Mark Hynes - thoughts on corporate disclosure

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

Thursday, July 30, 2009

“Engagement” – the new black

It seems to be the governance word of the moment. Engagement is being positioned as at least one of the buttresses in place against a future ‘massive failure of corporate governance’. Indeed some are fearful that engagement will be something on which government will press to legislate.

So a couple of writings this week caught the attention, which may interest IR teams.
An interesting enquiry among investors and a spread of FTSE Chairmen and CEOs on shareholder engagement with FTSE companies. It was conducted by headhunters JCA Group on behalf of the FRC.

The intent and thrust of the paper is set out in the first sentence. “From our research it is clear that the key task in shareholder engagement is to improve the ongoing quality of the dialogue between shareholders and companies.” So is the view the IR profession isn’t doing its job very well?

It also quotes verbatim from interviews. For example “Alongside ‘investor relations’, companies should have a ‘shareholder relations’ process. Chairman should meet the top 5, one could have a small group to cover the next ten; maybe the SID should meet the top three. New non-executives should be expected not only to offer [but actually] to meet the top 5 shareholders.”
To be fair there are a lot of useful insights into how the buy side and senior management perceive the investor communications process to be working now. The FRC discussion paper which references this work is open for comment until 9th October 2009.

However what concerns is that ‘engagement’ is seen by all as wholly beneficial. The argument seems to go that if investors engage, governance will improve with consequent enhanced returns. Obviously it has its place, but a spirited counter argument was put in the FT earlier this week.

For a start, should investors be the ‘policemen’ of good governance at the companies in which they invest? Isn’t their fiduciary duty to the sources of the funds (pension holders, unit trust investors, insurance policy holders and so on)? And does enquiring closely as part of engagement risk investors putting themselves on the inside, and unable to trade? And resources are always limited, let alone at this economic moment. Will investor organisations have sufficient to engage with all the companies in which they invest?

So the wider question remains – who should really oversee UK Plc; entrepreneurs and professional managers, or investors?

Merit as always on both sides of the argument, but in either event the IR profession is under scrutiny.

Thursday, July 16, 2009

EU-wide short selling disclosure rules?

Useful liquidity providers, and an informed source of true market value, or scavenger taking advantage of ill fortune in bad times? The hedge fund industry is fighting back against the latter image, notably in the FT whilst regulators look at how to ensure that the problems of last year are not seen again. CESR’s proposals would require a significant amount of reporting.

We have seen so far 3 types of reaction from regulators; outright bans on short selling of financial stocks, now mostly being unwound, the reintroduction of US uptick rules preventing any trade being executed at a lower price than the one prior, and increased disclosure of short positions.

CESR has proposed a two-tier system under which a short position of 0.1 per cent would have to be disclosed to the regulator of the most liquid market in which the stock trades. A short position of 0.5 per cent or greater would have to be publicly disclosed to the market as a whole. CESR also has proposed incremental steps of 0.1% of issued capital for disclosure.

This is as compared to the proposed regimes in Europe, where a standard of 0.25% disclosure to the market as a whole is emerging as the proposed norm.

A couple of questions: first does the EU actually need a common standard? Given the wildly different approaches take thus far by national regulators who understand their markets, possibly not.

And what would IR teams do with the information if they receive it? Simply knowing would be helpful, perhaps, but engagement in the same way as with a traditional long investor is unlikely.

Finally, an interesting part of the CESR consultation refers to any short selling, whether done through a regulated exchange, or MLTF. Another sign that the activities of dark pools are coming under increasing transparency.

Thursday, July 02, 2009

Technology, trading and investor relations

It is a moment many an IR person dreads. A significant number of shares have changed hands overnight, and the FD wants to know why. Unfortunately, there are an increasing number of occasions when the technology has hidden the reason – or even the transaction – from view.
The good news is this may be about to change, following 2 announcements this week.

First, dark pools. Or more properly, multi lateral trading facilities. Dark pools of liquidity are crossing networks that provide liquidity that is not displayed on order books. They offer institutional investors many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their hands to others. Neither the price nor the identity of the trading company is displayed.

In new developments in dark pools. regulators have said this week that they will look into what Mary Schapiro, SEC Chairman, describes are “the potential investor protection and market integrity concerns raised by dark pools”. The European Commission is also looking into whether more disclosure around these trades should be required. However new platforms continue to arrive. BATS – a major player in the US - has unveiled plans to launch a pan-European dark pool, competing with the growing number of services launched by traditional stock exchanges.

Also in the US, NYSE and Liquidnet announced a cooperation that will allow NYSE-listed companies to see the ratio of intended buy orders against intended sell orders. This should help companies to react more effectively to developments that may be moving their share price - such as market rumours - by analysing buy and sell trends on the stock in the dark pool.

And almost inevitably, Twitter has found its way into trading systems. US-based technology firm StreamBase has announced the capability to monitor "tweets" for price sensitive information, and turn them into buy/sell orders to be executed through algorithmic trading systems.

All of which causes this old timer, who remembers blue buttons and jobbers, to shake his head in wonderment.