Financial PR/Investor relations: Changing the rules

A flurry of new directives governing the financial marketplace has placed increased demands on the sector's PR specialists.

Constantly evolving rule books and best practice within the financial sector are adding to the burden of an already difficult marketplace for financial PR and investor relations specialists. PR operators in the UK are now facing a new slate of terms and conditions to adjust to or prepare for. And, as corporate governance issues becoming increasingly important, noting these regulation changes requires the constant attention of PR practitioners.

The rules on listing companies - better known as the Purple Book - are in the middle of a review process. Under particular examination are the rules on selective disclosure of information and the issuing of forward-looking information.

The next stage in the review process is expected either later this month or in October, with the final set of rules scheduled to be published in 2004.

Furthermore, the Market Abuse Directive, dealing with issues such as insider trading, is due to take effect from October 2004, and some form of consultation on its translation into UK law is due the same year. And the Transparency Obligations Directive is expected to become law by 2005, although there is currently lobbying for a 2007 start date.

There is some concern - expressed in a recent paper co-authored by the Investor Relations Society, the CBI and the Association of British Insurers, as well as PR Newswire - that the Transparency Obligations Directive's push for quarterly reporting will produce a climate in which a flow of relevant information could be replaced by a supply of regular information of less value.

Add the creation of a more powerful Financial Services Authority (FSA) over the last couple of years, and you have what, on the face of it, looks like a very different regime under which PROs and IR specialists will have to operate.

'The rule has always been that all shareholders must have equality of information in terms of quality and time,' explains Weber Shandwick Square Mile director Mike Weir. 'In the past, it's been applied a bit more liberally.

I think the FSA has really tried to make the playing field a bit more level.'

Investor Relations Society chairman Diane Faulks, who is also Investor Relations Counsel Securities Services director at bank giant Citigroup, argues that the more information that is available in the public domain, the easier it will be for financial PROs and investor relations consultants to communicate. 'The more you can convince the company to put in the public record or the accounts, the less you have to think "How close to the wind am I?",' she says.

Nevertheless, one of the biggest problems of adjusting to these new regimes is that many of the rules lack clear guidance or examples that help PROs understand how the rules will be interpreted.

'The industry needs some degree of additional guidance,' says College Hill Associates director of investor relations Bob Haville. 'Training is one answer,' he adds.

Ultimately, the only real hard and fast rules will be established through case law. IR Society director Raghnall Craighead cites one such ruling as illustrating how quickly information should be put in the public domain: the FSA ruling in April 2003 on Marconi, the struggling telecoms operator. Marconi fell foul of the FSA when it failed to alert the stock market of its own changed performance expectations quickly enough. The internal expectations were downgraded on the afternoon of 2 July, but the market was not alerted until the end of play on 4 July. The FSA ruled that the Stock Exchange should have been alerted a day earlier.

Financial PROs also face the challenge of determining whether a piece of information that may be innocent in itself could become price-sensitive if added to other facts already in the public domain. For example, an innocent comment in an internal newsletter, combined with yet more innocent pieces of information from elsewhere, could then be analysed as having an impact on potential profits. This could be culpable.

'PROs are more at risk in some ways than IROs because PR practitioners tend to be much less City-focused,' warns Craighead.

The best way of avoiding such problems is to opt for full disclosure without impinging on business needs, and some fincancial PROs would even argue that the solution is to go the whole hog and formally regulate the business.

'The sooner financial communication gets to be entirely regulated the better, because in the past there have been some cowboy tactics. I would like to see financial PR being regulated properly by the Stock Exchange, the Takeover Panel and the FSA,' states Cardew Chancery chairman Anthony Cardew.

In the absence of moves in this direction, however, it seems that communicators are increasingly looking to lawyers for guidance, particularly when they are working on transactions.

'When it's legislative, and the legislation is subject to interpretation, you will always look to lawyers. The important thing is to know where there are issues,' says Penrose Financial managing director Gay Collins.

Financial PROs are not altogether unfamiliar with alterations to rules in the financial sector. Even back in August 2000, the Security and Exchange Commission's (SEC) Regulation Full Disclosure - better known as Reg FD, which applies to US companies - was an issue that has proved particularly challenging for some financial PR and IR experts, according to Faulks.

'I think regulators understand that companies may get themselves into certain situations, but it's how you get yourself out of it that matters,' says Faulks. She cites an inadvertent disclosure of a non-public fact in a conference call as a typical example of the issues faced by IR specialists.

These rules are still having an effect on the industry. For instance, the SEC recently took action against four companies, mostly on the grounds of selective disclosure, revealing information in analysts' briefings or conferences and failing to make this available to a wider audience.

In one case, a fine of $250,000 was levied.

And one of the most significant rule changes from last year was the Sarbanes-Oxley Act. Brought in to tighten up financial monitoring and transparency for US-listed companies in the wake of the Enron scandal, the Act requires companies to take a much tougher line on the release of any unaudited financial information.

'(The rules) do change very quickly, particularly out of the US,' admits M Communications co-founder Hugh Morrison. 'Restrictions on looking as if you're making a deal can change and can also be subject to interpretations.

We tend to be guided by the lawyers on this. as they are always on top of the subject. For example, if you are working on a transaction, they are the ones that say "This is the way it's going to be".'

Nevertheless, Faulks stresses that it's important not to let the lawyers use the complex regulatory environment as an excuse to run the show.

'The main challenge for financial PROs and IR professionals is ensuring that communication doesn't stay within the realm of the lawyers,' she says. 'If the lawyers had their way they would probably prefer to close down communication rather than encourage it.'

However, while Weber Shandwick Square Mile chairman Tim Jackaman agrees that some of the changes in the way financial PR and IR firms operate have been driven by the changes in regulation, he also argues that other changes have been driven by the needs of the market and clients.

In particular, he cites the increasing use of trading updates prior to the close period as something that has become almost part of the normal announcement programme for some companies.

Global challenges

Understanding the rule changes within just one financial market may be complicated enough for financial PR practitioners. But within an increasingly global business environment, communicators are having to look not only at the plethora of requirements where companies are listed in more than one market, or doing cross border deals, but also at the cultural expectations of investors based in different markets.

'There are very few companies that operate just within one jurisdiction these days,' explains Faulks. Haville agrees. 'The problem is that there are several regulatory bodies trying to implement stringent rules all at once,' he says. As a result, the situation has become so complex that PR Newswire is in the process of completing a series of guides and a website - www.disclosureresource.com - which will offer advice on the differing financial regimes across the globe.

'There's a lot of ignorance about what companies have to do in countries across Europe,' says PR Newswire global investor relations MD Mark Hynes.

'Investors receive variable amounts of information, depending on where the company is listed.'

It is in these instances that PR networks have the advantage as they are more likely to be able to get to grips with local variations, claims Financial Dynamics International chief operating officer Steve Jacobs.

Elsewhere, investors based in the US may expect companies to offer guidance on future profits, and may be reluctant to accept arguments from UK operations that such forecasts are not the done thing.

Although some US companies have also stopped providing these numbers, denying such requests at a time when investors need to be given all the TLC investor relations teams can muster is a tricky business.

Similarly, a European company considering a US listing, for example, would have to look at the practices of its rivals, says Faulks.

'Sometimes it's not the rules and regulations that are driving what you need to communicate. It can be driven by competitors who are more willing to be more open,' she says.

While the general rule for professional communicators may be to abide by the rules of the strictest jurisdiction, the mosaic of different requirements in different markets makes this an increasingly difficult path to follow.

'If you are working on a transaction between two relatively young countries, (the legislation to follow) will be the one that has the most stringent regulatory criteria,' says Morrison.

Citigate Dewe Rogerson managing director Andy Cornelius adds: 'The whole point about financial communications is that shareholders should be told when and what is happening. If you're not sure, you should check with the relevant exchange.'

Journalists' agenda

At the same time as the regulatory regime has changed, the agenda for journalists has also moved on, particularly when it comes to corporate governance issues.

Whereas in the past five years the media might just have delved to find out who the highest paid director of a company was, they are now they are looking in much more detail behind that, according to Collins.

There's a lot more scrutiny on basic corporate announcements than you would have expected several years ago, she adds. 'The practice before results go out is to make sure the questions that are most likely to come out are prepared. The depth of questioning in these areas is a lot greater and we spend a lot more time on this than we used to.'

And despite moves to communicate more directly with shareholders, the message that comes through the media is still regarded as vitally important.

'The media remains doubly important as most investors credit it as the second most influential in how they form perceptions, behind only direct contact with the management,' says Cubitt Consulting managing partner Simon Brocklebank-Fowler.

All these changes are encouraging the investor and media communication sides of the business to work closer together.

'IR practitioners want to make sure the messages going out to journalists are in line, as, obviously, fund managers watch TV and read papers,' says Faulks.

Communicating to the media is not the only solution, says Weir. He points out that the move towards allowing financial PROs to communicate with investors is a recognition that it makes little sense to restrict their communication skills to analysts and the press.

He adds: 'Every time you get a market emerging from its down phase, you tend to get things evolving a little bit. When times are tough clients are very conscious of the communication money they are spending.'

Despite this, Jackaman believes the bottom line remains the same.'One of the best truisms in our sector is that the best companies do not disappoint the market.' Yet, changes to rules governing the activities of specialist financial communicators will need to be closely watched over the next couple of years, as there are few signs of the changes abating.

Phantom bids, virtual action

You know the story. A rumour starts that a company is up for grabs.

Then the city hacks report that talks have started and a list of potential bidders is put out. The usual suspects garner lots of name checks, but then the action drops away after the potential purchaser fails to conclude the deal. And, as a result, these phantom bids affect the way communications are conducted.

The failure of investment bank West LB's approach to Anglian Water Group (AWG) is cited as a particular example of a bid that generated a lot of heat but never actually resulted in signatures on paper.

Cardew Chancery chairman Anthony Cardew, who's agency was involved in AWG's defence strategy, points out that when private equity companies approach a company they indicate a maximum price, subject to due diligence.

'That's a very unsatisfactory situation for shareholders,' he says. 'Why should a company give the advantage to a bidder's first offer, which is indicative, and is probably going to go down?'

For such bidders, publicity surrounding the approach can actually force the board to take the offer seriously. 'What the virtual bidder has to try and do is to get the shareholders of the target company to put pressure on the board to let them in and let them do due diligence,' adds Cardew.

By contrast, the rules for listed companies say bidders have to make a fixed offer, which in all likelihood will increase, particularly if other bidders come in.

'Sometimes, I think the bids that come in at the end can be the most credible,' adds M Communications co-founder Hugh Morrison.

However, some argue that those assigning sinister motives to bids that don't come off are failing to recognise the realities of the purchase process.

'There's a lot of work that needs to be done between being interested in a company and taking a decision,' says Penrose Financial managing director Gay Collins. 'The propensity for leaks is so much higher.'

Collins points out that the Stock Exchange is also much more alert to the creation of false markets and can seek clarification of a company's intentions early in the process.

'In addition, the Stock Exchange is much more sensitive about movements in share prices than they used to be; they will require clarification from a company,' she says. 'The stock market is now much more careful about any false markets out there.'

The suggestion is that early leaks and regulatory pressure can force people to make an announcement before they've got all the information they might want. If they drop out once it's been splashed all over the papers, it can look as if they were not serious.

The bottom line for bidders is that to retain credibility with both the press and the investment community, they need to make sure that their name is only attached to serious bids they have the financing in place for.

So should there be any stricter regulations to bidding for a company? The Takeover Panel says it is aware of the coverage being given to phantom or virtual bids, although it says it is not currently reviewing its rules.

In any case, Cardew argues that virtual bids, when they are conducted in the privacy of your own boardroom, can be useful.

'Every company should fight a phantom bid every six months (as an exercise) because they then have to show they are good value,' he adds.

Cash injection into private equity

The fall in stock market valuations in recent years, and the lower rates of return offered by traditional share investments, has had a knock-on effect on the financial PR market. But despite these setbacks, and the culture of rule book changes the sector is having to deal with, a new growth area has been created that will benefit the sector's communicators: private equity.

'At the moment, there seem to be a lot of private equity and leveraged buyout firms looking for assets to buy,' says M Communications co-founder Hugh Morrison. 'There's a feeling that good assets can't get any cheaper.'

Citigate Dewe Rogerson managing director Andy Cornelius agrees: 'Private equity companies have got huge funds, they are sitting on enormous piles of cash that people have given them and that gives them a big war chest.'

He adds that the other driving factor has been the relatively low valuations of listed businesses, which has made bidding realistic.

With returns on investments languishing for investors who have put their capital in equities and other more traditional financial instruments, it seems investors have started to look at options that might previously have been seen as too specialist or risky. The result is that money has been flooding into private equity funds.

Buying into companies at what they hope is the bottom of the cycle enables private equity firms to benefit from expected rising valuations when they exit, as well as the improved revenues generated by any structural changes they might make.

Globally, private equity now accounts for a major proportion of mergers and acquisitions activity taking place. In the UK, however, a lot of the action has been focused on the retail sector, with companies such as Debenhams and Bhs targeted by private equity backed bids.

According to The Sunday Times, the top 100 private equity deals in 2002 were worth £14bn. The biggest deal was the £2bn purchase of the Unique Pub Company, with the £940m Littlewoods deal and £867m Arcadia deal taking second and third place respectively. One of the attractions of the retail sector, and also the leisure sector, is the strong cash generative qualities of these businesses.

'These strong cash flows make it easier to finance acquisitions, because they put in equity and also quite a lot of borrowing to finance their take-overs,' explains Cornelius.

However, outside the retail sector it seems investors are ranging far and wide. The Sunday Times top ten deals for 2002 also include betting operations, car parks and property developers, as well as insurance businesses.

'Putting the retail sector aside, deals are fairly broad across the different sectors,' says Penrose Financial MD Gay Collins. 'There isn't a next 'most active' category behind retail. What they are looking for is good management teams, they are not looking for particular sectors.'

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