Mark Hynes - thoughts on corporate disclosure

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

Thursday, August 20, 2009

Cooperation by investors is OK, says the FSA.

TM’s recent post below “Engagement is the new black” missed a word in its title: collective. The announcement yesterday from the Financial Services Authority helpfully clarifies the rules of engagement covering cooperation between activist investors.

Investors can work actively together under certain conditions – especially on governance issues - without falling foul of European Union and UK rules against market abuse and acting in concert. But investors cannot trade on information they may gather while working together.

The recent FRC consultations on the Combined Code, and the Walker review have both encouraged institutions to engage with banks and other companies. However there had been concerns that collective engagement risked breaking MAD rules, as well potentially as the DTR rules on shareholder disclosures, including those newly issued on CFD disclosures.

A few questions arise; will these clarifications create a marked increase in engagement at all, let alone collectively? Probably not; long investors tend to have their own policies, which are unlikely to change, blandishments from the activist community notwithstanding.

Nonetheless engagement on ‘governance’ issues is clearly on the rise. One of the challenges for IR teams is in the extent to which they are part of the governance information chain. Many UK Plc boards regard this as a subject for them, not the traditional IR processes.

Get your retaliation in first, as a great Irishman once said. Avoid governance issues arising in the first place; however, companies broadly are not always brilliant at communicating around governance issues. A look at the annual reports of many companies for instance will show a marked reliance on the ‘compliance with DTR 7 and the Combined Code’ approach, and little on their use for wider communication.

For example, few use the (mandatory) board evaluation process to highlight what the board is working on. Few find ways of explaining the decision making processes and avoiding group think. And even fewer add colour to the succession and board composition processes. A notable exception to this is the latest report from Marks and Spencer, a report which raises the bar on governance communication.


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