Mark Hynes - thoughts on corporate disclosure

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

Thursday, May 28, 2009

The trouble with IMS’s...

One of the proposals when the Transparency Obligations Directive was in discussion in Brussels was whether to oblige companies to produce a full quarterly financial report, a l’Americain. After all went the argument, a significant number of European member states already require it; why not make it a pan EU requirement?

There are of course a great number of drawbacks to that as an idea, including a risk of increased short termism, so after a good amount of lobbying notably by the Quoted Companies Alliance, a solid (you might almost say British) compromise was reached.

The Interim Management Statement was born, and has been troubling companies and their advisors ever since. So we have been looking forward to a much trailed FSA review of IMS, and any “guidance” they can offer. And indeed it does offer a few clues that are worth considering, although it specifically rules out – probably to the relief of all – a template approach.

Aside from highlighting that some companies haven’t produced an IMS at all, the FSA review notes that the market regards IMS as useful communications opportunities, and that by and large there has been good compliance. However the review focuses especially on 2 issues: materiality and financial performance.

On whether a previous announcement is ‘material’ the FSA has declined to offer any further definition, although it does say that issuers may “find it helpful to consider the impact of an event/transaction on its financial position”. This still leaves a fairly wide margin of options.

On financial performance: ‘a general description of the financial position and performance of the issuer and its controlled undertakings during the relevant period’ as the DTR’s say, the FSA notes this is biggest problem area. This may be because of their statement in List! 14, that “We believe that IMS may not require financial data in certain circumstances.”

Some issuers have included data such as debt ratios, cash flow, gross and net assets, NAV’s and divi yields. In profiling this, the FSA may be giving a clue as to what they would like to see, although they do highlight that either narrative of financial data would be OK.

Finally they observe that different financial performance reporting indicators have grown up within different sectors, and that this is not a bad thing. So maybe when all is said and done, watching what the other guys do will continue to be the practical step. And after all, producing an IMS is a heck of a lot better than the originally planned quarterly report.

Wednesday, May 20, 2009

Walker Review – the missing link

The Walker Review closes for its initial public feedback at the end of next week. This independent review looks at corporate governance in the UK banking industry. Unsurprisingly, there are many who create a connection between the massive failures in the banking sector and an absence of corporate governance.

What is however surprising – at least to me – is the lack of focus on disclosure and reporting in the review. The Treasury website highlights 5 areas on which the review will dwell, but they do not include how the communication of governance should be enhanced. Why does this matter? Well, for one thing, much has been made of the role of institutional shareholders in engaging effectively with companies and monitoring of boards. But how can they monitor that which they cannot see?

The current reporting model is too dependent on the financial, technically complex, aspects of reporting, Narrative reporting on the non financial value drivers of the business has been subject to less intervention. Consequently too much short term focussed data is available, but not enough information.

Many companies take a largely compliance approach to governance reporting, However there are some great examples of good practice, which could be adopted more widely. For example, the reporting of some sub-committee activity to explain what issues the sub-committee has been dealing with over the year. There is a strong argument that the board should explain in broad terms the scope and nature of the issues that it has dealt with over the year.

Another example would be explanation of the how the board has got independent feedback on the overall board performance, discussion of the outcomes of the evaluation and what the board plans to do as a result. And of course, with executive compensation top of mind in this annual meeting season, transparency around how the Rem Comm works.

Whether good governance is working or not depends on many things, but an important indicator is the company's overall commitment to transparency and its ability to provide a coherent picture of key success factors for the company.

It would be good to see the Walker review include this in its thinking.

Thursday, May 14, 2009

It's that word again - transparency

It has been impossible to turn on the TV this week without hearing that ‘transparency’ is needed. The theme that public companies have been used to for many years – the demand for greater insight in to their affairs – has come home to our lawmakers.

I had a very interesting discussion early this week with a senior IR person who had been through a tough baptism into IR. She had taken the IR reins a few years ago at a company going through significant turmoil. Products were out of date and new ones not yet arrived; the share price was tumbling, each set of results produced further downgrades, and the (generally very supportive) long investors were getting concerned. And the financial profile of the company started looking attractive to new value investors.

I wanted to know more about this for a strategic IR course I am running in June for some East European IR directors. There were a number of lessons that emerged from this case study, but one that stands out was the decision to expand their disclosures. Putting more information into the public domain was a conscious decision, and aimed at supporting existing holders, providing insight to the sell side and to potential new investors.

The result was good news, and the company went on to great things.

I was reminded of this theme in reading the very helpful survey published by Citigate Dewe Rogerson. A key focus of the survey was on disclosure and guidance, where the survey reported that over 40% of companies have increased their disclosures over the past year and 28% plan to increase disclosure this year. And more companies are, according to the survey, offering ‘guidance’. This is very much European style guidance – focussing on non financial value drivers – rather than US style EPS point and figure guidance.

Telling the company story has never been more important. And no doubt our lawmakers will get there soon.

Wednesday, May 06, 2009

New regulation of rating agencies from 2010 will have an impact on investor relations practitioners.

Credit rating agencies wanting to operate in the European Union will have to register and be supervised from next year after European Parliament last week signed off draft rules proposed by the Commission.

The new regime will require agencies to apply to the Committee of European Securities Regulators in Paris for registration and be overseen on a day-to-day basis by “colleges” of national securities regulators. The new rules, fully operational in 2010, will impose requirements on ratings agencies – ranging from disclosure of the models and methodologies on which they base their ratings, to corporate governance standards, such as the presence of at least two independent board directors whose remuneration is not tied to the agency’s performance.

Traditionally many companies have thought of dealings with the ratings agencies as the preserve of Treasury, with the occasional burst of activity when a particular analyst wants a presentation on the strategy.

However in recent times, as debt has become more expensive, the credit rating has become an ever more important consideration. And as debt analysts – along with rating agencies – are turning up at equity analyst presentations, IR is increasingly involved. So these changes are potentially important.

Under the new regulations, agencies will be prohibited from issuing ratings if they do not have "sufficient quality information" to base them on. It is unclear what “sufficient quality information” is, or how it is defined, but IR can certainly expect an increasing flow of requests for information from rating agency analysts.

Rating agencies will also be required to disclose the models, methodologies and assumptions used in their ratings, and to conduct internal reviews of their ratings. Thus companies looking at a potential (expensive) downgrade will have access to the ‘workings out’ by which their rating was arrived at, and access to an appeals procedure.These new obligations are only applicable in the EU, and it will be interesting to see whether a consistent application is achieved across the EU – and indeed in the US.