Disclosure improvements needed to win new sources of capital: HM Treasury

So we are out – sort of – from recession. Good news, but the hangover will continue. This will include huge changes to the availability, cost and degree of freedom for companies to use capital. So discussion of how to increase access to alternatives is welcome. However the discussion paper on this issue from the Treasury, also suggests tougher disclosure rules for companies. (What, again, I hear you cry?)

One of the legacies of the crunch is likely to be the cost and availability of bank finance for a considerable period. Increased scrutiny and regulation of the financial services industry, the capacity of the banking sector, their balance sheet repair and reaction to the previous under- pricing of risk are some of the factors driving this change. So HM Treasury is looking at ways to help larger companies sell corporate bonds to institutional investors.

“Transparency” is once again the centre of attention: how much information needs to be reported to encourage investor demand? The Treasury has published a discussion paper to seek market views on the costs and benefits of increasing reporting requirements.

First, the Treasury’s paper highlights the differences between the UK and US regimes. US companies rely much less on bank debt, and more on bond issuance. The paper suggests that the corporate information disclosure regime in the US is more transparent and that reporting is more frequent. Therefore monitoring of investment risk is easier and cheaper for investors, with knock effects on companies’ access to debt.

So the willingness of companies to publish their debt covenants is again in the spotlight. As the Treasury’s paper notes “uncertainty about the credit quality of companies, and in particular the quality of investors’ claim on the company can be clouded by the presence of (often undisclosed) covenants imposed by lenders. Again, those with experience of the US suggest that more loan covenant information is publicly disclosed, creating more certainty for non-bank investors.” However any move to require this level of disclosure will almost certainly be contentious.

So debt IR is once again in the headlines. With good timing, Capital Precision has just published a study which benchmarks best practice debt IR. Worth a read.

Investor communication coming of age.

This week’s publication by the FRC of its Stewardship Code consultation is an important milestone in investor communication. For many years, IR has laboured to achieve the fair valuation, and the right balance of liquidity, creating context for investors to make decisions.
However this has been achieved in a vacuum; for the early practitioners there was no manual, no guides, no best practice. The IR teams have had to make it up as they went along, complying of course as they did so. Investors on the other hand have chosen to involve themselves with the companies whose shares they own - or not.

In the aftermath of the financial meltdown, (cometh the financial crisis, cometh the governance review) the regulators are examining the processes of how this works. And the Stewardship Code is a potentially very helpful part of that.

Announcing the consultation, the FRC said: “The benefits of a code which can help to bring about more effective engagement between companies and shareholders are potentially significant. They should lead to sustainable and enduring improvements in the governance and performance of UK listed companies and greater clarity in the respective responsibilities of asset managers and asset owners, which will assist the ultimate owners to hold to account those acting on their behalf.

“To deliver those benefits the code must set standards of stewardship to which mainstream institutional investors should aspire, and maintain the credibility and quality of these standards. It must foster a proper sense of ownership amongst institutional investors in the interests of their clients, and its success should be based on more effective communication between shareholders and the boards of the companies in which they invest.”

This level of clarity of interaction between investors and companies can only be helpful.
The wider question of course is that both the new (proposed) Governance Code and the Stewardship Code note in various places that “...companies should...” referring to their communications. What neither does is to provide the levels of detail on how they should.
And since in the view of many there is no difference between shareholder engagement and investor relations, we should look to see if this creates the opportunity to write the definitive IR book of best practice.