Mark Hynes - thoughts on corporate disclosure

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

Wednesday, September 30, 2009

A change to “standard” listing would present challenges for IR teams

The news this week that UK companies will be allowed to list on the London Stock Exchange using a less rigorous set of rules previously available only to overseas companies has some interesting potential dilemmas for IR teams.

For those who missed it, the FSA trailed – buried in the depths of the FSA Handbook rules update – the change which creates a “premium” listing and a “standard” listing. These terms replace the “primary” listing, and the “secondary” listing that was previously closed to UK companies.

The distinctions are potentially important. Briefly being a ‘standard’ listing removes:
· Pre-emption rights for investors
· The obligation to adhere to the Combined Code (they’d have to comply with the Corporate Reporting Directive instead).
· The obligation to have a sponsor
· Eligibility for FTSE indices
· The need for a 3 year record.

Is this change – much of which comes into force next April – going to have companies rushing for the new standard? Probably not. Pre emption rights for example are jealously guarded, instill confidence among investors thus lowering the cost of capital. The Combined Code is anyway viewed by some top class companies as a departure point, going beyond its minimum to explain the culture of governance within the company, where it fits, how the board works and so on. (See M&S annual report for an example). I suspect many more companies will want to enhance – not diminish their discussion of governance beyond the Code in 2010.

Debatably, sponsors also add a credibility to a company’s offering, especially given the (relatively) new sponsor requirements. And index membership underpins many institutional positions; some passive institutional investors are prevented from buying shares in companies that are not part of an index.

So I don’t believe companies will be rushing for this new option – lower compliance costs or not. Does that mean this change is irrelevant? No. For a start only equity shares are eligible for a premium listing. Instruments such as depository receipts will use the new standard. Also Aim companies seeking an upgrade may choose it as a stepping stone.And an underlying purpose of the change remains valid: it allows the LSE to compete more effectively with other EU exchanges for non UK companies that do not want to meet the higher standards.

The “premium” listing will come to equal prestige – important in this post crisis world. For those companies that do opt for the “standard” listing, the services of a good IR team to help put the company into proper context will be even more essential.

Thursday, September 24, 2009

Stock lending on the rise again.

Stock lending – the process whereby long funds ‘lend’ (ie transfer temporarily) their shares to a third party normally a hedge fund – has started to hit the news again. It had dropped off almost completely since late last year, with the down sizing of the hedge fund industry being part of the problem.

According to a report by consultancy Finadium, loan volumes of US equities to January 2009 had fallen from $717bn in 2007 to $300bn. And almost 20% of lenders had given up the practice altogether, despite the fees it earned and collateral cash it created.

However there are signs that it is on the way back. Lenders are returning to the market, although some are lending only those stocks in most demand – earning higher fees – rather than general lending programmes for lower fees.

And the cost of lending can now be tracked by a new index created S&P Indices. They have introduced a new index series designed to track the average cost of borrowing U.S. equities.

In a heating up activist market, older concerns are also resurfacing, specifically “empty voting” – a term coined by Hu and Black at University of Texas to describe where an investor’s voting rights achieved through borrowing stock, is greater than its exposure to underlying performance.

Now Dr. Hu is reported to be about to be appointed by the SEC to a position overseeing risk assessment. Should we look to see an improvement in the disclosure of positions held by US institutions? Many argue for transparency of both voting decisions and the amount of stock voted by each institution. Only this way can we create accountability.

Thursday, September 17, 2009

Rumours can seriously damage your reputation.

Type the word “rumour” into today and you get 10356 hits. The vast majority have a company name in the headline, and represent a headache/ task for the IR team. The potential for share price volatility is great. And how to handle rumours in a disclosure context is a theme that always attracts discussion among delegates on compliance courses I run for the Investor Relations Society.

And yet regulators struggle to define – never mind create rules around – rumours. The Australian Securities and Investment Commission is the latest to have a go, in its newly released consultation. For example, in the US, FINRA proposed rule 2030 defines “rumor” as “A false or misleading statement or a statement without a reasonable basis”, while in the UK we have the FSA’s Market Watch 30 offering “Information that is circulated purporting to be fact but which has not yet been verified”. Clearly a different interpretation, each requiring a very different approach.

Confidence in the integrity of the markets and efficient price formation may be undermined if the market believes security prices are improperly influenced by rumours that there is information affecting price that is not in the public domain. Today’s crop of rumours for example discuss share sales, takeover bid speculation, management changes and product recalls.

Rumours therefore have the potential to damage carefully guarded and built reputations. Next week I am looking forward to speaking at Communicate magazine’s latest conference “Rebuilding Reputation” and focuses on the financial services sector. One year on from Lehman’s collapse, and some banks are still struggling to win respect from stakeholders.

In my bit, I aim to discuss how failings in governance can impact valuations and some ideas for enhancing the understanding of how the board works. Only one example of reputation management, but a crucial one nonetheless.

Thursday, September 03, 2009

ESG factors growing as investment criteria

The last 10 years have seen a change in companies’ understanding of how environmental social and governance (ESG) factors affect their business operations. And many companies have placed these factors high on their priority lists.

For their part, large investors have increasingly developed public responsible investment strategies and are now more open about how they are implementing them, in many cases through signing up to the UN Principles of Responsible Investment, a framework that enables investors to consider environmental social and governance issues when making investment decisions. It has been very successful, with 573 signatories to the PRI representing some $18,000bn in assets.

This week, UNPRI announced that it was getting tough. Five investors who failed to report on their activities have been delisted for having failed to respond to its annual survey on their implementation of the principles, apparently treating the principles as brand-enhancements, rather than commitments.

It is easy to be cynical about these changes. The UNPRI themselves are full of caveats and protections against having to make different investment decisions. “Where consistent with our fiduciary responsibilities” goes the preamble. And it is also easy to claim – as one fund manager this week did - that “there is absolutely zero evidence that investors will see better performance using an SRI strategy”.

Nonetheless there have been a number of counter balancing events, also this week. Norway's $400bn sovereign wealth fund, the world's second largest, has overhauled its investment strategy to increase its exposure to environmentally responsible companies in an effort to combat climate change.

And there are a growing number of Asian pension funds that have already adopted ESG guidelines. Pension funds in Asia are set to post unprecedented growth in coming years as they seek to meet the retirement income needs of rapidly growing and ageing populations. It is estimated that the number of people in the region aged 65 years and over will more than double between 1995 and 2050. For many larger companies, Asia is already on the road show schedule.
So as IR teams consider their outreach and communications to investors, telling not only the equity story – but the ESG story as well - becomes essential.