companies would be allowed to issue shares up to two-thirds of their existing capital, rather than one-third, without holding an extraordinary shareholder meeting. That would also speed up the process.

The debate on technical issues such pre emption rights, the usefulness of prospectuses and other detail rumbles on, but most believe that this change is more about fundamentals.

As the marketing of the new shares extends beyond existing shareholders, the communication challenge is about helping investors not only understand the terms of the offer, but also the equity story. And, especially in ex privatisation stocks, helping retail holders decide. Existing institutional holders are likely to be able to decide in a matter of hours whether to take up an allocation, although Transparency Matters knows of one recent issuer who had to undertake 200 investor meetings to get the issue away successfully. The retail investors even more support.

With this comms challenge and the technicals, IR teams are going to need every minute of the 21 days…

Tuesday, January 13, 2009

Where do the FSA short selling disclosures leave us?

The FSA has tried to add clarity to the position on short selling and – perhaps as always – to steer a middle course between contrasting positions.

Most believe that in ‘normal’ times, short selling has a useful role to play when used in investment strategies and risk management activities in providing liquidity, reducing transaction costs and helping ensure pricing efficiency. Others of course stick to the position that short selling is the only form of ownership that benefits if the investment does badly.

However these are far from normal times, and the FSA is reserving its position on what might happen next. It has cancelled the ban on short selling of financial stocks and extended the disclosure regime to June 09, when it will review again. IR people will instinctively take the view that any transparency by investors is a Good Thing, and leads to a fair market all round.

However concerns remain on the disclosure of short selling positions.

First, the thoroughly inconsistent approach by regulators around the world. In the US the ban on short selling was short-lived while Australia’s expires on January 27. But Belgium, France, Germany and Switzerland extended their bans until further notice. Organisations such as the International Organisation of Securities Commissions and the Committee of European Securities Regulators are working on harmonising short selling regulatory regimes.

Top of their harmonisation targets should be disclosure; the rules of disclosure of short positions are a patchwork quilt. Some regulators (Holland, Spain, Belgium have maintained them, whereas others (Germany) have extended them, and one – Portugal – has revoked them. No wonder that key fund associations in the US, UK and Australia joined forces last week to plead for a more consistent approach by regulators.

And these investor organsiations introduce a new note – disclosure should be to regulators only, and not to companies, or to the markets generally. This is not likely to be well received by those responsible for investor relations.