Mark Hynes - thoughts on corporate disclosure

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

Thursday, May 27, 2010

Auditors to review governance reports?

We have heard the phrase “the devil is in the detail” a lot during the election. Quite small details can have unintended consequences. So it is with the proposals around a review of the auditing profession, proposed by the European Commission.

Commissioner Barnier will publish a Green Paper in the autumn this year on the role of auditors. The objective of this green paper is said to be to initiate a debate on the role and the governance of auditors, as well as the possible changes which could be foreseen in this domain.

The Green Paper will also cover issues such as the concentration in the audit market and its implications on financial stability, the emergence of small and medium sized practitioners, the audit of SMEs and international standards on auditing.

We understand that the review could also include the extent to which stat audit of governance statements should be included. At the moment something like 9 or 10 of the 48 mandated disclosures in the Combined Code are subject to audit. What if this were to grow to include much more of the governance statement – for example including the business model to be required by the new Governance Code to be released shortly?

I cannot imagine that the auditing profession would be thrilled at this addition to their workload, never mind the potential for unlimited liability. Presumably they would prefer to see some form of requirement for an assurance of the quality of the information.

And as always the workload of the IR team – and the company secretarial team – would rise.

Thursday, May 20, 2010

New communication targets for IR?

The responses to regulatory consultations aren’t always very revealing, but Tesco’s response to the FRC Stewardship consultation was. They wrote “We have a concern about unengaged fund managers increasingly delegating voting decisions, either internally to governance departments or through an unquestioning following of the recommendations of shareholder representative bodies.”

In recent years, institutional investing and institutional voting of portfolio shares have diverged.
In many institutions, the people making investment decisions have relatively little or no responsibility for voting the institution’s portfolio shares, except on strategic issues such as mergers and acquisitions, disposals and the like. Shares are voted by corporate governance specialists on the basis of an in house model that is viewed as universally applicable.

Among the reasons for this is simply scale of the task. The number of portfolio companies and the number of issues are large and growing. (Witness the growth in ABI red tops for example).

This has created a high cost for the investment management community and as a result, the industry has increasingly outsourced strategies to a small infrastructure of corporate governance managers that rely on the application of one-size-fits-all voting policies which many argue take no account of the situation at any particular company.

This places as always a burden on the IR team to widen their communication targets. These need to include the specialist governance teams at institutions, but also especially at the proxy voting agencies. IR of course for its side will always want to engage directly, a sentiment which was probably behind the Tesco plea.

Many of the responses to FRC included requests that the FRC ‘encourage’ the proxy firms to engage with companies, in the same way as investors themselves.

Is there a role for regulation in this? Hopefully not, if the voting agencies do engage on a one to one basis, however the SEC is increasingly under pressure to ‘register’ voting agencies. A first step to authorisation, and even to regulation?