Mark Hynes - thoughts on corporate disclosure

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

Wednesday, February 24, 2010

Well done investor relations! Profit warnings down.

As the next results season gets under way, an interesting study on the number of profit warnings in 2009 has been published by EY. The result suggests that companies – and their investor relations team – have done well in managing market expectations, but how long before the sell side starts factoring in more aggressive targets?

According to the research, listed companies issued 282 warnings in 2009. This figure represented a six-year low and a 37 per cent decline on 2008. Very unusually, there was not a single profit warning in the general retail sector in the final three months of the year. EY comments that this comes from a mixture of fiscal stimulus, cost cutting and a recovering economy which helped many companies to exceed earnings forecasts in the second half of 2009, which in turn kept profit warnings low in most sectors.

This trend also underlines the role played by IR in managing the expectations. Companies seem to be re-examining their approach to earnings guidance and are following a safety-first approach in the guidance they gave to the market. Many believe that it is preferable to set realistic expectations than to be overly aggressive and let people down, preferring guidance to be beaten on the upside.

And the fall in warnings has reinforced one of the golden rules of investor relations: that of avoiding negative surprises. Creating context has never been more important.

However 2010 is likely to be a different proposition; companies will have a tougher time in terms of managing expectations, as analysts build in more aggressive targets.

Thursday, February 18, 2010

“Fair” valuation? Not in these markets!

The classic definitions of investor relations all refer to the creation of a fair valuation as being a key objective of IR. There is a growing concern that the huge growth in non traditional trading venues and trading methods are not allowing proper price formation, and hence an incorrect valuation of the company’s stock. A number of important organisations are pressing for change as a result. (see below for links to their views).

When a company comes to market through an IPO, management of the company are highly focussed on helping the market understand the investment story, and winning support. The disclosures are closely coupled with the primary market share price, and the market transactions are watched like a hawk. The executive of a company take full responsibility for the share price at on IPO.

In the secondary market however, focus goes on to compliance, in the sharing of information in accordance with stock exchange or regulators rules – the so called continuing obligations. This allows ‘traders’ with no interest in the equity story to take part in the market. The share price moves up or down often based on no company sourced information, as algorithmic trading takes over responding to pre- and post-trade transparency data. In the secondary market today the executive of a company cannot and do not take full responsibility for the share price. And the volumes of transactions are very significant with at least 50% of all transactions being executed away from the traditional exchanges operating full “lit” markets.

As a result, overall market transparency is impaired as an increasing volume of trading takes place with non-displayed orders. A fall in volumes in lit venues can impair liquidity, which has an effect on the quality of price discovery, as price determination is based upon the prices discovered on the primary exchanges.

One of the problems for IRO’s is in understanding the nature of the venues, let alone the impact they can have on the share price process. Consider MTF’s (dark pools and lit), Systematic Internalisers, OTC markets reporting to the exchanges, and OTC markets reporting to Markit Boat....Its another language.

However the key point is the absence of transparency, which itself impacts price formation, and hence the company’s valuation. Is price formation a quality, reliable process based on company and economic fundamentals? If it isn’t how are genuine investors protected, and what does it say for the relationship between an issuer and investors.

And we haven’t even touched on illegal trading in a week where we have seen 2 major news items around market abuse...

So what to do? Companies have been noticeably unconcerned about this problem, however as regulators in both the US and the EU start to look at regulating these markets, issuers may well want to make their views known. Among those with information – and strong views - are: FESE, NIRI, Avenues, CFA Institute,

This is a complex subject, and there are many other aspects. But its a debate that I think companies should be engaging in.

Wednesday, February 10, 2010

Themes in IR – similar challenges in the Gulf, Russia, US, EU...

What a week; commissioned to run Investor Relations courses in Dubai and Moscow in the same week. And yet despite the cultural differences, IR remains constant.

First to Dubai to moderate a 3 day course on “Creating a world class investor relations strategy in tough times”. Very fortunate to have an excellent group to work with, from across MENA. Listed companies from Abu Dhabi, Jordan, Bahrain and Dubai, ranging from financial institutions to food and beverage.

And then on to Moscow (by the way it was a 40 degree temperature change...), to moderate an event at the British Embassy on attracting investment to Russian public companies, see here for detail, followed by a one day course for 35 Russian listed companies.

They could not be more different you would think. However while many issues are common not only to Gulf and Russian companies but also global investor relations people, there were some that were specific to those markets.

At the top level, IR teams are keen to ensure that investors get what they need by way of information about the company. Clearly, international investors when looking at emerging markets need an understanding not only of the company, but the environment in which the company is working. Economic conditions in Dubai (recently hugely changed) and Russia are important. IR presentations and materials therefore need first to set out the economic and market context, and only then discuss the company.

A second issue that people mentioned was the challenge of getting management/ board attention to the IR process. By and large, EU and US IR teams are able to count on the interest and commitment of their boards. Not so in either Russia or the Gulf. Without being able to count on providing management access to investors, or to provide insight into the company's future, IR becomes difficult (impossible?).

The third issue mentioned, was the challenge of understanding who the shareholders are. This is obviously the heart of IR and without understanding the profile of existing shareholders, it is hard to create a strategy for improvements. There are significant barriers, with foreign investors limited for example to equity swaps in some cases.

Fourth, the absence of a peer group. Whilst in the UK, Europe and the US, benchmarking against a peer group is standard, the lack of a genuine, local peer group is difficult. Comparisons with international peers are less appropriate.

Finally, I was very struck by how well international candidates are doing with the IR Society certificate. Since this is based around international best practice, enthusiasm to learn and follow international best practice investor communication is growing fast.