Mark Hynes - thoughts on corporate disclosure

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

Thursday, June 30, 2011

Borrowing some great ideas

It’s that time of year again. Across the land, IR, company secretarial and corp comms teams are gathering their thoughts about the direction their annual reports should take. What will the class of 2011 annual reports look like? So I was interested to see what “How does it stack up” from Radley Yeldar (see disclosures) had to say.

This is against a background of changing regulation. Reporting is one of the most consulted-on areas of IR work. 8 – no less- consultations in the last 18 months have asked what users and preparers of annual reports would like to see. What levels of disclosures? How to balance detail against readability? Should online start gradually to take more of the strain, and lessening content be mandated in the fixed format report?

Meanwhile of course, audiences continue to change. As recently reported, the average holding period for stocks has shrunk from 5 years to 5 months, a huge migration of investors needing support in understanding the equity story.

So looking at how others are approaching this issue is helpful. Among those reports which are worth a look for narrative reporting are Capita, BAE, Anglo American and Marks and Spencer. From the online perspective, Centrica, Barclays and Tullow Oil were recognised.

Meanwhile the sustainability report awards went to Centrica, Vodafone and Kingfisher. With sustainability becoming a key filter in stock picking for mainstream funds, telling the sustainability story is now key.

Imitation is the sincerest form of flattery. So borrowing ideas from these top reports makes sense.

Thursday, June 16, 2011

Independent research on the rise

New research from CSFI says the pre-eminence of the formal sell side is under renewed attack from the independent research sector. This will inevitably change some of the targets that IR aims at.

A few years ago, at a financial conference in Texas – well, it would be – FD’s were asked what IR teams did all day. They answered “deal with the sell side”. This very depressing answer hides the important contribution that “analysis” makes. Whether of their specific company, of a generic sector, or indeed of an economic future, research and especially trading recommendations, coverage is important to IR teams as an important channel of communication with institutional investors.

However, according to CSFI and EuroIRP, independent research is a growing percentage of buy-side research budgets. In 2010 it constituted 25% of all research.

What’s driving the changes?

One reason is dissatisfaction with the sell-side offering. Of course, referring to “sell-side research” is a massive generalisation and the quality of output from the investment banks varies significantly. At the same, there has been a proliferation in the quantity of research that clients are bombarded with, thanks to internet delivery, across a growing number of platforms both office bound and mobile. Not all of this has been of a consistent quality.

Independent research therefore meets the buy side’s need for high quality analysis untainted by corporate bias and for research that is not widely available, which provides the investor with a market edge.

This is a double edged sword, however. The independent research houses, like every other business, need to grow, yet if it becomes mainstream, the value of that information drops. The more independent research remains a niche, the more benefit it is to the buy side.

The research notes that expansion must, therefore, be through product diversification by area of expertise, sector or geography.

And the regulators? Five years go the FSA introduced their new regime on unbundling. However the independent sector must still contend with an uneven playing field. For example, banks’ leverage of corporate relationships to provide corporate access. Estimates are that corporate access now accounts for about 25 per cent of commission dollars paid for research and “advisory” services.

So how do the independents make money? Mostly this is a combination of hard cash subscriptions and Commission Sharing Arrangements. CSAs are designed to allow fund managers to choose a broker for execution and direct the research portion of the commission to another research provider.

And the implications for IR teams? As always, ensuring that levels of support to all analysts – sell side or independent – are offered. However beyond that, being aware of the potentially different – more in depth? - need for company information are met, and the opportunities for proactive outreach to this group.

Thursday, May 26, 2011

Stewardship report; improving but some way to go

"Quality of stewardship should drive mandates, the way quality of stock picking does,” This quote from the UK sustainable investment and finance association came in the run up to the launch of the UK Stewardship Code. There were some doubting Thomases who argued that the Code would become nothing more than a box ticking exercise, and that true engagement would take a while to happen.
However a new survey – field work carried out in September – suggests that progress is underway. The Investment Managers Association has launched its review, which indicates that almost eight in 10 UK institutional investors exercise their voting rights in all the companies in which they own shares. This confirms the UK as the country where investors are most likely to engage.

However, the Code’s impact is still unfurling. About one-third of respondents do not publish their voting records and about a quarter do not refer to the stewardship code in any of their mandates.

And IRO’s will be concerned that with less than half of their shares being owned by UK based investors, and with the ever shrinking time period of ownership, that this engagement is limited to a select few. The proportion of equity held by foreign investors, hedge funds, high frequency traders might not allow Stewardship Code signatories to influence outcomes as once they did.

However the survey provides some useful insights into how stewardship and engagement have operated positively. From the oft-cited Marks and Spencer, through Prudential’s proposed acquisition of AIG’s Asian businesses, and the (inevitable) debates on remuneration, there are examples where serious engagement between investors and companies has proved valuable.

There are some helpful messages for IR in this survey. Aside from the confirmation of increased voting participation, it affirms the need to reach out with the long term equity story – and notably on governance issues – to investors outside the traditional long-only UK investors. And the survey also highlights the increased cost of engagement to investors on governance and sustainability issues. The IR team that helps defray some of that cost through its communications programme will be appreciated.

Thursday, May 12, 2011

Cookies rule!

It can be a struggle to win eyeballs for the IR website. And when you have got them there, it would be nice if they stayed around for a bit. The IR website as we know is a key part of the IR team’s communications armoury.

So it is slightly troubling that regulators are planning on making it mandatory for users of websites to ‘opt in’ to cookies, rather than opt out. Another potential disincentive to access content.

The Department for Culture, Media and Sport is leading on implementing the new rules in the UK while the Information Commissioners Office will be responsible for regulation. They commented that ” Organisations with an online presence must prepare now for the anticipated new rules on user consent to cookies. They should audit how their sites operate, how they receive data from online partners and providers and what they receive so they have a clear understanding of where cookies are used and what for.”

The new law, which will come into force on in the UK 25 May 2011, is the result of amendments to the European Union’s E-Privacy Directive (Article 5(3) (in case it matters to you).

So far, the DCMS has yet (as I write) to publish precisely how these rules should be implemented. However the implications could be large. At a minimum, changes to Privacy Policy statements are likely to be needed.
For more detail on this see a note published on the Global3digital (see disclosure) site.

Wednesday, April 13, 2011

Mind the gaps!

OK, change of pace. Regulators have pushed more “stuff” for us to digest on EU level corporate governance and cutting the clutter in annual reports etc. And we will have to get our heads round this avalanche. Oh joy. But beyond the rules, experimentation on how build stronger informational links with audiences is taking place.

What I find so interesting about all this regulatory focus is the attitudinal gap between regulators, the ‘compliance movement’ in corporate reporting, and what IR teams and colleagues actually do in investor communication. The use of guidance to toughen up the ‘annual report’ as if it were the only communication with investors, is somewhat curious.

The second gap is between IR and what is happening down the corridor in corporate marketing. Marketeers are pushing the boundaries ever further in experimenting with new online ways of engaging consumers, while for the most part IR has not yet looked at web-engagement ideas.

Beyond the much discussed s-l-o-w adoption rates of social media by IR – albeit with some excellent examples of the use of Facebook, Twitter, Ipad and Iphone platforms in IR - there are some further out examples of the future of investor engagement.

Please stay with me here, because these things are happening, although they have horrible names.

First ‘gamification’. Put simply, gamification seems to be about applying the technologies used in gaming, Xbox and the like, to the web. This, combined with its use of exchangeable loyalty currency, is aimed at making users of marketing websites participate more than they do at the moment. Getting web users to complete surveys, ask questions, look at product video is always difficult, and this is aimed to help. Applied to IR, for example a site visit could become a must-see, and investor presentation come to life.

See here for an example used by Nissan in launching their Leaf car. (Hit the 3d button and then the Discovery tab).

The second is the area known as infographics. As an industry, IR is from time to time accused of being text heavy. Press releases, some annual reports and reviews are examples of investor materials which are ‘wordy’.

Infographics aims to represent the complex ideas behind the text, in a detailed but more accessible way. If you think Ordnance Survey maps, you get the idea. For examples, go here.

It’s a long way off, but...

Thursday, March 24, 2011

Narrative reporting - any nearer a conclusion?

When we will see any conclusions to the narrative reporting debate published by Government. I sometimes feel like we're Theseus in the labyrinth - but without Ariadne's help to find the way out.

1. The BIS / Narrative Reporting Consultation Paper, which noted “The Government will publish its conclusions at the end of the year” closed in October 2010. In it they asked some very detailed questions, including on technology. BIS then published Long Term Focus also highlighting narrative reporting. BIS published responses to the Narrative Reporting consultation in December – in which they noted “Corporate governance including narrative reporting is one of the Government’s priorities for action in that review. As part of this programme, we will be bringing forward policy proposals by Budget 2011.”

Yesterday, BIS published its Plan for Growth, in which they say “The Government will materially simplify narrative reporting for quoted companies to make it clearer and more focussed”. They promise that they will seek views from business by the end of July 2011 on the best ways to reduce burdens. Are we going round in circles?

2. FRC meanwhile had promised an outcome from its Cut the Clutter by yesterday, when Stephen Hadrill said they will provide it “shortly”. And of course there proposals on narrative reporting in the Effective Stewardship on narrative reporting.

Meantime, there is a consistent stream of information on which we are asked to concentrate. Environmental information, going concern, risk, governance...all described as being most important. And the choices on how and whether to harness ‘technology’ move around from CP to CP.

And in the middle of this, annual report preparers are trying to plan their reports, and decide where to publish them.

Now, where's that Minotaur.

Wednesday, March 16, 2011

And so to the ICSA Governance conference

A gathering of the great and good in this fast changing aspect of corporate reporting. I much appreciated the invitation to attend.

It was an excellent thematic discussion of many elements of the governance reporting debate, around the new guidance (developed by the ICSA for the FRC) on board effectiveness, including board decision making, composition, evaluation, and shareholder relations.

As I listened to the various contributions from the speakers, I was reminded of the 3 blind men in a room with an elephant. Each had hold of the tail, or the trunk, or a leg, and described what they thought an elephant was. Of course, none had the full perspective. However there were a number of takeaways for me.

The first was ‘how do you value the board as an asset?’ The board is almost always seen by the investors as the asset they ‘buy’, yet it is tough to assess the contribution it makes to the value of the company. Every one of the speakers agreed that a well run company was worth more than a poorly run one, but by how much? If valuing a company is about attaching a numerical value to each of the assets ultimately to create a share price, how to achieve that?

Second, much has been said about the need to defend the principle of comply or explain, against the depredations of the EU-level reviews of governance, with green papers due out soon. However, some speakers used other terms. We heard comply and explain, and explain and comply. These terms summed up a key theme for the conference –which was the avoidance of boilerplate. Telling the governance story.

And from the reporting perspective, there was some discussion around the frequent theme (in recent regulatory consultations) of technology in governance reporting. At its most basic, this implies putting ‘static’ data on the corporate website. But surely, it goes way beyond this to include interactive reporting, moving image and the use of social media? As IR Web Report highlights, a surprise YouTube hit today is Corning’s investor presentation with its amazing future vision. Whatever next; profiling the sum-of- the-parts contribution of the board through video?