Investors the key to changes to the Combined Code.

Cometh the downturn, cometh the regulatory review. Now it’s the turn of the Combined Code to be assessed. In its last review in 2007, only modest changes were proposed and implemented last year. Largely the Code won a resounding thumbs up from both issuers and investors. It has been regarded as state of the art. However the latest review emphasises the role that investors should play.

City folks are pointing out that the financial crisis justifies another look. The review of the Code comes against a background where the Walker review is looking banks’ corporate governance, and where the CEO of the FSA has highlighted the need for non-executives to commit more time and improve their technical skills, making them more like full time executives.

What does this mean for the beleaguered IRO?

First, what is the FRC looking at precisely? Aside from relatively obvious area of review, such as how board structures are working, and the support the board receives, the review will focus on the role that institutional investors can and should play.

This rather turns the Code and its purposes on its head. There are hints that revised commitment from leading institutional investors is needed to monitor companies’ application of the Code effectively and to make their views publicly known when they are not happy with a company's response to their concerns.

For many IRO’s, the Code has been the preserve of the company secretary, and the ‘compliance’ aspect has been uppermost in companies’ minds. However, as always, the IRO is the key channel to the investors, and managing how investors view the company and express their concerns cuts to the heart of the day job.

Making your views known to the FRC on what this means for IRO’s will be important.

How many reviews do we need?

The inevitable regulatory response to the challenges of the last few months is now in full swing. Yesterday’s Turner report focuses heavily on banks and the wider financial markets structures, but there are some clues for the wider corporate community of where change is coming.

One of these is in corporate governance where this week the Financial Reporting Council launched a review of the Combined Code to scrutinise board behaviour. And the chief executive of the Financial Services Authority, has said that non-executives would in future need to commit more time and improve their technical skills.

Despite the Code having been reviewed as recently as 2007, the FRC said they felt the financial crisis justified another debate. Connected to this is the Walker Review commissioned by the Treasury into banks' corporate governance, complementing the FRC wider Combined Code review.

But much of yesterday’s headlines on the Turner review were about the end of light touch regulation. Whether we eventually see a much more fixed regulatory structure in the UK – and many hope we do not – is open to question. What we are undoubtedly already seeing is a tougher FSA enforcement regime.

With the rise and rise of the actions on market abuse, and the much debated actions against companies failing to disclose inside information, the FSA has laid out its stall to make enforcement a priority.

Finally Turner was also reported as taking aim at short selling, and whether it should be outlawed. With many regulators having ongoing public enquiries (UK, France, Australia...) and others having already instituted changes in the disclosure rules (Hong Kong, Bulgaria...) this signal will be watched carefully.

The challenge with these reviews is that they can (sometimes) turn into new rules. And in this instance, those may well impact IR.

From IR to SR?

One of the changes coming from the 2006 Companies Act was those of Directors Duties. These have been upgraded to include a duty not only to investors but also to the wider stakeholder community. Thus Directors are duty bound to consider in their decisions, not only on members of the company – those who own the business – but also those who work in it, supply it, the community around it, those impact by its environmental performance and so on.

So are we in an era where in house IR managers are moving from focussing their communications almost exclusively on investors, to one where they consider the wider stakeholders? In fact, from Investor Relations to Stakeholder Relations? And as the company upgrades its focus on wider stakeholders, what are the impacts on shareholder value creation?

An interesting new study Over the Long Run: Short-Run Impact and Long-Run Consequences of Stakeholder Management, Roberto Garcia-Castro and Miguel Ariño of IESE and Miguel Canela of Barcelona University proposes that investment in stakeholder management over the longer term increases Market Value Added (MVA). (The authors use MVA in preference to traditional accounting-based measures such as Return on Assets or Return on Equity).

For example, a company that chooses a beneficial employee relations policy, costs incurred may include bonuses, training, amenities, above-average wages and so on. While these policies may have a negative impact on performance in the first years after investing, in the long term there is a significantly positive relationship between such stakeholder management policies and MVA.

From an IR perspective, it emphasises the need to communicate accurately the context in which investment in policies which benefit stakeholders will create shareholder value.