Last night, as Tom Enright opened his first CIRI conference as CEO with an almost entirely new team, he declared victory: 200 participants are in Victoria, BC for the event. That’s just shy of a budgeted 202 and down from last year’s 252 but it surpasses expectations.

Sharon Mathers, CIRI’s chairman, adds that around two thirds of attendees are practitioners (IROs and consultants) and one third are vendors, which is a comforting ratio for sponsors.

Conference co-chairs Darren Seed from Vancouver’s Westport Innovations and BMO’s Steve Bonin point out some other distinctions, like the way the agenda was shaped by email surveys organized by CIRI’s new director of professional development, Yvette Locker. Or the way all the sessions are open to everyone instead of certain ones being restricted to senior practitioners. In another new twist, many attendees are using special software on their BlackBerrys to follow the agenda and submit their feedback (and to tweet – see below).

Gwyn Morgan, the retired founding CEO of EnCana, was today’s keynote speaker, giving ‘a bird’s eye view of the global meltdown.’ Morgan, who lives nearby, was already well aware of CIRI considering his wife Pat Trottier was one of the founding directors of the organization and the first president of CIRI Alberta.

Morgan is currently chairman of SNC Lavalin, a director of several other companies and a widely followed columnist in the Globe and Mail, but as he described the future of the investment world, he spoke mostly from his perspective as a director of London-based HSBC Holdings.

He may have a lofty perch but Morgan was down to earth compared with two surprisingly optimistic newspaper editors in today’s closing general session. ‘It’s a fantastic time to start out in journalism,’ said Kirk LaPointe, managing editor of the Vancouver Sun, to more than a few skeptical gasps from the audience.

LaPointe and his fellow panelist, Patrick Brethour, BC editor of the Globe and Mail, said newspaper audiences are growing and there are big opportunities for the industry. LaPointe predicted the newspaper journalist of the future will be ‘less a gatekeeper and more a curator or tour guide.’ He said editors today study search engine optimization more than the craft of journalism: ‘We look to get Google juice.’

CIRI’s annual national conference continues through tomorrow. Several participants are using Twitter to comment on the event, including Darrell Heaps and Karen Adams from Q4 Web Systems (q4websystems), CNW Group’s Nadine Tousignant (Nadinet), Business Wire’s Tom Becktold (becktold) and the zu.com team (zutweets). Search Twitter for #ciri09.

By Neil Stewart

Thanks to IR Magazine for allowing us to bring this article to you.

Less is More...When it Comes to Disclosure
I expect that many of you, like me, are breathing a sigh of relief at surviving another annual reporting season. It is tempting to forget about the required documents until next year but there is real value in considering whether your disclosures are contributing to enhanced understanding, or simply enhanced information. As regulators and investors persist in pressuring issuers to provide more and more disclosure on business risks and uncertainties, the volume of information that companies are disclosing continues to increase.

Canadian Tire recently conducted an investor perception survey and while our analysts gave us high marks on the quality of our disclosure, they suggested that we make an effort to reduce the length of our disclosure materials. If the European IFRS conversion experience is any indication, the volume of pages that companies disclose is expected to rise substantially.

Clearly we all need to comply with disclosure regulations. However, increasingly at Canadian Tire, we felt it was time to step back and take a hard look at the depth and relevance of our disclosure materials. To that end, the finance and IR team reviewed our quarterly disclosure materials, with the objective of reducing their length by 15-to-20%. We engaged analysts in this process to make sure that we didn't eliminate disclosure critical to the Street in evaluating our performance and prospects. As this article went to press, we had reduced the MD&A from 60 pages to 45; proving that a 'less is more' approach to disclosure could be applied at Canadian Tire. • by Sharon Mathers, Chair, CIRI

Laying the Groundwork in 2009 to Thrive in 2010 and Beyond
At CIRI, we have been hard at work developing a strategic plan for the organization. This plan incorporates input from members across Canada, including practitioners, consultants and vendors. Nearly 10% of CIRI’s members shared perspectives that helped shape this strategy.

The plan, entitled Survive to Thrive, has CIRI focused on providing what is most relevant for the IRO. That means we are increasing the relevancy and frequency of communication on IR-related issues, identifying their impact on practitioners, and doing this cost-effectively. By refocusing CIRI now, we will be positioned to thrive as an organization and a profession once the economy improves.

Some elements of the plan have already come to fruition:

• the electronic distribution of Newsline and IR Focus;
• IR Bulletins on “Guidance on Disclosure Related to Current Economic Conditions” and “Regulators Propose Amendments to Canadian Corporate Governance and Audit Committee Regimes”;
• ongoing dialogue on issues and conference-related items through online surveys; and
• the launch of Consultants Corner and Supplier Central, improved directories on ciri.org.

This is just the beginning. You can expect more communication on IR issues, new and different ways for members to interact with the organization, and additional high quality professional development.

In June, CIRI will offer its 22nd Annual Investor Relations Conference, entitled Navigating Turbulent Markets. This event, hosted in Victoria, B.C., will deliver relevant information with exceptional speakers and interactive formats – enhancing participants’ ability to meet the challenges facing the investor relations profession.

I look forward to seeing you in Victoria. • by Tom Enright, President and CEO, CIRI

A few years ago, when Ian Chadsey took over the IR function at a relatively young, $3 billion public company in Calgary, he quickly realized that the new CFO had an extensive accounting background but knew little about investor relations. “The first thing I suggested,” recalls Chadsey, Vice President of Investor Relations at MTS Allstream in Winnipeg, “was taking a full-day IR workshop with CIRI.”

Chadsey accompanied the CFO to the IR workshop so that the two could later discuss the material together. “If you’re taking on a new role as CFO, IR is an important area to understand. You’re going to be asked direct questions from the financial community and you really have to understand how the various relationships work,” he says.

“Good communication does not mean that you have to speak in perfectly formed sentences and paragraphs. It isn't about slickness. Simple and clear go a long way.” – John Kotter

Have you ever read an article and realized, half-way through, that you don’t have the slightest idea what the author is talking about? And your confusion is not from lack of coffee that morning?

Our culture is bombarded by information. People’s attention is constantly being pulled in multiple directions. As a result, you have about three minutes to get your story across before a reader loses interest, so keep your message simple, succinct and effective. A great headline with no meat to it leaves the reader starving.

To create effective messages, you need to thoroughly understand your business, market and economic factors, and company strategy. Seek feedback so that your messages answer the Street’s questions and fix inaccurate perceptions. Listen to and involve management in the process, which helps keep messages consistent.

A recent and important decision of the Supreme Court of Canada provides guidance on certain Canadian corporate law requirements and the duties of directors of public companies in the face of competing stakeholder interests.

Proposed BCE Plan of Arrangement
In mid-2007, BCE Inc. (BCE) announced that it had entered into an agreement with a consortium led by Teachers’ Private Capital and others (collectively, Teachers) following an auction process involving competing acquisition proposals. The objective of the auction, as determined by a special committee of directors of BCE, was to maximize shareholder value while respecting bondholders’ contractual rights.

When Newsline asked me to write a column focussing on the CEO/IRO relationship, I thought it would be interesting from the perspective of a CEO married to an IR professional and founding director of CIRI. Writing this article together brought back memories of IR trips when working for competing companies; we would make the rounds to the same institutional investors and often spot the spouse’s business card lying on the desk.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” – Charles Darwin

It seems that everywhere you turn today, there’s an onslaught of bad news: companies laying off significant portions of their workforces, markets depressed, commodities at low prices, and the economy in peril. There is a high amount of financial and economic global distress, and we’re inundated with it.

IROs don’t have to look very far. It’s affecting our organizations in various ways: credit crunches, difficulty raising funds for operations or new ventures, decreased stock prices, negative media coverage, and layoffs. And always, there is the reality of unhappy shareholders.

In early January, the Canadian press widely reported the continuing worldwide slide in capital markets. Everyone knows the news has not been good. As reported in the press, the Bank of Canada’s quarterly survey of companies across Canada found that business leaders expect sales growth to slow, prices of products to increase at a slower pace and the workforce to shrink this year. Obviously, company earnings may be negatively affected.

The fear of public speaking is said to top lists of activities that people truly dread, outranking even the fear of death. “I feel like throwing up before a presentation,” confides Janet Craig, Vice President, Investor Relations at Nortel Networks Corp. “Over time, though, you learn what works for you as a speaking style.”

Some IROs find addressing large audiences natural and enjoyable. An example is Greg Secord, Vice President, Investor Relations at Open Text, who played guitar and bass professionally and has relished public speaking since the fourth grade. “Early on,” he says, “I learned to be comfortable in front of hundreds of people.”

“Perseverance is a great element of success. If you only knock long enough and loud enough at the gate, you are sure to wake up somebody.” – Henry Wadsworth Longfellow

An old Chinese proverb (or curse) reads: “May you live in interesting times.” Researching this phrase reveals that it is generally understood as referring to experiencing much upheaval in life – the implication being that the most difficult times are the most interesting and the most rewarding too. They challenge and test us, and occasionally they can bring out the best in us. And like it or not, we live in interesting times.

The Canadian Securities Administrators (CSA) recently introduced amendments to National Instrument 51-102 Continuous Disclosure Obligations, and Form 51-102F6 Statement of Executive Compensation, providing for new executive compensation disclosure rules. In addition to improving disclosure regarding executive compensation generally, the new rules are intended to require comprehensive disclosure of the value of total compensation payable to executive officers and how this compensation is determined. Public companies with financial years ending on or after December 31, 2008 will be required to make disclosure in the upcoming proxy season in accordance with the new rules.

New executive compensation disclosure requirements include:

As this is my last Newsline article, I am taking the liberty of addressing 10 things that took me (almost) 30 years to learn.

1. There’s never only one cockroach
Rarely do stock prices advance in the face of bad news. And unfortunately, bad news tends to come not in isolated instances but rather through a series of announcements. The sooner an investor can respond, the better. The problem is that due to a number of reasons, investors want to regard bad news as – if not an isolated event – one that should not have implications far into the future. Sometimes, but rarely, this proves to be the case; more often than not, the problems become far-reaching, time consuming and, most troubling of all, costly. Investors can address this by learning from their mistakes, or being disciplined enough to protect their capital by selling when the first piece of bad news becomes public, regardless of the cause.

The effects of the current economic slowdown will, for many, have a significant impact on the preparation of financial statements this year-end. Beyond dealing with the myriad business risks arising from the current market instability, management will also have to assess the accounting implications of the liquidity crisis. Stepping back to consider what financial statement captions might be affected by the current lack of liquidity, it quickly becomes apparent that there is the potential for some form of accounting or disclosure impact for most line items on the financial statements. For some, the issues will be so significant that the statements will need to address the risk that the company may not be able to continue as a going concern, and in some extreme cases it may no longer be appropriate to even prepare the statements on the basis that the company will continue to operate as a going concern.

Ian Chadsey, Vice President, Investor Relations, at Winnipeg-based MTS Allstream, notes that the conventional ‘deep value’ and ‘growth’ labels matter far less in the current turbulent market conditions than they have historically.

At no other time in our working lives have we witnessed the volatility, uncertainty and chaos in financial markets that we’ve seen in 2008. It seems certain that things will not return to the way they were before this roller coaster ride. We will, no doubt, experience structural and regulatory changes that will force us out of comfort zones and cause us to rethink how, when and why we do things.

When you overlay changes that were already on our horizon – like IFRS, Web 2.0 and XBRL – it’s apparent the lives of IROs and those serving the IR market will never be the same. Normally all of this would send people running for the hills, but since joining CIRI National a few weeks ago I’ve noted that ‘When the going gets tough…CIRI Gets Going’.

The key is our commitment to enhancing CIRI’s value equation by:

• Reestablishing the Issues Committee, with effective co-chairs Jennifer Pierce and Elaine Wyatt.
• Building on National’s and chapters’ high quality professional development sessions, which have produced an 89% satisfaction rating.
• Completing the review of accreditation for the IR profession.
• Continuing to produce high quality and highly regarded publications such as CIRI Newsline and IR Focus.
• Conducting the only Canadian IR Compensation and Responsibility survey (coming in 2009).

In these troubled times, belonging to the CIRI community is vital for rethinking IR strategies and tactics, as well as keeping a clear vision as we move ahead. All the best in 2009. •

Tom Enright
President and CEO
Canadian Investor Relations Institute

In order for IROs to properly and efficiently do their jobs they need to communicate and cheerfully cooperate with the enigma that we affectionately call the sell-side analyst.

When I think of sell-side analysts and the function they perform, my mind keeps coming back to the most famous of all steam vessels, the Titanic. Ships of that era had three smokestacks but the Titanic, because it was the best and would never have an equal, had four; interestingly enough, the fourth was a placebo. It served a very useful function as an attention-grabbing beacon, but could not function as a smokestack. And so it is with sell-side analysts: one of their key functions is to issue buy, hold or sell recommendations but any portfolio manager who has any experience knows it’s best to ignore them. (Bloomberg has a wonderful tool that graphs the price of one’s favourite stock and superimposes on it the buy, hold and sell recommendation of a given analyst – let’s just say it brings their credibility down to earth in a jiffy as, inevitably, the buy recommendations turn to sell just as the stock bottoms).

There is a need to balance the requirement to provide timely information with the risk of rushing the process so much that it eventually leads to either multiple announcements to the market or, worse yet, multiple restatements because financial information was incorrect.

Managing a Financial Restatement
In recent years there has been a dramatic increase in the number of financial statement restatements, generating significant discussions as to their causes and consequences. This has been particularly evident in the United States, but similar trends are occurring in Canada. Such restatements can have significant consequences for a company, its management and directors, investors and others, and the role of the IRO is critical to successfully weathering a restatement.

“One’s destination is never a place, but a new way of seeing things.”
– Henry Miller

“The world is a book and those that do not travel read only one page.”
– St. Augustine

There’s nothing quite like traveling to broaden the mind and soul…the sights, sounds, and tastes, as you encounter and learn another culture. Of course, when traveling you arm yourself with the appropriate knowledge to make the experience as positive as possible. You buy a guidebook and learn about different customs, languages and expectations – ‘you’re not in Kansas anymore, Dorothy!’ I love traveling – exploring the new sights, relishing the local delicacies and examining ancient culture; but it can also be uncomfortable at times – missing trains, getting lost, dealing with jet lag and the occasional overpriced meal. If you’re a creature of habit, perhaps consider traveling from your armchair at home! In truth, the personal travel experience is not that different from a corporate listing on a foreign exchange. There are some wonderful benefits, yet at the same time, potentially horrendous pitfalls. Whether your company is already listed on several exchanges or is considering additional listings (perhaps as a condition of financing), juggling multiple listings can be a challenge. Many IROs are at least familiar with the rules, regulations and hurdles of a listing in the United States – if not savvy about them. But it’s a different story when it comes to other foreign listings.

In September, as the worst economic panic since the Great Depression unfolded, the CEO of Scotiabank wasn’t minding the ranch and strategizing about coping with turbulent markets. Instead, he was travelling across Asia, discussing potential acquisitions and partnerships.

When people asked about the CEO’s whereabouts, “we answered that we’re focusing on our long-term strategy,” says Kevin Harraher, V.P., Investor Relations. At the same time, Scotiabank’s CFO headed to California to meet with American investors. “When we told U.S. investors that we’re a good place to think about investing, the reception was pretty warm,” adds Harraher. The itinerary for Scotiabank’s executives was no accident. “Our tactic is: Let’s get out there and talk to investors and let them ask questions,” explains Harraher. “We don’t want to be seen as behind the barricades.”

Even some companies outside the klieg lights of the financial services arena are taking a similar tack. “Sitting staring at a screen with nothing but red ink gets pretty depressing,” observes David Carey, IRO and Senior Vice President, Capital Markets, at ARC Energy Trust. “What we try to do is get out on the road and meet more people in times like these.”

I hope everyone had an enjoyable and safe summer with friends and family, and that you are ready for an eventful fall. Ian and his CIRI National team have been busy preparing for our autumn professional development program.

The season starts off with our Executive Insight sessions, scheduled in four cities across Canada. These will highlight how the changes in the economy have impacted the markets and ultimately your companies’ stock prices. Seasoned IROs will talk about their challenges and how they have communicated with investors in these turbulent times. Since our members come to investor relations from diverse backgrounds, we are offering programs on both finance and communications. In late October, Peggy Hedges, Professor at the Haskayne School of Business, will conduct an interactive session on financial statements and analysis for the IRO.

A communication session will be held in the spring of 2009. Be sure to attend the November 20 luncheon with Bruce Waterman, Chief Financial Officer of Agrium Inc. and Chief Financial Officer of the Year for 2008, according to Financial Executives International Canada, PricewaterhouseCoopers and the Caldwell Partners International. Details of all fall programs, including locations and pricing, are now available at www.ciri.org.

I’m very pleased to welcome to CIRI our new Director of Professional Development, Yvette Lokker. Yvette joined the CIRI team in early August and she is fully engaged in delivering our 2008/2009 program. Given her background in investor relations and experience in programming at the Ontario chapter level we are very lucky to have Yvette on our team. I know that you join me in welcoming her warmly as she reaches out to identify speakers for our events.

Details of upcoming Chapter events are available on the CIRI website. The Chapters and CIRI National are coordinating efforts to address important topics most effectively for members. We are aiming to maximize attendance through programming excellence.

In addition, we are proceeding with a study on accreditation of investor relations professionals. We will examine accreditation models in other professions, the benefits and challenges of accreditation, and the potential impact on IR professionals and CIRI. Members will be kept informed of our progress. The CIRI team has begun planning for our next annual Conference, which will be held in Victoria, British Columbia. Conference Co-Chairs will be announced shortly and a planning committee of CIRI members assembled. Some speaker invitations have already been issued. We anticipate another great program so mark your calendars for June 14-to-16, 2009 in Victoria.

You should expect your CIRI membership renewal notice in November. The many advantages of membership have been very evident to me over the past 10 years. Event discounts can actually pay for membership – but in my view, when you also consider six issues of Newsline and IR Focus annually, networking opportunities, and CIRI’s advocacy for IROs – the decision to renew is an easy one. I look forward to sharing all of these benefits with members in the year ahead. •

For example, given the way in which the funds my team manages at MFC Global are constructed, we consider it significant if we beat the stock market by 20 basis points or so on a particular day. In contrast, a 20-basis point swing for my small-cap counterpart is considered typical. But get a load of this: there was a day in July when we beat the stock market by well over 100 basis points – most likely my best day ever as a portfolio manager – and then, in the very same week, underperformed by well over 100 basis points on another day. Can you imagine having your best day ever and your worse day ever in the same week? The word volatile just doesn’t seem to capture the experience.

In the current economic climate, where the terms ‘credit crunch’ and ‘illiquid markets’ are discussed daily in national newspapers, companies have good reason to reconsider whether their financial reporting is sufficient. Analysts and investors will be poring over your company’s next financial statements and Management’s Discussion and Analysis (MD&A); looking for evidence of how the company is managing through the present market conditions.

Any web search for “business implications of climate change” will bring up hundreds if not thousands of articles, reports, studies and surveys on the topic. Recently introduced guidelines, laws, accords, mandates and commitments aimed at reducing our negative impact on the environment is a major business issue in Canada and around the world. As an investor relations professional, you must be prepared to address this increasing focus on environmental risk and ensure that investors understand the potential effects of your business on the environment and the impact of environmental regulation on your business.

What Investors Want to Know
In a February 13, 2008 news release, the Canada Pension Plan (CPP) Investment Board encouraged Canada’s largest companies to disclose more information on the business risks and opportunities they face as a result of climate change. The CPP Investment Board reported that it is one of 385 institutional investors around the world representing a total of US$57 trillion in assets under management that supports the Carbon Disclosure Project (CDP). The CDP is an independent not-for-profit organization aimed at creating “a lasting relationship between shareholders and corporations regarding the implications for shareholder value and commercial operations presented by climate change. Its goal is to facilitate a dialogue, supported by quality information, from which a rational response to climate change will emerge.”

“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.” – Albert Einstein

“It's a mistake to think that once you're done with school you need never learn anything new.” – Sophia Loren

Have you noticed a change in the air? A slight shift of the wind, an occasional look of anxiety on a child’s face, or the intermittent heart palpitation mid-sip of your mohito or glass of cabernet sauvignon? The season is changing, and everywhere you go it’s beginning to look like…school time!

When Montreal-based CGI Group announced a restructuring in 2006, communicating the news posed a translation headache on an epic scale. “In English,” says Lorne Gorber, Vice-President, Global Communications and IR for CGI, “restructuring means we’re tightening our belts and taking measures to improve things. But when you use the French equivalent−restructuration−it means you’re practically preparing for Chapter 11.”

Therein lies the challenge of translating disclosure documents that many investors will pore over, trying to read between the lines and obtain clues about future performance. Often, says Gorber, a literal translation doesn’t capture the nuances of what’s afoot because words like restructuring carry so much emotional baggage. In the end, CGI abandoned the English word “restructuring” altogether, describing what was occurring as “a competitive position strengthening program,” recalls Gorber.

CIRI’s highest honor, the Award for Excellence in Investor Relations, was presented by former winner Jo Mira Clodman to Tom Merinsky in June 2008, during CIRI’s Annual Conference. An abbreviated version of her remarks appears below. Each spring, a committee meets with the single purpose of determining whether to honor a CIRI member with our organization’s greatest tribute. The committee members are previous winners still active in CIRI and IR. The Award for Excellence recognizes outstanding contributions to CIRI and to developing the practice of investor relations.

Normally, the person making this presentation is the previous year’s winner – Nancy Woo of Eldorado Gold. But for the first time in the nearly 20-year history of the Award, neither the usual presenter, nor the winner, is at our Conference. Their absence reflects the challenges we all face in balancing work and family commitments. Nancy is on the road for her employer. Our winner is at home for his daughter’s high school graduation. I know both of them wish they could be in two places at once.

Let me tell you a bit about this year’s winner.

When companies around the world want to move heaven and earth to unlock the value of their resource assets, they call on Finning International. When Finning wants to unlock the story of its value for investors, it calls on the leadership and strategic thinking of its Vice President, Investor Relations, Tom Merinsky. Tom is based in Vancouver but his responsibilities span the globe.

Tom’s career began with 15 years in corporate and investment banking, and treasury roles. In 1996, he was named IR Manager of Westcoast Energy. Within days, he joined CIRI. After Westcoast was taken over, Tom moved first to Teck Cominco and later to Finning. Today, he truly has a ‘seat at the table’ and, as far as he’s concerned, one of the best possible jobs at a public company.

His tireless work on behalf of CIRI includes helping to reestablish the BC Chapter and becoming its President. He has served as Chair of CIRI’s Board of Directors and is currently immediate Past Chair.

IR is all about building value and building relationships. Tom’s colleagues in IR and at CIRI know he does a fine job on both fronts. He’s smart, he’s knowledgeable, he’s warm – he’s very credible – and he is committed to CIRI and to IR. We couldn’t ask for more from our leaders – or from an Award for Excellence winner. Please join me in a round of applause for CIRI’s 2008 Award for Excellence winner, Tom Merinsky. •

CSA staff provided guidance on May 9, 2008 regarding the disclosures expected from issuers intending to adopt IFRS before, on, or after January 1, 2011. This guidance applies to disclosure “relating to each financial reporting period in the three years before the first year that the issuer prepares financial statements in accordance with IFRS.” For public companies in Canada, the disclosure will begin as early as the second quarter 2008 MD&A (for companies with developed IFRS changeover plans), and no later than the annual 2008 MD&A. Management and IROs need to focus carefully on the guidance received from the CSA, the expected disclosures, and how best to communicate the change in accounting standards.

IFRS Changeover – a Significant Undertaking
The Staff Notice underscores the significance of the changeover to IFRS. It says that “…changing from current Canadian GAAP to IFRS will be a significant undertaking that may materially affect an issuer’s reported financial position and results of operations. It may also affect certain business functions. Investors and other market participants will need timely and meaningful information about these matters during the reporting periods leading up to an issuer’s changeover to IFRS.”

The CSA notes that since adopting IFRS is a change due to new accounting standards, it falls within the scope of current MD&A form requirements for annual and interim MD&A filed in compliance with National Instrument 51-102, Continuous Disclosure Obligations, as well as MD&A included in a prospectus.

The CSA encourages companies to consider whether any additional disclosure beyond MD&A could inform investors about how a company might be affected by the changeover to IFRS – and if other securities legislation requires the issuer to disclose specific information about the broader implications of its changeover to IFRS.

Incremental Approach To Disclosure
A company’s ability to provide information will naturally increase over time as it rolls out its IFRS implementation plan. The CSA therefore outlines an incremental approach to disclosure. The level of detail and the amount of quantified information increase as a company moves closer to its changeover date.

Key elements of a changeover plan may address, for example, the impact of IFRS on:

• accounting policies, including choices among policies permitted under IFRS, and implementation decisions such as whether or not certain changes will be applied on a retrospective or a prospective basis;
• information technology and data systems;
• internal controls over financial reporting;
• disclosure controls and procedures, including investor relations and external communications plans;
• sufficiency of financial reporting expertise, including training requirements;
• business activities that may be influenced by GAAP measures, such as foreign currency, hedging, debt covenants, capital requirements and compensation arrangements. Following is a summary of the expected annual and interim MD&A disclosures in the years leading up to changeover.

2008 Interim MD&A

• If the company has developed an IFRS changeover plan, discuss key elements and timing.
• If the company is well advanced in its IFRS project, discuss the impact of the changeover on its financial reporting.

2008 Annual MD&A

• No later than three years before the changeover date, discuss the status of the key elements and the timing.
• If the company is well advanced in the IFRS changeover project, discuss the impact on its financial reporting.

2009 Interim MD&A

• Update the progress of the IFRS changeover plan and note any changes.

2009 Annual MD&A

• Discuss preparations for changeover to IFRS, building on aspects discussed in 2008 and interim 2009 MD&A.
• To ensure investors understand the key elements of the financial statements that will be affected, provide a narrative description of the major identified differences between the company’s current accounting policies and those it must/expects to apply in preparing IFRS financial statements, including any assumptions about future changes to IFRS.

2010 Interim and Annual MD&A

• Provide updated discussion of preparations for changeover to IFRS, building on aspects discussed in 2008, 2009, and interim 2010 MD&A.
• Discuss in more detail the key decisions and changes that have been or will be made relating to the changeover to IFRS, including decisions about accounting policy choices under IFRS 1 and other relevant individual IFRS standards.
• When preparing interim and annual MD&A, if a company has quantified information on IFRS’s impact on key line items in its financial statements, this information should be included.

The Staff Notice also outlines the specific requirements for disclosure by investment funds.

Next Steps
The changeover to IFRS is a major undertaking with potentially significant implications for issuers, investors and other market participants. Communicating timely and clearly with shareholders about the company’s progress and the expected impact of the conversion to IFRS on its reported financial position and results will help shareholder understanding and reduce the element of surprise. Many European companies, after their IFRS conversions in 2005, noted that they should have communicated better with their stakeholders in advance about the expected impact. We have the opportunity to learn from their experience. •

Rob Brouwer is a Partner and Mag Stewart is a Senior Manager with KPMG, Toronto.

What’s wrong with promoting your company? Nothing – subject to ‘truth in advertising’ laws and other prohibitions on anti-competitive behavior, that’s what marketing is all about: promoting your company and the goods or services that it sells.

What’s wrong with promoting the securities of your company? Nothing again, so long as you follow the rules – and there are quite a lot of them. Laws relating to the promotion of securities can be categorized in two basic rules – the registration rule and the prospectus rule. These rules reflect key objectives of Canadian securities laws: investor protection, investor confidence and capital market efficiency.

To understand the two basic rules, you need to know the meaning of a couple of important terms used in securities legislation: “trade” and “distribution”.

A “trade” includes:

"Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all, accurately so they will be guided by its light." ~ Joseph Pulitzer

In the extremely hectic world of IR, we are often stretched too thin – consumed with day to day tasks and putting out fires – to even consider adding to our workload with board reporting. Some of us barely make it through year-end with all our faculties intact! But in our constantly evolving profession, it has never been more important to implement some form of report to the board from the IR perspective. New and changing regulations, the advent of additional investment vehicles, laws, and market events – all impact our companies and are growing concerns for our shareholders. And your board needs to hear what you know, since you are closest to shareholders and the Street.

Year-to-date, the S&P/TSX Composite Index has declined at an almost 11.0% annualized rate, based on the results for the quarter ended March 31, 2008. In addition, due to the uncertainty created by sub-prime mortgage and non-bank asset-backed commercial paper exposure and write-downs, investors are not in a happy mood – and this is certainly unsurprising. Canada’s manufacturing sector is most likely in a recession. The paper and forest products industry? It’s in a multi-year depression! The press has absolutely nothing positive to report and CNN is giving us a constant barrage of disconcerting facts and figures.

Three or four times a week, Jim Estill, Chief Executive Officer of Guelph, Ontario-based SYNNEX Canada Limited – a subsidiary of U.S.-based and NYSE-listed SYNNEX Corporation – puts fingers to keyboard and cranks out a new blog entry for an audience of approximately 3,000 readers. "I can only blog about public matters after they're public, so I mostly blog about personal struggles," says Estill. The greatest perks from blogging? "I get lots of counsel and ideas, and sometimes people send me free books," he says.

Estill, who's published his Time Leadership blog since May 2005, is one of a small but attention-getting cadre of CEOs who share their insights in cyberspace. As of mid-April 2008, approximately 11.6% of Fortune 500 companies had active public blogs, according to the Fortune 500 Business Blogging Wiki. CEOs who blog represent a far tinier subset. In Canada, the number of public company CEOs who blog can almost certainly be counted on a single hand.

Among the more than 400 who attended the IR Magazine Canada Awards in Toronto, perhaps the most notable standouts were the CEOs, CFOs and other members of senior management teams supporting their IROs and celebrating their companies' successes. They proved the notion that IR is a team effort, as so many of the winning IROs attested.

Darren Entwistle, CEO of TELUS, who was ranked number one in the ‘Best IR by a CEO’ category, sent a video message. “In an era of increasing disclosure, TELUS takes seriously our duty to maintain an open and honest dialogue with the investor and analyst communities,” he said. “To foster these positive relationships, we are always striving to provide clarity on our strategic direction and decisions, addressing the tough issues, and as well listening to obtain insight on investor views. I see this as a two-way exchange of ideas. We also believe in setting annual targets and then being accountable for achieving and adjusting them if necessary in a very open manner.”

Robert Noorigian, head of IR at CN, summed up the sentiments of many of the winners. “When markets are really good, being an IRO is easy. It's when the markets start to get tough that being an IRO is hard,” he announced. “In back of me, there are a lot of other people who have made me and made my company look really good…Obviously there's my IR team but…there's the CEO, the CFO, the operating people, the chief marketing officer and many others.” Below is the list of winners, identified in a survey of more than 250 investment professionals from a list provided by Thomson Financial and Equicom, as well as 100 retail investors in a survey conducted by PrecisionIR Group. The full results, including in-depth comments about shortlisted companies by the analysts and fund managers who voted, are published in the Investor Perception Study, Canada 2008 available at www.thecrossbordergroup.com. •

Determining when merger negotiations need to be disclosed to the public can be challenging. Disclose too soon and your stock may be in for a roller coaster ride – a premature announcement can scuttle the deal if the news drives the stock too high, while news of negotiations that are subsequently abandoned can send your stock tumbling. If you wait too long and get it wrong, you may find yourself accused of failing to meet securities laws requiring timely disclosure of material changes. Investor relations professionals can now look to the recently released decision of the Ontario Securities Commission (OSC) In the Matter of AiT Advanced Information Technologies Corporation, Bernard Jude Ashe and Deborah Weinstein for guidance.

Securities legal counsel advise, generally, that merger negotiations need not be disclosed until a definitive agreement is reached. The OSC’s decision, in essence, supports this position and provides some useful guidance as to when merger negotiations must be disclosed as a “material change” under the Ontario Securities Act.

As this article goes to print, it is safe to say that so far 2008 has provided investors with more volatility, pain and anguish than all of 2007. (And come to think of it, 2007 was a heck of a lot tougher to handle than 2006, wasn’t it?) The issue facing investors is how much more of this (lousy stock market performance) must we endure and when will it be over.

Alas and alack, I cannot help you there but I am confident that I can assist with one aspect: your upcoming annual proxy circular. When I was hired into this industry over 25 years ago, it was safe to say that we didn’t spend an enormous amount of time poring over these documents. Back then, when you had seen one annual proxy circular, you had seen them all: appoint auditors; approve the slate of directors; and fix management remuneration. In addition, individual shareholder proposals that did make the circular were incredibly rare and institutional shareholders didn’t pay much attention to them because the proposals weren’t taken very seriously. On top of that, it was very rare for a client to quiz us on how we voted on any issue, let alone an extraordinary one.

Now that many senior IROs have attained a ‘seat at the table’, they face fresh challenges, including navigating the triumphs – and trials – of a far closer working relationship with the CEO. John Paul Macdonald, Senior Vice President, Public Affairs at Bombardier Inc., says that all of the CEOs he has worked with have been extremely smart. “More often than not, though, really brilliant people lack people skills,” he says, and the stresses of the job can make CEOs irascible. His advice? Know your stuff, gain the financial literacy necessary to be credible, and present your views honestly but respectfully.

Although IROs can take steps to foster a better working relationship with the CEO, sometimes the chemistry is so flawed that it makes the job nearly impossible. Janet Craig, Vice President, Investor Relations, at Nortel Networks Corp., says that her only not-so-positive relationship with the six CEOs she has worked under foundered because of “philosophical and personal” differences. “I did the work I needed to do, but ultimately I wasn't as effective because honestly, I think that the CEO didn't like me that much,” says Craig. After a while, she found a new position. “I probably would have been fired if I hadn't left,” she adds.

The Right Chemistry
Naturally, every IRO identifies different make-or-break issues for working with a chief executive. “Before I go into a company, I always have a heart-to-heart talk with the CEO to determine if we have the same views of disclosure,” says Naomi Nemeth, Vice President,

Investor Relations, at Homeland Energy. She advocates a “very straightforward discussion of specific scenarios” because she wants to know whether the CEO plays by the book (her philosophy), or likes to push the disclosure envelope. Nemeth has turned down jobs because she didn't agree with the CEO on this critical point.

The initial interview presents a terrific opportunity to gauge whether the IRO/CEO relationship has the potential to work. How much time the CEO spends with a candidate is often an indication of the amount of access you'll later enjoy. Karen Attwell, who founded Attwell Communications in Calgary after a 10-year career in IR, puts it this way: “If the organization doesn't feel it's important for you to meet the CEO, it may not be the senior job they're presenting.” Having the right chemistry with the CEO isn't the same as being friends, maintains Macdonald. On the contrary, he believes that a good IRO needs the detachment to listen to analysts, investors, and journalists – and then explain their various points of view to management.

Macdonald advises new IROs to develop a thick skin. “If the CEO reads something he doesn't like and then lays into you, you have to have the patience and empathy to realize where it's coming from,” he says. Instead of feeling defenseless when tempers flare, IROs should consider the pressures CEOs face and “put on flak vests when things are going to be flying,” he jokes.

Former Ontario Finance Minister Janet Ecker was the special guest at the CIRI Senior IR Assembly on November 22 in Toronto. Later, she sat down with CIRI President & CEO Ian Bacque for a question and answer session that drew on her life in politics, on television, and in business and corporate communications.

The recent surge in private equity buyouts has some IROs questioning what they’d do if private equity investors came knocking. Already 3,000 private equity funds have raised $500 billion worldwide, according to the Private Equity Council. Some have been particularly aggressive in the Canadian market, including major U.S. buyout group KKR and the Ontario Teachers’ Pension Plan’s private equity arm. The question of what happens to investor relations at target companies largely depends on the private equity buyers but experts say IR should be aware of the options these deals present.

“It is an interesting journey to go through the process of being with a publicly held company and taking it private,” says Smooch Reynolds, Chief Executive Officer of IR-specialized recruiting firm The Repovich-Reynolds Group (TRRG). “But it really depends on whether the private equity firm wants the IR person to stay. If there are bondholders, there is still an investor component and it can be a worthwhile chapter of experience in doing a different type of IR.”

Katherine Vyse has special insight into this unique form of IR. As Senior Vice President, Global Marketing and Client Communications at Brookfield Asset Management, she’s in charge of raising her company’s profile with potential investors in Brookfield’s private equity funds. “My private equity IRO role is still evolving but currently it focuses on bringing some of the traditional IR tools and techniques to the private equity side of the business,” she says.

“Regard your good name as the richest jewel you can possibly be possessed of – for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to gain a good reputation is to endeavor to be what you desire to appear.”

Socrates Greek philosopher in Athens (469 BC - 399 BC)

This might seem like a dramatic way to begin a column about the art of investor relations, but it is directly on point with regard to my subject for this issue – reputation management. In the forum of public markets, fortunes (and stock prices) rise or fall in reaction to sometimes unforeseen or uncontrollable events.

Along with additional line items on the balance sheet, and a new statement of other comprehensive income, the enhanced disclosure and presentation standards provide more qualitative information about the risks that companies manage. By the first quarter of next year, that information will grow to include quantitative measures of risks managed by the company. Here is a brief description of some highlights.

CICA Handbook Section 3855, Financial Instruments – Recognition and Measurement,

An issuer’s inability to accurately and quickly identify its shareholders has long been a subject of criticism in Canada. We certainly lack the transparency available in some other jurisdictions. Some people believe that institutional shareholders as a group actually like anonymity, and have thus resisted transparency initiatives, but I do not believe this is true. However challenging it may be, identifying your shareholders should be a key initiative of your IR program. You will find it difficult to qualitatively benchmark the success of your IR plan if you can’t ask for direct feedback from your investors. As well, gauging key changes in your ownership base will allow you to determine what is driving interest in your company – is it investment style, is it your industry, your strategy, your state of play, for example? Truly under-standing these things will also allow you to prioritize management time on road shows and enable you to be strategic about selecting your one-on-one meeting opportunities. You will also be better prepared in the event it becomes important to solicit a proxy vote.

With companies launching sustainability strategies daily, green is definitely the new black inside corporate boardrooms today. Environmental initiatives are now seen as a way to boost a company’s reputation and, in some cases, its bottom line. By investing in energy efficiency technologies and renewable energy, many Canadian companies are reducing their greenhouse gas (GHG) emissions and addressing a growing concern among institutional investors and sell-side analysts who have flagged global warming as an immediate concern. “Climate change is the most important issue for investors to follow right now,” says Julie Gorte, Senior Vice President for Sustainable Investing at mutual fund company Pax World Management Corp. Gorte has been studying corporate responses and trends in climate change for years and has seen a notable improvement in the number of companies addressing this issue and the quality of reporting in this area. Still, as Gorte says, companies are much more likely to report on climate risks if they also have positive news to tell. “GE, for example, is doing a good job of reporting on the issue as it’s making money with Ecoimagination but many companies that don’t have a positive story aren’t reporting at all.”

When asked to describe his leadership style in three words, Ian Bacque doesn’t miss a beat. “Focused, strategic and effective,” he says, from his home office in Uxbridge, Ontario. These qualities will definitely come in handy when Bacque officially steps into the role of President and CEO of CIRI this September 4th.

Speaking a month before his official start, Bacque is clearly looking forward to leading a growing organization in a fast-moving industry. Even in the middle of Southern Ontario’s stifling heat wave, he’s busy contemplating CIRI’s role. “Advancing the credibility of the investor relations profession and the competence of CIRI members is really the key role for CIRI,” he says. “Ensuring competence and professionalism will lead to greater credibility over the long term so long as there is also an effective communication plan around this effort.”

What attracted Bacque to his new position is the ability to lead such a well-known and respected national association. The fact that CIRI is in the capital markets arena is a real bonus, he adds. Most recently, Bacque spent three years as Director of Ontario Government Relations at TELUS. There he got a taste of what it’s like to work for a publicly-held company and he is excited to delve deeper into equity markets culture. At TELUS, he also gained first-hand knowledge of what it’s like to work with a dynamic CEO and some of the challenges and opportunities facing investor relations professionals.

“I really enjoyed TELUS’ high performance culture and its dynamic leadership made it exciting every single day,” he says. The company’s commitment to corporate citizenship also impressed Bacque, who was responsible for developing the telecom’s government relations plan and community investment program. “I enjoyed serving on the TELUS Toronto Community Board, making a difference in the communities in which we lived and worked; it felt good,” he says. “I’m very pleased that TELUS and its IR professionals are members of CIRI.”

A lawyer by profession, Bacque also spent time as a solicitor for The Toronto-Dominion Bank. Additionally, he has plenty of experience in policy and regulatory affairs, since he worked as a senior policy advisor for the Ontario Ministry of Finance. While at the Ministry, Bacque was involved in several regulatory initiatives including pension, insurance, and financial institution policy reforms, as well as working with the Ontario Securities Commission.

It comes as no surprise, then, that Bacque intends to get CIRI more engaged in regulatory issues affecting public companies and investor relations professionals. “CIRI’s vision is to be recognized as the Canadian authority on investor relations, committed to enabling fair and efficient capital markets, and one of its goals is to take a leadership role in Canadian capital markets by representing the views of CIRI members,” he says. “Achieving our vision and goals requires engaging governments, regulators, and policy makers during official processes, and also outside of these processes, to effectively advocate for CIRI members and their viewpoints.”

Bacque is no stranger to the inner workings of industry organizations. Prior to joining TELUS, he was Director of Government Relations at the Canadian Institute of Public & Private Real Estate Companies (now REALPac), a national real estate association representing Canada’s largest publicly listed and private real estate companies.

On reflection, Bacque says REALPac was a good introduction to the art of considering a wide range of views and finding a position that serves the goals of all members. “REALPac represented public companies, private companies, pension funds, and brokers, and, within those categories, members owned offices, shopping centers, apartment complexes, etc.,” he points. “So you had a wide range of viewpoints and you had to pull all of them together to figure out the common ground.”

Heading a professional organization based around job function rather than industry will call on similar skills, Bacque adds. “CIRI members may work for companies in all sectors of the economy, but they have a singularity of purpose, from a professional standpoint,” he says. “Whether an IR professional works for a mining or medical company, the goal is the same: to achieve an effective two-way information flow between a public company and the investment community.”

When asked what he is most looking forward to about leading CIRI, Bacque says learning about members and their companies tops his list. He is also enthusiastic about meeting his team and the rest of the CIRI Board because he feels they will be instrumental to his success. “Being effective requires an excellent team and being responsive to the Board’s direction in implementing the strategic plan, and, at the end of the day, associations are all about the members,” he adds.

First on Bacque’s agenda is soaking up information. “I’ll be listening a lot at the start, that’s for sure,” he says. He already sees plenty of opportunities for CIRI in terms of growing the membership and attracting sponsors, both of which will be key focuses when he takes over. Bacque is impressed with the level of professional development and continuing education that CIRI offers and says he will find it a challenge to build on the organization’s excellent record in these areas. He’s aware that it will take a little while for him to get his sea legs at CIRI. “I’m sure it will take some time in the role for me to get a good sense of what direction we’re going to be headed in,” he adds.

A father of two young children and stepdad to two teenagers, Bacque relaxes by spending time with his family. In the winter, the Bacque clan heads for the ski slopes; in the summer, swinging golf clubs is the sport of choice. As is fitting given his political background, the incoming CIRI leader is a self-confessed news junkie. “I am always reading newspapers and websites and have the radio on to stay on top of the latest news,” he adds. This desire to stay on top of news will undoubtedly serve Bacque well as he gets ready to enter the fast-paced world of IR.

IROs working for companies with dual listings are bound to ratchet up the air miles. “You can’t sit in your office in Toronto and manage a dual listing,” says Robert Lavalliere, speaking from an airport. The Vice President of IR at Anvil Mining, which trades in Australia and Toronto, has 20 years of experience running IR for companies with multiple listings and is adamant about getting out and kicking tires.

Today most investor relations professionals are actively targeting investor pools outside their domestic market and there are plenty of theories on the best way to pursue shareholders beyond your home terrain. Some IROs claim a secondary listing is the best strategy to tap into foreign institutional dollars while others say a single listing on a high profile exchange is enough to provide the liquidity and speed of execution that global institutions require.

I’m not the most technologically proficient portfolio manager out there (but thank goodness my associate is, being fresh out of university). Whenever a new TLA is announced (and for the uninitiated, a TLA is a Three-Letter-Acronym), my head automatically starts spinning. I immediately conclude that, whatever it is, it has something to do with technology and, try as I might, I will never be able to totally comprehend what it does, or why it matters.

Adrian Holliday reports on the IR challenges for London’s Aim-listed companies

No trading record, no minimum market cap, fewer reporting requirements and, for investors, some congenial tax benefits. The attractions of London’s Alternative Investment Market (Aim), and other small exchanges around the globe, abound.

In 2005, Aim had its most profitable year since its launch in 1995 with 335 IPOs, raising a total of £6.46 bn ($11.31 bn) in new issues. The exchange’s total market cap rose 40 percent to £1,399 bn in contrast to £1,021 bn at the end of 2004.

But given the relative ease of listing on Aim, it’s understandable that some speculation about the quality of investor relations among listed issuers should ensue. The question is, how effective are the management teams of these nascent businesses at explaining their company’s strategy? And is the less strict regulatory environment a boon or a potential danger to investors?

Rising to the challenge
Rory Stear, CEO of Freeplay, a £6.63 mn market cap Aim-listed company that produces electronic appliances based on wind-up energy technology, believes in clarity. Effective IR for him involves maximizing every opportunity to put his case to the market using the clearest language possible.

‘I can’t stand jargon,’ says Stear. ‘The annual report is a great opportunity for a small company to remind all its stakeholders what it’s really about and to highlight the things that are unique about it, in the most straightforward language.’

Hardy Amies, the UK’s last couture house, is another Aim minnow, with a market cap of just £5 mn. CEO Tim Maltin says one of his biggest IR tests is keeping in touch with a very broad shareholder base and encouraging ongoing voting interest. ‘Our previous incarnation was on Ofex for five years, so we’ve actually been listed for seven years,’ says Maltin. Ofex is the UK independent market for companies up to £20 mn. According to Maltin, shareholders tend not to get involved in voting – and that apathy disappoints him.

One of the biggest challenges for these small companies involves the cost and logistics of communicating to a large audience. ‘Getting half-yearly results out to 2,000 shareholders, for instance, is very expensive,’ says Maltin.

Maltin has worked out a cunning way to keep costs down by hiring students to come and lick stamps for mail-outs. But even when costs are under control, these companies still face the daunting reality of trying to communicate to shareholders via intermediaries. ‘The other difficulty is that we send out things to shareholders who have shares in nominee accounts, and nominees are extremely bad at forwarding information to individual shareholders,’ adds Maltin.

Spelling it out
Again, clarity is the name of the game when young, Aim-listed companies are trying to explain their business strategies to current and potential investors. Many of these issuers are in complex and relatively new industries with which investors and analysts aren’t so familiar.

Michael Tapia, CEO of technology utilities company Qonnectis, finds keeping shareholders updated on the company’s business strategy a challenge. Qonnectis was originally a pure internet business, but it has now evolved into an internet technology and utilities operation.

‘I’m aware that some who are less in touch with the business haven’t understood how we’ve changed,’ Tapia says. ‘But we’re investing more in the IR part of the web site, which includes share price and industry information. We also include stories about energy news, the environment, carbon emissions and energy prices.’ Tapia views the web site as an efficient method for keeping shareholders informed on the industry and Qonnectis’ own story.

John Halfpenny, CEO of CMR Fuel Cells, recognizes the need for delivering a simplified IR message. His company develops fuel cell technology for a variety of power-generation applications, including military power packs.

‘You can focus on green energy or lower emissions, but the key story is the commercial proposition – the classic features and benefits,’ says Halfpenny. ‘Why is it that current solutions are deficient in meeting a need? How does your product meet its need?Marketers talk about features and technology, but it’s the benefits that people really look for.’

Attracting coverage
Sell-side coverage is another major hurdle for small-cap companies. ‘These companies may have a range of investors, including private clients, investing from a speculative basis – people who are perhaps buying for inheritance tax reasons – and buy-and-hold investors who bring responsibility, which is what you want,’ says Hardeep Tamana, CEO of stockbrokers Fyshe Group. ‘But you’ve got to understand the effect of news flow and how to make your stock marketable to the broker community. Plenty of companies do IR roadshows, but most fail to realize that under current FSA regulations, most firms will never feature on any stock recommendation list unless there’s independent research on the company.’

Getting that coverage is very difficult for early-stage issuers. ‘It’s always a question of economics,’ says John Nuttall, an analyst with London-based Investec. ‘If you believe a firm will generate sufficient commission or win an advisory relationship as a consequence of covering an Aim company, you’ll do it. But if you don’t think so, you won’t.’

Attracting the sell side is about economics, resources and time, adds Nuttall. He won’t consider covering any company with less than a £70 mn market cap. And while some companies might consider investing in paid-for research, it’s generally good practice to continue to target traditional brokerage research because that is what the buy side will read.

Maintaining the balance
While many Aim-listed issuers appear to be taking a proactive approach to investor relations, these companies aren’t required to do so. Gary Withey, a partner with London-based KSB Law, says current Aim legislation doesn’t require ongoing investor relations dialogue with shareholders. ‘When we float a company on the Aim market we make sure it is aware of the Quoted Companies Alliance guidelines for Aim companies, which require dialogue with shareholders to establish a mutual understanding of the company’s objectives,’ he says. ‘While this is helpful, the majority of the recommendations are about corporate governance. I can run a company according to all the available corporate governance guidelines, but still effectively tell my shareholders very little.’

Withey says the UK government’s current Company Law Reform White Paper addresses the disclosure challenge young companies face. ‘The problem we always have is how much you tell investors without releasing price-sensitive information,’ says Withey. ‘You can, by all means, have an IR director people can call with specific questions, but you can’t tell them specifically what you’re doing with projects likely to impact on the share price.’

Clarity, balance and consistency are the best IR ingredients for companies that are listed on Aim or any other small-cap exchange. This is the best way for a young company to attract shareholders that will take it to the next level of growth. As always, aim high.

by Adrian Holliday
Thanks to IR Magazine for allowing us to bring this article to you.

Mike Reilly looks at the ‘other’ over-the-counter market as the Pink Sheets launches a US version of Aim

There’s a new wrinkle in the fabric of the markets – one that may bring an alternative for US investors hungry to own more international shares and for foreign issuers eager to raise their profile but unwilling to take on the costs of SEC registration, exchange listing requirements and Sox compliance.

The Pink Sheets – or the Pinks, as it is known on Wall Street – dates back almost to the beginning of the 20th century. It has traditionally been seen – and still is by many today – as an outdated paper-based quotes arena for a wide array of shares – and mostly dicey penny stocks at that.

But under the stewardship of a savvy New York area native named R Cromwell Coulson, the Pink Sheets has become a robust contender for the attention of many companies, including western Europeans who have recently shied away from the US.

With a snappy internet venue for its now all-electronic quotations, the Pink Sheets has steadily added features to make the market attractive to all constituents – issuers, market-makers and, most importantly, investors. Its quotes are distributed by all the major vendors, from Reuters to Bloomberg. Now it plans an elite quotation that will require high levels of disclosure, though not as high or as extensive and expensive as those required by SEC registration.

Here comes OTCQX
The Pink Sheets’ new OTCQX is touted as being similar to London’s Alternative Investment Market (Aim) in its structure, and Coulson has created a chart on the new web site (www.otcqx.com) showing the parallels. The chart also shows how the new service will stand out from both the Pink Sheets and the OTC Bulletin Board, on which many over-the-counter stocks are posted under the aegis of NASD.

The bottom line for non-US companies is that by backing a US quote of their stock listed, say, in London or Frankfurt, a ready market is presented for US investors. Such quote generation is done by market-makers, typically broker-dealers, who simply begin to make a market in a given stock and then post their bid and ask prices. This may come from their own belief that interest is out there, or it could be generated by institutions that let the dealers know they want to see prices.

Companies like Nestlé, Roche and Heineken already trade on the Pink Sheets and enjoy US visibility without the high costs of Sox regulations or registration and listing fees. ‘Look at consumer brands with US employees, with big US customer bases,’ says Coulson. ‘If you are Volkswagen, you want people who buy your cars to be able to buy the shares easily. It increases the number of repeat customers.’

The overall move in European markets toward greater transparency and best practice in disclosure plays directly into the new OTCQX proposition. By offering a venue that guarantees only companies with strong disclosure habits and regular financial reporting that meets its listing standards, the OTCQX hopes to attract more investors and well-regarded issuers, regardless of size.

More varied IR
The new service will create three tiers of companies, with the highest level of well-qualified firms having to hit several marks in addition to regular financial reporting and good disclosure. Added criteria include management certifications, quarterly reporting and the appointment of a ‘designated advisor’ – a kind of monitor to ensure compliance.

Since there is no exchange listing and the requirements of SEC filings are limited to matching those of companies’ home countries, there can often be a certain relaxation of IR among Pink Sheets stocks. There is no retail component to IR for Roche, for example, since its shares are mostly owned by institutions and it does not seek retail investors in the US. Then there are the special situations, which abound on the Pinks. Owens Corning, driven to bankruptcy by asbestos lawsuits, moved over to the Pink Sheets while working itself out of its problems.

Sox pushed some US companies onto the Pinks along with foreign ones. Moving off the American Exchange shortly after Sox came over the horizon was a strategic choice for the Ziegler Companies, a Midwestern financial services firm with billions of dollars in business and billions more under management for clients.

‘I immediately perceived Sox as highly problematic from an expense and management point of view,’ says Ziegler CEO John Mulherin. ‘Requirements for new board committees, Section 404 compliance, extra auditing – all these combined to create a task we could not afford. We decided to de-list and deregister.’

But unlike Owens Corning and others who almost seem to be hiding on the Pinks, Ziegler cares a lot about its shareholders and their perception. ‘We made a lot of calls, wrote letters and had conversations with shareholders, clients, employees and other constituents. We spent a great deal of time explaining to people how to use the Pink Sheets,’ Mulherin recalls. ‘It was important we be very clear about our views on corporate governance and transparency.’

Did the move to the Pinks pay off? ‘The effort was endorsed by shareholders, who saw that we were saving capital and guarding profits. The stock price appreciated by 10 percent,’ the Ziegler CEO states.

Foreign companies unwilling to take the expensive and rules-strewn path of a full exchange listing may be encouraged by the new ‘premium’ OTCQX. After all, Federal Reserve figures show non-US stocks represented just shy of 16 percent of US portfolios at the end of 2005 – a record level, but one that leaves a lot of room for growth.

by Mike Reilly

Thanks to IR Magazine for allowing us to bring this article to you.

Jeff Cossette samples the opinions of the 572 investors and analysts who voted in the IR Magazine Canada Awards 2006

Not everyone can design an effective investor communications plan. Fewer still can focus the diverse talents needed to craft an IR strategy that ranks among the world’s best. Those at the top possess a remarkable blend of discipline and skill uniquely suited to the job at hand. But they also have something extra: an ineffable essence that binds these qualities together and that rubs off at the meeting point between company and investor.

How does an IRO know he or she has it? The standard metric of success – consistent, generous salary increases – is, of course, ‘standard’ for a reason. But a more fundamental – and perhaps less confidential – measure of job performance is the opinion of an IRO’s ‘external’ clients: investors and analysts. Their collective judgment is revealed each year at the IR Magazine Awards.

Since 1998, IR magazine has commissioned an annual study to uncover the Canadian financial community’s opinions on the state of IR. The IR Magazine Canada Awards, held in association with the Globe and Mail, are part of a global series canvassing over 8,000 investors and analysts in over a dozen countries and regions. This year, unlike previous surveys, each of the 250 Canadian sell- and buy-side analysts and portfolio managers was interviewed by phone. Together with the opinions of 215 retail investors and 107 US portfolio managers and analysts, verbatim comments are contained in the Investor Perception Study, Canada 2006. Institutional contacts were provided by Thomson Financial, while PrecisionIR from WILink conducted the retail survey.

Overall, the survey found that members of the Canadian investment community recognize IROs at Canadian companies as playing an important role in their daily working lives. However, a minority of respondents lament the fact that some IROs in Canada are not sufficiently senior to answer all their questions. Several say this problem can be ameliorated by raising the profile of the IRO’s role within the company.

‘IR in Canada is nowhere near on a par with the US,’ says one buy-sider. According to another: ‘At meetings, an IRO may accompany the CEO, but we never see them on their own – they just facilitate and organize meetings.’

When asked if IROs should present directly to the board, 60 percent of those who responded said ‘no’ – and many were even taken aback by the question. ‘That’s a job for senior management,’ says one respondent, echoing the prevailing sentiment. Another adds: ‘Keep them as far away from the board as possible. IROs often want to show how powerful they are, and they end up overreaching themselves.’ One respondent remarks: ‘The problem is IR people don’t listen to us very well in the first place.’

Listen and respond
In fact, the ability to listen is a key element to being a successful IRO – 40 percent of survey respondents list ‘communications skills’ as an effective IRO’s most important attribute. Smart IROs know that communication is a two-way street. For example, Scott Lamb, vice president of investor relations at TD Bank Financial Group, which won two prizes at this year’s awards gala at Toronto’s Royal York Hotel on January 26, attributes TD’s award for best IR web site to ‘listening to our clients’. ‘We pay attention to the kinds of questions coming into the IR department,’ says Lamb. ‘If we can meet that information need on our site, that just helps us to be more efficient, and our customer base appreciates it. It is key to have a two-way flow of information.’

Listening skills are also critical for Flora Wood, IR manager and corporate secretary at Harris Steel Group. ‘Most of the people we’re serving – analysts, institutions and retail investors – will tell us precisely what the most important thing is to them when deciding to invest in our company,’ says Wood, co-winner of the award for best IRO at a small to mid-cap company. ‘But they won’t necessarily tell us that in the first conversation. So listening skills are important to get enough of their trust that they are willing to tell us what they are looking for.’

Wood says an IRO’s key attributes vary by sector and market cap, but it is always necessary to be close to senior management. ‘You must be treated as someone who needs to know, as closely as possible, everything that management does, then filter confidential information and communicate a subset of the whole,’ he says. ‘The other approach some companies take is to educate the IRO only in what’s going to be communicable to the market. That’s not the best approach.’

One way Wood stays close to the loftier decision-makers at Harris Steel is via her role as corporate secretary. ‘The CEO who hired me gave me that title,’ Wood explains. ‘Frankly, I wasn’t entirely sure what that was and wanted to give it back, saying I just wanted to be an IRO. He said, insightfully: No. While it doesn’t make sense for you to be a director, you have to be someone who sits at the board level. As corporate secretary you are at all the meetings and learn from that experience. At the same time, that allows the board to have whatever degree of interaction with you that they want on the IR side.’

Strategic adviser
The ability to be both a corporate communicator and a strategic adviser within the company has also been a pleasant and exciting opportunity for Robert Noorigian, vice president of investor relations at CN. ‘Simply acting as a meeting coordinator could not be a very rewarding role,’ comments Noorigian, who won the award for best IRO in the mega-cap category (CN also took the prize for best investment community meetings and the Ciri grand prix for best overall IR, mega cap). ‘Board members will go through all the analyst reports and other written material provided to them, but they also want to talk to someone who talks to shareholders and analysts all the time,’ Noorigian continues. ‘They want to know what shareholders think about the direction the company is taking. More interaction with the board is a trend that will become increasingly important going forward. I do presentations to the board and I expect more IROs will do so in the future.’

According to Janet Craig, director of investor relations at ATI Technologies (which won the Ciri grand prix for best overall IR, large cap) and winner of the award for best IRO at a large cap, the IR person the investment community wants is ‘one who knows the business, can speak with management, and is responsive, proactive and polite.’

‘You are in a constant feedback loop as long as you have open relationships with analysts and investors,’ adds Sheila McIntosh, vice president of IR at EnCana, which won awards for best financial media relations and best retail investor communications. In fact, EnCana regularly does its own formal (and anonymous) survey of the investment community. ‘We do surveys at the end of each investor day – what worked and what didn’t, and suggestions for next time,’ says McIntosh. ‘Meanwhile, when we are talking to people on the phone, we can get a sense of whether people found things like conference calls informative or not.’

Another trait among investor relations officers that is highly valued by the investment community is specific industry knowledge and company experience. As one survey respondent explains: ‘The more familiar an IRO is with the company and industry, the more advantageous it is.’

Epitomizing this breed of IRO is Kim Nelson, investor relations manager at Langley, British Columbia-based biotech AnorMED. A former AnorMED scientist who spent five years in research, Nelson attributes her good relationships with analysts and investors to being able to answer questions with credibility. ‘Biotech is a difficult industry, and much of what we talk to investors and analysts about is our clinical data and the science behind the research,’ she says. ‘Being able to articulate that is a definite benefit.’

All in all, the survey results confirm that the anatomy of a successful IRO is composed of more than just communication skills and a flair for organizing meetings. Future award winners will be taking note.

by Jeff Cossette

Thanks to IR Magazine for allowing us to bring this article to you.

Hulus Alpay offers some wise words on roadshows and cost savings for the annual reports

Q- We’re a small-cap company with a broad shareholder base and we’re not pleased with the rising costs of mailing out our annual report. We give shareholders the option to get the annual report online, but we still mail out around 2,000 reports. Any advice on how we can cut down these costs?

A- While it is certainly true that we live in a digital era, some things never change – like producing and distributing printed copies of your annual report. Although electronic copies seem like a no-brainer to save on printing costs, industry sources claim only about 15 percent of the population opts for them. That number should increase gradually over time, however.

In the interests of stretching your annual report budget, perhaps you can save money in other ways – for example, streamlining the preparation process to avoid expensive editorial changes later in the production phase. Also, you might want to rethink the length, the use of graphics and the choice of paper stock.

Something else to consider is that the ‘summary annual report’ seems to be back in vogue. These annuals contain fewer pages than traditional reports, since many of the financial pages are left out.

Depending on the nature and size of your company, you might also think about a folder-style report in which one of the folder’s pockets holds the 10K. Lastly, you may want to investigate the cost of distributing your annual report on a CD, or perhaps making this option availabe to your shareholders.

Q- Is there a standard practice for the length of presentations in one-on-one meetings? Last time we were on the road, investors seemed to want more time for questions and less time spent on the formal presentation. I’ve cut down my CEO’s slides and suggested we provide an extra five minutes for questions, but I wonder if there is a standard length that most companies follow.

A- What you’re finding is generally correct. Investors prefer to spend time asking questions when face to face with management. The length of one-on-one meetings varies from 20 minutes for a deal roadshow to as long as an hour for a non-deal roadshow. But as a general rule of thumb, investors will allow for a longer meeting when they’re genuinely interested in getting a deeper understanding of your story or industry. I recommend determining the length of each meeting in advance of your visit, either by asking the investor or making an educated guess based on what you think they want out of the meeting.

Investors aren’t shy and will tell you if they are simply looking for an opportunity to ask questions or want to be educated through a lengthy presentation. It’s important to have a presentation that can easily be modified to suit every opportunity. It’s really as simple as having a core presentation to which you either add or subtract slides depending on the investor’s familiarity with your company.

E-mail questions to advice@thecrossbordergroup.com. Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.

Thanks to IR Magazine for allowing us to bring this article to you.

Terry McWilliams reports on the UK pension deficit crisis that’s hitting home for IR

recently as the 1990s, Britain’s corporate-sponsored pension plans were the envy of the world. Schemes were flush with abundance. Only the rare fund had a shortfall, and life was good. But now this pension paradise has been turned upside down.

Today, a staggering 94 percent of final salary pension schemes at FTSE 350 companies report pension deficits. Six FTSE 100 companies have shortfalls larger than 30 percent of their market capitalization. Underfunding estimates reach as high as £150 bn ($262 bn) for UK companies.

In Europe, the overall pension deficit was Ä116 bn ($138 bn) for the 50 companies on the Dow Jones Stoxx index, with companies in Germany, Spain, the UK and the Netherlands reporting the largest average pension deficits. ‘We’re talking some big numbers,’ says Marc Hommel, an actuary with PricewaterhouseCoopers.

This major reversal in fortunes set in motion a number of regulatory and accounting changes that companies must implement this year. The solutions designed to restore corporate pension health are complex and challenge traditional corporate power structures, experts say. ‘It’s an attack on all fronts,’ says Orlando Harvey Wood, a pensions partner with the Deloitte consulting practice in London. ‘So much has been piled on companies in such a short period of time.’

‘You won’t find a magic bullet solution, in my view,’ says John Grout, technical director for the Association of Corporate Treasurers. ‘Companies will have great difficulties with their shareholders, who will not like what they see.’

Filling the holes
Under the UK’s Pensions Act 2004, most companies must plug their pension funding gaps within a decade. Some have increased fund contributions, while others are making one-off payments. Royal

Bank of Scotland hacked its deficit downward with a £1.1 bn payment that included £750 mn in cash. Scottish & Newcastle’s cash one-off reduced its deficit to £372 mn. Another option is a buyout, which means providing enough assets to allow an insurance company to provide future benefits in full. The total cost, experts say, is much higher than the accounting figure on the books. Whatever the method chosen, UK companies in pension deficit must placate a new overseer: the pensions regulator.

To ensure full scheme funding, the regulator can prohibit dividends, halt mergers, acquisitions and divestitures, alter refinancings or stop other transactions. Lingerie manufacturer Sherwood Group, for example, was told to pay nearly £8 mn into its pension fund before a share buyback could proceed.

‘That shows the strength of the environment in which they’re operating,’ says Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers (Apcims). ‘In fact, we have created something more powerful than the takeover panel on the Competition Commission.’ Bob Scott, partner at actuaries Lane Clark & Peacock, notes that potential mergers and acquisitions deals are already being curtailed.

While the regulator is a formidable force, company executives must also deal with newly empowered pension boards that have the authority to negotiate higher pension contributions. Pension trustees will be more demanding of cash, says Hommel. ‘It’s an opportunity for a trustee now at the corporate table to act as any other unsecured creditor,’ he adds.

Companies with huge deficits must negotiate better pension terms ‘or tell shareholders that cash flow will be going into the pension scheme,’ says Grout. ‘Not a welcome message for shareholders, and a nightmare for an IR director.’

Watch your step
Communicating pension deficit details and corporate fixes can be like walking in a minefield – one has to tread carefully. ‘If you’re a human resources person, an investor relations person or a general PR person, you’ve got a big problem,’ warns Grout. Different audiences have conflicting agendas: shareholders want return on investment, while workers want the promised retirement security.

‘The investor relations director has to juggle all of these things,’ says Grout. ‘In particular, you don’t say things to shareholders or analysts that do not exactly jell with what human resources is saying to the trade unions or the workforce. They will compare notes. Blogs will be set up and they’ll say things. It’s an unusually difficult job.’

Analysts are looking for clear explanations about pension deficits, actions and assumptions. ‘It is incredibly complicated,’ says Stephen Cooper, head of valuation and accounting research for UBS and one of the analysts calling for more information about assumptions. ‘But you need to disclose why it’s complicated and give the necessary explanations to help people interpret it. Companies shouldn’t hide behind long-held actuarial speak or technical jargon.’

Cooper thinks analysts will handle corporate valuations in a straightforward fashion, like debt. ‘Sure, these companies have large pension deficits,’ he notes. ‘But a company has to repay borrowings in the future; it’s like making lease payments on an aircraft, and they have to meet their pension obligations as well.’

Hommel says analysts will look at pension contribution impacts on cash flows, the scheme’s ranking against other creditors, claims on contingent assets, and the company’s ability to retain and motivate its workforce.

‘The pension deficit impact will be very hard for investors to measure,’ says Harvey Wood. ‘Most know it’s something to be worried about because it could have a material impact on stock price, dividend patterns and who knows what else.’

Analysts may face confusion as well. In his PhD study on analyst behavior, Ernst & Young partner and auditor Finn Kinserdal finds that many Norwegian analysts have difficulty with pension accounting. ‘These are smart people, but they think these [IAS19] rules are complicated,’ says Kinserdal, a member of the European Financial Reporting Advisory Group.

What lies ahead
UK companies don’t just have to deal with reducing deficits – they’ll also have to pay into a government Pension Protection Fund, which protects pensioners from company insolvencies. Premiums are based on the size of pension deficits and company credit ratings, and, as analysts note, represent another use of corporate cash.

Reducing total pension costs will be a future priority for companies. Analysts believe more companies will follow the example of Rentokil Initial, the first FTSE 100 company to freeze its final salary pension scheme and funnel new employees into a new, less costly program.

Knight says these closures are a clear example of the ‘law of unintended consequences’. ‘Regulators didn’t expect that rules enacted to protect pensions would result in their demise,’ she says. ‘But something had to be done at companies like British Airways, which is a small airline attached to a large pension fund.’

Recent publicity about the stability of private and public pensions has brought much-needed attention to retirement funding. ‘People are saving more for their pensions, and companies and employees are thinking more about it,’ Knight adds. ‘They’re not thinking of pensions as some sort of free benefit. Remuneration is a combination of salary and pension.’

The bad news is that the pension crisis isn’t going to disappear. ‘To think that it can’t get worse is to ignore the experience of Japan over the last 25 years,’ says Tony Osborn-Barker, a director in consulting at Deloitte. It seems that now is the time to bone up on the intricacies of communicating pension deficit details.

New reporting rules What exactly is the size of a company’s pension scheme deficit or surplus?

The answer is guided by IAS 19, the international accounting standard, and FRS 17, the British equivalent. All public companies in the UK and Europe are required to adopt IAS 19 beginning this year.

Under IAS 19, most companies are opting to reflect pension schemes’ actuarial gains and losses outside of profit calculations, although companies can recognize all pension costs against earnings immediately if they wish. And, for the first time, companies are required to incorporate a pension fund deficit (or surplus) directly onto the balance sheet, rather than putting the explanation in a note.

‘All I can say on the matter as an economist is that bringing corporate pension liabilities onto the balance sheet is a positive development,’ says Jean-Pierre Casey, head of research at the European Capital Markets Institute.

by Terry McWilliams

Companies from Spain, the US, Russia and Israel show the effects of good IR, writes Richard J. Wolff

Times change and practices evolve, but good IR must always include the ‘five Cs’ of communication: commitment, consistency, credibility, clarity and continuity. With sound communications, a well thought-out strategic IR plan and careful targeting to the right audiences, a company can realize its full and true valuation.

A well-known 2002 study by Oxford Metrica and Ernst & Young, ‘Risks that matter’, demonstrated that a company’s IR skills are a key factor affecting analysts’ and investors’ perceptions. Indeed, poor IR is often found to be one of the most important sources of sudden and major drops in share value. Investors demand responsiveness and accessibility and they want intermediaries who are able to discuss operating issues, markets and the competitive environment fluidly.

Why is transparency important?
Transparency provides the context that validates a company’s financial projections, including details on strategy, plans, risk management and corporate governance. It is a key determinant of shareholder value, and the demand for transparency rises whenever investor confidence wanes.

Take the banking industry. Back in the mid-1990s banks were still black boxes. The common attitude of bankers toward investors was ‘Follow me and I will provide great ROE, but don’t ask me how!’ Investors rightly balked, and enlightened banks, led by top-tier US institutions, decided to change their reporting and put a spotlight on their activities. They began to provide much greater granularity in reporting their operations, and this was well received by the marketplace.

Banco Santander is a case in point. In 1996 it instituted a policy of reporting more complete information by lines of business, and by mid-1998 its stock had soared 276 percent versus 176 percent for the Ibex 35. Of course, a lot of other things were happening at the time – Santander was becoming the largest bank in Latin

America and was well on its way to becoming the largest bank in the euro area by market capitalization – but this refreshingly open and transparent reporting stance unlocked value for the bank.

Eduardo Suárez, IRO at Santander, says: ‘Commitment to financial transparency served us well during our international expansion by highlighting the excellent operational efforts that were being realized by the bank.’

One example closer to home is the MIM Corporation, now BioScrip, which in early 2000 was an unknown pharmaceutical healthcare management organization. It had produced consistent financial results and growth, but was still unknown to the market and was valued at a significant discount to peers.

‘We instituted a proactive and strategic IR program in 2001, a year that coincided with enormous tensions and downward pressure in financial markets,’ recalls Barry Posner, an executive VP at BioScrip. ‘We based our effort on peer analysis and perception studies, and then developed analyst and institutional target lists and created investor materials communicating our strategy, our results and our benchmarks to the financial community.’ The result was that BioScrip was the second best Nasdaq performer in 2001, with more than 1,800 percent appreciation in share price.

Strategy and perception’s key role
Perception and benchmark studies, as well as peer analyses, are the tools a company needs to improve its marketplace perception and to determine whether its business strategy is resonating with investors. A company should seek to have a marketplace perception that is aligned with its true operational reality.

Companies change over time, and investor recognition of transformation can be fundamental to unlocking shareholder value. If a company’s strategy calls for a substantial transformation of its operating units, the marketplace may be slow to perceive the change or may fail to detect it altogether. The task of the IRO is to help communicate the change by crafting the right messages and developing a calendar of IR activities (press releases, roadshows, conferences, trade events, etc) that convey the new operating reality and help shape a new perception in the marketplace.

Lukoil, one of the world’s largest vertically integrated oil and gas companies, is a good example of how to unite strategy and perception. Gennady Krasovsky, deputy director of strategic planning and investment analysis at Lukoil, comments on the key role played by investor relations as the company transformed itself: ‘Last year we unveiled our new strategy of transforming the perception of Lukoil as a Russian company into a perception of Lukoil as a global energy company. We intensified our investor and financial media communications with the help of a leading agency and focused on establishing Lukoil as a thought leader in the energy sector by providing strong sectoral research, which we are continuing to this day.’

Ever-increasing disclosure

Regulation FD brought about the ‘democratization’ of disclosure, requiring a level playing field among institutions, analysts and retail. Sox also increased the speed of disclosure and requires communication of all essential elements of a company’s performance. With all this regulatory attention, the distance between transparency and formal disclosure is narrowing. The regulators’ view is that better disclosure builds marketplace credibility.

One non-US company that has decided to embrace this view is Israel’s Bank Hapoalim, which recently announced a level 1 ADR program. Dr Nadine Baudot-Trajtenberg, head of IR at Bank Hapoalim, notes: ‘We have conducted a thorough benchmark study reviewing best practices to help us improve our communication with investors. We have greatly intensified our investor targeting and outreach and, wherever possible, we have underscored our strong commitment to being an international bank as well as the leading bank of Israel. Our decision to begin trading in New York reinforces our determination to be a global player and helps us to access the deepest capital market in the world.’

Gone are the days when CEOs, CFOs and IROs could sit back and say, ‘We’ll just perform as a company and the stock price will follow.’ Competition for investors’ attention is massive and global, and today’s investors have no incentive to put their money in companies that perform well but do not provide acceptable levels of transparency and communications. Like it or not, investor expectations of transparency have taken firm root over the last decade, and there is simply no other way forward in today’s capital markets.

Richard J. Wolff, chief executive officer, the Global Consulting Group, rwolff@hfgcg.com

The author would like to thank Jaime de Piniés, Anne McBride, Todd Gerlough and Daniela Viola of the Global Consulting Group for their assistance in preparing this article.

Thanks to IR Magazine for allowing us to bring this article to you.

Foreign investment is driving the growth of IR in India. Ben Bland reports from Mumbai

markets in India have come a long way since 22 men gathered under a banyan tree in a Mumbai park to form the Native Share and Stockbrokers Association in 1875.

Today more than 7,000 companies are listed on the Bombay Stock Exchange (BSE), as it is now known, with at least another 150 companies expected to come to market this year. Together they’re expected to raise $10 bn, according to Prime Database, an agency that tracks primary listings.

The BSE’s benchmark Sensex index burst through the 10,000 barrier for the first time in early February – just one of the many signs of an equities boom largely driven by the foreign institutional investors (FIIs) that now own 30 percent of the market (see page 61, Shared value). In 2005, FIIs put more than $10 bn into Indian equities. And as they continue to invest in this market, they are forcing companies to improve their IR.

IR on the rise
It’s no coincidence that the first companies to seek out foreign investors through American depositary receipts (ADRs) or global depositary receipts (GDRs) are often the first to develop their IR programs. Take Grasim Industries, part of the Aditya Birla Group, which established its GDR program in Luxembourg in 1992. This move led Grasim’s CFO, DD Rathi, to launch the first ever non-deal roadshow by an Indian company in 1994.

Speaking at IR magazine’s debut conference in Mumbai on February 23, Rathi pointed out that the market capitalization of the BSE has risen spectacularly, from $303 bn in December 2004 to $604 bn in February 2006. This increase in equity has pushed the need for better IR, he added.

‘The rising interest of FIIs has had a significant impact on IR practice in India,’ explains Rohan Suchanti, vice president of Pressman PR. ‘Analysts from these institutions have played an important role in making companies see the value of sound investor relations.’

Ved Prakash Chaturvedi is managing director of Tata Asset Management, one of India’s biggest institutions with nearly $2 bn under management. He believes the IR mindset has been evolving over the last 15 years but, despite this, he feels there is still a lot of room for improvement, particularly ‘in the way companies go about targeting potential investors’.

At present, only 5-10 percent of mid and large-cap companies here have an IR function, according to MS Anand, deputy general manager of share registry and investor services company Karvy Computershare. He feels that IR will continue to expand in India as long as the market continues to do well, but is concerned this growth will tail off if there is a major correction or a crash. So it seems the link between good IR and valuation is still to be fully accepted by many in India.

Leading the way
Infosys Technologies is at the forefront of Indian IR, consistently commended by analysts and investors at the IR Magazine Asia Awards. NR Narayana Murthy, Infosys’ chairman and self-styled ‘chief mentor’, has argued that ‘the raison d’être of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year’.

Infosys applies this philosophy directly to its IR. As S Krishnan, the company’s head of global taxation, puts it: ‘We know we have to give investors what they want.’ Krishnan says Infosys’ management is committed to open investor relations, and there is no discrimination between FIIs and domestic funds or between shareholders and non-holders.

To keep investors as up to date as possible, the company usually issues results within two weeks of the end of the quarter. ‘Infosys always prices share offers at a level that is attractive to the investor – a lower price if necessary,’ he says. ‘That was the philosophy when we listed on Nasdaq and continues to be today.’

Challenges ahead
But the IR picture in India isn’t all rosy. The country has a burgeoning financial media, and while this presents numerous opportunities for companies to convey their message, it also means there is an army of eager hacks waiting to pounce on any perceived inconsistency or poor performance.

There is no doubting the power of the financial media, according to R Ramaswamy, CFO and company secretary of MRO-TEK, a network solutions firm. His company was faced with an IR crisis after a set of results was misinterpreted by a TV station and the share price dropped by 10 percent. He explains that it is very difficult to correct erroneous media reporting and that it was vital to communicate directly with shareholders in this instance.

Rathi emphasizes that Indian companies also face significant difficulties in identifying who their non-domestic beneficial shareholders are. Only those FIIs registered with the Securities and Exchange Board of India are allowed to invest in the market directly. But non-registered individuals and institutions can invest indirectly through participatory notes (PNs), a type of derivative contract issued against the underlying security. However, the Reserve Bank of India, among others, has raised concerns about PNs because they mask shareholder identity.

Identifying your shareholders and dealing with a vociferous media are common challenges for IROs in an emerging market. But, as the discipline becomes more established in India, there are also great opportunities. ‘IR is gaining in prominence and getting bigger by the day,’ concludes Rajat Dutta, general manager of planning and corporate communication at the Great Eastern Shipping Company. ‘It’s an exciting profession to be in.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

Ben Bland looks ahead to two of the biggest events on the European IR calendar

It’s that time of year, folks. Dust off your suit and polish your chat-up lines for that IRO who caught your eye at last year’s gala dinner – it’s conference season once again. The UK’s IR community will gather at the Investor Relations Society’s (IRS) annual conference in London on May 4. The morning will kick off with a comprehensive look at risks and rewards as they relate to companies, investors and IROs. Another session will tackle the challenge laid down by Cadbury Schweppes chairman John Sunderland at last year’s conference, which is to improve institutional investors’ transparency and governance. Fund managers and governance and IR experts will go head to head on this issue.

IROs will have to wait until the afternoon to get their teeth into the real meat of the day, which is a discussion on the UK pension crisis and its implications for IR. After a range of parallel sessions, the day will be capped off with a dinner and awards ceremony, where delegates can network, discuss best practice and drink themselves into a stupor.

Meanwhile, in Frankfurt, Deutscher Investor Relations Verband (Dirk) will be holding sessions in English for the first time at its annual conference on May 22 and 23. The conference motto, ‘Aufbruch der Deutschland AG’, which was introduced last year, is an attempt to encapsulate the changing nature of capital markets in Germany. The English translation, ‘Germany Inc on the move’, fails to capture the double meaning of the German word Aufbruch, which implies a break-up of the old way of doing things as much as the development of new approaches.

‘The key message of the event is that new investors, new forms of financing and other developments are changing the German capital market as we know it,’ says Kay Bommer, Dirk’s general manager.

Dirk founding member Heinz-Joachim Neubürger will present the opening keynote speech. With Neubürger due to step down as CFO of Siemens in early May, he will be free to air his views on the importance of investor relations without being constrained by his corporate role.

Another highlight will be a second keynote by Axel Heitmann, CEO of Lanxess, a chemicals manufacturer spun off from Bayer. There will also be workshops looking at what German IROs can learn from their US and UK counterparts.

Best session for beginners
IRS: ‘Careers in IR: The changing dynamics’. In this session, experienced IROs tell all for the benefit of their more fresh-faced colleagues.

Dirk: ‘How can the board measure the success of investor relations?’ Ingo Alphéus of RWE presents a case study on this current topic.

Best session for senior IROs
IRS: ‘Changing influences on buy-side decision-making’ will dissect what fund managers expect from investor relations today.

Dirk: ‘Fixed income: How bonds and bondholder relations impact your equity – tools to get best value out of an active bondholder program’. With debt IR as the new buzzword, this is your chance to find out what debt holders use to assess a company’s debt story.

Best session for IROs with a conscience
IRS: ‘What comes first: SRI or CSR?’ Your chance to join the debate on how socially responsible investing and corporate social responsibility fit into investor relations.

Dirk: ‘Corporate social responsibility/ SRI investors’. This is a current topic for IR – here, two academics will explain how IR should tackle CSR and SRI.

Investors and analysts want more disclosure and less spin. They support shareholder proposals for majority voting for directors. Only 10 percent of sell-side analysts say they don’t cover small or mid-cap companies, and just 18 percent dropped small or mid-cap coverage over the last year.

These are just some of the results from the ‘non-awards’ portion of the Investor Perception Study (IPS) behind the IR Magazine US Awards 2006, which gathered opinions from 2,404 portfolio managers, analysts and retail investors. Around the world, IR magazine surveys over 5,000 individuals every year, making this study the largest of its kind today. This year in the US, Erdos & Morgan was once again commissioned to conduct the study with contact lists from research partners Thomson Financial, Ilios Partners, Barron’s and BetterInvesting.

Back to feedback
One of the first questions in the IPS was open-ended: what could IR do better? David Levine, VP of corporate advisory services at Thomson, could have predicted the response. ‘The investment community always wants more – more disclosure, more access to management, more everything,’ he says. ‘If a company has 24 product lines, they want 24 P&Ls. They want it as granular as it can be.’

This creates an inherent tension between investors and IROs, who, after all, simply don’t know or can’t disclose everything – like what the future holds. And Levine has little sympathy for respondents who complain of companies using Reg FD as an excuse not to communicate. ‘That’s disingenuous,’ he says. ‘You see portfolio managers backing a CEO into the corner at investor conferences, and if some of their questions were actually to receive an answer, someone would have to lead the CEO away in cuffs.’

404 question
2005 saw companies meeting their Sarbanes-Oxley Section 404 obligations for the first time, examining their financial reporting controls and getting them audited. Did companies do a good job of communicating about the process? Nearly 70 percent of buy-siders and 60 percent of sell-side respondents believe so. But while they got enough notice that companies were in compliance – or not, on occasion – many want more detail, and overall they believe companies are reluctant to discuss the substance of their 404 reports in public.

On the other hand, many survey respondents don’t care. As one says, ‘Companies are not doing a lot to publicize 404 reports, but I’m not sure there’s a huge demand for all the details. After all, auditing is boring.’

Small-cap struggle
There has been a constant refrain since Spitzer’s global settlement and then after Sox that small caps are lacking analyst coverage. But according to this year’s IPS, the vast majority of sell-side analysts surveyed still cover small and mid-cap stocks, although the number of stocks each individual covers has gradually increased over the past three years. Levine’s theory is that while big Wall Street firms may have less small-cap coverage now, specialist firms have picked up the slack: ‘The market for the sell side is now dominated by hedge funds, so analysts have an incentive to look for stocks with a greater upside, greater volatility and larger returns. Small and mid caps have got all that.’

Sell-side analysts have their own complaint that hasn’t been assuaged since last year’s survey focused on an issue straight from the headlines: corporate retaliation against sell-side analysts. In 2005 analysts were asked if they had ever felt shut out of a company’s communications after a downgrade; nearly 40 percent said yes. You would think that after a whole year’s scrutiny this practice would have declined – instead, it seems to have sensitized analysts. In 2006, 41 percent said yes when asked if they had felt shut out just over the past year.

Corporate advertising
The IPS is produced in association with Barron’s, so corporate advertising is an important focus. ‘The IPS has allowed us to track, over a period of many years, where investors get market information and what influences their investing activities,’ says Donald Black, VP of marketing at Barron’s. ‘The buy side, sell side and retail investors all name business/financial publications as the leading source for finding companies to follow as potential investment targets. That’s powerful data we use to convince firms to advertise in our pages.’

Results show that corporate advertising has led many portfolio managers, analysts and especially retail investors to investigate a company’s investment potential and even to invest. A huge majority of all three groups – over 85 percent – believe a powerful corporate advertising campaign can positively impact a company’s stock price.

A new question asked how respondents rate different corporate advertising messages. The buy side is most interested in management’s strategy, while the sell side’s attention focuses on new product development. The message all three groups are least interested in? A social, political or environmental one. So much for socially responsible investment.

by Neil Stewart

IR MAGAZINE US AWARDS 2006 WINNERS

Best disclosure policy
Wachovia

Best M&A investor relations
Duke Energy/Cinergy
Washington Mutual/Providian Financial

Best communications with the retail market GE

Best use of conferencing – mid to large cap Citrix Systems

Best annual report – large to mega-cap Berkshire Hathaway

Best annual report – mid to large-cap KLA-Tencor

Best annual report – small to mid-cap Gentex
Leggett & Platt

Best corporate advertising to the investment community Intel

Best financial media relations – mid to large-cap KLA-Tencor

Best senior management communications – mid to large-cap The E.W. Scripps Company

Best IR web site Cisco Systems
eBay

Best use of technology
Hartford Financial Services

Best IR for an IPO
Diamond Foods

Most improved investor relations
McDonald's

Best corporate governance
McGraw-Hill

Best IR by a continental European company in the US market
Nokia

Best IR by an Asia-Pacific company in the US market
TSMC

Best IR by a chairman, president or CEO Jeffrey Immelt, GE

Best investor relations officer – large to mega-cap
Joe Binz and Colleen Healy, Microsoft

Best investor relations officer – mid to large-cap
Tom Katzenmeyer and Amie Preston, Limited Brands

Best investor relations officer – small to mid-cap
Carol DiRaimo, Applebee's

Grand prix for best overall investor relations – mega-cap
GE

Grand prix for best overall investor relations – large-cap
Aflac

Grand prix for best overall investor relations – mid-cap
Citrix Systems

Grand prix for best overall investor relations – small-cap
Applebee's

Thanks to IR Magazine for allowing us to bring this article to you.

There’s only one true test of IR, and it’s not stock price performance, investor decisions or sell-side ratings – it’s what analysts and investors think of a company’s IR program outside of stock performance. This year, over 2,400 fund managers, analysts and retail investors chose the best in IR among US companies on this basis. Their comments are contained in the IR magazine-commissioned Investor Perception Study, US 2006.

Some of 2006’s top companies, including GE, Aflac and Limited Brands, are no strangers to winning accolades from the US investment community for their IR efforts. These repeat winners are the benchmarks for investor communications among their peers. Other IR practitioners are new to the spotlight and stood out because of their extraordinary efforts over the last year.

Carol DiRaimo is a three-time winner of best IRO in the small to mid cap category who somehow manages to give the Street the impression she’s on call 24/7. ‘I am anxiously awaiting developments in human cloning,’ jokes DiRaimo, VP of IR at Kansas-based Applebee’s International, which also won the grand prix for best overall IR in the small cap category for the third year running. ‘Two of me would be better than one. Until that time, I will continue to rely on my Blackberry.’

As in past years, fund managers and analysts applauded DiRaimo’s timely and thorough responses. Not surprisingly, DiRaimo has a policy of responding to messages before retiring for the night and often works early morning hours before heading to the office.

‘I’ve learned that sell-side analysts usually have a pattern of when they publish their research,’ she says. ‘Some do it before midnight, but others publish between 4 am and 7 am.’

Limited Brands’ Tom Katzenmeyer and Amie Preston also stood out for their responsiveness among analysts and fund managers. ‘Both Tom and Amie always answer our queries, no matter how lame!’ says one analyst. ‘They are willing to hear our investment theses and comments. They don’t play those you-downgraded-our-stock-so-wewon’t- call-you-back-so-fast games.’

Katzenmeyer and Preston won best IRO in the mid to large cap category. This is the fourth year in a row that this team has walked away with these awards.

Also applauded for its responsiveness was Citrix Systems’ IR team, which won the grand prix for best overall IR in the mid-cap category. ‘Citrix is very responsive and provides good, detailed information,’ says one respondent. This is a first-time win for the Florida-based company.

City swings
Along with timely responses, the US investment community clearly appreciates a visit. Two of 2006’s grand prix winners were applauded by fund managers and analysts for the quality and number of meetings they hold.

‘We do over 250 investor meetings in a year and about six big analyst meetings,’ says Dan Janki, VP of investor communications at GE, which won the grand prix for best overall IR in the mega cap category. ‘We do city swings in and outside the US where we spend the morning with specific institutions and do a retail focus. Then, in the afternoon, we spend time with executives and customers in that city.’

To pull off this level of engagement, Janki needs a very cooperative management team. In fact, his CEO, Jeffrey Immelt, was praised as the most thorough and fully involved CEO by one analyst and took home the award for best IR by a chairman, president or CEO in 2006. ‘Immelt stands out because of his access to investors and willingness to talk openly and candidly about the company,’ says Janki. ‘We tie that into our financial reporting to ensure investors have the information they need.’

New York-based insurance giant Aflac’s IR team also prioritizes face-to-face meetings. ‘The cornerstone of our communications is the annual analyst meeting that we conduct every spring,’ says Ken Janke, senior VP of IR at Aflac, which won the grand prix in the large cap category.

The company gets about 100 attendees from the buy and sell sides when it hosts the event in New York and around 80 when it goes off-site to Atlanta. ‘We have a meeting on our business that runs from 8 am to 4 pm, and we joke about drinking from a fire hose in terms of the amount of information.’

Going the extra mile
Two weeks after its analyst meeting, Aflac’s IR team publishes a transcript of the event – this runs to about 90 pages. ‘It’s a really great tool,’ notes Janke. ‘Investors find it very convenient for getting an in-depth understanding of the company.’

Institutional investors and sell-side analysts also took note of McDonald’s over the last year and voted the company as having the most improved IR in the US for 2006. ‘Mary Kay Shaw [VP of IR] has made a strong effort to further the transparency of the company’s strategies and increase access to management,’ says one analyst.

‘We took management around much more than in the past and IR made phone calls proactively rather than just returning calls,’ says Shaw. ‘I was very proactive in meeting shareholders to introduce new management and communicate our thoughts on activist shareholder proposals.’

McDonald’s has been the target of activist campaigns related to genetic engineering of food and has been upfront in addressing this with shareholders. ‘McDonald’s IR effort has steered management to address current and prospective activist issues with thorough and objective analysis,’ says one investor.

Above the rest
Another notable US winner this year is McGraw-Hill, which picked up the award for best corporate governance. ‘For a media company – and a family-run business at that – McGraw-Hill has more concern and respect for shareholder value than its peers,’ says one analyst. ‘It’s the most transparent media company and has a fairly impressive and independent board.’

‘Our senior management has long known the importance of having an independent board, and McGraw-Hill has had a majority of independent directors for decades,’ notes Steven Weiss, VP of corporate communications for the publisher. The stock is widely held by McGraw family members, but they do not hold a separate class of shares.

In July 2005, the company’s board eliminated its poison pill provision and approved a new shareholder rights plan. ‘The policy states that if the board adopts a new rights plan without first obtaining shareholder approval, the new plan will expire within one year of adoption unless ratified by shareholders,’ says Weiss. ‘The new policy is consistent with good corporate governance practices and provides the board with the ability to act in the best interests of our shareholders.’

Straight talk
It’s the timeliness and intelligibility of Wachovia’s financial statements that captured the attention of analysts and fund managers this year – the North Carolina-based bank won best disclosure policy in 2006. Wachovia’s IRO says the bank’s current policy is the culmination of six years of hard work.

‘The policy has evolved since the end of 2000 and we have been working steadily since,’ says Alice Lehman, senior VP of IR at Wachovia. ‘We developed a formal plan for the whole company and then worked to make the information more userfriendly, complete and transparent.’

Lehman has been upfront in telling the investment community that one of her IR goals is to improve the disclosure of the bank’s financials, and she has received positive feedback. ‘We have heard time and time again that this is one of the best disclosures on the Street,’ she says.

This sentiment extends to the majority of IR magazine’s US winners, who are consistently complimented for the transparency and depth of information they provide to portfolio managers and analysts. These are indeed the models of best practice for IR according to the profession’s most important target audiences.

Another commonality among these award winners is the internal recognition IR receives, particularly from senior management. GE, Aflac, Applebee’s and Limited Brands’ IR teams, for instance, all have tremendous support from top management that recognizes the value of IR.

So, while the only real test for IR is what the investment community thinks, the only real chance for IR to shine is if it’s valued by management – and management’s view of IR is usually fairly easy to discern. For instance, a sure sign of approval is a trip to Tiffany’s with your CEO the morning after the IR Magazine US Awards. That’s what one of this year’s top winners reportedly received. But as shopping trips are covered by full disclosure requirements, she can’t disclose what was purchased. We’ll just have to watch for a particularly bejeweled IRO at 2007’s big event.

by Adrienne Baker

Thanks to IR Magazine for allowing us to bring this article to you.

Adrienne Baker looks at the investor relations behind the biggest M&A deals going

Some IROs really take responsiveness to heart. Suffering from sinus troubles and in the midst of preparing to jet off to Munich the next morning, Kiran Bhojani still takes time to respond to questions about how he’s handling the IR behind one of the biggest deals around.

‘You make sure you know everything about the business and strategy,’ says the head of IR for Düsseldorf-based energy giant E.ON. ‘I was involved right from the start, so I know every aspect of the transaction including the legal and regulatory details.’

On February 21, E.ON launched a €29.1 bn ($34.72 bn) all-cash bid for Spanish utility Endesa. The offer topped a previous bid by Spain’s Gas Natural by about 30 percent. ‘We immediately went on a roadshow to Frankfurt, Paris, London; we hit all the major markets in Europe and the US to speak to our shareholders,’ reports Bhojani. ‘They said, Thanks for coming by and explaining your strategy. They really appreciated it. Don’t wait to go on the road.’

The company now awaits regulatory approval of the deal from Spain’s National Energy Commission, which was granted wider powers in the wake of E.ON’s bid. With such a straightforward all-cash offer, the only real concern raised by shareholders during the roadshow was whether the Spanish government would block the deal, says Bhojani. ‘There are a lot of things working in the direction we’d like to see,’ he adds. The European Commission, for instance, is reviewing the validity of new powers given to Spain’s energy regulator.

While IR’s job is not to meddle in political grandstanding, such spectacles can be hard to avoid when it comes to large M&A deals in Europe, where national government agendas often clash with broader European market concerns. But, as Bhojani says: ‘We stay out of politics – we are business people.’

One step ahead
As ‘business people’, IR professionals need to stay on top of the strategy and keep investors and analysts continuously informed. ‘It’s very simple and very complex,’ says Martine Hue, who heads IR for Luxembourg-based steelmaker Arcelor. ‘We have to inform our investors and repeat endlessly what we have achieved in four years in terms of profitability and growth, which has all led to free cash flow that has to go to investors in different forms like dividends and buybacks.’

Hue sits on the other side of one of the most closely watched deals today. She’s heading the IR strategy behind Arcelor’s defense of a €19.9 bn hostile bid by Mittal Steel. It’s been a series of group and one-on-one meetings for Hue and her management team and, on this late March night, they’re hosting a gala event for 1,000 retail shareholders where CEO Guy Dolle will tell the story yet again.

But telling the equity story – repeatedly, and in a very short period – is nothing new for experienced IROs. What can leave one a little breathless is the incessant demand for information from hedge funds and arbitrageurs.

In the Arcelor-Mittal fight, there are no shares available on the Mittal side, so arbs are not a concern – but hedge funds are watching like hawks. ‘You have the hedge funds that are waiting for an improvement on the offer made by Mittal, and if that should happen, you have two categories of hedge funds: those that will stay and those that will bring their shares to Mittal,’ says Hue. ‘It depends on the information you get from both sides.’

‘Our deal was a full stock deal, so there were people taking positions in one or the other stock and the phones were ringing fairly regularly,’ reports Julie Dill, VP of investor and shareholder relations at Charlotte, North Carolina-based Duke Energy, which is acquiring Cincinnati-based Cinergy. ‘The hedge funds and the arbs were really just pushing to try to see if we would break and give some added insight,’ she adds. Fortunately, says Dill, her team was well trained ‘to stay on message’.

Shark watch
In big transactions, hedge funds are clearly a force to be reckoned with. ‘You have to talk to them and meet them, and make specific efforts to adapt information to those people who sometimes won’t vote or probably won’t be shareholders at the time of the formal offer,’ says Matthieu Simon-Blavier of Georgeson Shareholder Communications.

Based in Paris, Simon-Blavier is currently working on the defense side of the Arcelor-Mittal bid as well as representing other big names like Gas Natural and Suez. He says the key with hedge funds is finding out who they are and why they have taken a stake in the company.

Following the Deutsche Bourse coup last year, where hedge funds blocked the exchange’s bid for the London Stock Exchange and forced out its top two executives, it’s important to be aware that some hedge funds will buy up a chunk of shares and take an activist position. ‘Then you have others that are not voting at all,’ notes Simon-Blavier. The key is to distinguish one from the other.

Proxy advisors can often provide a link between IR and hedge funds. Once hired, Simon-Blavier’s firm receives calls from hedge funds asking about a client company’s strategy. ‘We contact them, but at the same time, some are calling us knowing we are advising the company,’ he says. ‘They may want to meet with the company or receive their latest information.’

The ‘X’ factor
For veteran M&A specialists, there are few surprises when it comes to these deals. Simon-Blavier says the only twist in the Arcelor-Mittal fight is the media’s behavior. ‘All the focus has been on Arcelor, but no one knows much about the Mittal side because we don’t have a history in terms of governance,’ he says. Specifically, the fact that the Mittal family owns more than 80 percent of the voting rights should be a concern to potential holders of the company, he adds.

The media also played an unexpected role in Washington Mutual’s acquisition of Providian Financial last summer, when a major shareholder went public with its opposition to the bid. On August 1, Putnam Investments, one of Providian’s major holders, put out a release saying Washington Mutual’s bid was too low. ‘When Putnam put out that press release, everything moved up a notch as that was almost unprecedented,’ Providian IRO Jack Carsky told IR magazine in September.

The media jumped on the story following Putnam’s release, criticizing Institutional Shareholder Services’ (ISS) role in the deal and suggesting that shareholders were giving up their right to an independent assessment of the bid by accepting Washington Mutual’s offer. ‘We thought there may be some shareholders not satisfied with the price offered, but we didn’t think they would be so vocal and visible,’ explains Alan Magleby, senior vice president of IR at Washington Mutual.

While heading IR at JPMorgan, Magleby never experienced such action by a major shareholder. ‘It seemed there was a piling effect from a media perspective, but we had worked closely with ISS and ratings agencies and they were comfortable that the price was fair,’ he says. In the end, the bid went through with 83 percent of total voting shares approving the deal.

The majority of IROs won’t experience the intensity of a high-profile M&A transaction that comes complete with front-page news stories, political strife, regulatory hurdles and swarms of sharks eagerly waiting to make a fast buck off any tidbit of information. Still, the same principles apply for small deals in terms of IR strategy.

‘You need to show the market that you are on top of the defense – or offense – situation from an IR point of view,’ advises Mark Simms, managing director of London-based independent capital markets intelligence specialists Capital Precision. ‘Then you become a valuable commodity.’

In the loop
A good way for investor relations people to shine is by reaching out to investors and analysts immediately and keeping them closely informed the whole way through. ‘Sometimes the best learning experience is a baptism of fire,’ comments Richard Dietz, SVP of IR for AT&T, which has a bid out to buy smaller telecom company BellSouth. ‘But we are very disciplined in preparing the IR activity around these kinds of deals.’

In announcing the BellSouth offer, AT&T had an analyst call with a variety of experts explaining the deal at length, including how it would impact the company’s guidance. ‘We understand how important it is for analysts to understand what we are trying to do and why,’ adds Dietz.

‘Investors want to look in the eyes of the CEO, hear them explain the strategy and see them be open and transparent about when they made the decision and how,’ says Bhojani. ‘We have to explain thoroughly the advantages of Arcelor and why it’s important to stay an Arcelor shareholder,’ adds Hue.

At the end of the day, as Hue points out, investor relations ‘doesn’t drive the bus’. But an IRO’s reputation certainly depends on how well and quickly stakeholders are informed throughout the ride, which comes back to the crucial issue of responsiveness. When taken to heart, it forms the backbone of exceptional IR, in any situation.

by Adrienne Baker

Thanks to IR Magazine for allowing us to bring this article to you.

Ben Bland reports on how to plan the ultimate European roadshow, one city at a time

For youthful English aristocrats in the 18th century, the grand tour was an opportunity to sample the many delights of Europe. But while these prototype backpackers took months or sometimes even years traveling at their leisure, foreign issuers lining up at a European roadshow are probably looking at a week or two at most. Their trips are likely to be less enjoyable than the drinking and philandering popular with the young bucks, but a lot more rewarding – financially speaking, at least.

A well-planned and executed European roadshow presents the chance to meet with a range of diverse but important investors in a reasonably short space of time. Management’s itinerary will depend on the nature of the company, its current investor base and its future targeting plans.

But it would be hard (or foolhardy) to miss out London or Frankfurt. ‘You just have to do London and Frankfurt because there’s so much there,’ says Gunnar Miller, head of European equity research at Allianz Global Investors in Frankfurt. ‘After that you could probably do a rotating schedule of the other important but not as time-efficient places.’ With this in mind, what follows is one plan you might consider for organizing your European roadshow, with experts’ opinions on what each money center offers.

Days one and two: London
Where else to start your journey than Europe’s biggest financial center, with local institutions collectively managing $2.38 tn in equities under management? ‘You get great exposure among the financial community here,’ says Neil Wesley, a fund manager with London-based Morley Fund Management.

Logistically speaking, London is also something of an international transport hub. However, that doesn’t mean that getting around is quick or easy. Whether you arrive at Heathrow or on one of the new all-business-class airlines at Stansted Airport, you’re bound to spend at least 45 minutes traveling into central London.

But transport is likely to be the least of your worries as you try to whittle down which of London’s 2,000 analysts and 3,000 portfolio managers you would like to meet. One clear divide is between the traditional, long-only fund managers, most of whom are based in the City, and the hedge fund community, which is based around Mayfair in the West End.

Hedge funds are growing faster in London than anywhere else in the world and now account for some $225 bn of assets under management (roughly 10 percent of the total equities under management in the capital), according to International Financial Services London.

The days of companies dreading hedge fund interest are now long gone, and most accept that hedge fund managers are little different from other potential investors. ‘Many of the more reputable hedge funds claim they have longer-term horizons than the media gives them credit for,’Wesley comments.

As for traditional buy-side institutions such as Morley, Wesley says larger caps with more liquidity capture the most fund manager attention. But that doesn’t mean that mid caps have nothing to gain here. ‘The mid-cap sector, which is not as well researched, can be interesting, and there might be a few gems you can look to unearth,’Wesley adds.

Day three: Edinburgh
After two days in London, fly up to Edinburgh for a day to escape the bustle and get access to an investment community that is often unfairly overlooked. With $295 bn under management, Edinburgh’s buy side holds more in equities than Zurich institutions ($231 bn) and slightly less than Frankfurt’s buy side ($355 bn).

According to Andrew Milligan, head of global strategy at Standard Life Investments, Edinburgh has a large enough asset management community to attract visiting companies. Because of its distance from London, however, the Scottish capital also has ‘a certain independence and detachment and an ability to take the long-term view,’ he adds.

The fund management universe in Edinburgh is also quite diverse given the city’s size. ‘There are a number of operations like ourselves, Scottish Widows and Axa that are related to large insurance companies, even though we’re all active managers with third-party funds,’ explains Milligan. ‘Then there is a group of smaller operations who are usually very externally orientated, such as Martin Currie and Baillie Gifford. Lastly, there are some more high-performance funds and some investment trusts.’

For those weary of London’s traffic and public transport, Edinburgh is also much easier to get around, with most of the key institutions situated in the relatively compact city center.

Days four and five: Paris
You can now get from central London to the heart of Paris by train in less than three hours, saving you the hassle of airport check-ins and allowing some much-needed time to edit your presentations or catch up on sleep. You’ll most likely need the latter, because the analysts and investors in Paris will expect a more formal approach than their Anglo-Saxon counterparts.

‘Maybe in the UK or the US, the equity story and future expectations are more important,’ says Philippe Risacher, Paris-based European sales director of CapitalBridge, a market intelligence firm. ‘But people are more formal in France. You need to be very clear and precise; figures are important.’

The sell side plays less of a role in Paris so it’s easier to target the buy side directly, according to Risacher. ‘The buyside market is bigger than the sell side,’ he says. ‘On the sell side there are no more than five or six main French players, including Société Générale Securities Services, BNP Paribas and Exane. But on the buy side, there’s Credit Agricole, BNP Paribas, Société Générale Asset Management and Aviva, to name but a few.’

As in London, traffic is a real problem, especially during rush hour. You might find it more convenient to take the Métro. With good planning, you should be able to complete all your main meetings in two days.

Days six and seven: Frankfurt
The best way to plan your roadshow is to measure the potential footprint of each visit in terms of the amount of assets under management you can cover in a given period of time. Miller explains the formula: ‘Zurich’s a pretty small town, which means you can go there for a oneday trip and walk from one place to the other. It’s similar in Frankfurt, but your footprint in Frankfurt in terms of how much assets under management you can visit in one fell swoop is much bigger.’

Allianz positions itself as a truly global asset manager with a focus on fundamentals and no predetermined sector or geographic concentrations. Miller feels that many companies could do more to help investors understand their story. Too often, he claims, issuers rely on a ‘stylized meeting cycle’ of uninspiring CFO and IRO presentations following quarterly reporting.

‘I’d much prefer management to come around and talk about their business off the quarter,’ he comments. ‘The market digests quarterly results in minutes and hours. You don’t have to come round and read us a report that we’ve already read and show us numbers that we’ve already seen.’

Rather than trying to work out the nebulous investment ‘style’ of each city or institution, companies would perhaps be better off spending their time honing their presentation technique. ‘I have a meeting with a large-cap company today and I was a little hard pressed to put together a question list because they’ve just done the numbers,’ says Miller. ‘Most of the number-based questions have already been asked and they haven’t been in the office since they reported, so they don’t have any new input. Increasingly I’m encouraging people to suggest management think outside of the box more.’

by Ben Bland
Thanks to IR Magazine for allowing us to bring this article to you.

Editor's note: The Bank of New York sponsored this special feature

The stock transfer agency market is continuing to witness significant change. Fewer players, the introduction of new technology and evolving regulation present considerable challenges and opportunities, not only for those involved in the transfer agency business but also for public corporations that rely on outside agents to maintain shareowner records and perform services quite visible to senior management.

Market consolidation
During the past several years, the transfer market has undergone some consolidation as smaller agents have exited the business. Competition has generally been categorized in two tiers: large agents and smaller agents with a local presence. Over the past 18 months, however, the landscape has changed considerably, led by the acquisition of one large agent and the recently announced exit of another small agent. Prior to this contraction, agents were trying to purchase market share by driving prices downward. In the face of price compression, agents position themselves based on relationship, technology, service quality and compliance postures. As transfer agents work to differentiate themselves from each other, issuers benefit from higher standards and customized solutions.

For corporations looking to select a transfer agent, the picture is particularly challenging. Jack Sunday, CEO of independent research house Group Five, explains: ‘This is a very mature market and there is healthy competition between the top three or four providers.’ And the situation is only likely to continue as new requirements weed out the weaker providers. ‘I strongly suspect we will see further consolidation leading to fewer choices for clients,’ Sunday says. ‘A lot of the smaller players will move out of the market or be taken over.’

Ranked number one
Sunday points out that the results of the 2005 shareowner services corporate satisfaction study support his point. The Bank of New York topped the list in the transfer agent industry for the fourth consecutive year, for agents managing more than 10 mn shareowner accounts. Sunday explains that while there has always been some similarity in the services provided, the results of the past few years show that the industry as a whole has improved the quality and breadth of its services. Over 1,450 US corporations participated in the survey, representing about 39 mn registered shareowners.

The task of selecting a transfer agent, once within the domain of responsibility for corporate secretaries and IROs, has more recently shifted to procurement professionals, whose focus is often limited to pricing. But there should be more to the selection process than just price.

According to Gary Nazare, managing director of transfer agency services at the Bank of New York, corporations must look beyond price and basic transfer agency services. ‘There has been a gradual evolution of the market over the past several years, and this has led to certain expectations and efficiencies across the market as a whole. This has had a significant effect on the way services are priced and marketed.’

The price pressure experienced by agents has led to a need for greater operational efficiencies. Nazare says: ‘The primary question is, how do you cut costs while enhancing quality?’ Typically, this is a question of technology. Converting much of the information held on stock certificates and other paperwork into electronic format is essential to increasing operational efficiency and moving toward dematerialization.

‘The bank has invested heavily in an integrated imaging platform,’ Nazare explains. ‘We are committed to reducing the movement of paper throughout our organization – whether it is certificates or instructions – through the imaging of documents or through scannable stubs. Our state-of-the-art scanners read the document, link it to the appropriate account and in some cases process the entire transaction. We are cutting down on keystrokes in every transaction.’

One limitation with full utilization of new technology is the demographics of US shareowners. The registered shareowner is typically less comfortable accessing accounts online. The industry exhibits relatively low utilization of the web overall, but this is clearly improving. Many clients recognize the cost benefit of dematerialization (book entry positions versus expensive inventories of stock certificates) and, most notably, electronic delivery of annual meeting materials. ‘We are looking at the front end to further empower clients and their shareowners through the web site,’ Nazare adds. ‘Working together with our clients, we’re making inroads in this win-win opportunity.’

Regulatory focus
The stock transfer agency market, like the financial markets as a whole, has adapted to new regulations that change the way business is carried out. From anti-money laundering and the US Patriot Act to Gramm-Leach-Bliley and, of course, the effects of Sarbanes-Oxley, regulation is significantly more complex today than it was just five years ago.

The Bank of New York has a natural advantage in the management and monitoring of compliance issues, according to Nazare. This is largely due to the strong corporate governance culture throughout the bank: ‘We recognized the need for compliance professionals dedicated to our business line and while that adds to our cost, it provides peace of mind to our clients. We also have the advantage of compliance best practices as learned from 23,000 colleagues serving clients in 100 different countries throughout the Bank of New York network.

‘One of the main differentiators for the bank is the fact that we are very efficient at dealing with compliance issues,’ Nazare continues. ‘We have constant oversight from internal auditing, risk management and other levels, as part of the larger bank business. Our compliance teams ensure that changes are implemented as regulations evolve.’

In addition to the compliance challenges discussed above, there are also impending changes in the SEC’s transfer agent rules that may require agents to rethink the delivery of some of their services. Significant changes are anticipated, and there has been much discussion regarding transfer agents’ role in administering dividend reinvestment and buy direct plans. Should this occur, the market may see even more consolidation.

Full suite of services
As governance and compliance issues continue to evolve along with the transfer agent business, it is important for corporations to consider what other services their agent may be able to provide. Apart from the obvious benefit of greater support and knowledge, the corporate secretary or IRO may be able to find some price efficiencies by conducting business at a ‘one-stop shop’. In fact, Nazare points out that 75 percent of his stock transfer clients also have at least one other relationship with the bank. Clients have access to related services that are complementary to the transfer agent relationship, including cash management, employee plan administration and trade execution as well as global capabilities for processing M&A transactions. By positioning itself as an all-round ‘securities services provider’, the Bank of New York is well placed to take advantage of changes in the industry and to be a driving force behind them.

Clearly, technology, service and regulatory concerns will continue to drive market dynamics in the transfer agency industry. Corporate secretaries and IROs would do well to consider all of these factors, as well as the overall strength and breadth of services offered.

For more information contact:
Kevin Brennan
Phone: +212 815 7160
E-mail: kevbrennan@bankofny.com

Thanks to IR Magazine for allowing us to bring this article to you.

April 2006Canada’s business trust boom is teetering toward bust. What’s an IRO to do? Neil Stewart reports

Barbara Gray, an analyst with Blackmont Capital in Vancouver, calls them ‘fallen angels’: business trusts that have cut their distributions. Her feisty research reports compare trusts to the risky high-yield bond market in the US, and her recent 2006 outlook opined: ‘We believe 2006 will mark a turning point in investors’ love affair with business trusts.’

Having got the scent of a short-selling opportunity, hedge funds are sniffing around, as are business reporters. The usual job of bankers these days, said a recent CanWest News Service article, is ‘foisting crummy income trusts on an unsuspecting Canadian public.’

Dirk Lever, managing director and chief income trust strategist at RBC Dominion Securities, is more sanguine. ‘There’s been more positive than negative, more distribution increases than decreases,’ he says.

There are plenty of trusts where IR is not a bad job at all. Last month Cineplex Galaxy Income Fund had its annual meeting at the Paramount Toronto theater, celebrating rising box office receipts with popcorn, candy and a 50 ft-wide PowerPoint presentation. ‘When our charts go up, they go way up,’ says the trust’s IRO, Pat Marshall.

IR may be less glamorous at BFI Canada, a waste management company, or at Connors Bros sardines, but these companies are well respected in the investment community. ‘The trust structure is for mature, stable companies; leaders in their industry sector with stable cash flows,’ says Janis Koyanagi, TSX Group’s senior manager for income trusts, structured products and ETFs. ‘But it’s not for everybody.’

And there’s the problem. A sizeable proportion of ‘everybody’ has used this unique Canadian financing for all kinds of businesses, many lacking the stable cash flow needed to sustain their promised payouts. Gray points out that 31 out of 139 business trusts have cut or suspended distributions, and she predicts that ‘half the business trusts will end up as fallen angels.’ After riding a wave of enthusiasm for the past five years, IROs are now challenged to differentiate their trusts from among a host of falling angels.

The birth of trusts
Income trusts were born in the 1980s with energy trusts. The idea is simple: a trust doesn’t pay corporate tax on income that it distributes to investors. Investors are taxed but still get more than they would from a dividend-paying stock, so the only loser is the government. Thus the outgoing Liberal government last year zeroed in on the C$300 mn in taxes it missed out on in 2004 and tried to introduce a tax on trusts. With an election looming, legions of retail unit holders made the government back off. All signs point to the new Conservative government letting the issue lie.

In the 1990s, ‘mature’ and ‘stable’ meant ‘boring’. Investors wanted price appreciation, not income stability. Only in the last five years – with the idea of steady payouts looking pretty good after the stratospheric rise and fall of many companies, and with interest rates at rock bottom – have business trusts taken off.

In 2005, $5.2 bn of TSX’s $15.2 bn in IPOs came from income trusts, and these now make up about 10 percent of the main board’s capitalization. With that kind of clout building, it made sense to admit trusts to the S&P/TSX Composite Index. Last year the trust laws were changed to introduce limited liability for trusts. That cleared the way for trusts to join the index in December 2005 with a 50 percent weighting, moving to 100 percent in March 2006. A total of 72 trusts joined the index, mostly in energy and real estate but including 16 ‘business trusts’ from a range of other industries. Some index trackers stuck with the equity-only index at first, but according to Tony North at Standard & Poor’s in Toronto, ‘acceptance of this index has increased steadily. More and more indexers are going to the composite index rather than the equity index.’

‘For large-cap trusts, the index has given them greater visibility and greater access to institutional investors,’ says John Vincic, executive vice president at BarnesMcInerney, a Toronto consultancy that worked on Aeroplan Income Fund’s award-winning IPO last year.

Barry Hildred, president of the Equicom Group, has income trust clients like ED Smith, the jam maker that went public in 2005, and CML Healthcare, which converted to a trust in 2004. Like many in trust IR, Hildred at first insists it’s the same as IR at any corporation. ‘These companies have to strive or survive in their respective industries. The messaging really isn’t any different,’ he says. But he goes on to describe a lot that is different: ‘Of course, there are new metrics.’

Earnings shmearnings
‘The information expectations for trusts are different,’ Lever confirms. ‘For example, I couldn’t care less about earnings. My focus is on the sustainability of cash flow.’

Ebitda and distributable cash (and how it’s calculated) are at the top of the list of important trust numbers, but they’re not part of Gaap and have no standard definition in Canada. They’re discussed in the MD&A but not included on the financial statement, and they’re not likely to be. ‘The accountants don’t want to touch this,’ says Lever, who is working on trust reporting standards as part of a four-person committee created by the Canadian Association of Income Funds.

The difficulty facing this group of four is devising standards that will work across the huge range of industries represented by business trusts. Related to this is the problem of research coverage for trusts. Most banks have analysts covering trusts across different industries. ‘How can an analyst be an expert in all these different businesses?’ asks Philip Koven, VP of Bryan Mills Group, a communications firm.

These generalist analysts have naturally focused on yield rather than underlying business fundamentals, the same way trusts’ traditional retail investor base fixated on yield. As the trust space expands, however, there are more sector-focused trust analysts, and a more institutional investor base is looking beyond yield. ‘Income trusts don’t want to be trading on the basis of yield,’ Koven says. ‘It’s incumbent on them to convince investors that they should be valued on the intrinsic value of their businesses, not their distributions.’

In the meantime, if you’re an IRO at an income trust valued on your yield and on the verge of cutting your distribution – in other words, about to become a fallen angel – what’s Koven’s advice? ‘Panic.’

by Neil stewart

Thanks to IR Magazine for allowing us to bring this article to you.

Caroline Thomas looks at roadshows in the world’s equity capital

New York, New York. Loud, fast-paced, energetic – it’s a city that makes an impact. As the financial and news media capital of the US, and home to the world’s two largest stock exchanges, Wall Street, and innumerable corporations, brokerage houses and investment banks, it also has enormous importance as a roadshow destination.

And there’s certainly an eager roadshow audience to be found. The city’s ten largest investment firms alone have combined equities under management of over $1.25 tn and have predominantly low or moderate turnover, according to CapitalBridge.

While the size, amount and variety of investors means there are great opportunities to be had, it also means a large number of companies are all competing for New York-based investors’ attention. In this environment, roadshows have to be well planned and perfectly executed.

Background research
‘It’s important to find the right match, to be sure that you’re talking to the right people,’ says Montieth Illingworth, managing director of the New York office of communications firm Gavin Anderson. ‘There’s no point going to a fund that has maxed out in your sector, so pick your targets well.’

One thing that makes New York different from other US cities is the high concentration – and ever-increasing number – of hedge funds. They can’t be ignored, but they don’t have to be pandered to: ‘Don’t alter your message to tailor to a subsection of the audience,’ advises Mark Bonacci, New York-based director in the corporate financial practice of PR firm Burson-Marsteller. ‘Stick to a good, long-term message.’

Of course, it’s important to pick the right time for your roadshow, and not just so you have a clear slot among your peers. A non-deal roadshow should fit with what investors are currently looking for, and right now it seems that conservative but solid growth companies are in vogue.

‘In the past year the equities market has not been that great. There’s an inverted yield and bonds aren’t performing too well,’ comments Illingworth. ‘What this means is that there’s a great appetite here for companies that can get investors to alpha. The buy side wants solutions; it’s not easy to get to alpha in this market. That creates an opportunity for an IRO to come in with a strong story and an investment thesis that will get that buy side to alpha.’

‘Despite any challenges, New York remains a very active, very fertile place for investing,’ says Bonacci. ‘Companies across many different industries can raise a lot of interest here.’ He adds, however, that the New York scene is easier for mid-cap and large-cap companies than it is for small-cap or micro-cap enterprises. ‘A lot of the institutions are pretty sizeable and like to take decent positions while working discreetly. With small or micro-cap companies, it’s harder to go in and out without affecting stock price; furthermore, there’s not as much equity research on the smaller companies, so it makes investing more of a risk.’

Despite the devil-may-care attitude for which New Yorkers are renowned, it seems stability is key when it comes to investing. ‘The buy side would rather get 4-5 percent growth in the long term on a quality stock than ride the waves of a risky investment,’ says Illingworth.

Laying out the facts
The sheer number of institutions here means New York should be on the roadshow calendar at least once a year for senior management, with IROs visiting two or three times on top of that. Roadshows can easily last up to three days and should cover everything from large group meetings to one-on-ones. ‘One of the great things about investor marketing in New York City is the investment community’s flexibility around meeting formats,’ says Valerie Gerard, executive VP of IR at New Jersey-based CIT Group.

It’s critical to leave time, either before or after the presentation, for investors to mingle informally with management. ‘For some investors, meeting the top executives is a requirement before making an investment decision,’ Gerard says.

For companies new to the investment scene, it’s important not to skip background information. ‘You’ve got to remember that investors in New York often cover 100 companies or more and, as a result, may not be fully up to speed on your company,’ Gerard points out.

For more established companies, however, it’s a safe bet that your audience will be very much up to date on your company as well as your industry and peers. Make sure your management is fully briefed on any industry developments and can differentiate you from peer companies.

After the presentation, be prepared for a thorough Q&A session with some very probing questions. ‘We’ve noticed a higher level of sophistication among attendees in New York City over the past few years,’ explains Tony Russo, CEO of New York-based strategic communications firm Noonan Russo. ‘In healthcare, for example, investors often have advanced degrees. Even very young analysts know the science as well as the industry very well.’

In addition, corporate social responsibility is a rising topic of interest for New York investors. New York’s five largest investment firms all have around a quarter to a third of their assets invested in companies included in the Dow Jones Sustainability Index, according to CapitalBridge. If CSR is important to your firm, make sure New York investors are aware of it.

Sticking to the plan
One stereotype of New Yorkers that does hold true is the frantic pace at which they operate – time is precious in the Big Apple. When it comes to roadshow planning, make it as easy as possible for investors to attend meetings and get the information they need.

‘You won’t find much resistance to early morning meetings,’ says Sharon Weinstein, director of IR at Noonan Russo. ‘Most New Yorkers would rather get meetings out of the way and get back to their desks.’ As Manhattan also has a large commuter population, late afternoon meetings aren’t too popular.

Weinstein recommends giving hard copies of presentations and other materials to investors. ‘There is a very positive reception in New York to the distribution of printouts of slideshows, with space alongside to write notes,’ she says. For longer and more technical presentations, Weinstein suggests putting the presentation on a memory stick for each attendee to take away with them.

When it comes to choosing meeting venues, it’s best to pick places that are as easy as possible for investors and analysts to get to. More and more, that means these individuals’ own offices. ‘It is becoming increasingly difficult to get New Yorkers away from their desks, so plan on many in-house meetings in offices and conference rooms,’ says Gene Marbach, group VP of New York IR and PR firm Makovsky & Company.

New York has a huge number of hotels that are used to hosting investor roadshows both large and small. For breakfast, lunch or dinner gatherings, Gerard offers a handy tip: ‘Use the sell side to arrange meal-related meetings, as their roadshow groups know which restaurants have private meeting rooms. They are also well equipped to manage multiple invitations.’

In terms of getting around, New York can be surprisingly easy. ‘Logistically, I think New York is one of the easiest places to do a roadshow – everything is very compact, and you can often walk from one place to the next,’ says William Walkowiak, director of IR and corporate communications at New York-based EDO Corporation.

Most financial institutions and hotels are in the midtown area, but there are still a number of firms downtown in the Wall Street area. Despite the relatively short distance between these two locales, and the high concentration of institutions midtown, traffic in Manhattan can sometimes hinder even the best-laid roadshow plans.

Most companies hire a limo for the day – or sometimes resort to taxis – but if you’re on your own, or your colleagues are an adventurous bunch, don’t rule out the subway. It can sometimes be the only sure way of moving quickly between midtown and downtown.

Pre-planning a sensible route of one-on-ones is important here. Post-9/11, most buildings require sign-in and photo ID, and at busy times this can add an extra five or ten minutes.

For companies looking for help setting up a roadshow, New York has a great concentration of both consultancies and sell-side sales teams. ‘There’s no place better than New York for the range of investor relations agencies,’ explains Walkowiak. ‘You can find agencies specializing in any industry, market cap and particular need.’

This pretty much sums up New York. It’s a city where you can find anything you’re looking for – from the world’s largest institutions to the tiny boutiques, from presentations given to thousands at investor conferences to days of one-on-ones, from limo journeys to subway rides.

by Caroline Thomas

Visitor information Where to present
The St Regis
2 East 55th St
+1 212 753 4500

New York Marriot Marquis
1535 Broadway
+1 212 398 1900

Le Parker Meridien 118 West 57th St
+1 212 245 5000

Where to eat Mas
39 Downing St
+1 212 255 1790

Best for cocktails MObar at the Mandarin Oriental
80 Columbus Circle
+1 212 805 8800

Top 10 New York buy-side firms Firm Main style Equities under mgmnt ($ bn)

Alliance Capital Management Growth 312.0

TIAA-Cref Index 170.4

Goldman Sachs Asset Management Value 127.0

JPMorgan Asset Management Value 113.3

OppenheimerFunds Value 106.7

CAM North America Growth 103.9

Deutsche Bank Trust Company Americas Index 93.1

Morgan Stanley & Company Asset allocation 86.5

Morgan Stanley Investment Management Value 85.8

Neuberger Berman Value 77.8

Thanks to IR Magazine for allowing us to bring this article to you.

Terry McWilliams reports on the differences between UK and US investor relations

As Irish dramatist and socialist George Bernard Shaw once said, ‘England and America are two countries separated by a common language.’ It’s a shame he’s not around today, because nowhere does his observation ring truer than when you look at the two countries’ different approaches to investor relations.

Americans and Brits see eye to eye on most things, but the two countries don’t approach investors and the financial community in the same way. The reasons are complex and intertwined, involving differences in culture, geography, regulation, pace of market developments, and yes, even language.

When the two systems intersect – when you go across the Atlantic for a roadshow, for example – the dissimilarities and unfamiliarity with local customs can leave executives flabbergasted (or ‘gobsmacked’, as they might say in the UK).

‘If you sit down with a US analyst or institution and they are not happy, they will likely tell you,’ says Steffan Williams, managing director of Capital MS&L, an IR firm that has offices in London and New York and is part of the worldwide Publicis Groupe. ‘In the UK it is perfectly plausible to have a charming meeting that lasts for two hours and the CEO will think, Gosh, that went really well – and the fund managers actually disagreed with everything the CEO said but didn’t want to tell him.’

Williams says the lack of feedback from polite UK fund managers leaves many American CEOs perplexed as to why their meetings come up empty.

And what turns UK fund managers off? Management may have failed to address local buy-side issues, or may not have properly accounted for the fund manager’s risk profile and investment horizon. In some cases, US management can appear too slick or might have unachievable expectations from a trip across the pond.

The problem could, however, be more basic. ‘Investors are not comfortable sitting with management and saying, The real problem is you,’ says Al Loehnis, a founding director of online corporate communications agency Investis and a board member of the London-based Investor Relations Society (IRS).

Brash and aggressive analysts
Cross-border issues aren’t limited to US companies visiting the UK. UK executives newly exposed to the US investment community may interpret questioning by buy-side analysts and fund managers as aggressive.

Keith Russell, a veteran IR practitioner who travels to US investment centers four to five times a year, says US analysts regularly pepper him with questions about his company’s business and results.

‘To do well in the US, you have to be able to think on your feet,’ says Russell, senior VP of IR for Stora Enso, a Finnish paper, packaging and forest products company with a substantial presence in the American upper Midwest. It’s a process that can be challenging but rewarding, he adds. By contrast, Russell observes, questions from the UK financial community are less probing and analysts generally accept the information they’re given from the company.

‘There are plenty of exceptions to the rule but on conference calls, I can’t help but notice the US guys are really clued up on what’s going on and the UK investors sometimes aren’t,’ notes Williams.

Worlds apart
The approaches are different because of the predominance of sector-managed funds in the US, says Gary Leibowitz, VP of IR at London-based brewers SABMiller and an IRS director.

Industry sector specialists often spend much if not all of their careers getting very knowledgeable about their sector, Leibowitz says. They use that knowledge to probe management. In contrast, Leibowitz points out, many on the UK buy side are generalists, managing broad portfolios that may include everything from banks to construction companies.

‘Generalists use voice inflections and other personality assessments to get a gut feeling as to whether they believe the CEO or not,’ Leibowitz says. ‘The point is their questions and judgments are formed primarily on the basis of what the company says without a lot of on-the-ground insight from their own research. Call me old-fashioned, but I think that research is what people should be getting paid to do.’

Loehnis, a former analyst, says that a lot of assessment in the UK is about reading between the lines and seeing how well management answers tricky questions.

‘The UK may be culturally used to having a cozy, more relationship-based approach than the US market, where there is a huge abundance of choice and you have to do your homework before you make your investment decision,’ observes Williams. ‘People still want that face-to-face contact across the table.’

Another difference, believe it or not, is language. ‘The language of investor relations is more reserved in the UK, both on the positive side – companies are less reluctant to put out exuberant press releases – and on the negative side,’ notes Miranda Lane, a veteran IR and PR practitioner and managing director of London-based Financetalking. ‘Words like ‘challenging’ and ‘difficult’, when applied to market conditions, seem to have greater impact here. This is also a function of our earnings guidance being less precise.’

Playing by their own rules
There’s another reason company and investor relationships aren’t the same on both sides of the pond: financial markets are regulated differently.

‘The US regime is much more rule-based, whereas the UK regime is based more on principles,’ says Loehnis. Indeed, American companies conduct IR in line with very complex and specific rules, whereas UK issuers are more concerned with following the spirit of guiding principles.

‘In the UK, a company must present a true and fair view – but the regime is much less prescriptive on how that is actually achieved,’ Loehnis says. ‘UK companies are allowed a little more interpretation and leeway than firms in the US.’

UK issuers must take care with price-sensitive information, but there is no equivalent to the US’ protective ‘safe harbor’ language for forward-looking statements or earnings guidance. Because they do not have this safety net, UK companies tend to talk about expectations and aspirations, says Lane. ‘And they use coded language,’ she adds. ‘For certain companies, ‘double-digit growth’ is understood to mean 12 to 15 percent.’

Regulatory filings for most US issuers are available through the SEC’s Edgar system. In the UK, however, there is no centrally accessible online site. Each company decides how much information to post on its own site to meet the true and fair reporting principle.

Navigating the two worlds is particularly confusing for companies that have a foot in both. ‘The best thing to do is to operate in a manner that satisfies the minimum requirements in both regimes,’ advises Leibowitz. ‘In other words, don’t share anything remotely price-sensitive in private sessions.’

Jumping ahead
The UK investment community is relatively compact. Many companies traditionally review results with the financial community and answer questions in person. With some exceptions, companies find analyst conference calls aren’t really necessary. ‘Instead, you book a meeting room and expect analysts to show up,’ says Lee Godfrey, chief operating officer of WILink, an IR communications services provider.

By contrast, analyst conference calls have long been used by US IR departments to reach a geographically diverse analyst base. Extending those calls to webcasts in order to meet Reg FD requirements was easy.

Loehnis says UK companies are jumping straight to video webcasts of their financial presentations. ‘The main event remains the physical meeting,’ he explains. ‘Video brings stuff to life a little bit more if you can show people the whites of your eyes.’

Banking on exposure
The roles of outside advisers are, of course, divergent in each country. Corporate brokers act as trusted advisers for UK companies. They help guide the company’s financial communications, provide investor relations counsel and set up roadshows to reach fund managers.

UK financial PR firms handle relationships with the sell side and the vibrant national financial media, while IR firms are generally called upon when strategic or critical communications counsel is needed.

In the US, IR firms provide a wide mix of counsel and communication services as part of an advisory team that includes securities lawyers and senior management. Leibowitz sees a greater IR role for US investment bankers due to their market wisdom. ‘Because investment bankers are insiders, I personally avail myself of their advice in terms of crafting our positioning at a higher level,’ he says.

Consolidation and consistency
Could there be a day when both markets are essentially the same? Arvind Sood, VP of IR at California pharmaceutical company Amgen, sees a growing convergence between European and US IR. He spent seven years in France with Aventis and its predecessor Rhone-Poulenc. ‘European IR has become more proactive and sophisticated, and today’s analysts and fund managers on both sides of the ocean are very comparable in terms of skill sets,’ he says.

With the adoption of international accounting standards, the upcoming European Union Transparency Directive and other cross-border initiatives, chances are the differences between UK and US IR will begin to wane. As to whether both sides of the IR pond will ever be entirely unified, that’s a question for George Bernard Shaw.

by Terry McWilliams

Thanks to IR Magazine for allowing us to bring this article to you.

NGOs can be a valuable ally or a real enemy for multinationals. Ben Bland takes a look at an uneasy partnership

Relations between corporations and non-governmental organizations (NGOs) have traditionally been the preserve of the caring, sharing CSR department. But as NGOs develop more sophisticated ways to engage with shareholders, IR professionals are beginning to take note.

Socially responsible investment (SRI) might be nothing new, but now more mainstream funds are incorporating SRI analysis into their decisions. The question is, can business-NGO partnerships improve a company’s standing in the eyes of these investors?

There’s no doubting that NGOs have the potential to harm shareholder value. Big consumer companies that have strong brand equity, such as Coca-Cola, Kimberly-Clark and Nike, have a lot to lose from well-targeted NGO boycotts. Similarly, industrial corporations with big environmental footprints, such as miners and oil companies, are vulnerable to environmental NGO campaigns that disclose their negative impact on local communities.

‘NGOs are clearly one of the stakeholders that we feel affect big companies’ reputations and therefore affect shareholder value,’ says Karen Shapiro, shareholder advocacy associate at Domini Social Investments. ‘So there’s definitely a financial case for NGO engagement – it’s essentially managing a potential risk.’ New York-based Domini manages more than $1.8 bn of assets and uses a range of environmental and social criteria to make investment decisions.

The wood for the trees NGOs can play a useful role in bringing issues to the attention of SRI funds, but that doesn’t mean these funds will jump on the bandwagon. A case in point is Greenpeace’s long-running consumer boycott campaign to force paper products company Kimberly-Clark to adopt a genuinely sustainable forestry policy. Domini agrees with Greenpeace that Kimberly-Clark is not doing enough to protect virgin forests. As a holder of more than $7 bn in stock, however, this fund doesn’t want people to stop buying its products.

‘The fact that Greenpeace launched such a visible campaign raises concerns for us as shareholders,’ Shapiro says. ‘So we want to know that the company is responsibly addressing these concerns.’

Domini tried talking with Kimberly-Clark, but when nothing resulted Domini filed a shareholder resolution that was supported by like-minded investors. Kimberly-Clark’s IR and environmental departments tried to persuade Domini that its concerns had already been addressed and then took the step of opposing the resolution with the SEC, without success. The proposal was voted on at the company’s AGM; while it didn’t pass, it received enough support to be filed again in 2007.

Hitting the radar
Mainstream investors and analysts often become aware of an NGO’s relationship to a company when the NGO tries to sour an issuer’s reputation. Two prime examples of this are Newmont Mining Corporation and Freeport-McMoRan Copper & Gold. Both of these companies have come under fire from local and international NGOs for their record on human rights and environmental issues.

Colorado-based Newmont faced criticism from Amnesty International, among others, after local police shot several protesters blockading one of its sites in Ghana in November 2005. One of the protestors later died. Freeport, a Louisianabased company that gets much of its income from its massive Grasberg mine in Papua, has faced violent protests from indigenous community groups as well as opposition from shareholders in the US for its regular payments to the Indonesian military.

Parvathy Krishnan, a mining analyst at independent research house Morningstar, thinks NGO action presents potential risks for these companies. Freeport is particularly vulnerable in this respect because of its dependence on a single site.

‘It’s more of a concern for Freeport because Newmont is more diversified,’ Krishnan comments. ‘Grasberg is their main mine, so they would have everything to lose if it shut down. There are NGOs and human rights issues, but some of them aren’t related to Freeport itself; they’re to do with the separatist movement in Papua.’

Both companies claim to be working with local NGOs to improve their community relations. Freeport, which as Indonesia’s biggest tax-payer contributes more than $1.1 bn a year in revenue, says that it spent $64 mn on projects to help the communities living around the Grasberg site.

Critics might argue that these efforts are just PR exercises, but the issue for IR is whether investors care either way. Krishnan says she is concerned about what these companies are doing to rehabilitate mining areas, but ultimately she doesn’t think this issue will have a deep impact on the bottom line. ‘I don’t see such risks making a very big dent in these companies’ financials,’ she says.

Responsibility sells
While some companies’ CSR programs aren’t worth the recycled paper they’re written on, other enterprises make a genuine attempt to communicate with stakeholders and improve their social and environmental performance. One such corporation is Novo Nordisk, a Danish healthcare company listed in Copenhagen, London and New York. As well as working with NGOs such as the World Wildlife Fund and the Oxford Health Alliance (which Novo Nordisk helped found), the company toils hard to sell its CSR story to the investment community. Alongside its usual roadshows, Novo Nordisk runs specialized meetings pitched at SRI investors, which it launched in the US recently.

Some of Novo Nordisk’s shareholders are interested in hearing about the company’s NGO partnerships. ‘We have indications that with some investors, like SRI investors, providing NGO information does make a difference,’ says Susanne Stormer, Novo Nordisk’s director of accountability and triple bottom line leadership. ‘With our mainstream investors, it doesn’t seem to transmit to a better profile.’ While of investors, this is not the case at Novo Nordisk. Stormer, who sits astride the sustainability and IR departments, is responsible for all non-financial reporting and edits the company’s unified annual report.

Stormer believes that she has done her best to interest mainstream investors in Novo Nordisk’s NGO partnerships. She concedes that much of the real interest remains relegated to SRI funds, however. ‘Although there’s quite a lot of convergence between SRI and the mainstream in terms of their expectations about information on business strategy, some of the additional information that is rated very highly by SRI investors tends to be rated quite low by mainstream investors,’ she says.

Thinking long term
From the other side of the fence, Shapiro thinks companies have a lot to gain by engaging with the SRI community. ‘Some companies don’t yet understand that we might not be their largest investors but we are their long-term investors,’ she says. ‘While more mainstream managers chase the quarterly returns of a company and will sell shares solely based on that, we don’t value a company in that way.’

Olivia Lankester, senior analyst on the governance and SRI team at F&C Asset Management, also believes business- NGO partnerships should interest long-term investors. ‘Good governance includes good relationships with key stakeholders, including NGOs,’ she says. ‘If these relationships are neglected, companies can face increased regulatory risk and reputational damage and can miss out on market intelligence. In these respects, it’s a concern for investors.’

Ultimately, if companies are serious about CSR and sustainability, they must take the responsibility for getting their investors interested in the issue. ‘Companies need to integrate these policies into their mainstream presentations and talk about how they add value to the business,’ concludes Lankester. ‘The challenge is to pick out those aspects that impact on shareholder value and integrate them into traditional reporting and presentations.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

Elizabeth Judd looks at ethics and investor relations

A few years ago, Lou Thompson, president and CEO of the National Investor Relations Institute (Niri), helped advise an IRO who had discovered that her company was invoicing goods that were then shipped to a warehouse – in essence, cooking the books. ‘I’ve known people at Niri who’ve taken a walk because they knew what their bosses were doing wasn’t ethical,’ he says, adding that this IRO ultimately resigned over corporate shenanigans. What’s more, the IRO’s former employer was subsequently investigated by the SEC.

Without a doubt, says Thompson, the IRO did the right thing. ‘It takes a bold person to do what she did, but it’s your reputation at stake – and your reputation goes with you wherever you go,’ he says.

Although IR once seemed to be relatively insulated from tough ethical choices (not to mention the rough and tumble of the courtroom), that’s no longer true. When Mark Koenig, former IRO at Enron, turned out to be a star witness in his former employer’s much-ballyhooed trial, IROs everywhere paid attention.

Some IROs contemplating Koenig’s fate are clearly questioning some of their most long-cherished beliefs. ‘I’d like to think the underlying ethics have always been there,’ says Jay Gould, IRO at Huntington Bancshares and a member of Niri’s ethics council, ‘but maybe given what we’ve seen in the marketplace, this hasn’t been the case.’

Nowadays, IROs are asking themselves how they would react were they in Koenig’s shoes. ‘If there’s a lesson to be learned, it’s that walking away is the right decision,’ emphasizes Gould. ‘Staying and hoping that things will get better ends up compromising you to the point where you can get prosecuted – and that’s an eye-opener for most IROs.’

The latest ruckus about ethics has been created by revelations at the Enron trial. ‘You see Koenig’s fingerprints on the setting up of the disclosure of the off-balance-sheet businesses, and it’s been alleged that he helped create a mock trading room to which they brought analysts,’ notes Thompson. He insists that Koenig was the exception, not the rule: ‘The issues faced by Mark Koenig at Enron go more to the extreme.’

The buck stops where?
In theory, IROs at companies plagued by scandal could be in one of two boats: either they knew what was happening and turned a blind eye, or they were in the dark. ‘IROs are subject to the risk that they don’t know the complete picture if they don’t have a true seat at the table,’ asserts Thompson. Joseph Badaracco, a professor of ethics at Harvard Business School, believes that IROs might not always be privy to misconduct. ‘A clever fraud can fool all sorts of people,’ he says.

Although deception isn’t always obvious, what matters most is the character of the IRO. ‘There are IROs who dig intensely for information,’ says Gould. ‘If they’re told something, they’re quizzical and will investigate it. That’s a very healthy attitude.’ The best IR professionals, he continues, ‘don’t mind being unpopular. You can’t be a yes-man and be a great IRO.’

Although IROs may be concerned about losing their jobs, anecdotal evidence shows that investor relations people at companies where something’s seriously awry have little in the way of job security anyway. Ed Arditte, senior vice president of IR at Tyco International, joined the company in May 2003, well after its troubles were widely known. Sheri Woodruff, Tyco’s VP of media relations, notes that the previous management team is almost entirely gone; Tyco replaced 390 of the top 400 staff members, including all the IR staff and the full board of directors.

The same is true for the IR team at Adelphia Communications. Jeff Lawton, VP of IR, and Mark Spiecker, director of IR, both joined around March 2003, according to Paul Jacobson, VP of corporate communications. At the trial of John Rigas and his two sons over the Adelphia accounting scandal, the company’s former IR director, Karen Chrosniak, served as an important witness. Chrosniak revealed that Rigas had misled Moody’s and inflated data for investors; she was granted immunity from prosecution in exchange for testifying for the government.

Huge strides
One thing is certain: IROs who sense wrongdoing have far more resources than they did four years ago, when the first accounting scandals hit. Niri rewrote its code of ethics in 2002, and at the same time decided that each of its 4,300-plus members would be required to sign its ethics code. The Canadian Investor Relations Institute (Ciri) also has an ethics code, but this organization chose a slightly different path and hasn’t mandated that all members sign, says Ciri president and CEO Bob Tait.

In 2002 Niri also established its ethics council. All Niri members can turn to the council for confidential help. The council also has relationships with lawyers who can advise Niri members or help them obtain counsel.

If someone is found guilty of misconduct in court or by a regulatory authority like the SEC, Niri’s ethics council will study the situation and, when necessary, recommend that the individual’s membership be terminated. Conway Communications’ Jane McCahon, who is a former chair of Niri’s national board as well as its ethics council, points out that Niri once terminated the membership of a west coast IR consultant found guilty of insider trading.

That said, a membership organization can only do so much. Mark Koenig was a Niri member when the worst of the alleged abuses at Enron occurred, although he later let his membership lapse, says Thompson.

New legislation has also helped IROs in an ethical pickle. Sarbanes-Oxley’s Section 404 and recent regulations in Canada protect whistleblowers, says Tait. He points out that such protection is critical given that Koenig – perhaps rightly – felt his job would have been in jeopardy had he criticized Enron’s practices.

Meanwhile, the steady spotlight on ethics has led to improvements. Margarethe Wiersema, professor of strategic management at the business school of the University of California, Irvine, likens the growing popularity of corporate codes of ethics to sexual harassment policies. Before sexual harassment laws came into effect, people sensed that certain behaviors were inappropriate, but codifying exactly what actions cross the line helps to prevent abuses.

As an example of how attention alone sometimes gets results, Wiersema notes that once accounting scandals began to hit the front pages of newspapers everywhere, there was a flurry of earnings restatements. In 1997, for instance, the Government Accountability Office said that only 83 listed companies, or less than 1 percent, restated their earnings. In 2002, in contrast, 220 companies – or 2.95 percent of the 7,446 listed companies out there – restated their earnings. Why was this the case? Senior management, according to Wiersema, took a long, hard look at their accounting practices and realized that they needed to be more rigorous.

Most agree that while best practices in IR may vary by geographic region, the fundamentals of ethics – knowing and doing what’s right – transcend national borders. Nonetheless, Gould points out that the infrastructure around ethics is much stronger in the US than elsewhere. He also notes that the body of case law in the US ‘showing where some of the lines are drawn in the sand’ arguably means that American IROs are more aware of their ethical responsibilities than their foreign counterparts.

With globalization, though, Tait contends that standards are rising everywhere. He notes that in order to attract North American capital, public companies in wilder and woollier outposts must strive to meet the high level of ethical standards demanded in the US.

Finally, Tait observes that corporate scandals are hardly a US phenomenon. Canadian companies like Hollinger, Air Canada and ATI Technologies have had their share of embarrassing incidents. In response, Canadian regulators recently enacted a raft of new rules making IROs and others liable if they misrepresent a company’s fortunes or fail to disclose material information in a timely fashion.

Everyday ethics
Outside the headline-grabbing cases, IROs do regularly face garden-variety ethical dilemmas, often centering around disclosure. Bradley Allen, VP of investor relations and corporate communications at Imation and the new chair of Niri’s ethics council, says: ‘I’ve faced situations where I’ve had to ask myself, What’s the right thing to do from a disclosure standpoint?’ There are inherent tensions, he says, because ‘an IRO plays the role of ambassador of your company to the capital markets and ambassador of the capital markets back into your company.’

Most of the confidential calls Niri’s ethics council receives concern disclosure, according to McCahon. ‘Sometimes it’s not even clear-cut whether we disclose something or we don’t,’ she says. ‘It’s the color put on it. It’s how you’re talking about it. Are you being as forthright and transparent as you need to be?’

McCahon asserts that written policies can really help an IRO gain the conviction to voice doubts: ‘The printed word can help you say, I’m right about this. I know I am.’

Room for improvement
Thompson believes that managing earnings to meet consensus numbers remains the thorniest ethical issue faced by IROs. He contends that managing earnings is a more pervasive problem than many realize – and it’s an area that Sarbanes-Oxley didn’t really touch.

Thompson cites Baruch Lev, a professor at New York University’s Stern School of Business, who last year told a symposium that better than 40 percent of Standard & Poor’s companies have consistently met or exceeded their consensus forecasts by a penny. ‘You can’t have a record like that without some manipulation of earnings,’ says Thompson.

What’s the solution? Thompson recommends that IROs refuse to tolerate this high-risk – and inappropriate – practice. ‘If IR people think management is engaging in manipulating earnings to meet the consensus numbers, they need to step up and say, You’re putting yourselves in jeopardy, you’re putting me in jeopardy, and this has got to stop.’

Once again, the ethical crux for an IRO comes down to personal integrity. ‘Shame on us that we in corporate America got ourselves into this position, but here we are,’ says Gould. ‘Now investor relations officers had better be true to themselves, because the world’s watching.’

by Elizabeth Judd

Thanks to IR Magazine for allowing us to bring this article to you.

Ian Sax delves into this year’s hot topic: majority voting meets binding proposals

It’s the compensation, stupid. There’s your slogan for the current proxy season – and it’s no surprise considering the tales of outsized executive pay stories moving through the courts of public opinion.

The current focus on compensation has led to a number of hot-button areas for this season, from golden parachutes to director independence. But for 2006, the issue getting the most attention is majority voting for director elections. ‘Our sense from our membership is that this is the big one.We know of some 130 proposals on this issue,’ says Alyssa Ellsworth, managing director of the Council of Institutional Investors in Washington, DC.

Experts are watching a number of shareholder meetings to see how much support majority voting receives this year. The results of two major test cases are already in: investors in Sprint Nextel and Novell have approved proposals for majority voting with 66.4 percent and 61.7 percent of the vote respectively.

Patrick McGurn, executive VP at proxy adviser Institutional Shareholder Services (ISS), says that while the hottest issue is indeed majority voting, proponents face a different environment this year than they did in 2005. Both McGurn and Ellsworth note that in 2006 many companies have taken proactive steps to address the issue of director elections rather than leaving a vacuum for shareholders with proposals of their own.

Taking action
‘How the votes are turning out is really a case of the haves and have-nots: companies that have done nothing to address shareholder concerns on majority voting are seeing very high results for the proposals, some above 60 percent,’ McGurn says. ‘Those that have done something are not experiencing support for majority vote proposals – in fact, very rarely is the support above 45 percent.’

The ‘something’ that companies have done is to address shareholder concerns by voluntarily adopting majority vote standards. There are a number of different benchmark models, with one of the most widely copied being the so-called Pfizer model.

‘The debate is now focused around two approaches: the Pfizer model, which is a policy that the director resignation will be handed in and considered; and the Intel model, which is the preference of the building unions,’ explains Con Hitchcock, outside counsel to Amalgamated Bank’s LongView Funds. ‘They prefer it because it’s a bylaw change and it says a director must be formally elected by a majority. Pfizer’s standard says the person is elected but the company must ask for his or her resignation because he or she didn’t get a majority. Pfizer can then do what it wants.’

Binding challenge redux
The twist to this year’s proxy season is the emergence of binding proposals that actually require changes to a company’s bylaws, rather than non-binding proposals that are far more commonly employed. This brings us to a note of shameless self-congratulation: in 2000, your correspondent asked the question in IR magazine: ‘Can shareholders really force binding bylaw changes on companies through a vote?’

Back in 2000, the practice was nearly unheard of. In fact, most investors did not consider binding proposals a realistic option. Now they are a much-discussed approach.

While still not prevalent, binding proposals are being mooted by a number of the building unions, such as the American Federation of State, County and Municipal Employees (Afscme). Pension giant Calpers has filed three, and Harvard professor and long-time compensation critic Lucian Bebchuk has targeted eight companies with bylaw amendments this year (AIG, Bristol-Myers Squibb and Time Warner have already accepted his proposals or some variation, while the remaining five are in opposition).

Doubts still linger over whether or not a binding proposal is an effective tool. One question is whether or not the various state laws allow them. Typically, states dictate what changes shareholders can make to corporate bylaws, with an eye toward not encroaching on boards of directors’ responsibilities.

But Gary Lutin, an investment banker at Lutin & Co in New York and an adviser in corporate control contests, says it’s possible in nearly every case to frame the proposal in a manner consistent with the purpose of bylaws to define the responsibilities shareholders have delegated to their board. In fact, Lutin issued what we called the ‘Lutin challenge’ in our 2000 article: ‘I’ll accept the challenge to put any proposal that concerns legitimate issues of corporate governance into a binding bylaw format.’ No one took him up on his offer.

As for the question of state laws, Lutin remains adamant in his support for the approach: ‘I’m not aware of any reason why you couldn’t do a binding proposal in almost any state, except maybe for someplace like Nevada, which designed its corporate law deliberately to frustrate investor rights. People said you couldn’t do it in Delaware, but that proved to be just a defense lawyer myth. All you need to do is read the statute to see how it really works, and use common sense.’

Double trouble
This year almost all binding proposals are on the issue of majority voting. And because they are binding, they remain extremely controversial. Companies don’t like having what they consider the duty of their boards subjugated, and some investors are queasy about employing such all-or-nothing tactics.

General Dynamics, for example, is facing a binding proposal from Bebchuk. The company is strenuously opposed to his action: ‘The Bebchuk proposal leaves no ability to address whatever issues caused a lack of a majority vote. And if a director doesn’t get a majority vote, he or she can’t stand for reelection again.We consider such a binding change to our corporate bylaws, especially one that would automatically disqualify a director from reelection, to be Draconian and to open the door to unintended consequences,’ says Ray Lewis, VP of IR at the Virginia-based company.

Afscme has been one of the most active in filing binding majority vote proposals. The union fund is using the proposals as a follow-up action aimed at companies that have not adopted what it views as adequate standards on majority voting following well-supported votes on non-binding proposals.

‘We know there is huge shareholder support for majority voting standards,’ says Rich Ferlauto, director of pension investment policy for Afscme. ‘The reaction of putting in director resignation policies hasn’t been sufficient. Many companies aren’t responsive to shareholders’ wishes to see an election process where a director is nominated by a majority. We’re filing binding proposals where we’ve seen support in the past from shareholders and where they’re likely to be enacted.’

One note of caution for companies: Ferlauto says Afscme plans to expand its use of binding proposals beyond the issue of majority voting. ‘Our new focus next year is going to be on ‘up and down’ votes on executive pay.We’re basing it on the UK model, which requires a shareholder vote.We have some non-binding proposals on the issue this year, and we’re expecting to do well. If we do have support and targeted companies don’t respond, we’ll come in with binding proposals next year to require companies to submit the compensation committee report for shareholder advisory approval.’

McGurn says he expects ISS to support non-binding proposals on the issue. ‘It is unlikely that a binding proposal on this topic would pass muster under state law, and it might therefore get the red light from the SEC staff. If it did, our analysis would be on a case-by-case basis.We would not be inclined to support proposals seeking annual binding votes on compensationpractices. That’s too much micromanagement for our tastes.’

But McGurn believes that, as with majority voting, companies should take proactive steps to head off shareholder dissatisfaction. ‘We do think it’s a good idea, especially for boards to have feedback on compensation,’ he says. ‘We don’t understand why more US companies don’t offer up an annual non-binding vote on compensation.’

by Ian Sax

Thanks to IR Magazine for allowing us to bring this article to you.

David Haarmeyer finds new directions in corporate communications, but the usual underlying tensions remain

Corporate disclosure, financial reporting and corporate communications in general are undergoing a sea change. On the surface, the two big drivers are a bumper crop of corporate scandals and the strong regulatory medicine that followed in its wake.

What has not changed – and is indeed the underlying force behind these drivers – is the conflict between investors and management over the control of corporate resources. Investors face a big information gap in trying to monitor management’s actions and the health of their investment, and aligning management’s incentives with owners’ interests can be accomplished only imperfectly. This defines the governance problem, and corporate communications is one important tool in the struggle to solve it. To be successful and add value, corporate disclosure should reduce uncertainty and minimize the information gap.

Thanks to more efficient capital markets, the internet and increasingly powerful tools that can look through accounting numbers, investors are in a better position than ever to address the owner-manager conflict. One example of this is the rise of hedge fund-led shareholder activism.With substantial capital and flexibility, these lightly regulated partnerships are closing the information gap by taking minority stakes and gaining board representation.

As vocal board members and investors, hedge fund activists also work to align management’s interests with those of shareholders, or at least the fund’s. Their participation can have a salutary effect on a company’s strategic clarity – any ambiguity regarding capital allocation and business focus is quickly eliminated.

To better understand the communication challenge given these new economic realities, it is helpful to remap corporate information channels. This also has the advantage of providing insight on how best to respond to the challenge in a way that is not only consistent with but also advances good corporate governance by reducing uncertainty.

Information transformation
In addition to more efficient capital markets and rapidly advancing technology, regulatory changes have dramatically changed the way information about a company flows between investors, analysts and intermediaries. The diagram opposite shows the various audiences to which quantitative and qualitative information flows in today’s corporations:

Mandatory disclosures: This channel has received considerable attention and corporate resources thanks to Sarbanes- Oxley. Indeed, there is a legitimate argument over whether a focus on getting the numbers right and ticking the right boxes has obscured more fundamental questions about the drivers of profitability, looming industry risks and how management allocates capital.

Voluntary disclosures: Quarterly earnings guidance is under fire. There is a growing recognition that guidance can lead to a bias toward short-term decision-making, financial fraud or value destruction on the scale of Enron. Michael Jensen, managing director at the Monitor Group, who has looked closely at governance and organizational failures, calls ‘managing earnings’ and ‘income smoothing’ forms of lying because they involve manipulation of financial reports. Although it is not likely to disappear altogether, this form of disclosure is in retreat.

Selective disclosure: Reg FD has presumably shut down this channel. Economic studies have shown that Reg FD has tended to impact small firms disproportionately as they have fewer resources for taking advantage of other channels and attract less interest by analysts and investors to begin with.

Signaling through corporate actions: Although not well recognized as a standard channel, the actions companies take can send strong signals to investors and analysts. Decisions to buy back stock or raise the dividend, for example, may indicate a company’s capital allocation plans, dearth of investment opportunities or commitment to financial discipline.

Information generated by sell-side analysts: The Sox requirement to separate equities research and investment banking has contracted this channel and left it in search of a revenue model. Thus, according to Reuters Research, only about 55 percent of all public companies are covered by Wall Street analysts, and of these, 75 percent are followed by one or two analysts.

Information generated by buy-side analysts: The buy side has tended to benefit at the expense of the sell side and has a more incentive-compatible business model. Because it trades on the information it generates, the buy side goes the extra mile to understand a company’s performance drivers, key risk factors and management use of discretionary cash. And for hedge funds taking a 10 percent to 20 percent stake in a company, the incentive to understand the value levers of a company is even stronger.

Shifting power
This remapping of the corporate information channels indicates that the balance of power between management and investors is shifting. The information asymmetry that defined the relationship in the past is giving way to increasing transparency as capital markets and technology throw more light on a company’s numbers, business logic and strategic plans.

Companies are adapting to this new communications landscape. Amy Hutton, associate professor at the Tuck School of Business at Dartmouth College, has documented innovative disclosure practices that firms have taken in response to Reg FD and away from earnings guidance. Hutton’s research highlights a trend by companies to either provide their business outlook or disclose operating metrics.

By removing the temptation to make short-run decisions to meet earnings targets, these practices also have the advantage of providing a renewed role for analysts: doing the hard analysis and making profit forecasts. By providing investors with a deeper understanding of their business, managers are more likely to be successful at closing the information gap. This should increase investor confidence and attract long-term investors. The alternative to an honest dialogue with investors is far less attractive.

David Haarmeyer is an independent economic consultant.

Thanks to IR Magazine for allowing us to bring this article to you.

Terry McWilliams finds out what experts are predicting for the next phase of IR’s evolution

Forget about Blackberries, blogs, webcasts and specialty data feeds. In the 1970s, the popular way to deliver corporate financial news involved feet.

Greg Pettit used to hand-deliver press releases to financial editors in New York. ‘This was before faxes, and we couldn’t trust the bicycle messengers not to lose them,’ says Pettit, who today runs Hill & Knowlton’s financial communications practice.

Indeed, IR’s technology and techniques have progressed dramatically in the last three decades. And, according to senior IR practitioners, industry executives, futurists and other experts, an explosion of change lies ahead. Advancing technology, falling barriers to globalization, expanded regulation, growing shareholder activism and governance reform are all etching distinct patterns into the evolving IR landscape.

What’s going to happen? No one can say with absolute certainty – but the collision of major trends and market forces provides a tantalizing glimpse of the possibilities to come. Real-time online annual meetings and proxy voting. Democratic corporate governance. Globally consistent accounting, regulatory and listing rules. A further shake-up of the sell side. Seamless stock trading. Viable alternatives to publicly raised equity. Whatever realities emerge, many agree that the role of IR professionals will become even more vital.

The turning point
Industry veterans contend that the foreseeable future for investor relations is being shaped by the convergence of two industry events: the spread of the internet, and recent governance and disclosure requirements like Reg FD and Sarbanes-Oxley.

‘Together, these developments have greatly expanded information access to a broad audience beyond professional investors, who traditionally enjoyed privileged access to market developments,’ says Cathy Baron Tamraz, president and CEO of the financial news distribution service Business Wire.

These changes leveled the playing field by virtually putting a stop to one-on-one guidance and turning once exclusive meetings to publicly accessible webcasts. IR information has blossomed through web sites, blast e-mails, news feeds, on-demand audio and video presentation downloads, and even satellite radio.

‘With expanded digital choices, people walking down the street can get earnings and financial information of any type, immediately, from their cell phone, PDA or laptop,’ says Jerry Schwartz, owner of New York IR firm GS Schwartz & Co. ‘These changes will have cultural, social, economical, political and financial impacts.’

For example, when smooth, real-time wireless internet video becomes available, CEOs will be called for virtual one-on-one meetings. ‘Future investors will be clamoring to look the CEO or president in the eye,’ says John Mauldin, newsletter editor and president of Texas-based Millennium Wave Advisors. ‘It won’t be the jerky stuff you see now, but real live video,’ Mauldin adds. ‘Ironically, in the age of the internet, it will provide us with closer and more personal communication.’

Turbo-charged analysis
The use of enhanced technology won’t be lost on analysts and fund managers. An initial step is XBRL, a tagging innovation designed to help slice and dice data.

‘It’s early, but when XBRL becomes widely adopted, it will be an evolutionary – if not revolutionary – technology that will make information more accessible to investors,’ says Gordon McCoun, New York-based senior managing director of Financial Dynamics.

Thomas Berghage heads a San Diego-based financial firm, NeuWorld Financial, which works with artificial intelligence. He foresees technology allowing analysts to explore significant interactions and relationships that might not otherwise be detected. ‘People are going to be awestruck by the future uses of smart computer systems,’ he says.

For the immediate future, traditional sell-side research will continue its decline as falling trading commissions threaten funding. The buy side and management will continue to liaise directly. And, despite the evolution of technology, fund managers and management will continue to meet face to face, claims Kevin Faulkner, IRO for technology company BEA Systems.

It’s conceivable that private equity and other available capital may bring other pressures, with implications for IROs. ‘Boards are not going to give management several years to fix a problem,’ says Crocker Coulson, CEO of Los Angeles-based CCG Investor Relations. ‘The patience of boards for underperformance has dwindled to almost zero because so much capital is sloshing around.’

The growing number of ‘sophisticated hedge-type’ investments – derivatives, credit swaps and options – may also challenge traditional equity-based IR efforts, notes David Lascelles, co-director of the Center for the Study of Financial Innovation, a London-based think tank.

New layers of oversight On the subject of regulation, two words ring out from the industry: expect more.

There will be increased regulations involving operating, financial and social responsibility disclosures, Lascelles says. Also anticipate more onerous accounting standards, new Sarbanes-type controls and, in Europe, a Reg FD equivalent, he adds. Additional reporting changes may result from consolidating stock markets, a trend recently highlighted by Nasdaq’s courtship of the London Stock Exchange.

‘If you look ten years ahead, two things will shape the share market,’ predicts Lascelles. ‘One is globalization: national barriers are falling, and the idea of national stock exchanges is rapidly becoming obsolete. The other is virtualization, the process by which markets lose their physical presence and exist in computers.’

‘To serve a widening array of investors, exchange trading hours will likely be extended. ‘As a result, IROs could be on call, theoretically, all the time,’ adds McCoun.

‘Some companies might choose to move to countries where disclosure and governance regulations are less stringent, while others will choose to stay where they can achieve the most attractive valuation.

‘Eventually, however, it may not make a difference what country you’re listed or headquartered in – Lascelles envisions a global standardization of accounting and disclosure requirements. In the end, Lascelles claims, issuers will benefit from harmonized standards. ‘Companies would rather produce one set of accounts than 28,’ he says.

‘No more hiding
Because more wide-ranging information about a company’s social, environmental and financial practices will be available in the future, UK futurist Dr Mike Jackson thinks special interest groups will find their way onto IR’s radar. Armed with more information, these groups will likely align themselves with shareholders and try to influence corporate behavior.

‘ ‘Shareholders will also have a bigger say,’ says Jackson, founder and chairman of research and analysis consultancy Shaping Tomorrow. ‘They’re going to have more tools, they’re going to have more knowledge, and they’re going to demand more knowledge. Huge amounts of business intelligence will become available and it will be more difficult for a company to hide.’

‘A heightened spotlight on corporate behavior may result in governance becoming a more democratic process, notes McCoun. ‘More people will have a voice in how a company is managed and run.’ The proliferation of news Carefully planned and executed IR communications will be more important as the number of information sources – and the number of people accessing them – increases.

‘To ensure message consistency and to prevent inadvertent disclosures, Pettit and others see various corporate communications ‘silos’ converging. Departments handling IR, PR, marketing, public affairs and other company information will carefully coordinate their efforts. This will help protect reputation and valuation, and provide top-to-bottom knowledge about the business.

‘ ‘IR considerations will have to come into all communications because analysts and investors will get their information from anywhere,’ Pettit says. Alternative news sources outside mainstream financial news will become important considerations, adds McCoun. ‘For example, you wouldn’t normally think a trade publication would be an IR responsibility, but if it shapes the perception of the company, then I would argue it is,’ he says.

‘In addition to dealing with a nearly continuous news cycle, IROs will have to make critical choices involving an increasingly diverse shareholder audience located across multiple time zones. While important news can be distributed simultaneously, only a portion of IR’s main target audience will receive it during business hours. And, increasingly, language differences will have to be considered.

‘Despite the rise of alternative and online information sources, traditional news outlets aren’t going away, claims Baron Tamraz. In other words, financial news providers with credible reputations will continue as the most trusted sources for news.

‘Some IR experts also predict the need for companies to further educate individual investors as the latter continue to bypass brokers and buy stock directly. Annual reports, in paper or electronic form, will remain one of their main sources on current and potential investments.

‘Keeping up with rapid-fire market developments will be a challenge, says Schwartz. ‘We have an extremely headline-driven stock market, and that’s not changing,’ he asserts. ‘As IR people we have to manage the news faster and we have to manage the distribution of news faster. It’s the obligation of IR people to stay ahead of the curve of changing technology. Every time there is something newer, faster and better that makes it easier for information to be disseminated to an ever-wider audience, the more we have to know.’

‘Looming wildcards
The road ahead for investor relations will be full of surprises – as is the case now, growth and success will be mixed with scandals and market disruptions.

‘ ‘If you look back at the inflection points, they have been because of some kind of cataclysmic event,’ says McCoun. ‘We wouldn’t have Sarbanes-Oxley if it weren’t for Enron and Adelphia and the market meltdown. There is a school of thought that says the next financial accident will reshuffle the deck and we will have to evaluate the environment from there.’

‘Regardless, following best practice is the best route – and the importance of the role will be magnified in the future. ‘IROs have earned higher visibility, prestige and a seat at the table in recent years,’ says Baron Tamraz.

‘by Terry McWilliams

Thanks to IR Magazine for allowing us to bring this article to you.

Adrienne Baker reports on the latest trends in webcasting at the UK’s largest issuers

Unlike certain more covert professions, IR is an open book. IROs have the advantage of being able to ply their peers for tips on the trade or simply surf the web to find out what competitors are doing in a number of areas including financial reporting, governance and annual reports.

Those currently interested in learning about best practice in webcasting should check out Vodafone’s webcasts. According to the latest CTN webcasting survey, the UK telecom runs the best webcasts among the UK’s largest companies. This annual survey scores the webcasts of FTSE 100 companies based on quality criteria including technology, innovation, usability, delivery and production. It also identifies emerging trends in this area. London-based CTN Communications conducted the survey in association with IR magazine.

This year, Vodafone receives a total score of 60 percent, which is up 3 percentage points from 2005. Vodafone’s webcasts stand out because of the company’s use of technology and innovation to make the event more informative and appealing.

In particular, Vodafone uses highquality videos, editing and sound to deliver an informative and accessible webcast. ‘They are embracing the spirit of transparency and communications online,’ says Kai Duggal, who oversaw the survey and is business development manager at CTN. ‘As well as providing all the core information to analysts and investors online, they are making it interesting.’

As Duggal points out, analysts that don’t participate in the live results presentation rely on webcasts as their source of company information. This is why it’s essential for companies to provide this audience with a thorough yet easy-to-follow webcast. ‘Vodafone is presenting quite a complete picture and paying attention to all the quality criteria, and it is still willing to experiment with any new channels that are developing,’ Duggal says.

More and better
What’s interesting is that the FTSE 100 companies that scored the highest in terms of quality webcasts this year also tend to be doing more webcasts outside the regular investor calendar. ‘Top scorers are increasing the number of webcasts outside the annual and quarterly results presentation and trying to grab anything that is worth communicating,’ says Duggal. Common events throughout the quarter include investor seminar webcasts, interviews with CEOs and other business heads, and product launch announcements.

These UK companies are also putting greater emphasis on events outside of the traditional results webcast. ‘Cable & Wireless, for instance, is webcasting longer presentations and using streaming flash technology to reach wider audiences,’ notes Duggal. The communications company is publicizing these presentations more and, as a result, getting a higher number of investors and employees to view them.

Another notable trend is the increase in video presentations. Of the 82 FTSE 100 companies webcasting their financial results, 45 provide the presentation on video. ‘With video, companies are being more transparent not just about their messages but also about who they are,’ says Duggal.

By packaging additional interviews and news in video format, investors and analysts can choose to view key messages instead of sitting through an entire results presentation. HBOS and PartyGaming are examples of FTSE 100 companies including additional video presentations alongside their results and AGM webcasts.

Duggal says this increase in video use also signals an overall trend whereby companies are moving beyond the nuts and bolts of webcasting to seeing the brand value of this communications tool. In other words, now that IR is comfortable with the technology and it’s widely accepted as a good tool to meet disclosure standards, companies are beginning to view webcasting as part of reputation management. According to the survey, the number of FTSE 100 companies including management interviews with results announcements went up from 21 in 2005 to 27 this year.

Three tiers
In analyzing the webcasts of FTSE 100 companies, CTN identifies three levels of webcasting among the UK’s largest players. ‘First you have companies like Vodafone that are embracing the technology as an accepted communications channel and are taking every opportunity to do things according to best practice and regulatory requirements but also make it engaging,’ says Duggal.

Other companies that fit into this category include Rolls- Royce, Royal & SunAlliance, Tesco, BAA, Cable & Wireless and Friends Provident. Notably, the survey shows Rolls-Royce has scored 50 percent higher over last year in terms of the quality of its webcasts in 2006.

The second category CTN isolates is for companies doing basic webcasts without embracing new innovations that make the tool more appealing to audiences. It places BHP Billiton in this group. Thirdly, there are those who aren’t webcasting at all or are doing a relatively poor job. BOC Group and Morrisons don’t use webcasting, and Hilton Group (now Ladbrokes), United Utilities and British Airways are among the companies CTN highlights as having the worst webcasts.

The reasons behind Hilton Group’s low-quality webcasts include multiple pop-ups that result in poor access if pop-up blockers are activated and a metallic, tinny sound quality, according to the survey. The company received a score of 20 percent this year.

A surprising 10 percent of FTSE 100 companies still choose not to use webcasting. But the survey suggests that with more companies fully embracing the medium outside regular results presentations, non-converts risk falling behind in their investor communications. Those IROs on a mission to update or begin webcasting should consider logging on to the webcasts of FTSE 100 companies that rate high in this year’s survey. After all, why not take advantage of the overt nature of webcasting best practice?

by Adrienne Baker
Thanks to IR Magazine for allowing us to bring this article to you.

John Deosaran suggests a direct link between valuation and best practice

Corporations have spent billions of dollars complying with Sarbanes-Oxley and a lot of time wrestling with how to implement governance practices that provide appropriate oversight without stifling management flexibility. Investors, meanwhile, first began examining governance purely as a risk mitigation tool, but today there is a shift as more fund managers attempt to understand what governance can tell them about performance.

A recent study entitled ‘Did new regulations target the relevant corporate governance attributes?’, by Georgetown University’s Reena Aggarwal and Rohan Williamson, found value in the incremental adoption of good governance practices. Using Institutional Shareholder Services’ (ISS) corporate governance quotient (CGQ) data on 5,300 companies, Aggarwal and Williamson found that value increased by 4 percent for each attribute of better governance. By adopting ten governance attributes, firms increased their value – as measured by Tobin’s Q – by an average of 40 percent.

In January 2004, Lawrence Brown and Marcus Caylor of Georgia State University reinforced the governance/performance link. They used industry-adjusted CGQ scores to study the correlation between four areas of corporate governance (board, compensation/ownership, takeover defenses and audit) and 15 performance metrics (TSR, profitability, volatility, dividends, etc). They concluded that high CGQ scores positively correlated with higher shareholder returns, higher profitability, lower risk (beta) and higher dividend yields.

Two landmark studies came even earlier: ‘Corporate governance and equity prices’ (Gompers, Ishii and Metrick, 2003) and ‘Governance mechanisms and equity prices’ (Cremers and Nair, 2003). The authors of the former study found that investing in companies with the strongest shareholder rights and selling those with the weakest would have earned abnormal annual returns of 8.5 percent. Firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth and lower capital expenditures, and made fewer corporate acquisitions. In the latter study, Cremers and Nair found that a strategy focusing on long positions in companies exhibiting higher takeover vulnerability and shareholder activism and short positions in companies exhibiting lower takeover vulnerability and shareholder activism would yield abnormal returns.

ISS, as a proxy voting and governance ratings company, naturally has a strong interest in these academic reports, and in 2005 revised the CGQ methodology to better reflect the relationship between governance and performance. ISS’ quantitative analysis group studied the correlation between 77 rating factors and 16 financial and risk performance metrics over the period 2002-2004. The weight of each governance variable in the model is determined by the strength of its correlation to the various performance measures, both individually and in aggregate.

The mounting empirical evidence of a strong correlation between governance and performance suggests that analysis of governance can be used for much more than simply avoiding the most poorly governed companies. Moreover, as research begets more discussion between investors and management, shareholders at all levels will be sure to benefit.

John Deosaran is vice president of Institutional Shareholder Services’ ESG analytics group.

Thanks to IR Magazine for allowing us to bring this article to you.

Adrian Holliday speaks to investment banks and finds corporate access is the order of the day

Commerzbank Corporates & Markets ‘We’re seeing a complete change in the relationship between research departments and the other areas of investment banks,’ explains Dominic Hughes, head of corporate broking at Commerzbank Corporates & Markets. ‘At the same time, the changing needs of asset managers mean that the quality and cost of research are really under the spotlight because banks can’t cross-subsidize research departments from transaction-based banking departments.

‘Also, broking margins have been viciously cut back, and the traditional business models just don’t work,’ Hughes adds. Because of this, the days of ‘free’ investment banking research are over. But while the quantity of research will decline, the quality should improve, according to Hughes. ‘We have already seen the development of a new type of sell-side boutique that is rewarded for its quality of intellect on a fixed-fee basis rather than through transactions.’

For IROs these changes mean it’s even more challenging, in some cases, to make sure a company’s story is heard by the right audience. Traditionally, companies have relied on sell-side brokers to a certain degree to sell their story to the buy side. But now Hughes says not enough IROs appreciate that research is written to generate trading flows. ‘The truth is that the sell-side analyst, no longer subsidized by investment banking fee income, is under constant pressure to generate ideas that will create short-term trading volume rather than long-term performance,’ he says.

So, how should IROs deal with this changing set of circumstances? Hughes sees the industry reaching back to its roots. ‘It’s a case of going back to the old style of relationship broking that made firms like Cazenove famous,’ he suggests. ‘In an environment where products and services are increasingly commoditized, that style is going to become much more relevant.

The real value has to lie inside relationships. This is why corporate access has become such a buzzword in equity broking.’

Hughes refers to a 2005 study from Greenwich Associates that shows around 40 percent of commission paid to brokers by asset managers is now related to arranging meetings with corporate management. ‘If this is the case, why maintain expensive sales and research teams?’ he asks.

Asset managers are placing increasing importance on direct contact with company management when deciding to invest. ‘That means IROs have more market power than at any time previously and, as ever, with power comes responsibility,’ says Hughes.

‘IROs will have to work even harder to develop deeper relationships within the investment community and to become more immediately recognized within their own companies as core members of the corporate management team, rather than just in-house financial PR,’ he adds. ‘This is vital if they are going to take the weight of endless investor meetings off the shoulders of the CEO and CFO.’

Bear Stearns
Nicholas Bell, senior managing director at Bear Stearns, says demand from buy-side institutions to meet with companies has been steadily rising for a number of years.

‘Investors have always wanted access, but we are seeing companies increasing their own efforts to facilitate that demand,’ explains Bell, who covers the European media sector from London.

European companies in particular have become more investor-friendly. ‘What we are seeing is the buy side increasing its own research capacity, which will lead to greater demand for access to management,’ notes Bell. ‘This is particularly true when you have sector-based analysts working in a buy-side firm.’

Another change that is increasing investment banks’ corporate access role is the changing nature of European IR. Familycontrolled European companies have traditionally been less concerned with investor outreach, but that has changed over the last five years.

‘There’s much more awareness now about corporate governance and how companies are run,’ says Bell. ‘Things began to change, for example, with the hostile Vodafone bid back in 1999, so the old ideas of protectionism have been falling away.’ Vodafone’s bid for German telecommunications and engineering group Mannesmann initiated a debate on how German companies are managed.

Bell also notes that stronger support for the investor relations function is facilitating the corporate access role for investment banks. ‘Ten years ago, even in some of the bigger companies who had dominant shareholders, there might only be one IRO,’ says Bell. ‘Now they might have five. I think we are seeing IR emerge as a much more significant department in its own right.’

Banc of America Securities
‘The buy side is consistently telling the sell side that it wants direct corporate access,’ explains Brian Tobin, managing director of corporate access at New York-based Banc of America Securities. ‘Of course, research analysts tend to be in touch with them, but what they really want is management teams brought to their office on a regular basis.’ Tobin reckons 80 percent of Banc of America Securities’ corporate access projects originate from research relationships, as opposed to direct investment bank contact.

Despite disclosure restrictions, the buy side still has a hankering for looking management directly in the eye. ‘Everyone now is subject to Reg FD, but you can get a feel for the subliminal stuff,’ says Tobin.

From the corporate access point of view, targeting the buy side has become much more focused, Tobin claims. ‘You can’t just say to the sales desk, We’ve got this company, get investors in for a meeting,’ he says. ‘That could potentially be a nightmare, with possible inappropriate meetings. The most important thing for us is that meetings are effective. Sometimes, however, an investor will meet with a company but won’t be interested in investing in it. Instead they will use the meeting to compare other companies in a certain sector, which is not necessarily the best use of the IRO.’

Tobin thinks IROs really need to pay better attention and rethink their relationships with hedge funds. ‘Sometimes an IRO will say they want long-only investors, but sometimes those investors have embedded hedge fund departments,’ he notes. ‘And they may meet the person who operates the internal hedge fund. But the flip side is that some hedge funds do take long-term stable positions. In other words, your hedge fund aversion may be unfounded.’

Standard Bank
Hong Kong-based Peter Mack says Asian investment remains based on name recognition as much, if not more, than credit ratings. Investment banks are recognizing and pricing opportunities in Asia and taking positions in local companies, says Mack, who is Asia head of primary markets and debt capital markets at Standard Bank.

‘Investment banks are increasingly taking positions now as principal investors in mezzanine and subordinated tranches of transactions which would, in more mature markets, be normally filled out by the buy side,’ he says. ‘So the banks are trying to fill that structured debt financing side.’

Investment banks here are also developing the buy side market for structured transactions and lower-rated quality transactions, says Mack. ‘The creation of a syndicate function for Asian credits and Asian currencies for the asset-backed sector and high-yield credits creates an environment of liquidity and assists investor education,’ he explains.

That education is increasingly important given the lack of Asia-based asset-backed transactions, says Mack. ‘To the extent that you’re bringing out new asset classes and deals, you’ve got to look at the broader educational campaigns about the asset class, not just the specific issuer,’ he asserts.

This stage of the Asia-wide economic cycle is also shifting the opportunity set. ‘It’s all about where we are now, and we’re at a turning point with more opportunities for private equity and leveraged buyouts, compared with, for example, less of a focus on a non-performing loan sector,’ says Mack.

Citigroup Has the impact of the global settlement and research unbundling affected the investment bank model significantly when it comes to more modestly sized companies? Diane Faulks thinks not. ‘We have a growing small-cap team of 16 analysts covering about 250 small European stocks, apart from covering over 2,800 stocks globally,’ she says.

However, Faulks says that IROs still have more work to do to understand why shareholders come into a stock, how long they’re likely to hang onto it, and what performance criteria they’re likely to use. ‘But it is getting more difficult for companies to track ownership; the market moves so quickly, and funds are not always transparent since shareholders don’t hold shares in their own name,’ she says. This is the challenge for many IROs, according to Faulks: to locate shareholders so that you can have an open dialogue.

Nevertheless, as some investment banks are finding, institutional clients increasingly want direct face-to-face contact with companies, well away from the roadshow visit. ‘If you look at the process of unbundling, it has meant more clarity for everyone on what investors actually value in terms of real service from banks. One growing area of appreciation is the opportunity to meet with company management directly,’ Faulks explains. ‘It’s of really growing importance for corporate access. It’s across all sectors – investors want access to companies of all sizes and sectors.’

by Adrian Holliday

Thanks to IR Magazine for allowing us to bring this article to you.

A top-flight IRO from a big Canadian bank joins a unique spin-off weeks before the IPO. Ian Williams investigates

When Aeroplan spun off from ACE Aviation, Air Canada’s holding company, IRO Trish Moran and CEO Rupert Duchesne had to explain how the company could make money from handling frequent flier miles for an airline that had been on the verge of crash-landing not long before.

Because Aeroplan was going public as an income trust, they also had to explain to foreign investors how this peculiarly Canadian structure worked. Then, shortly after the IPO, Moran and Duchesne also had to contend with a looming government decree to remove many of the fiscal privileges that made investing in income trusts so attractive. Moran confesses it took ‘a lot of handholding’ with investors south of the border, where Canadian news is as scarce as penguins at the North Pole.

Six months after a vastly oversubscribed IPO and with the government’s tax issue resolved satisfactorily, Moran and Duchesne could declare their mission accomplished. Not least among their achievements was winning best IPO at the IR Magazine Canada Awards on January 26.

In fact, the valuation their endeavors have given Aeroplan has made the company the biggest part of ACE, so the frequent flier plan seems to have proven more commercially successful than actually flying the planes. The achievement was all the more laudable in that it was – for Moran in particular – something of a scramble.

‘You need someone like me...’
With ten years of investor relations under her belt, Moran was senior manager of IR at TD Bank Financial Group when she met Duchesne in August 2004. Inspired by the rumors that Aeroplan was about to take off, she told him: ‘You probably need someone like me.’

Duchesne agreed, and what’s more, remembered. In April 2005 he called Moran and asked her to start immediately. She stubbornly insisted on giving a week’s notice and taking a week off. ‘I’m glad I did,’ she reminisces, since her first day set the pace for the next six months by including a dawn flight to Montreal and a 14-hour day with the lawyers and investment bankers drafting the prospectus.

ACE wanted the deal closed by June, leaving just weeks to put the prospectus together, plan the roadshow, meet with investors, and price the deal. ‘I hit the ground running and haven’t stopped,’ Moran recounts.

With the help of Toronto-based IR agency Barnes McInerney, the roadshow took Aeroplan from Vancouver to Calgary, Winnipeg, Montreal, Toronto, Boston and New York.

Preparing the content of the roadshow presentation was important. ‘Firstly,’ Duchesne points out, ‘this is a peculiarly appropriate company to become an income trust. We have an annual cycle of earnings but it is a very steady one, with very predictable capital expenditures before you get to free cash flow. Secondly, it makes for a higher valuation, since we remit our profits gross to our unit holders. With more free cash flow, that’s a higher multiple.’

Clearing up confusion
Since Aeroplan was the first loyalty marketing business to go public, Duchesne also had to clear up some arcane points for investors during the roadshow. He explains that whenever a customer buys a ticket from a partner airline or retailer, the latter pays Aeroplan cash per mile. Then when customers redeem their miles, Aeroplan buys them tickets or other goods. The difference between the two is Aeroplan’s gross profit. Although there can be a long gap between when miles are accumulated and when they are redeemed, Gaap accounting recognizes revenue only when miles are ‘spent’.

As it got ready for the IPO, Aeroplan modeled worst-case scenarios like the loss of a major partner, against which it set up a reserve equal to approximately 50 percent of the miles outstanding at the time of the offering. The reserve is for C$400 mn ($352 mn), although the tested scenarios got nowhere near that amount.

It helps, Duchesne adds, that the business is counter-cyclical. When airline traffic falls, the airlines offer more frequent flier miles to passengers – sometimes as much as double or treble the usual number. When asked if the September 11 attacks affected the business, Duchesne states: ‘Bizarrely, after September 11, we found people were using Aeroplan miles and did not seem to be scared of flying.’

On the roadshow, Duchesne discovered that the two big questions were ‘What is the reserve and how is it calculated?’ and ‘How robust are your breakages?’ Currently and at the time of the IPO, breakage, which refers to unredeemed miles, was estimated at 17 percent.

Although the program is rapidly expanding to become more of a general loyalty scheme, the core of Aeroplan’s success is its relationship with Air Canada, which guarantees 15 percent of its seats for Aeroplan members.

Cozy majority
Of course, Air Canada is paying for those seats, and such a cozy relationship with a majority shareholder could ring alarm bells in these days of corporate governance activism. However, Duchesne reassured investors that all the inter-company agreements were vetted by a third-party accounting firm to make sure they were fair and reasonable, and at arm’s length. ‘We had to do that because some of our directors sit on the ACE board as well, so we had to protect them from a conflict of interest.’

Since the IPO was so overwhelmingly oversubscribed, most investors were clearly comfortable with ACE’s 85 percent holding. Even so, institutional investors are pressing for ACE to disgorge more of its stock, which would increase liquidity. Duchesne and Moran would also like to see this, since once Aeroplan has a float in the $500 mn to $600 mn range, and it has been public for a year, it is eligible to be included in the S&P/TSX Composite Index. Indeed, shortly after we spoke, ACE announced a special distribution of Aeroplan units that, once complete, will increase Aeroplan’s float and see ACE’s stake in Aeroplan drop to 75.5 percent.

While everyone seems to think that inclusion in the index would be a good thing, Duchesne engagingly admits that if you ask the bankers to quantify the gains, ‘they start wriggling’. While he has doubts about the index’s effect on valuation, Duchesne keeps in mind that ‘it allows you to access the capital markets much more quickly and effectively if you want to make an acquisition’.

Retail investors were avid buyers in the IPO, but large turnover subsequently occurred. ‘The big investors got so few units, they were desperate to get up to par with their holdings,’ Duchesne explains. ‘This caused the price to move up quite smartly, so a lot of retail holders who got in at $10 took their profits and got out at $13.’

Investors and management alike are also focusing on the degree to which the Aeroplan concept is transferable to foreign shores. There is certainly no shortage of US airlines flying on empty tanks that could benefit from monetizing their loyalty plans. ‘Because of our cost of capital, unique ownership structure and links with other airlines through the Star Alliance, we are in a strong position to do that internationally,’ Duchesne says.

Having overseen the take-off, Moran is now charting the IR flight plan by retracing the original roadshow for follow-up meetings with investors. ‘We are also going to redevelop the IR web site, take a fresh look at the presentation materials we are using, and put together a formal IR strategy to take to the board of directors,’ she says. Given her thorough approach, there must be many companies that ‘need someone like’ Moran. Her CEO will be hoping she’s not so bold as to advertise that fact again.

by Ian Williams Thanks to IR Magazine for allowing us to bring this article to you.

Alpay weighs in on the somewhat nebulous realms of retail IR and updating guidance

Q- What is the rule of thumb when trying to attract retail investors into the stock? We’ve never directly targeted this audience but we’re noticing more interest since we increased our dividend, and I know these investors tend to be long-term holders.

A- Companies quite often overlook retail investors, and they do tend to be long-term holders. The fact that your company is a dividend payer makes it attractive to this group.

There is no ‘rule of thumb’ when it comes to retail investor work. Some will point to certain levels of ownership and the dedicated resources needed to service them, but each company traditionally has its own retail investor base profile. Well-known and easily understood companies, like consumer product companies, tend to attract ‘mom and pop’ investors.

Perhaps the best and most efficient way of reaching this important market is through BetterInvesting, a non-profit organization providing investment information, education and support that empowers its members to become successful lifetime investors. BetterInvesting has almost 100 regional chapters that plan, organize and present investment seminars, workshops, computer events and investor fairs throughout the year.

Another strategy for generating retail ownership is through the establishment of dividend reinvestment programs, also known as DRPs (pronounced ‘drips’). If your company doesn’t have such a program, you should look into starting one.

Q- We recently had a situation where an analyst wanted to verify our quarterly forecast right around our reporting date. I smelled danger, so I suggested he look at our previous release to answer any questions. This analyst is new to our industry and probably fairly inexperienced, as he asked for this information in a very casual manner. I am just wondering how IR should head off this type of thing, because it would be easy for a less experienced IR person to succumb to such a request. Any thoughts?

A- You should also beware of analysts who know better but are looking for that slip-up to gain an advantage over their peers.

To get around this, most companies have what is commonly referred to as a ‘black-out period’ in which management does not comment about earnings as the company’s reporting date draws closer. If your company does not have such a policy in place,you may wish to revisit this issue.

The request would be less sensitive if you had been asked to affirm a previously issued press release not so close to your reporting date, provided you did not comment any further on the accuracy of the forecast. But, given the timing, your response could be deemed as an affirmation of previously issued guidance and a possible Reg FD violation. The best advice is to seek the opinion of your legal counsel before treading into this reporting gray zone. So, when in doubt, ask a lawyer.

E-mail questions to advice@thecrossbordergroup.com. Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.

Thanks to IR Magazine for allowing us to bring this article to you.

Adrian Holiday reports on the move to simplify cross-border voting

As names go, it couldn’t sound more innocent. But last year the Children’s Investment Fund (TCI) stuck the knife hard into Deutsche Börse’s $2.5 bn offer for the London Stock Exchange. Calling on muscle from heavyweights like Fidelity Investments, TCI successfully derailed Deutsche Börse’s bid, and the German exchange’s CEO, Werner Seifert, resigned soon afterwards.

In light of the Deutsche Börse coup, how does IR keep shareholders ready to fight when predators like hedge funds try to thwart management’s ambitions? Internal shareholder revolts are a relatively new phenomenon, with shareholder opposition historically coming from the target’s shareholders.

One blue-chip IRO who recently experienced a failed hedge fund-led attack says it’s important for IR to stick to the basics. ‘Decide whether dialogue will take place directly between shareholders and yourselves or via the media bear pit,’ he advises. ‘We decided immediately that we wouldn’t engage in mudslinging. We then had to make shareholders aware of the basic facts. If you follow that route, it’s easier to see the legal picture, and how it could ultimately be resolved. What you don’t want is a great pot of litigation. Sticking to the facts of the situation and talking only about these helped us.’

Extra hand-holding
It’s often the case that smaller shareholders need a bit of extra hand-holding when the media is hot on the story. ‘We did take a lot of trouble with our smaller shareholders; this was tough compared to our institutional shareholders, who are far easier to reach,’ says the IRO mentioned above. ‘Phone helplines for retail holders, as well as aiding these holders to understand the facts of the situation, helped rebuff the hedge fund raptors eventually.’

The issue of reaching smaller shareholders is complicated by the fact that it’s hard to know who sits behind nominee accounts held by brokers. ‘If the brokers are in charge of the nominee accounts, it’s damned difficult to talk to smaller shareholders,’ notes Roger Lawson of the UK Shareholders Association (UKSA). ‘One thing an IRO can do is ensure smaller shareholders are enfranchised, and companies could try and support the enfranchisement campaign we’re running.’

The UK government is being lobbied by the UKSA to ensure shareholder rights are improved via the new Company Law Reform Bill. As things stand, many nominee shareholders are denied the chance to attend or vote at meetings because their shares are effectively invisible within broker accounts. ‘Some companies don’t want to make it easier for retail shareholders to vote because of costs,’ says Lawson. ‘But most, if they had any sense, would.’

One issue is the fact that some boards are under the illusion that the institutional vote is all that counts. ‘Some directors still think that if they have a problem, all they have to do is invite their institutional shareholders in for a chat,’ adds Lawson. ‘But look at what happened to Marks & Spencer when Philip Green put in his offer! Twenty-five percent or more of M&S shareholders are retail, and when it came to the crunch, it was private shareholders that helped M&S reject Green’s bid. M&S do try very hard to communicate with their private shareholders, and it’s paid off.’

Playing favorites
A history of favoring institutional holders makes engaging with smaller stakeholders challenging. Whether trying to encourage shareholders to vote their proxies or come to the AGM, it can be very difficult to get smaller investors involved. Many AGMs are tightly arranged, predictable and dull affairs in which larger shareholders dominate on topics that may have already been touched on behind closed doors.

To its credit, the European Union is pushing forward proposals to make it easier for shareholders to flex their rights. Its directive will facilitate cross-border proxy voting and end share blocking, a major deterrent to shareholders. Share blocking requires banks to certify that they have blocked a holder’s shares for a given period prior to the AGM.

EU internal market and services commissioner Charlie McCreevy claims that a third of all share capital of EU-listed companies is held by non-residents. ‘Our proposals will introduce a range of key minimum standards to facilitate cross-border voting using modern, reliable technology,’ he says. ‘All this will help to strengthen the role of shareholders and spread EU investing.’

Building a fan base
Jane Fiona Cumming of corporate governance consultancy Article 13 notes that better communications with retail shareholders won’t be automatic. ‘Even electronic voting, which is a good idea, could perpetuate a move toward more box ticking,’ she says, adding that this could lead to companies ‘avoiding or misunderstanding shareholder concerns.’

Pushing AGM attendance may not be the most proactive move, Cumming says: ‘Everyone says shareholders should attend AGMs, but sometimes you have to take the debate to the people rather than expecting them to turn up to an AGM.’

For companies that are ambivalent about retail shareholder communications, the web is a no-brainer, says Peter Walker of governance consultants Pielle Consulting Group. The theory is that if it works for rock groups reaching out to their fan base, it can work for corporates too.

‘Some companies want to deter everyone from coming to the AGM for the goody bag, but at the same time they want to engage them,’ suggests Walker. ‘Companies could ask shareholders if they want the full set of quarterly or annual documents or tighter, briefer comments on a quarterly basis. Both can go on the web site. It should be one of the principle vehicles you have in dealing with shareholders and stakeholders.’

Cultural nuances
Until shareholder rights are more consistent across nations, it will be difficult to get cross-border voting in full swing. ‘In terms of cross-border voting, there can be different legal backgrounds,’ explains Richard Singleton, director of corporate governance at F&C. ‘Until 18 months ago, French companies had to have a chairman and a CEO. You weren’t legally allowed to split the role. So, if you were a British shareholder saying you had to split that role, that was very difficult.’

Board structure makes a difference too. Some supervisory boards may be more removed from day-to-day management issues than unitary boards where the chairman’s committee oversees day-to-day issues.

While the push to get the vote may be mired in cultural baggage, European issuers are making great strides. Sarah Wilson, managing director of proxy voting agency Manifest, is quick to praise much European IR and its attitude to smaller shareholders. ‘The quality of info can be very good in Europe,’ she says. ‘But IR professionals should be asking the board why they’re not using a registered share route. The transparency of the share register is such an important concept for good quality dialogue between companies and shareholders, as well as getting shareholders to talk to each other.’

by Adrian Holiday
Thanks to IR Magazine for allowing us to bring this article to you.

Daniel Gross, no pun intended, on the latest executive compensation red flag

Investor relations professionals frequently have to deal with an embarrassment of riches. Literally. When executives reap gigantic windfalls triggered by mergers or acquisitions, or bosses dump shares in advance of a negative earnings report, hostile calls from the press and shareholders light up the switchboard.

The latest challenge: dealing with questions about ‘gross-ups’, cute little techniques whereby shareholders pay for the taxes incurred by CEOs and other top executives when the latter realize windfalls. Last fall, the Wall Street Journal did a lengthy article on the trend. The grossest gross-up came in March when Capital One bought North Fork Bancorp. John Kanas, CEO of North Fork, received a package worth more than $185 mn, including up to $111 mn in gross-ups alone.

Executives have adopted a range of tactics to explain such oddities. They are, in ascending order of effectiveness:

The 1950s nuclear bomb drill method. In other words, duck and cover. ‘My sole comment would be I consider it to be a fair and appropriate package,’ said Raymond Nielsen, chairman of North Fork’s compensation committee. Upside: who can be against fairness and appropriateness? Downside: reeks of stonewalling.

Blame the market. ‘Hey, everybody’s doing it, and we’ve got to stay competitive!’ When the Wall Street Journal commissioned compensation consultant Equilar to do a study of the 100 largest companies, it found that more than half were offering gross-ups to top executives. Upside: shifts the focus of the story from your company to a broader trend. Downside: if the words ‘lower quintile’ and your ticker symbol ever appear in the same sentence, benchmarking can become a four-letter word.

Blame the directors. A Coca-Cola Bottling Company spokesman, talking about a huge gross-up for its boss, told the Wall Street Journal that the allocation ‘was unanimously passed by

the compensation committee, overwhelmingly approved by shareholders and all proper corporate governance protocols were followed’. Upside: the ignominy suffered by directors is offset by the fat fees they receive. Downside: could make for uncomfortable moments at the next golf outing.

Gently refer reporters to the relevant sections of proxy statements and other SEC filings. The New York Times reported, for example, that ‘North Fork’s compensation committee, as is common among large companies, has relied upon an outside consultant to provide advice on its pay practices, according to its regulatory filings’. Oh, and the same disclosures hinted that the consultant – in this case Mercer – had done other services for the company, like retirement planning. Implication: the consultants recommended a sweetheart deal because they were angling for other business. Upside: plays into a general society-wide contempt for non-value-adding consultants. Downside: these guys do benchmarking for IR compensation and budgets too.

Daniel Gross writes the ‘Moneybox’ column for Slate.

Thanks to IR Magazine for allowing us to bring this article to you.

Investors are becoming more wary of their risk factors, but as Ben Bland reports, the spate of Russian listings in London carries on

In 2005, Russian and Commonwealth of Independent States (CIS) companies raised an impressive £3 bn ($5.27 bn) listing in London, according to the London Stock Exchange (LSE). Comstar, a subsidiary of Russian conglomerate Sistema, raised £606 mn when it joined the LSE in February. And the trend looks set to gather pace this year. ‘The pipeline in 2006 looks like it will be every bit as strong and diversified as last year,’ says Jon Edwards, head of the CIS business development team at the LSE.

The tranche of listings by CIS firms may have bulked up the LSE’s coffers while it was fending off a hostile takeover attempt by Australia’s Macquarie Bank, but they also raise red flags. In short, how good are these companies’ IR, governance and accounting practices?

Kazakhmys, the Kazakh copper miner, catapulted onto the FTSE 100 after a very successful IPO in October 2005. At the time IR magazine went to press, Kazakhmys’ shares were trading at around £9, up from an offer price of £5.40. Questions have been circling about the company’s commitment to UK governance and accounting practices, however.

In its favor, Kazakhmys has elected to incorporate as a UK company and therefore must adhere to the Combined Code. Most other listings from the region opt for global depositary receipts (GDRs), meaning they’re only obliged to meet the governance standards of their own country.

Playing FTSE
Particular attention has been focused on Kazakhmys because its presence in the FTSE 100 means that a number of index tracker funds are obliged to invest. This opens up index investors, many of which are retail holders, to risks associated with investing in a company still new to IR and governance best practice.

Kazakhmys, which is roughly 70 percent owned by three of its directors, has already attracted criticism for some of its corporate governance practices. These include investing its employee pension fund in its own shares, giving an interest-free loan to one of its directors, employing an executive chairman and making a number of unusually high payments to non-execs.

Jinsoo Yang, Kazakhmys’ softly spoken head of IR, has been working hard to explain the company’s strategy to a market that knows little about Kazakhstan, let alone Kazakhmys. He’s enlisted the help of financial PR agency Finsbury, and his efforts seem to be paying off.

F&C questioned the company’s commitment to good corporate governance at its inaugural AGM in December. Now, however, F&C’s director of corporate governance, Richard Singleton, accepts that Kazakhmys is trying hard to adapt to conditions in London. ‘We’re in a continuing discussion with Kazakhmys about areas of potential concern, and it’s quite a productive dialogue,’ he explains.

There are limits to how far the company is willing to conform to the expectations of London’s financial community, however. Yang says some investment banks were keen for an English CFO to be brought in. ‘The problem is that they wouldn’t understand the Kazakh assets,’ he says. ‘If they don’t speak Russian or Kazakh and they don’t have any background or experience in Kazakhstan, how can they understand our operations in Kazakhstan? We are the best people to understand our assets.’

Breaking the rules
There have been suggestions that listing in London is a useful way for CIS companies to bulk up the security of their assets. Home governments are less likely to meddle if a company has a large foreign shareholder base, the logic goes.

But Yang rejects the assumption that listing in London was a way of shielding Kazakhmys’ assets. ‘Maybe that’s true for Russian companies, but we are very different and I’m sorry to see we’re included in the same grouping,’ he comments. ‘The Russian companies are doing GDRs, which have less compliant procedures.’

While speculation about the motives behind certain Russian listings is warranted, Russian companies have to be domestically listed in order to list abroad. ‘There are ways around it, however,’ notes Tom Blackwell, Moscow-based vice president of the PBN Company, a strategic communications and IR firm. Steel producer Evraz Group and Russia’s largest grocery retailer, Pyaterochka, both sidestepped the rules, listing in London through an international subsidiary. These moves left Russia’s market regulator, the Federal Financial Markets Service (FFMS), less than pleased. ‘The actions of Evraz and Pyaterochka are gray schemes; they bypass our legislation, but legally we cannot do anything about this,’ explains an FFMS spokesperson. But, following discussions with the advisers who were responsible for these listings, the FFMS is confident they will be able to avoid such ruses in future.

Predicting the unpredictable
Russian listings in London are not a new phenomenon. Before Sistema came to market at the beginning of last year, there were already four Russian companies listed on the LSE. But 2005 was definitely a watershed year in terms of the number of companies listing and the amount of money raised. In Blackwell’s opinion, there’ll be even more Russian and CIS companies listing in London this year, with one or two particularly big ones in the offing, namely Rosneft and Vneshtorgbank. But realistically, he expects the momentum to then tail off. ‘There’s been so much activity that it’s not sustainable at this level,’ he says.

In future, those looking to list may find a more skeptical London investment community. Novolipetsk Steel, which listed in December, attracted much criticism for the 27 pages of ‘risk factors’ contained in its IPO prospectus, including the news that a director had just resigned after being charged in a criminal case. Investors were naturally left a bit twitchy.

‘It was clear toward the end of 2005 that there was a shift, with more attention focused on risk,’ concludes Blackwell. ‘That’s a trend that’s going to continue now, and it puts more pressure on companies to make their investment case.’

In the shifting world of emerging market listings, it appears that the only certainty is that the market will dictate how well a company’s story shines through.

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

Cary Krosinsky looks at the UN’s new principles for responsible investment and their effect on IR

With the scientific community convinced that human contributions to global warming are undeniable, it’s no wonder some of the world’s largest investors are getting serious about the related risks and responsibilities of their investments. More reporting requirements for public companies are definitely on their way, and there is a clear opportunity for IR, by proactively broadcasting environmental, social and governance (ESG) progress, to build and solidify a committed, long-term investor base.

Perhaps the most tangible proof lies in the new principles for responsible investment (PRI), produced under the umbrella of the United Nations Environment Program Finance Initiative (Unep FI) but in fact owned and signed by some of the world’s largest pension funds, including Calpers, the New York State and Local Retirement System, Caisse de dépôt et placement du Québec, and Dutch pension fund ABP. These have been joined by investment management firms like ABN Amro, BNP Paribas and Mitsubishi UFJ.

This is arguably the most ambitious project of its type to date, but there has been some skepticism. Are the principles finely worded but empty promises? It would be wise to heed the words of Colin Melvin, managing director of Hermes Equity Ownership Service and chair of the PRI Investor Group: ‘The job of the investor group now is to create specific actions, working together, to encourage better reporting and performance by the companies we invest in.We’ll be meeting over the next month to develop shared metrics as they relate to our ability to evaluate funds from an ESG perspective.’

In other words, these investors are now obligated to act according to the principles. They will measure their investments according to factors like carbon intensity, and if they insist that these measurements be within certain boundaries, portfolio adjustments will inevitably occur.

A major element of the principles is encouraging investors to report their progress – without this measure, the principles would potentially be nothing more than an exercise in PR. So, not only are the world’s biggest investors committed to the PRI, it will also be possible to track their commitment.

Formal engagement
Engagement with portfolio companies is critical to the PRI. Hermes, for example, is noted for behind-closed-doors discussions, and others may follow this pattern. An example of more aggressive action is the landmark move by PRI signatory Denise Nappier, treasurer for the State of Connecticut, against American Electric Power (AEP). Nappier pushed the company to disclose its environmental footprint and related risk profile and compare them to its peers. Her ‘climate risk resolution’ garnered 27 percent of the vote at AEP’s 2003 shareholder meeting – a record for a climate risk-related vote. AEP’s resulting climate risk report is now used as a model for what the State of Connecticut requests from other electric power companies.

An important question is that of what would constitute a critical mass of investors. Melvin feels that the PRI ‘already has that critical mass,’ with around $5 tn of institutional assets under management already represented. Principle number four commits the PRI Investor Group to encourage others to join, and every day new institutions sign on. Any remaining sense that fiduciary duty prevents pension fund trustees and others from using ESG factors in their decision-making was negated by last year’s report by Paul Watchman of UK law firm Freshfields Bruckhaus Deringer, featured on Unep FI’s web site (www.unepfi.org). In fact, a stronger argument could now be made that a failure on the part of long-term investors to at least consider ESG factors constitutes a dereliction of fiduciary duty.

Quantifying ESG factors can be a real Pandora’s box, but there has been a lot of movement in this area recently. Within principle three, the signatories say they will ‘ask for standardized reporting on ESG issues (using tools such as the Global Reporting Initiative).’ They will inevitably ask companies for some sort of standard, well-accepted disclosure format. IROs should familiarize themselves with the possibilities, and ensure they are prepared to answer ESG-related questions.

Disclosure parameters
There are already very specific disclosure parameters out there. Nick Robins, head of SRI funds for Henderson Global Investors, speaking about the carbon exchanges now active in Europe, says: ‘Carbon now has a price, but it still does not reflect the full external costs of greenhouse gas emissions. One way for investors to gain a better understanding of future risks would be for a ‘shadow price’ for carbon to be included in company accounts.’

There will likely be an ever louder call for companies to describe their environmental behavior in such specific financial terms and include this information in disclosures to analysts and fund managers. Fund managers are under heavy pressure to perform, minimize risks and compete successfully for investment mandates. As specified in principle number four, that competition will increasingly demand adherence to the PRI. In turn, institutional investors will demand the right disclosures from their portfolio companies.

Cary Krosinsky, a director at CapitalBridge, is a member of the PRI expert group.

Thanks to IR Magazine for allowing us to bring this article to you.

Jeff Cossette looks at the heady game of stock surveillance

It’s hard out there for a stock watcher on the Street. Many of their traditional information sources have dried up, and their industry has been the subject of SEC investigations in the US. And with moves in various markets to increase shareholder transparency, the stock watcher’s business model is at risk.

But IR continues to hanker for faster and better information about who is buying and selling stocks. According to a global survey on shareholder transparency commissioned last year by the International Investor Relations Federation (IIRF), there is a clear appetite for change among investor relations professionals frustrated by the challenges of identifying who has ownership of their company’s stock. Eighty-one percent of the 346 investor relations officers polled would like the IIRF to push for greater transparency, according to the survey.

When do you need outside help? Dea Katel looks at how companies work with IR and financial PR agencies

The scope of IR consultants’ relationships with both clients and the investment community is now broader than ever before. The hot competition for capital means more companies are seeking market intelligence like peer research, while others are doing more with less by outsourcing IR chores. Whether a company needs to get creative, diversify its shareholder base, go global with its message or survive a crisis, help isn’t far away. IR magazine talked to seven companies about how they use consultants.

On the road
> Spartan Motors makes chassis for fire trucks and motor homes. The company runs a ‘real roadshow’ that puts the CEO behind the wheel of a luxury RV. The roadshow was the brainchild of Spartan’s IR agency, Lambert Edwards & Associates (LE&A). Spartan has had LE&A on a retainer for the last seven years, using the firm like most companies use an in-house IR team. Last year, Spartan CEO John Sztykiel kicked off his roadshow with an analyst event in New York. He then drove the motor home to meet with portfolio managers, analysts and media in Boston, Cleveland and Chicago. Sztykiel says having a creative, innovative IR agency gives Spartan a competitive edge. ‘Being interesting has had a tangible impact on who covers us and who owns us,’ he says. Last year, one portfolio manager who ended up buying Spartan stock admitted he would never have met Sztykiel if he hadn’t been curious about the RV.

Spreading the wealth
Alaska Communications Systems (ACS), a telecom headquartered in Anchorage, listed in 1999 but didn’t have any in-house IR or consultants until Liane Pelletier joined as the company’s new CEO in October 2003. She enlisted the help of New York-based small-cap specialist Lippert/Heilshorn in September 2004 and launched an IR program to redirect the company’s financial strategy.

Although ACS was still two-thirds tightly held, Lippert went ahead and orchestrated a non-deal roadshow to start getting the company’s name out. ‘We were not on the radar screen at all and we didn’t even have anything to sell at the time,’ Pelletier comments.

Pelletier was determined to increase the public float in response to what she perceived as pent-up demand. After getting unfavorable feedback from Wall Street over proposed income deposit securities, a type of hybrid security that pays monthly income, ACS backed away and instead issued 10 mn new shares. The stock price went up immediately. ACS then marketed a secondary offering for half of the majority holder’s shares, and in March 2006 the original shareholders exited completely.

‘By teaming up with a particular kind of IR firm and attaching ourselves to existing expertise and networks, we were able to position ourselves so that when the exit plan was finally executed by this large shareholder, the stock went up and was completely consumed.We never even got to fulfill all the demand out there,’ Pelletier says.

ACS’ stock price more than doubled, its sell-side coverage doubled, the number of institutional holders almost tripled, and the three-month average of daily trading volume saw a dramatic increase.

Working remotely
Global Sources, a Hong Kong-based media company, listed on Nasdaq in 2000. With no internal IR team, the company used Lippert/Heilshorn to launch a corporate communications and IR program. Although 90 percent of Global Sources’ business is in mainland China, Hong Kong and Taiwan, its sole listing is on Nasdaq and all its shares are US-owned.

‘In a sense, we are between two customer groups. From the institutional side of things, our most important investor audiences are in North America, so we felt we needed a strong professional activity over there,’ says Jim Strachan, chief marketing officer at Global Sources.

Outsourcing IR to a US-based firm helped pave the way for a successful secondary offering in 2005, with increased analyst coverage, a strong institutional investor constituency and increasing liquidity.

Insider IR
Tel Aviv-based Bank Hapoalim is Israel’s largest bank, but until two and a half years ago it didn’t have any staff responding to analysts’ calls. Now it has a top-flight IRO in place – Oxfordeducated Nadine Baudot-Trajtenberg was in the securities division at Hapoalim, so she brings an insider’s knowledge to the investment community.

For support Baudot-Trajtenberg relies on the Global Consulting Group, which has provided counsel, targeting studies and a benchmark study that Hapoalim has found particularly useful.

‘We weren’t paying enough attention to our international media image, which is important when starting to expand abroad as a company,’ Baudot-Trajtenberg remarks. ‘We had bought a bank in Switzerland and one in Turkey, so we required broader corporate communication as a growing company.’

The bank’s shareholder base has changed dramatically since it implemented its IR program, with the percentage of stock held by foreign institutional investors jumping from 15 percent to 40 percent. In April the bank established a level 1 ADR program.

Baudot-Trajtenberg has noticed Israeli IR taking shape, with other banks in the country starting to set up programs similar to Hapoalim’s.

From Russia with love
Sometimes IR has as much to do with public affairs as it does finance. When those public affairs are Russia’s, the heat is really on. On April 11, Nasdaq-listed US firm Plug Power announced that Interros, one of Russia’s biggest private investment firms, and metals giant Norilsk Nickel were making a $217 mn cash investment through their joint venture, Smart Hydrogen, giving them a 35 percent stake in Plug Power.

All the parties agreed that transparency was essential. Apco Worldwide, a public affairs and strategic communications firm in Washington, DC, helped Plug Power develop all the materials and messaging for the sensitive announcement, making certain everything was consistent across all three companies and compliant with both US and Russian standards. When it came time to deliver the details of the deal to the public, Apco had Plug Power put all the information up on the web: Q&A, background on all the companies involved, and a transaction summary. ‘Our analysts reacted most,’ says Cynthia White, manager of PR and marketing at Plug Power. ‘We don’t have anyone in an IR position, so typically analyst questions go through our CFO. Analysts went to the site to get all the information they needed, so by the time they got to our CFO, they had only one or two qualifying questions.’

In times of crisis
Alpha Natural Resources, a coal mining company in Abingdon, Virginia, started working with the Financial Relations Board (FRB) even before it went public in February 2005. FRB acted as an extension of the company’s IR department, helping with messaging, investor targeting and board communications.

FRB worked with Ted Pile, Alpha’s director of corporate communications, who joined the company a few months before the IPO to build an IR program. Together they got an NYSE-compliant web site up and running and created a roadshow presentation.

‘FRB helped us do some initial shareholder composition analysis right after we went public, when there were all types of different shareholders coming in,’ Pile says. ‘We needed help developing a compatible shareholder base over time, and FRB helped us do an analysis and then develop a targeting plan. That is why I use them from soup to nuts.’

Alpha’s IPO was a success, but the stock came under pressure toward the end of the year. Management was actually on the road selling a secondary offering while the mining disaster of 2005 was front page news. With FRB’s help, Alpha devised a crisis management program with constant communications differentiating its own coal mines from those hit by the disaster.

Making a comeback
Hervé Séguin had been working with Toronto consulting firm BarnesMcInerney for around a decade when he took on the job of CFO at Ontario-based Certicom. He brought his consultant along to help with press releases, conference calls, AGMs and annual reports. ‘I came here four years ago, to a company that was just five months from putting a lock on the door,’ Séguin explains. ‘How could we communicate to the investment community, which had just lost millions of dollars in value, that we were rebuilding, and how could we get them back as shareholders with faith that we were going to recover the company?’

Certicom’s main concern was getting the market to stop concentrating on quarter-by-quarter performance, a preoccupation that caused a lot of volatility. BarnesMcInerney helped devise a plan to stop talking about the quarter more than it had to and start communicating long-term plans.

The test came a couple of years ago when Certicom hit a bad quarter. It immediately announced the news, but the stock didn’t react badly. When results recovered the following quarter, the stock still didn’t move, proving that investors were definitely focusing on the long term.

by Dea katel

Thanks to IR Magazine for allowing us to bring this article to you.

The Chinese government’s hand in business makes IR in China a complicated affair. Caroline Thomas reports

As Western companies, particularly internet firms, look to expand operations into China, the issue of government interference and control is something IROs need to understand.

On January 24, 2006, the Chinese government shut down Bing Dian (‘Freezing Point’), a publication renowned for covering topics such as corruption, Taiwan, censorship and nationalism in school history books – issues that are not up for public debate in China.

The next day, Google launched a Chinese version of its search engine (www.google.cn). This site is restricted by the Chinese government’s censorship rules so that any web pages deemed ‘inappropriate’ are blocked.

The internet sector is currently receiving the most attention in terms of government intervention. ‘Censorship is the issue du jour for business in China,’ says Cedric Chao, partner at law firm Morrison & Foerster. It was only in 1995 that the internet was made commercially available in China. Today there are more than 100 mn internet users in the country, which has become one of the fastestgrowing markets in the world.

For some, the embryonic stage of the internet industry – and of the Chinese market in general – is justification for companies to adapt their practices to suit China. Many foreignbased companies comment that investors have only recently grasped how important it is to make inroads there.

‘When we started in China in 1985, our presence there wasn’t on investors’ radars,’ says James Jarrett, VP of legal and government affairs for Intel. Jarrett was previously president of Intel China and, before that, VP of IR. ‘I was in the IR job until 1996 and I don’t recall a single question coming up about China during that time. I was always amazed at how little awareness there was among the investment community about what was happening in China.’

Jarrett says that the situation began to change in the late 1990s. ‘At this point you started to see more interest as financial analysts came to understand China was becoming a big player in the software world,’ he notes. But despite this increased interest, Jarrett claims there was still an information gap. ‘Analysts still had a lack of understanding about China’s potential. It’s only in the last six years that this has changed.’

Staying neutral
Google’s decision to go into China and follow the government’s rules created quite a stir. CEO Eric Schmidt’s defense was that Google had to follow each nation’s laws and customs, emphasizing the neutral status of the company.

This is the position also taken by Intel, whose semiconductors are used in the Chinese government’s computers. ‘We supply a chip that can be used for 100,000 different things,’ says Jarrett. ‘We’re a pretty neutral force. You buy the chip and you can program it to do a lot of different tasks, so it’s not something we can control. Our job is just to provide technology.’

Google includes a note at the bottom of censored searches informing the user that content has been blocked. The search engine is also choosing not to offer e-mail, blogging or social networking in China for fear that it will not be able to protect users’ privacy.

This is the situation in which Yahoo! found itself two years ago when it was asked by the Chinese government for information about journalist Shi Tao, who was accused of revealing state secrets via Yahoo! e-mail. Yahoo! provided the information and Shi Tao was sentenced last April to ten years in prison. The e-mails allegedly included information on the Chinese government’s guidelines for reporting on the 15th anniversary of the Tiananmen Square massacre.

Leading the way
Chunming Zhao, a senior equity analyst covering technology and the Chinese internet at Susquehanna Financial Group, thinks Google’s China launch is a positive sign. ‘The censored Google.cn is a symbol,’ he explains. ‘It signifies that the Chinese market is important enough for Google to take this localized approach.’

Companies adapting – or compromising – their Western business practices is not something Zhao, as an analyst, worries about. ‘Many institutional investors have asked if I am worried or surprised about Google’s actions,’ he says. ‘My answer is no. Google had to adapt in order to operate in China and to show respect for the local environment; the last thing you want to do is annoy the Chinese government.’

Information flow
Government interference and ownership does, however, affect perceptions of Chinese issuers. ‘We can’t work with Chinese companies who cannot adapt to a formal approach to investor communications,’ says James Shapiro, senior managing director of Galileo Global Advisors. Shapiro notes a big difference between state-owned and private companies in that private companies are generally more transparent.

But if a state-owned company explains its business well, investors and analysts are less apprehensive, notes Shapiro. He highlights a case where a client was a well-known state-owned company that operates in the West. ‘It was always clear that the government directly owned a large majority of this publicly traded company,’ he says. ‘But people accepted that this is part of the nature of many large companies in China, and it wasn’t an issue because the company was run well.’

A further example of this is that of the so-called ‘red chip’ stocks listed in Hong Kong. Many of these businesses have Chinese state-owned enterprises as their parent companies but aren’t disregarded for their transparency or investor communications.

According to Chao, state ownership is not the issue. The real problem for investors and analysts looking at Chinese equities is transparency of ownership. ‘Sometimes I have had dealings with state-owned enterprises, and you do have to wonder how much control there is on the part of the government,’ he comments. ‘In some cases you’re not entirely sure who the owner is.’

This lack of transparency can complicate deals as well. According to Chao, when contracts are signed or deals are made with Chinese issuers, it sometimes turns out that the real owner of the company or assets is another party entirely. As a result, there are a number of investigative consulting firms springing up in China that look into the party with which their client is dealing, paying particular attention to any possible links with the government.

Fear of the unknown
According to Arvind Ganesan, director of the business and human rights program at Human Rights Watch, the opaque nature of some Chinese business practices constitutes a major risk for companies and their investors. ‘No one can be sure of the limits the Chinese government will go to, or what they will demand next,’ he says. ‘Companies may end up capitulating to arbitrary demands.’

The ‘unknown’ intentions of the Chinese government in terms of regulation may be the most challenging aspect for IROs working for companies doing business here. Shapiro agrees that the bigger issue for Western companies in China isn’t the difference in regulations between China and the West, but the uncertainty of how these regulations will impact companies.

‘The rules are in flux, and it’s hard to know exactly what they are,’ he says. ‘On top of this, you get mixed messages depending on who you ask about how flexible the rules are. It would definitely help if there was more transparency regarding the rules companies are subject to in China.’

Jie Chen, IR manager at Shanghaibased Focus Media, regularly fields questions from investors about regulatory issues. In particular, she’s often asked about the Chinese government’s involvement in company operations. In response to these concerns, Focus Media includes details about domestic Chinese regulations in its annual report.

The IR department at Chinese firm Baosteel Group tells a similar story. ‘Sometimes we do have international investors asking whether the government will interfere with the company’s daily operations,’ says an IR representative from the company. Baosteel’s IR team feels that solid communication and transparency about internal operations can overcome any investor worries. ‘Our sound corporate governance is one of the reasons why quite a number of institutional investors show strong interest and many have invested in the company,’ its IR representative says.

Linda Chien, IR manager at Chinese recruitment firm 51job, agrees: ‘Investors don’t ask if the government is involved in our operations, but they do ask how existing or new regulations may impact our business. This is the risk of doing business in China and most investors are aware of it.’

For Chien, any risks for Western issuers moving into China are far outweighed by the potential benefits. She cautions, however, that companies will have to go along with what the Chinese government decrees. ‘Companies will need to operate within the rules and regulations,’ she says. ‘I don’t think this dynamic is going to change any time soon.’

These Chinese IROs are keen to stress that what is more important than investor concerns is the changing nature of the Chinese market. Despite the controversy over Google’s entry into China, these IROs see clear signs that China is opening up to the West.

Professor Oded Shenkar, Ford Motor Company chair in global business management at the Fisher College of Business, Ohio State University, and author of The Chinese century, believes that while companies and investors should see changes in China as an indication of a more open society, they should also realize the limits to change there.

‘There will be changes, but China is never going to adopt a completely Western style of business and government,’ he says. ‘The sooner both sides accept and adapt to this, the smoother the progression will be.’ It seems this is the lesson for both sides: adapt as soon as possible to avoid any problems further down the line. With clear communication as the cornerstone, maybe perfect balance can be achieved.

by Caroline Thomas

Thanks to IR Magazine for allowing us to bring this article to you.

How do you manage IR through a takeover that might land you out of a job? Two IROs share their survival skills

Morgan Molthrop was vice president of IR at California-based Infonet Services Corp, which was bought by British Telecom in March 2005. He was retained by BT Infonet as a consultant and is writing a book about his post-corporate experiences.

Takeover blues
How secure is your job? In the world of IR, the answer is often ‘not terribly’. A merger might be great for shareholders, but there’s rarely room for an acquired company’s IR team in the combined structure. Here are a few tips on how to make lemonade when your company gets squeezed.

Be a trusted adviser. Your relationship with your CEO and CFO will determine how you are treated when they sell the company. Your value as a trusted adviser comes from knowing what you’re talking about, leading the company through difficult communications challenges, saving the CEO from embarrassing situations, and – perhaps – being an effective internal referee.

Once they know you can be trusted, the powers that be will naturally turn to you to help them through what amounts to the paramount decision in the life of a company – when a slip of the tongue or an operational snafu can derail the deal of a lifetime, when investment bankers see the communications function as theirs alone, and when legal advisers see IR as a complication and an opportunity for casebook disaster.

Think strategically, if not unconventionally. Our company couldn’t have lasted as a standalone firm while continuing to be competitive. In fact, we were the last company in our field that wasn’t part of an industry giant, and eventually we just wouldn’t have had deep enough pockets to compete. But we could provide a higher level of customer service than others, and our strategy was to take that client service message to Europe.

unlike analysts and investors in the US who were averse to any telecoms story at the time, Europeans were eager for a client service-oriented service provider. By creating interest among European investors and exploring moves such as a listing on the London Stock Exchange (LSE), we helped attract the attention of our ultimate suitor.

Develop an M&A plan in advance. Just about every company will eventually be bought or buy another firm. And just about every legal team will tell you that you can’t breathe a word before the deal is finalized, even to your outside IR consultant. So practice – that is, take your team on a merger test run using fake names and fake press releases. Create a binder that has all the contact names of press people, key shareholders, executive contacts, and so on. Keep it updated quarterly and regularly discuss the fictitious merger with your internal and external teams.

That way, when the real deal happens, everyone knows what’s expected of them and you can easily translate your fiction into reality. Remember, any merger should start with a bullet point ‘talking sheet’ that the CEO might use to describe the deal. Begin your exercise by creating a fictional talking sheet, promoting the current best assets of your company and some fictional assets of a peer company. Practice security during test runs, too, to find out where leaks are likely to spring.

Reach out to other IROs in your industry. One day one of them could be your boss, or you could be theirs. Knowing how they approach their jobs, likes and dislikes will prepare you for the day when you have to work together for the common goal of promoting a ‘unity event’. Develop a professional rapport, perhaps with regular lunches to discuss the industry issues, challenges or shareholders you have in common. Use National Investor Relations Institute (Niri) events to network with other IROs, especially if you’re in different regions.

Clarify your goals. You may be helping navigate the very deal that will put you out of work but you still have to function professionally. Think about what would motivate you to keep going. What kinds of incentives do you believe you deserve? What will it take for you to give your all to this situation? Write it down, mull it over. Don’t sell yourself short. The truth is, M&A is where most senior executives make their fortunes and, compared with them, you’re not asking for a fortune. You won’t get a golden parachute but, if you play your cards right, a bronze one can be tailored just for you.

Demonstrate your loyalty. You’re in the car going to a meeting with your CEO or CFO. Naturally, he or she turns to you to talk about what’s going on. Now is the time to say, ‘You know I’m going go through this with you. I wouldn’t leave now. But please, while you still have the power, make sure I can have some maneuverability afterwards.’ Get his or her word on it and when the stock incentive list is made, make sure your name is on it. Now there’s no excuse for you to be distracted from your ultimate goal: to get the deal done effectively and communicated brilliantly.

Be there for the deal’s close. Few experiences in your life will be as exhausting or as rewarding as bringing a merger to a close. We went through more than 70 drafts of our press release in 72 hours while preparing a press conference, a conference call, joint media appearances, a new web site, shareholder communications and employee sessions in every region of the world. And remember: it’s not a deal until it’s signed, sealed by the board and then approved by shareholders. Be prepared for a lot of hurry up and wait and several Red Bull-fueled nights.

Aid in the transition. In the time between the deal being announced and shareholder approval, meet with the IRO of the company you’ve merged with. If you are now his or her boss, great. Be frank about his or her prospects within the new organization and help out if he or she is looking for a new job. If he or she will be your boss, ask for the same and be open to ideas.

Help with the transition to the very end, providing all necessary documentation and whatever information he or she might need to make the job easier. For me, this resulted in a consulting position after my role was officially eliminated, giving me the time to recover from an exhausting schedule and the flexibility to see more of the world’s non-conference room facilities.

Shipping news
Based in Montreal, Jeremy Lee was Vice President of IR and Public affairs for UK-headquartered CP Ships. The company was acquired by Hannover-based Tui through its container-shipping subsidiary Hapag-Lloyd. Lee is now with global capital markets adviser Christensen, heading its Canada business.

Like many IROs, I had not had any experience of managing the IR function on the receiving end of a takeover offer. But, as so often happens in IR, I had the opportunity to learn something new every day.

On August 21, 2005, CP Ships announced its board’s recommendation of an all-cash offer from Tui of $21.50 per share or $2 bn in total. Including debt, the transaction’s total value was $2.3 bn. The final step of the acquisition was approved at a special shareholders’ meeting in Toronto on December 14, 2005. CP Ships shares were de-listed from the Toronto Stock Exchange on December 20, 2005.

Speculation that CP Ships might become a target started in August 2004 after it restated its financial results for the years 2002 and 2003 and the first quarter of 2004. This coincided with disappointing performance in its largest market: the transatlantic. The company’s stock price suffered a drop of more than 30 percent.

Rumor intensified around the end of April 2005 when the world’s number one carrier, Maersk Sealand, announced its plan to buy Royal P&O Nedlloyd. The industry had been ripe for consolidation for some time and the financial community anticipated further transactions. From April onwards the phone calls probing for any hint of a deal in the making increased significantly.

‘We do not comment on rumors’ became a daily mantra. Interestingly, sell-side analysts did not probe. Maybe they knew they would get no comment from an IRO who was fast gathering experience in dealing with sometimes far-fetched rumors, many of which originated in the industry media and then made the rounds of investors and business journalists.

The kick-off
The most satisfying aspect about the pre-acquisition announcement period was that Hapag-Lloyd’s name never featured as a potential suitor, even after an announcement at the end of July that CP Ships was ‘in discussions regarding a possible transaction’. And yet Hapag-Lloyd and CP Ships are an obvious match with complementary markets, services and ship fleets.

August was a busy month. On August 11, 2005, CP Ships announced record second quarter results, reflecting significant progress in rebuilding profitability in the firm’s transatlantic business. For the next ten days, in anticipation of a possible announcement about a transaction, IR and communications worked long hours to prepare news releases, investor and employee presentations, and Q&A materials. Daily conference calls took place between Tui, CP Ships and outside advisers including investment bankers, lawyers and IR and communications teams.

IR spent the days immediately after the acquisition announcement gathering reactions from analysts and institutional investors for senior management, and handling a deluge of calls from merger-arbitrage funds.

The IR experience with current investors was painless as shareholders were delighted with the $21.50 share offer, which is 28 percent higher than the settled price on April 28.

My task was made easier by the fact that the transaction was 100 percent cash and, based on comparable transactions and historical and prospective earnings performance, the offer represented immediate and full value to shareholders. Shareholders were also confident that Tui would complete the transaction on a timely basis, which it did.

The arb effect
The IR experience with the ‘arbs’ was more challenging. On the first few days of trading following the acquisition announcement, volume increased 20-fold as merger-arbitrage traders traded their often highly leveraged positions. This group of investors focused on the possibility of a counter-offer at a higher price and the risks of the transaction not completing, carefully analyzing details of public documents to find a special angle.

High trading volume – a normal feature of this type of transaction – continued into October. The initial offer expiry date of October 7 was extended until October 18, pending certain regulatory approvals, including the EU’s. Counter-offer rumors increased. Following the extension of the first offer period, tendered shares were withdrawn as the merger-arbitrageurs wanted to maintain their positions in the stock until the last moment in case of a possible counter-offer.

On October 12 EU regulatory authorities approved the transaction and counter-bid rumors subsided. On October 18 shareholders tendered 89.1 percent of the outstanding shares, sealing the acquisition even though the number was fractionally short of the 90 percent required under Canadian corporate law to accelerate closure through a compulsory acquisition of the remaining shares.

From an IR perspective, there was not a lot left to be done other than to continue to provide general information to retail investors directing them to the information agent, the transfer agent or their brokers for assistance in completing the share tender documentation. However, a special shareholder meeting was required for Tui to acquire the remaining outstanding shares. Somewhat of a formality, this took place on December 14 in Toronto. Lessons learned

1- Ensure you are part of the ‘inner circle’ on the transaction. It is essential that IROs can give the impression to investors – especially the hedge funds and arbitrageurs – that they have sufficient and up-to-date knowledge.

2- Keep in touch with the transaction team. Unless you have experience of the documentation for these types of transactions, you will need the team’s help in understanding the process and the jargon. Although time-consuming, this ultimately reflects in the quality of your communication with the investment community.

3- Communicate with your IR counterpart in the acquiring company. Hedge funds in particular play both ends and will use any inconsistencies in communication to leverage more information from you or the acquirer.

4- Maintain a close relationship with your own communications group to ensure message consistency, tone and content.

5- Read all transaction-related public documentation carefully; merger-arbitrageurs are experts at reading these documents. Stick to the facts – do not get drawn into speculating. The arbs look for the slightest indication in the content or tone of your response as a signal of new or increased risk or opportunity related to the deal.

Thanks to IR Magazine for allowing us to bring this article to you.

Hulus Alpay offers advice on institutional targeting and updating the IR web site

Q - We’re in the process of boosting our institutional outreach and it’s proving quite a challenge to determine which institutions we should be meeting. Our budget is fairly limited but one of our main IR goals this year is to attract new institutions into the stock to offset some recent hedge fund activity. Any tips on ensuring we’re approaching the right fund managers?

A - Start by analyzing your existing base of institutional investors. There are several database tools available to help you with this, including those offered for free by Nasdaq or your specialist firm if you’re on the NYSE. You want to develop a profile of your existing institutional shareholders taking into account such characteristics as investment style – growth, momentum, value, and so on.

From this you should be able to ascertain the type of institutional investor most likely to be interested in your company.

Some institutional targeting tools will also enable you to analyze the holdings of peer companies, from which you can develop a list of suitable candidates – namely, those companies that hold two or more of your peers.

Q - Is there a definitive resource on IR web sites? We’re in the process of relaunching our site and I am looking for information on how investors and analysts navigate IR web sites and what type of data they’re searching for.

A - Many IR web site vendors publish guides on what should be (or can be) incorporated into a company’s site. Of course, you may have to listen to a polite sales pitch if you request such information, but very few things in life come without a price.

While this is a good place to start, you can also do some research on your own. Analyze the web sites of peer companies to see what they include. If certain commonalities exist, consider incorporating those elements into your site. Also, look beyond your industry and at companies that are most admired – basically those companies everybody talks about – because they may have interesting features that could be adapted for use by your firm.

But nothing should be designed in a vacuum. Talk with your institutional investors and find out whose sites they admire, and why. Also make sure you keep in mind retail investors, who often have different needs when it comes to IR web sites. From all of this, you should be able to design a functional site that will have great appeal.

One word of caution, though: technology is rapidly changing, so you should repeat the exercise described above regularly, at least on an annual basis, to ensure your site is evolving with investor needs and regulatory changes.

E-mail questions to advice@thecrossbordergroup.com.

Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.

Thanks to IR Magazine for allowing us to bring this article to you.

Dea Katel gets the behind-the-scenes stories of recent IR successes from the consultant’s side

A lightning response
Debbie Mitchell of Dix & Eaton

Sometimes, consultancies are hired to help with a routine transaction and then find themselves embroiled in a crisis. When the right action is taken quickly, however, a company’s ability to execute its strategy isn’t ruined.

In spring this year Cleveland-based IR consultancy Dix & Eaton worked with Columbus-based Retail Ventures while the company prepared to spin off its Designer Shoe Warehouse (DSW). Just as IPO preparations got under way, DSW found itself dealing with a major data theft issue involving hackers accessing the firm’s database and retrieving customer information, including more than 1 mn credit card numbers.

‘Through a series of processes, DSW immediately alerted the public and its customers and continued to update critical constituencies on the status of the security issue,’ says Debbie Mitchell, managing director of Dix & Eaton.

By taking action quickly, the company was able to execute a successful IPO during a difficult period. ‘We were ready to do an IPO but the first concern had to be protecting DSW’s customers,’ observes Mitchell.

Stepping in
Kathy Waller of the Financial Relations Board

California-based IntraLase, a laser vision company, went public in November 2004 and faced one of its biggest IR challenges in the first quarter of this year. In the middle of a new product launch, Frank Jepson, IntraLase’s former vice president of corporate communications, unexpectedly passed away. While trying to close the first quarter books, Shelley Thunen, the company’s CFO, hired the Financial Relations Board (FRB) to step in and help.

‘Our specific challenge was jumping into a situation during a lot of exciting developments and meeting specific deadlines,’ says Kathy Waller, executive vice president of FRB. ‘We needed to ensure the IntraLase story was showcased in the best possible fashion without missing a beat.’

FRB coordinated IntraLase’s role in the industry’s biggest trade show, communicated its first quarter earnings and picked up the pieces of its annual report. ‘[Jepson] had selected a design firm already,’ says Thunen. ‘No-one knew where that was in the process so we came in and worked with the design firm to get the report done on time and on budget.’

Battle ready
Judith Wilkinson of Joele Frank Wilkinson Brimmer Katcher

Last year, New York-based investor relations company Joele Frank Wilkinson Brimmer Katcher represented Mony in the Mony-Axa merger deal. The firm was brought in because three dissident shareholders – representing about 12 percent of shares outstanding – opposed the merger.

Judith Wilkinson, a partner at Joele Frank Wilkinson Brimmer Katcher, stresses the importance of a quick response to the arguments dissidents raise. It’s crucial for IR to reinforce its message and reassure shareholders that the company is doing what is smart, she points out.

‘Shareholders need to be assured of a fair process and a fair price in addition to confidence from analysts and other third parties who are more credible on the valuation,’ Wilkinson says. ‘Firms always need to adjust when there is opposition because they are used to talking to their shareholders but they are not used to having someone take a magnifying glass out and examine every word to see if they can use it against them. In the end, the beauty of a situation like this – unlike a lot of IR situations – is that you win or you lose with the shareholder vote. There is a certain purity and elegance to the final vote.’

Switching lanes
Roger Pondel of PondelWilkinson Bulletin board-listed companies aren’t usually enticing clients for established IR firms but Los Angeles-based Outdoor Channel Holdings managed to get PondelWilkinson to help in its plan to upgrade to a Nasdaq listing.

‘As a firm we rarely take on bulletin board companies but when quality advisers such as Bear Stearns on the banking side and Paul Hastings on the legal side come knocking at your door talking about a bulletin board company, you have to listen,’ says Roger Pondel, a partner at PondelWilkinson.

PondelWilkinson set up a two-year strategy in collaboration with Outdoor Channel Holdings’ bankers and lawyers. The strategy focused on upgrading and making professional its communications, corporate governance and disclosure. It also included launching an investor relations web site and adding new board members.

The main challenge was attracting long-term institutional investors. ‘We got through based on a combination of the relationships we had with some of these institutions and the way in which we presented the company – the fundamentals were there from the start,’ says Pondel. Outdoor has now been listed on Nasdaq for a year.

Fresh eyes
Andrew Merrill of Edelman

In late 2003, the corporate board and senior management of Texas-based Cornell Companies came under intense attack from Pirate Capital, an activist hedge fund. The fund accused the company of gross mismanagement and poor decision-making, drawing much negative media attention.

IR firm Edelman was brought in by James Hyman, Cornell Companies’ chairman and CEO, in January 2005 when he was hired by the board to turn things around at the juvenile corrections’ builder and manager.

‘Edelman was retained to provide strategic communications counsel in support of Hyman’s turnaround of the company, which included closing facilities and eliminating a number of executive positions,’ says Andrew Merrill, global managing director of financial communications at Edelman.

‘[Edelman gave Cornell] an unbiased appraisal of the positioning of our story in the marketplace and helped us think through the ultimate approach that would inform which path to take,’ comments Hyman. The CEO added a number of directors to Cornell’s board who were supported by Pirate Capital and was able to find resolve with Pirate without going to a proxy battle.

Looking for guidance
Gordon McCoun of Financial Dynamics

The question of how and when to give earnings-per-share guidance is something many IR departments are struggling with at present. Pennsylvania-based Electronics Boutique was experiencing share price volatility when providing quarterly guidance updates. ‘The stock gyrated positively when guidance was beaten and then reacted negatively when earnings didn’t meet the guidance,’ explains Gordon McCoun, IR specialist at New York-based Financial Dynamics, which counts Electronics Boutique among its clients.

Financial Dynamics worked with Electronics Boutique to focus on longer-term performance drivers and produce a more conservative set of metrics so the numbers made sense and were realistic. ‘This meant when we set longer-term guidance parameters and didn’t change them, Electronics Boutique could develop a track record of meeting the expectation – consequently turning a stock that traded volatile but flat over time into one that made a reasonable move,’ McCoun says. ‘A company needs to take ownership of the expectations and not leave it up to the analysts.’

Guidance is at the top of the laundry list of issues clients are coming to Financial Dynamics for, McCoun adds.

Precious metals Larry Snoddon of Apco

Moscow-based Norilsk Nickel, 50 percent of which is owned by Russian private equity firm Interros, chose communications firm Apco to help with its acquisition of Stillwater Mining in Montana in the fall of 2002.

‘This case was particularly political because Stillwater is a miner of palladium and platinum, which are strategic metals,’ explains Larry Snoddon, vice chairman and managing director of Apco’s New York office. ‘So it was not only the issue of the first Russian acquisition of an NYSE-listed company but also the fact that the acquisition was mining strategic metals.’

Apco started by introducing Norilsk to the American market prior to the acquisition. ‘Norilsk came to the US and met a number of people in Washington from regulators to legislators,’ says Snoddon. ‘One of the questions that arose was, Why are foreign companies coming in and acquiring this company where many of our people are employed? So we worked with unions, opinion leaders, legislators and representatives in Washington and provided community relations as well.’

Apco helped structure the company’s new board and the acquisition went through in June 2003.

Hired to fire
Michael Claes of Burson-Marsteller

Michael Claes, managing director of corporate finance at Burson-Marsteller, tells of a highly sensitive situation his firm recently took on involving a large technology company. The firm, which prefers to remain anonymous, essentially hired Burson-Marsteller to fire its chief executive officer.

‘[The board members] described trying to have a meeting with this CEO, who would be unavailable for weeks if the chairman or one of the board members wanted to meet with him,’ Claes remembers. Shockingly, Claes says this type of scenario is coming up more and more often.

Burson-Marsteller had another client in the financial services area that it worked with for two years on a plan to get rid of its CEO. The main reason the situation dragged on for two years is that the board couldn’t work up the commitment to make a decision, reports Claes.

‘It’s a very strange phenomenon to see how far this has come,’ Claes comments. He feels the public is unaware of the magnitude of the problem because most situations like this are not visible or remain low profile.

by Dea Katel

Thanks to IR Magazine for allowing us to bring this article to you.

Adrian Holiday looks at the IR strategy behind the biggest IPO in the UK since 2001

How does a company attract investors and plan a long-term strategy when it’s threatened by the US Department of Justice (DoJ) and a rash of lobbyists determined to impede its ability to do business? Fairly easily if it is online gambling company PartyGaming, whose strategy is proving to be a winning hand – multiple winning hands, in fact.

Founded by Ruth Parasol, a US lawyer who made her fortune from telephone sex lines with her father Richard Parasol, PartyGaming provides a spread of branded online gambling products, such as PartyPoker, StarluckCasino and PartyBingo. The brands, which dominate the worldwide online gambling market, are enormously successful. Last year, this Gibraltar-based business collected sales of more than $600 mn with a profit jackpot of almost $372 mn.

Though highly profitable, almost 90 percent of PartyGaming’s revenues come direct from US gamblers. This is an issue for anyone remotely interested in PartyGaming’s long-term business plan, because the DoJ maintains that online gambling is illegal and wants to prosecute PartyGaming, which would deprive it of most of its current sales base.

But with no solid US assets, PartyGaming continues to cut and deal anyway, regardless of prosecution threats. It floated 20.6 percent of its equity on the London Stock Exchange (LSE) in June, completing the largest IPO on the LSE since 2001. And this month PartyGaming becomes part of the UK’s FTSE 100.

Partying on
Julian Harris, a partner at Harris Hagan, a law firm specializing in gaming and leisure, says the DoJ’s allegation that PartyGaming’s operation is illegal is based on an outmoded piece of legislation called the Wire Act, which is designed to prevent cross-state sports betting. ‘[The Wire Act] covers sports betting but it is stretching the point to say it applies to gaming – and it also stretches the point to say it applies outside the US,’ he observes. ‘It’s based on a US view of where the players are. [UK] law is completely different in that gaming takes place where the computer servers are located, and it’s up to other countries if they want to ban their citizens from using them.’

Harris says the DoJ has taken action against similar operators from third world locations such as Costa Rica, slapping on injunctions the moment funds get repatriated. ‘But, politically and diplomatically, that would be very difficult in western jurisdictions,’ he points out. ‘The reality is that the DoJ hasn’t done much – and I don’t think it will.’

To date, institutional investors haven’t been scared off by the DoJ’s claims. The flotation was three times oversubscribed when PartyGaming listed on June 27 and soared 11 percent to reach a market value of over $9 bn on its first day of trading. Richard Singleton, governance director at London-based Foreign & Colonial Investment Trust, says PartyGaming’s IPO looked ripe for the plucking. ‘It was priced to sell – it would have been a dereliction of duty not to buy,’ he observes.

Supported by advisers Dresdner Kleinwort Wasserstein, which also advised Sportingbet, another gaming company, on buying an online poker site last year, PartyGaming floated for 116p ($2.12) and, as IR magazine went to press, it was hovering around the 175p ($3) mark. Sell-side analysts from Deutsche Bank and Citigroup are betting it will rise higher with both placing buys on the stock. Citigroup, for instance, has placed a target price of 185p ($3.24) on the share price.

PartyGaming certainly doesn’t lack for a sell-side fan base. Out of 15 recent research notes (some written pre-IPO and some written shortly afterward) only one – from Arbuthnot Securities – failed to deal a ‘buy’ rating. ‘Arbuthnot’s general premise was that the majority of our business is poker and US-based,’ says Peter Reynolds, PartyGaming’s head of IR. ‘Its basic argument was that we were too US-focused. I did point out we didn’t set out to construct our business this way originally but when the [US] market exploded in 2002, we absorbed the majority of the increase, taking 50 percent of the market.’

Over the long run
What’s spurring the investor optimism behind PartyGaming is hope for continued high growth. Already its revenues have rocketed 90 percent this year to over $222 mn, with operating profits at just under $130 mn, and some experts estimate the online gambling industry will triple in size within five years.

From an IR standpoint, this type of story will naturally attract investors interested in high growth, but value investors also find it appealing, Reynolds points out. ‘We’re a very fast-growing company but we also have a very strong cash flow, which is a strong value pull,’ he explains. ‘When people talk of ‘value’ it means different things to different people.’

Reynolds won’t divulge the current makeup of PartyGaming’s shareholder base. Just back from vacation, he says he’s still doing the math. In the medium term, however, the IR strategy is to sustain earnings growth and continue to build shareholder value. The online gaming market remains fragmented, which often signals market share consolidation on the horizon.

Not everyone on the Street is singing PartyGaming’s praises, however. Graham Neale, equity research director at Killik & Co, didn’t recommend PartyGaming to clients and he’s not convinced the cards are stacked quite the way PartyGaming would like, either. ‘In the short term, PartyGaming could be a profitable trade,’ Neale says. ‘But there are risks. One is that the industry is generating revenue from poker players playing for only a few months, and retention rates on all poker web sites have been poor. Most players are losing money so they’re stopping playing. When an industry is going through a high level of growth, despite the loss of existing customers, you’re achieving revenue growth because new customers are still coming through the front door. But as soon as the rate of new customers slows, you reach the point where the number of people leaving outnumber those entering.’

Justin Urquhart Stewart of Seven Investment Management, a division of Killik & Co, also refuses to talk up the PartyGaming story. ‘The regulatory concern is a big red flag,’ he notes. ‘And these areas are very much open to fraud – much depends on the security of the structures in place. It’s been a bit of a fashion fad and the best of the value may already have been had. It’s certainly a cash cow, but there are definitely distinct risks.’

Trouble ahead?
From a legal standpoint, one of the risks to PartyGaming’s business is the Kyl bill, an anti-gambling bill led by Arizona Republican Senator Jon Kyl. The Arizona senator has already had his bill kicked out of Congress more than once, but he’s persisting.

If passed, the bill would impose stiff penalties on banks or third party intermediaries involved in the transfer of funds to offshore gaming operations. The DoJ has already attempted to crack down on financial players processing transactions in an attempt to block revenues but some transactions still got through via online money transfer services developed for gaming and betting sites.

David Schollenberger, partner and head of gaming at law firm Manches in London, says US politicians will be looking very carefully at what happens in the UK before passing final judgment on legislation designed to deal with online gambling. The UK’s recently passed Gambling Act 2005 makes it the first country to legalize offshore gambling. ‘The Senate will be playing a wait-and-see game, possibly for years and years, until it decides what it wants to do,’ says Schollenberger. ‘Of course, it’s not popular to make [gaming] official but if it sees the UK as a successful model, then Kyl’s bill is likely to fail – again.’

That’s what PartGaming is betting on, too. Reynolds appears at ease with the Kyl lobby and its threats. ‘There have been several attempts [at making online gambling illegal],’ he says. ‘But in the US they already have online gambling with horseracing and there’s online gambling going on in the Indian reservations. Given the similarity of this Kyl bill to the last one, I have to say it has real difficulties. But we’re keeping an eye on it. The World Trade Organization (WTO) has already said there’s an inconsistency between on and offshore operators, because you already have state lotteries and online gaming.’

The WTO’s ruling is an ace PartyGaming wants to hold on to. It is based on a case argued last year by the tiny Caribbean state of Antigua and Barbuda, which claimed US attempts to ban international online gaming were against international trade rules, and unfairly protected US betting interests. Antigua and Barbuda won, though the US has subsequently appealed.

But what about the long arm of the DoJ? Is Reynolds convinced PartyGaming can keep building its pot of winnings while the enforcement agency waits for the right moment to pounce? ‘We have 26 pages in the prospectus devoted to the risks to investors, but we’ve made sure we have the right people on our side,’ says Reynolds. ‘And we’re very comfortable with our board-level and non-board skills. There are lots of challenges, but it’s also hugely exciting – especially with such investor interest.’

by Adrian Holiday

Thanks to IR Magazine for allowing us to bring this article to you.

Vanessa Theiss finds out what it takes for companies to pass the City test

London is known for its history, its world-famous landmarks and its robust financial community – otherwise known as the City. In terms of total equity assets under management, London’s buy side is the world’s third largest, responsible for nearly $2 tn in equity assets.

The City is home to some 2,000 analysts and around 3,000 portfolio managers, many of whom take an active interest in foreign equity. Around $490 bn of assets under management in the City is invested in non-domestic shares, according to CapitalBridge. This makes London a hotbed of financial activity and a ‘must visit’ for companies planning a European roadshow.

The UK capital is also a place where almost any company – regardless of market cap or sector – can arrange a series of meetings with fund managers who are likely to take an interest in its investment story. Investing styles vary greatly in London, and hedge funds are a fast-growing entity.

‘You have everything here,’ points out Lynda Ashton, head of IR at London-based J Sainsbury, and chair of the Investor Relations Society (IRS) in London. ‘You have all the different types of funds including index, value, Garp, growth and hedge funds, and you also have private client brokers. Companies should spend at least two days doing roadshows in London.’

Targeting is king
Because London offers such a substantial and diverse investment community, targeting the most appropriate portfolio managers and buy-side analysts is essential. Matching institutions’ investment styles to your company’s strategy is necessary to ensure senior management’s time is not wasted in this financial center.

Ian Arnold, director of corporate finance at MFI Furniture Group, a furniture retailer based outside London, encourages IROs to survey the investment community well before arriving. ‘It is quite important the IRO has contacted institutions first and talked to them about their operations,’ he points out. ‘If an institution expresses an appetite and it is a relatively large one, then it is worth lining up a meeting with your CEO or CFO.’

Hedge funds are prominent in London, and many take long positions in their investments. Filtering out the value hedge funds might require the assistance of broker firms or stock surveillance services, however. Still, it can be well worth the extra effort as these can be very fruitful targets.

‘I know of a fund that has about £300 mn ($522 mn) under management – it targets only ten investments and holds those long term,’ says Arnold. ‘Although this fund is technically a hedge fund and is small, most companies would consider it well worth talking to as its average investment stake is £30 mn.’

To best manage time spent with hedge funds, small group meetings are advised. ‘Quite often hedge funds have similar investment styles, so a group gathering is the best way to meet with them,’ suggests Ashton. As for managing your time with the big name institutions in London, setting up one-on-one meetings at their offices is recommended.

What to expect
London portfolio managers and analysts are renowned for being highly knowledgeable and overly prepared for discussion with companies. Therefore, expect investors to ask detailed questions and test senior management’s ability to speak eloquently about the company’s story.

‘Some portfolio managers may adopt a ‘listen and observe’ approach, determining how effective the CEO and CFO are in presenting a coherent investment message,’ notes David Hothersall, executive director of Kinlan Communications, a London-based investor relations and public relations agency. ‘However, the silence may be punctured by extremely detailed questions that show the investment manager has done his or her homework in advance. In all cases, be very well prepared for detailed financial questions. If the answer is not available immediately, promise to come back to the inquirer within a day, if possible.’

Richard Buxton, UK equities manager at Schroder Investment Management, one of the UK’s largest investment firms, also warns companies to come prepared to answer questions. ‘Most companies come in with a presentation they wish to give, and nine out of ten times we say, Let’s not do that because we have a whole series of questions,’ he says. ‘We have done our homework; we have gone into your report of accounts; we have seen the trading statement [and] we want to talk about the following issues.’

Meetings should run for an hour, with 15 minutes dedicated to the presentation and the rest to a Q&A session. To be on the safe side – as the knowledge base of each asset manager varies – ask investors prior to the visit if they would like to be talked through a presentation, or if they prefer the meeting to be entirely in a Q&A format.

A long-term view
Defining long-term potential is a goal for most investors here. As such, it’s best to create clear, concise presentations focusing on business strategies and long-term growth. ‘The most important issue is to show you have a plausible story to tell,’ notes Arnold. ‘You have a strategy for long-term growth, a good understanding of your marketplace and a competent management team. That’s what you need to pass the [City] test.’

Buxton says his firm’s interest is in companies’ long-term potential. ‘We focus more on longer-term issues, structural issues, the industry the company operates in, potential pitfalls and potential opportunities,’ he explains. ‘We want to understand where [CEOs] believe they can really add value, and where they are allocating capital to do that, rather than hear lots of news on current trading, last week’s sales data, and that kind of noise.’

Although Buxton covers UK equities, Schroder Investment Management invests in international equities as well. ‘Schroder is an active investor; we are long term and slightly contrarian, so we have relatively low turnover,’ Buxton says. ‘We look to exploit inefficiencies in the market by taking a longer-term perspective as to potential returns on investment.’

Two financial centers It is vital to keep in mind that London’s investment community is located in two areas: the West End and the City. It takes about half an hour to drive from one place to the other, so it is imperative to schedule meetings in one area around the same time to limit travel time between meetings.

Hiring a car service with an experienced driver is highly recommended, as London traffic can be horrendous. There is also an extensive one-way system in the center of London that can be tough to navigate if you’re not familiar with it. Traveling from the West End to the City, or even further east to Canary Wharf, in some cases, requires a savvy driver. It is wise to brief drivers of your roadshow schedule a day prior to meetings so they can choose the best routes in advance.

It is appropriate to start meetings as early as 7:30 am, and finish the day with an early dinner gathering. You can fit up to six one-on-ones and two group meetings in a day. It is common for buy-side analysts to manage one-on-one meetings at big institutions that up to 15 people attend. This high attendance is often a positive sign, as it indicates high interest.

IROs are advised to keep in frequent contact with investors here, with senior management visiting at least once a year. ‘Going to London about twice a year is important,’ says Laurence Borde, founder and CEO of Media Tree, an international roadshow consultancy based in London. ‘It is totally appropriate for the IR team to do the interims and let the CEO and CFO do the main yearly and half-yearly announcements.’

Finally, the British are known for their punctuality, so don’t be late for meetings. ‘Be very strict with your timing,’ advises Arnold. ‘When in meetings say, We are here for an hour and we will have to leave by a certain point in time. That way the buy-side analyst can mange the meeting and be aware of when you need to get up and go.’

Top ten London buy-side institutions Firm Investment style Identified equities, $ mn

Legal & General Investment Management Index 117,622.6

Barclays Global Investors (UK) Index 104,782.2

Fidelity International Growth 98,391.1

Schroder Investment Management Garp 69,867.4

Morley Fund Management Garp 57,561.2

JPMorgan Asset Management Growth 52,125.2

F&C Asset Management Value 47,932.5

State Street Global Advisors Index 42,476.3

Deutsche Asset Management UK Growth 38,314.6

Insight Investment Management Growth & income 36,675.0

Note: Based on most recent public equity holdings disclosure and other public sources, the time of which may vary.

Source: CapitalBridge Visitor information Where to stay

The Savoy
Strand, WC2R OEU Tel: +44 20 7836 4343 Fax: +44 20 7240 6040

Great Eastern Hotel Liverpool Street, EC2M 7QN Tel: +44 20 7618 5000 Fax: +44 20 7618 5001

Where to present

The Brewery
Chiswell Street, EC1Y 4SD Tel: +44 20 7638 8811 Fax: +44 20 7638 5713 E-mail: info@thebrewery.co.u City Presentation Centre 4 Chiswell Street, EC1Y 4UP Tel: +44 20 7628 5646 Fax: +44 20 7628 6776

Glaziers Hall 9 Montague Close, SE1 9DD Tel: +44 20 7403 3300 Fax: +44 20 7407 6036 E-mail: sales@glaziershall.co.uk

The Insurance Hall 20 Aldermanbury, EC2V 7HY Tel: +44 20 7417 4417 Fax: +44 870 606 1814 E-mail: insurance.hall@cii.co.uk

by Vanessa Theiss

Thanks to IR Magazine for allowing us to bring this article to you.

Morgan Molthrop explains how to strike gold on a west coast roadshow

Ah, the west coast. Sunshine, movie stars, vineyards, Disneyland, Highway 1 – and about $2.58 tn of equity capital to be tapped. And if that isn’t incentive enough for an IRO to head for California, how about this: California buy-siders are long-term investors. According to Cary Krosinsky at CapitalBridge, 96 percent of Californian investment turnover is characterized as either low, very low or moderate. As a bonus, 41 percent of that money is invested in value stocks: growth and Garp funds account for about 20 percent of the pie.

In northern California, Silicon Valley ensures a veritable Mecca of institutions focused on hardcore tech sectors. In the south, consumer products, biotech and healthcare companies abound in Orange County. A new tech corridor is springing up between Calabasas and Santa Barbara along the Ventura Freeway. Entertainment, broadcast media and communications companies congregate around Hollywood and Burbank, as do investors following these sectors. For companies in these industries – and their corollary sectors, like telecoms – a trip out west is essential.

The hometown team
‘Beyond the California-based firms, many of the buy-side institutions have specialists in the entertainment or tech fields that rival or exceed their east coast colleagues,’ says Roger Pondel, co-founder of Pondel/Wilkinson, one of southern California’s oldest and largest IR consultancies.

‘As a brand-name, large-cap company recognized around the world, we are fortunate to have an almost continual demand for meetings here from east coast and overseas analysts and investors,’ says Wendy Webb, senior vice president of IR at the Walt Disney Company. She notes that several top entertainment analysts and investors also call the Los Angeles area home, including Jeff Logsdon of Harris Nesbit Gerard, Dave Miller of Sanders Morris Harris, and Laura Martin of Soleil/Media Metrics on the sell side, and Capital Research and Management, TCW Asset Management and Primecap Management on the buy side.

‘There are so many entertainment and related internet and tech companies based on the west coast that we are often shown off as part of a sell-side-sponsored tour for institutional investors,’ notes Webb. ‘They might spend two or three days visiting Disney, Fox, DreamWorks, Google, Yahoo!, Paramount Studios, Warner Studios, Lions Gate, and so on.’

Trans-Pacific roadshows
For investor relations pros from other countries seeking capital in the US, California is an important stopping point. While the UK, Canada and Japan still top the list of foreign investments by Californian institutions, there is a healthy, growing investment trend toward China, Taiwan, Korea and Australia. And, as almost 75 percent of all flights to North America from Asia stop in either Los Angeles or San Francisco, the west coast is a natural location for Asian executives to tell their story to investors.

The top industries invested in by Californian institutions are financial: banks, insurance companies and real estate and mortgage capital firms. Not far behind are healthcare and oil and gas companies. ‘We have a very good record of providing full agendas for large-cap and growing mid-cap companies in these industries, especially in San Francisco,’ says Pondel.

Where to go, what to expect
While Los Angeles and San Francisco more or less evenly divide $2 tn of equity capital within their metropolitan borders, San Francisco is a far more efficient market for IR meetings, says Crocker Coulson, president of CCG Investor Relations, a Los Angeles-based IR consultancy. ‘With over 50 percent of San Francisco capital concentrated in the downtown area, you can do a luncheon meeting and then build a day of one-on-ones that will really bear fruit,’ he notes.

To be thorough in your pursuit of capital, Coulson suggests spending an extra day to include San Mateo, San Jose, Menlo Park or Oakland, visiting some of the boutique firms that might have a particular interest in your industry, growth prospects or market cap. One investment manager in San Mateo sees about half the firms he’s interested in without leaving his office. ‘Because of our size and our proximity to the airport, it’s relatively easy for them to visit us,’ he says.

San Francisco has a lot of choice when it comes to meeting venues. Webb favors the Mandarin Oriental, while another IRO says the Westin St Francis and Hyatt hotels are also adequate and convenient locations for meetings.

‘Be prepared for tough questions,’ suggests Pondel. ‘San Franciscans are savvy, proud people who don’t see the Wall Street Journal as a fashion accessory. They will have done their homework.’ He recommends a relatively brief introduction and a more give-and-take conversation over lunch.

The flight between San Francisco and Los Angeles is about an hour; if only traveling by road in Los Angeles were as easy – this is not a city for the autophobe. And if you haven’t been here before, don’t risk making your first trip with your CEO in tow, especially if you think you’re going to be able to use a cab or perhaps rent a car and MapQuest it. This is a trip you’ll need a guide for – one who has a good knowledge of the local investment community. So hire a car and expect to do what everyone does here: stay in it much of the time.

‘You can’t just have a luncheon meeting and expect people to travel to it,’ says Coulson. ‘The time it takes to get across town in Los Angeles precludes this. In New York, Boston, Chicago or San Francisco, institutional investors will show up at your meetings. But a group luncheon in Los Angeles means a retail broker luncheon.’

Not that that’s such a bad thing. If you’re looking for high-net-worth individual shareholders, this is the place to be. Somebody’s got to run all that Hollywood money, and you can draw these folks in if you keep the venue close to Beverly Hills. But that’s something you as the IRO can do on your own without your CEO – and only if an individual shareholder outreach program is appropriate for your company.

For institutional investors, you not only have to know how to get to them, you have to know which ones to target once you’re inside the complex. ‘Cap Research in Los Angeles has a lot of active funds,’ Pondel points out. ‘But its Byzantine internal structure makes it difficult to get into if you don’t know what you’re doing.’

Filling in targets
Chances are you already have a handful of Los Angeles investors in your portfolio, so start by meeting one-on-one with them. Then fill in your targets geographically, preferably using a local pro to help you determine time between meetings. ‘We usually start clients out in Pasadena, then hit downtown, the west side and Orange County,’ says Coulson. Pasadena investment houses include Roger Engemann Associates and Provident Investment Counsel. Downtown, there’s Capital Research and Wells Fargo.

If your firm has over $500 mn in market cap, you should spend a day in San Diego. Brandes, with over $1 bn in equities under management, is worth the trip alone. San Diego is about 90 minutes’ drive from Los Angeles if you don’t hit traffic. That means leaving early in the morning (5 am) or after rush hour (10 am) to arrive for 7 am or noon meetings.

For small to mid-cap companies, California offers a plethora of research houses and smaller banks. WR Hambrecht offers Dutch auction-style IPOs, and Roth Capital Partners in Orange County is number one in private investment in public equity transactions for small-cap growth.

The ideal Californian IR itinerary? Arrive in San Francisco on a Wednesday night. Have one-on-ones in the morning, a group luncheon, then one-on-ones in the afternoon. On Friday, visit one of the outlying investment houses and then head out to San Jose. Spend the weekend in Big Sur, south of Carmel on Highway 1, then fly out to Los Angeles. Visit your top targets with one-on-ones on Monday and head down to San Diego or Orange County on Tuesday morning after rush hour. Do a luncheon and afternoon one-on-ones, then fly out of either San Diego or Orange County airport on Wednesday.

by Morgan Molthrop

Visitor information, San Francisco

Where to present

Mandarin Oriental 222 Sansome Street +1 415 276 9888

Westin St Francis 335 Powell Street +1 415 397 7000

Where to stay

Four Seasons 757 Market Street +1 415 633 3000

Ritz-Carlton 600 Stockton at California St +1 415 296 7465

Where to take your CEO for dinner

The Dining Room at the Ritz-Carlton +1 415 773 6198

Visitor information, Los Angeles

Where to present

Omni Hotel 251 South Olive Street +1 213 617 3300

Where to stay

Beverly Hilton 9876 Wilshire Blvd +1 310 274 7777

Where to take your CEO
for dinner

Lucques 8474 Melrose Avenue

Top ten buy-side institutions Firm Main investment style Location

Equities under mgmnt ($bn)

Barclays Global Investors (US) Index San Francisco 725.7

Capital Research and Management Value Los Angeles 682.1

Capital Guardian Trust Co Garp Los Angeles 160.0

Calpers Index Sacramento 122.9

Dodge & Cox Value San Francisco 105.6

Brandes Investment Partners Value San Diego 101.0

Franklin Templeton Investments Growth San Mateo 72.1

Dimensional Fund Advisors Quantitative Santa Monica 62.4

TCW Group Growth Los Angeles 53.5

Primecap Management Company Growth Pasadena 49.3

Thanks to IR Magazine for allowing us to bring this article to you.

South African companies are taking IR to the next level. Matthew Gower reports from Johannesburg

After another eventful year, South African IROs were ready to kick back and relax on July 20 at the IR Magazine South Africa Awards 2005, the fourth awards event in the region. More than 200 IROs, service providers and company executives gathered at the Hilton Sandton hotel in Johannesburg to be entertained by the evening’s host, local TV business news presenter Lindsay Williams, while celebrating the best and brightest in South African IR.

The awards are based on the results of the IR magazine-commissioned Investor Perception Study, South Africa 2005, which interviewed 95 local and overseas sell-side and buy-side analysts and portfolio managers who cover South African shares. This year the survey shows that while IR standards at the nation’s large multinational companies are now as high as their US or UK-listed equivalents, standards have rapidly improved at smaller companies, too.

The evening’s biggest winner was South Africa’s largest banking institution, Standard Bank Group, which took home awards for best overall investor relations for the second year running, and for best investment community meetings and best black economic empowerment (BEE) program.

Kim Howard, who heads Standard’s three-person IR team, says the award is the culmination of five years’ work by the bank and its chief executive Jacko Maree, who has provided excellent support for the IR function. ‘Maree’s a great communicator who believes in dialogue with shareholders so you could say IR just follows on from his great communications style,’ she says.

Howard has also found her former job as a consumer analyst at HSBC tremendously helpful for her IR role. ‘Being a sell-side analyst helps you understand the importance of fund managers as clients,’ she explains. ‘In some ways I feel I’ve gone into a position where I have more of these clients.’

But while many South African companies have taken important steps to improve their corporate governance practices and are responding well to the rise in shareholder activism, some survey respondents also note the slow rate of progress made by others. Local companies clearly face key IR challenges in the near future and only those prepared to be candid and forward-thinking about disclosure will succeed.

Winners' roundup Grand prix for best overall investor relations For a company in the JSE top 40 index: Standard Bank Group

For a company not in the JSE top 40 index: Metropolitan Holdings

Best investor relations web site AngloGold Ashanti

Best annual report Barloworld, Sanlam

Best investment community meetings Standard Bank Group

Best use of virtual conferencing Sappi Best corporate governance BHP Billiton

Best IR by a CEO or CFO Bernard Swanepoel –Harmony

Best at BEE Standard Bank Group

Best investor relations officer For a company in the JSE top 40 index: Belinda Williams – Telkom

For a company not included in the top 40 index:

Tyrrel Murray – Metropolitan Holdings

by Matthew Gower

Thanks to IR Magazine for allowing us to bring this article to you.

Terry McWilliams reports on what not to do with this year’s annual report

Want your next annual report to be horrid? Design a cover so bland, so devoid of substance that it threatens to induce reader narcolepsy. Put as many words as you can in the chairman’s message. Make the sentences really long. Say as little as possible about things that didn’t go right. And ask your employees for digital photos. These pictures are not only homespun – they’re free.

Take these steps, experts say, and your document will have shareholders and the financial community wagging their tongues with colorful language of their own. That’s not the way it’s supposed to be. Most companies spend significant amounts of money and time to create these self-administered report cards.

For whatever reason – poor planning, misguided advice or rancid execution – many publicly traded companies continue to produce failing annual reports. All too often, management falls victim to one or more of the following seven deadly sins of annual reporting.

1- Flat writing
‘Our objective with this annual report is to offer you detailed information on the conduct of business and the results achieved by the company in 2002.’ That is the chairman’s opening sentence from Spanish utility Endesa’s 2002 annual report.

It’s an example of many reports with banal chairman’s statements that lack personality and underestimate reader intelligence, says Matthew Grenier, who analyzes the reports of the top 100 European firms ranked by the Financial Times.

‘Sometimes the writing seems to be designed to make the reader close the annual report and walk away,’ observes Rebecca McEnally, director of capital markets for CFA Institute, a non-profit organization that administers the worldwide chartered financial analyst (CFA) program.

Long sentences and multiple dependent clauses play havoc with clarity and understanding. Sid Cato knows this first-hand – his newsletter, which critiques annual reports and highlights trends, penalizes reports with overly long sentences. Long letters also draw Cato’s wrath: he castigates Cinergy’s 23-page letter to shareholders – which is between six and eight times the worldwide average length – as a reflection of the chief executive’s ‘massive unbridled ego.’

An annual report can be glossy, with dramatic graphics and artistic photography, ‘but it’s a failure if it reads terribly and the investment story lacks impact,’ points out Martin Hennessey, managing director of London agency The Writer. ‘The truth is that a failure to invest in the words is generally a false economy.’

2- A boring cover
In this case, you can judge a book by its cover. The cover sets the stage and tone for a company’s report. If it doesn’t lure the reader inside, it has failed. ‘A cover gets someone to read on – or put the report down,’ says Susan Karlin, president of Suka Design, a New York design agency that produces both corporate and non-profit reports. A cover should grab a reader, be provocative, say something unique and reflect a strong, convincing theme – far more than a rote recitation of name and year, Karlin says.

Companies reporting a less-than-stellar year don’t necessarily have to feature dancing and singing on their annual report cover. ‘But make it interesting,’ advises Richard Carpenter, writing consultant and development director of corporate reporting at Radley Yeldar.

3- Hiding the story
Nothing infuriates the investment community more than hiding information or skipping around tough issues. That’s the most common mistake companies make, says McEnally. ‘It’s simply failing to provide information that people need, and obscuring critical information,’ she observes. ‘Eventually investors find out, and that’s when the lawsuits start. Companies and management fare better in the long run if they are forthcoming.’

The European fashion company Vivat Holdings diverted attention in its 1990 annual report, financial columnists suggest, by publishing a photo of a topless woman next to its financial statements. The report didn’t sit well with shareholders. Vivat no longer exists as a publicly traded company.

In such cases, management sometimes thinks ‘it can pull the wool over its audience’s eyes,’ says Hennessey. ‘It doesn’t really care what the outside world thinks.’

4- Misleading charts and graphs
Figures don’t lie, but they can create the wrong impression. Bars in charts can be flip-flopped. At first glance, they can suggest fortunes are rising rather than falling. Large percentage changes can be softened or magnified by changing the starting point on the bar scale. Some companies cherry-pick charts for inclusion in good years, but not in bad ones, notes Carpenter.

5- Hyperactive or lethargic design
Overactive design can confuse readers. With many elements – copy, graphics and photography – competing for dominance, the eye can bounce off the page. Cato thought his cat’s hair had fallen onto the page of a report he was reviewing, but he quickly discovered the ‘hairs’ were designer-placed thin curved lines. He has also seen a number of other graphic devices – arcs, upside-down type – that make him yearn for designs that are ‘clean, inviting and user-friendly’.

Clean doesn’t have to mean bland, as was the case with tobacco company Gallaher Group’s 2004 annual report and financial statements. ‘I know the tobacco industry is controversial, but the company’s apparent wish to avoid offending anyone led to one of the greyest reports ever,’ notes Hennessey.

Orange’s 2002 report was little better. Investors received a plain Word-style document, with no photos, no chairman’s statement, no graphs, ‘and no attempt made, it appears, to engage the reader,’ says Grenier. ‘And this from Orange, a perceived leader in brand communication.’

If only more companies’ reports were basic, says McEnally. ‘As a fundamental analyst, I would be delighted if annual reports were plain and not a lot of money was spent on glossy paper and expensive photographs,’ she comments.

‘Overdesign, underdesign – there is a balance you have to strike,’ says Karlin. ‘You want to direct the reader and not make him or her struggle. Time is limited. You want to pull them in, hook them and provide texture to keep them.’

6- Type from hell
Poorly used typefaces can stop a reader cold. In Wallace Computer Services’ 1998 annual, white type on a silver background tended to obscure information – ‘especially in a financial highlights section showing a falloff of net income,’ recalls Cato.

Many type problems occur in footnotes. ‘A key problem is increasing amounts of regulation,’ says Carpenter. ‘It leads companies to try to squeeze additional content into the same space to keep costs down so they don’t have to print a larger report.’ This means companies resort to tighter leading (the space between lines of text) and smaller type. McEnally suggests putting narrative information into tabular form where possible.

7- Myopic use of photography
The digital camera has changed the photographic landscape, says photographer Benjamin Chapnick, president of New York-based Blackstar. Because amateurs (typically employees) don’t have experience in lighting, composition, background and so on, they produce digital images that are inconsistent but free of charge. Images can be corrected to a certain extent with computer software, but the power of a professional’s trained eye can’t be replaced.

‘Photography should advance the theme while building the corporate brand,’ Carpenter says. ‘Why skimp on doing it right? It makes the company look cheap.’

Sometimes purchased photography leads to problems, too. Karlin remembers when the same stock image showed up on the annual report covers of two technology competitors. ‘Be original or you will look bad,’ she warns.

Good or bad, the direction or theme is ultimately the CEO’s responsibility. ‘That has always been true – the CEO gets the ultimate say,’ says Chapnick.

Final word
At best, poor reports will lose you readers, experts say. At worst, they can damage corporate credibility and reputation. ‘An annual report is a company’s number one opportunity to create a positioning for the firm and to set itself apart with a compelling investment story,’ says Debbie Mitchell, former chair of the National Investor Relations Institute (Niri) and senior managing director of IR at Dix & Eaton in Cleveland. The biggest sin of all may be squandering that opportunity.

by Terry McWilliams

Report virtues
Now you’re familiar with the most common annual report vices, discover the latest trends and best practices are by requesting a copy of the European Annual Report & IR Web Site Yearbook 2006, produced by IR magazine in association with PrecisionIR. For details, e-mail david.barrett@thecrossbordergroup.com.

Thanks to IR Magazine for allowing us to bring this article to you.

Hulus Alpay offers advice on teaching senior management about the value of IR

Q- work for a mid-sized manufacturing company that had a very limited IR program prior to my joining last fall. One of the consequences of this is that I now spend a great deal of time educating senior management and employees on what the function does. Do you have any advice on how to educate internal audiences on IR?

A- This is actually a very common situation, especially in the small and mid-cap world. Even the largest and most sophisticated companies can have a management team that is fantastic at running the business, but which often falls short when it comes to knowing how IR can help the company.

I would start with a presentation to members of the management team, either one-on-one or as a group. Start with the basics about how IR should be considered part of the strategic planning process, and explain that the function is equal in importance to marketing, finance and other corporate disciplines. Work your way up to what this means for the company, using examples when appropriate.

Lastly, insert messages about IR’s importance in all your communications with management, adding IR insights to weekly, monthly and quarterly reports. You should include insights into various related matters such as the trading patterns of the company’s stock and analysis of investor inquiries and institutional holdings, as well as a review of how the company’s peers are performing.

Q- What’s the best way to handle a heavy inflow of retail investor queries? We’ve had several announcements recently that have caught the attention of our retail holders and have caused an influx of calls to our IR hotline. Our regular policy is to return calls within 24 hours but our staffing doesn’t allow for this when we have an unusually high volume of calls.

A- Consider taking a few of the most common queries and adding them to the FAQ section of your investor relations web site. If there are many questions, you might also want to consider a special dedicated section for the topic in question.

Some companies with a high percentage of retail ownership might want to consider separate FAQs for each press release, if warranted. I would also recommend altering your IR hotline voice message to include some dialogue about these FAQs and then direct callers to the FAQs on the site for further information. Just make sure you give people an option to immediately return to the hotline if they do not have a question related to the addition you have made.

Naturally, make sure the answers to these questions are run past legal to avoid any potential disclosure issues. As a best practice going forward, try to build these announcements with potential questions in mind so they can be proactively addressed in press releases, if possible.

Thanks to IR Magazine for allowing us to bring this article to you.

The controversial economist John Kay tells Ben Bland how independent equity research could change the face of IR

One of the UK’s most eminent economists, John Kay has built a reputation as something of an iconoclast. He was made the first director of Oxford University’s Said Business School in 1997, but walked away from the ivory towers just two years later, frustrated at having failed to reform the university’s outdated management structures.

He has lampooned the ‘bullshit’ spoken by so many business people and characterized the proliferation of corporate social responsibility (CSR) reports as ‘absolute garbage’. So should the big broking houses be concerned now that Kay has sell-side research in his sights?

Establishing independence
From his elegant townhouse in the heart of London’s West End, Kay explains he doesn’t rate the quality of sell-side research very highly. He is speaking as an economist who likes to challenge the received wisdom but also as the chairman of Clear Capital, an independent equity research firm founded in 2003.

New regulations came into force in the UK at the start of the year, requiring the separation of trading and research fees paid by the buy side to brokerage firms. Kay believes this change could hit the sell side hard. ‘I doubt if sell-side research is going to die out but it will diminish quite a lot in quality,’ he says. ‘Some of it will become more genuinely independent and some will become more internally focused and directed toward investment banks’ own investment management and trading activities, rather than being in free circulation to institutional customers.’

Although still in its early stages, recent research by Investit, a fund management consultancy, indicates that unbundling is fueling growth in independent research. Kay agrees there is a new opportunity for independent research. ‘I first thought about independent equity research ten years ago when I was running an economic consultancy,’ he explains. ‘But I decided against it then because I concluded there was no way I was ever going to get paid for the work. I became interested again because conflicts of interest had been so obviously exposed as a result of the dotcom boom and, with some of the regulatory pressures that followed, I though it might now be possible to get paid.’

Regardless of the changes taking place in the market, Kay stresses that independent research must justify itself, not by being independent but by being better. To achieve this quality, Clear Capital has adopted a different kind of research methodology that Kay feels eschews the short-termism so rife on the sell side.

‘It’s about lifting your head above what next quarter’s earnings are going to be and looking at fundamental values in terms of long-term strategy,’ he says. ‘Our starting point is to look at an industry and ask what distinctive capabilities are important to it and then look at a firm, asking what its particular capabilities are. That takes you into questions of which kind of differentiation companies have that is sustainable.’

The future’s bright, but for whom? Fidelity Investments and Morley Fund Management are already paying to receive Clear Capital’s research, and the company hopes it will pick up more business as institutions finalize the restructuring of their commission payments. Kay thinks the strategy-led approach represents the future for equity research and believes this could significantly alter the nature of relationships between companies and investors.

‘What’s intellectually interesting about independent research is that you can look at basic medium to long-term questions about company strategy without being dependent on good relations with management or having to listen to what management tells you,’ Kay observes. Ultimately, if Clear Capital’s approach becomes a larger part of the market, he thinks IR practitioners are ‘going to have to learn some different skills’ or even ‘be different kinds of people’.

But, perhaps rarely for an economist, Kay is keenly aware of the limitations of crystal ball gazing. ‘Even ten years ago, it seemed inevitable that almost all large business would be organized in big, quoted public companies – that no longer seems to be true,’ he points out. ‘And it’s a reversal people haven’t really noticed. They used to think the continental European corporate organization, which typically had very concentrated ownership, was yesterday’s model and obviously on the way out in favor of an Anglo-American structure. But, actually, the direction of change is now the opposite.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

The controversial economist John Kay tells Ben Bland how independent equity research could change the face of IR

One of the UK’s most eminent economists, John Kay has built a reputation as something of an iconoclast. He was made the first director of Oxford University’s Said Business School in 1997, but walked away from the ivory towers just two years later, frustrated at having failed to reform the university’s outdated management structures.

He has lampooned the ‘bullshit’ spoken by so many business people and characterized the proliferation of corporate social responsibility (CSR) reports as ‘absolute garbage’. So should the big broking houses be concerned now that Kay has sell-side research in his sights?

Establishing independence
From his elegant townhouse in the heart of London’s West End, Kay explains he doesn’t rate the quality of sell-side research very highly. He is speaking as an economist who likes to challenge the received wisdom but also as the chairman of Clear Capital, an independent equity research firm founded in 2003.

New regulations came into force in the UK at the start of the year, requiring the separation of trading and research fees paid by the buy side to brokerage firms. Kay believes this change could hit the sell side hard. ‘I doubt if sell-side research is going to die out but it will diminish quite a lot in quality,’ he says. ‘Some of it will become more genuinely independent and some will become more internally focused and directed toward investment banks’ own investment management and trading activities, rather than being in free circulation to institutional customers.’

Although still in its early stages, recent research by Investit, a fund management consultancy, indicates that unbundling is fueling growth in independent research. Kay agrees there is a new opportunity for independent research. ‘I first thought about independent equity research ten years ago when I was running an economic consultancy,’ he explains. ‘But I decided against it then because I concluded there was no way I was ever going to get paid for the work. I became interested again because conflicts of interest had been so obviously exposed as a result of the dotcom boom and, with some of the regulatory pressures that followed, I though it might now be possible to get paid.’

Regardless of the changes taking place in the market, Kay stresses that independent research must justify itself, not by being independent but by being better. To achieve this quality, Clear Capital has adopted a different kind of research methodology that Kay feels eschews the short-termism so rife on the sell side.

‘It’s about lifting your head above what next quarter’s earnings are going to be and looking at fundamental values in terms of long-term strategy,’ he says. ‘Our starting point is to look at an industry and ask what distinctive capabilities are important to it and then look at a firm, asking what its particular capabilities are. That takes you into questions of which kind of differentiation companies have that is sustainable.’

The future’s bright, but for whom? Fidelity Investments and Morley Fund Management are already paying to receive Clear Capital’s research, and the company hopes it will pick up more business as institutions finalize the restructuring of their commission payments. Kay thinks the strategy-led approach represents the future for equity research and believes this could significantly alter the nature of relationships between companies and investors.

‘What’s intellectually interesting about independent research is that you can look at basic medium to long-term questions about company strategy without being dependent on good relations with management or having to listen to what management tells you,’ Kay observes. Ultimately, if Clear Capital’s approach becomes a larger part of the market, he thinks IR practitioners are ‘going to have to learn some different skills’ or even ‘be different kinds of people’.

But, perhaps rarely for an economist, Kay is keenly aware of the limitations of crystal ball gazing. ‘Even ten years ago, it seemed inevitable that almost all large business would be organized in big, quoted public companies – that no longer seems to be true,’ he points out. ‘And it’s a reversal people haven’t really noticed. They used to think the continental European corporate organization, which typically had very concentrated ownership, was yesterday’s model and obviously on the way out in favor of an Anglo-American structure. But, actually, the direction of change is now the opposite.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you. March 2006

The controversial economist John Kay tells Ben Bland how independent equity research could change the face of IR

One of the UK’s most eminent economists, John Kay has built a reputation as something of an iconoclast. He was made the first director of Oxford University’s Said Business School in 1997, but walked away from the ivory towers just two years later, frustrated at having failed to reform the university’s outdated management structures.

He has lampooned the ‘bullshit’ spoken by so many business people and characterized the proliferation of corporate social responsibility (CSR) reports as ‘absolute garbage’. So should the big broking houses be concerned now that Kay has sell-side research in his sights?

Establishing independence
From his elegant townhouse in the heart of London’s West End, Kay explains he doesn’t rate the quality of sell-side research very highly. He is speaking as an economist who likes to challenge the received wisdom but also as the chairman of Clear Capital, an independent equity research firm founded in 2003.

New regulations came into force in the UK at the start of the year, requiring the separation of trading and research fees paid by the buy side to brokerage firms. Kay believes this change could hit the sell side hard. ‘I doubt if sell-side research is going to die out but it will diminish quite a lot in quality,’ he says. ‘Some of it will become more genuinely independent and some will become more internally focused and directed toward investment banks’ own investment management and trading activities, rather than being in free circulation to institutional customers.’

Although still in its early stages, recent research by Investit, a fund management consultancy, indicates that unbundling is fueling growth in independent research. Kay agrees there is a new opportunity for independent research. ‘I first thought about independent equity research ten years ago when I was running an economic consultancy,’ he explains. ‘But I decided against it then because I concluded there was no way I was ever going to get paid for the work. I became interested again because conflicts of interest had been so obviously exposed as a result of the dotcom boom and, with some of the regulatory pressures that followed, I though it might now be possible to get paid.’

Regardless of the changes taking place in the market, Kay stresses that independent research must justify itself, not by being independent but by being better. To achieve this quality, Clear Capital has adopted a different kind of research methodology that Kay feels eschews the short-termism so rife on the sell side.

‘It’s about lifting your head above what next quarter’s earnings are going to be and looking at fundamental values in terms of long-term strategy,’ he says. ‘Our starting point is to look at an industry and ask what distinctive capabilities are important to it and then look at a firm, asking what its particular capabilities are. That takes you into questions of which kind of differentiation companies have that is sustainable.’

The future’s bright, but for whom? Fidelity Investments and Morley Fund Management are already paying to receive Clear Capital’s research, and the company hopes it will pick up more business as institutions finalize the restructuring of their commission payments. Kay thinks the strategy-led approach represents the future for equity research and believes this could significantly alter the nature of relationships between companies and investors.

‘What’s intellectually interesting about independent research is that you can look at basic medium to long-term questions about company strategy without being dependent on good relations with management or having to listen to what management tells you,’ Kay observes. Ultimately, if Clear Capital’s approach becomes a larger part of the market, he thinks IR practitioners are ‘going to have to learn some different skills’ or even ‘be different kinds of people’.

But, perhaps rarely for an economist, Kay is keenly aware of the limitations of crystal ball gazing. ‘Even ten years ago, it seemed inevitable that almost all large business would be organized in big, quoted public companies – that no longer seems to be true,’ he points out. ‘And it’s a reversal people haven’t really noticed. They used to think the continental European corporate organization, which typically had very concentrated ownership, was yesterday’s model and obviously on the way out in favor of an Anglo-American structure. But, actually, the direction of change is now the opposite.’

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

With board members demanding more information, Ben Bland looks at how perception studies can help IR fill the gap

At the heart of investor relations lies a key tension: while IROs must communicate their own company’s message to investors, they are also responsible for channeling the views of the same investors back to the board. Reconciling these two roles can be fraught with difficulties. That’s one of the reasons companies so frequently commission external perception studies to explore the views of investors on a variety of issues, in a range of different situations.

IROs worth their salt will already have a good sense of the attitudes of their investors and analysts. But the anonymous nature of perception studies allows honest feedback free from the fear of being blacklisted or cut out of the information loop. The independent nature of these studies also lends credibility to the exercise, which is particularly important when presenting investor views to the board.

‘There’s nothing like third-party information,’ explains Guy Cantwell, manager of corporate communications at oil drilling giant Transocean, from his office in Houston. ‘We have our own internal thoughts about things but to get a scientifically valid survey that tells us what people in the financial community are thinking about – that’s vital to us. The scientific validation of third-party research brings a lot of value to it.’

Regular check-ups recommended
There are several different ways in which perception studies can be used. Perhaps the most common is the annual benchmarking survey, which provides an assessment of investor views on issues such as company and board performance, and the quality of corporate communications and IR. Some companies also carry out more regular ‘maintenance’ studies, to gauge reactions from the investment community following quarterly reporting or a large roadshow. And others deploy perception studies strategically, to get a sense of investor feeling about M&A activity, for example.

Transocean carries out a benchmarking study every two years but it has also commissioned an investor survey to analyze opinions following a merger. AstraZeneca, the pharmaceutical giant, conducts studies annually, looking in detail at trends over two or three-year cycles. ‘Our particular interest is in the year-on-year trends our research shows us, as opposed to concentrating too much on one specific set of numbers,’ says Chris Major, head of corporate PR at AstraZeneca. ‘We try to understand the trends and respond accordingly.’

AstraZeneca’s perception studies are based on a familiarity-favorability axis, which measures investors’ impressions of the company against their familiarity with it. ‘The investors are asked how familiar they are with us, what criteria they use to judge pharmaceutical companies, how we stack up against these criteria and how we’re benchmarked against our peers in several key areas: quality of and access to management, R&D, productivity, innovation and corporate responsibility,’ Major explains.

With such a high profile in the pharmaceutical industry, AstraZeneca is often in the public eye and the company takes a keen interest in how it is portrayed in the media. So as well as tracking the views of investors and analysts, AstraZeneca conducts perception studies of the financial media. And, just as with investor studies, this format allows those who might have an issue with the company’s communications to raise it without fear of retaliation.

Land Securities, the UK’s largest quoted property company, carries out biennial studies of its main equity investors to get feedback on the effectiveness of the board and the company’s IR and corporate communications strategies. Jennifer van der Eem, Land Securities’ IR manager, insists that, though most IROs already have a clear impression of the feeling on the ground among investors, perception studies are still useful as a means of backing this up.

‘So far there have been no great discoveries, which I think is better than having something you hadn’t considered at all cropping up,’ says Van der Eem. ‘Especially if you’re doing a board-level study, you should have a good idea what the key themes are that will come through from every investor you talk to. You should pick them up if you’ve got a sensible IR program.’

Don’t shoot the messenger
Despite the best efforts of company directors and their IR teams, it is inevitable that some investors will find fault with a board or its strategy. In such a situation, couldn’t presenting negative investor feedback to the board put IR in an uncomfortable position? Van der Eem, for one, is not too concerned by this possible conundrum, insisting that there would be no need to ‘shoot the messenger.’ The real problem, she quips, would arise if she had to present feedback to the board which indicated that the IR department was no good.

Perception studies are one of the main tools of investor relations and, as such, are constantly evolving in line with shifts in the world of capital markets. The increasing move away from equity, stimulated by perceived stock market volatility, has led companies to pay more attention to debt investors. After a large debt restructuring in November 2004, for example, Land Securities carried out a perception study for its debt investors to improve its debt IR. While most perception studies are based on interviews with companies’ existing investors, ‘absentee’ studies examine the views of institutions that are not currently investing but might in future. The purpose of these studies is to identify what it is that is turning off potential investors.

This can be useful for companies of all sizes, but small and mid-caps perhaps stand to benefit most. These normally have fewer resources and tend to focus their communications on current investors. An absentee study can, therefore, help them better understand how to broaden their investor base.

It’s true that you can hope to get as much out of your perception study as you put in. Open-ended questions will elicit a broad range of views about the company and its strategy. But closed-ended questions are much more useful for conducting year-on-year quantitative analysis. One recent trend, for those with a large enough sample size (perhaps 50 respondents), is correlation analysis, whereby further insights are drawn out by delving deeper into the data. For example, you can find out whether those investors who have been meeting more frequently with management have different views on the company from those in the broader investment community.

Many IROs seem to use perception studies as little more than a benchmarking exercise but, arguably, they could be getting much more from the process. No one wants to commission expensive external research that shows that you were not as well informed about your investors as you thought. But there is undeniably a lot of value to be gained from finding out what investors and analysts think about a company away from the loaded atmosphere of formal meetings. Due to the anonymous nature of these studies, you will lose out on the chance to ‘ice’ your analysts. But you will gain a wealth of knowledge about what your investors really think.

by Ben Bland

Thanks to IR Magazine for allowing us to bring this article to you.

Dea Katel on how IR is keeping up with advances in conferencing

A decade ago, conferencing via phone, video or web was the next big thing. Unlike so many next big things from the 1990s, however, conferencing has lived up to the promise. It was already spreading fast when Reg FD gave it the final push in 2000, making earnings calls and webcasts practically compulsory for public companies.

The technology didn’t stop there, though. With broadband internet now widespread, conferencing providers have been able to keep introducing new tricks. For example, web conferencing – or sharing documents and other files while speaking over the web – is being adopted by IR teams for internal company use, and firms are becoming more comfortable with webcast and teleconference add-ons such as Q&A queuing and online polling. With a variety of services to choose from, what are IROs actually using?

Valda Colbart, IR officer at Ohio-based Rurban Financial, is a client of Premiere Global Services and a fan of new web-based tools. Like practically all US IROs these days, she uses webcasts to supplement her company’s quarterly earnings calls. She also uses live audio and PowerPoint presentations on the web for internal communications. Colbart likes the real-time monitoring element now available for teleconferences: she can see who is signed in and listening, and who is waiting in the queue to ask questions. ‘Certain types of individuals ask certain types of questions,’ she says. ‘Queuing allows us to prepare. An investment banker might be next, and we know the type of question he or she will probably ask.’

Since beginning to use these services in 2002, Colbart has seen marked advances in the technology. She says conferencing services have been fine-tuned so they are now easier to set up and more user-friendly, with a greater number of options available.

Beyond quarterlies
Lawrence Spencer, director of IR at Idacorp, an Idaho-based energy company, is a typical conferencing user. He employs Shareholder.com for audio conferencing and webcasting five times a year, for quarterly earnings calls and the annual meeting.

The new generation of IROs is represented by Carol Miceli at Cambridge, Massachusetts-based Genzyme. She turns to Thomson Financial for webcasting more often than once a quarter, citing disclosure regulations as the main reason. She says webcasts should be standard practice for all communications with the financial community, so Genzyme’s analyst days, investor conference presentations and other IR events are webcast in addition to its quarterly calls and AGM.

‘On occasion we do special teach-ins for investors, showcasing additional information on a special topic of interest to the financial community,’ Miceli says. ‘We also provide video streaming for internal employee meetings, allowing the audience to see the speaker on the web almost in real time. It’s the evolution of webcasting – exciting and more interactive.’

Looking ahead, Miceli would like to see more accurate transcriptions; some vendors use automated transcribers, which can mean lots of typos. She also wants better audio quality, noting occasional interruptions or echoes – and she’s not the only one. Since suffering an interruption during one conference call, Gene Truett, vice president of IR and credit at Harsco, puts enormous value on call clarity. ‘It is so important to make sure a call doesn’t get interrupted, especially when you have your CEO, CFO and the rest of the senior management team, and you are presenting to the public,’ he explains. ‘Seamlessness is critical.’

Back to basics
That desire for quality is one reason some companies prefer simple conference calls and webcasts, and avoid special features. One of the biggest challenges service providers face is to keep developing new, interactive options while maintaining the seamlessness and clarity that IROs like Truett insist on.

Video webcasts, for example, are popular in Europe but hardly used at all in the US. Mary Jensen, director of IR at Essex Property Trust, a Palo Alto-based real estate investment trust, is sticking with plain audio teleconferences and webcasts. ‘We’re not into the newest, trendiest products,’ she says. ‘We like what works and has been proven to work.’ On the other hand, Jensen likes using multimedia features for internal communications such as monthly web conferences in which employees interact with the CEO.

Elizabeth Sharp, vice president of IR at Smith & Wesson, uses basic audio for quarterly calls, webcasts and internal company meetings, but she’s intrigued by the idea of video. ‘It would be terrific if they could stream video of investor conferences,’ she observes. ‘It really gives investors the opportunity to see the presenter in action and gives them one more connection with the company, one more sensory input.’

Jensen, who uses Thomson Financial and WebEx, salutes the progress in conferencing technology, but she thinks there’s still room for improvement in the visuals. ‘PowerPoint slides can take a long time to load, especially if there are complex graphics involved,’ she explains. ‘It could be very efficient to do some of our investor targeting right from our offices, with a nice presentation and investors able to see our CFO and CEO, instead of going on the road.’

Some companies see cost as an obstacle when deciding on multimedia enhancements to webcasts. Lori Owen, IRO at San Jose-based Xilinx, enjoys all the new features that have developed recently, but says high costs can make her hesitate to take full advantage. ‘I would like to see the price continue to drop as it still seems fairly expensive to me,’ she notes.

But technology can save money, too. Sharp sees webcasting reducing the cost of Smith & Wesson’s earnings call because it has reduced numbers on the dial-in teleconference and continues to reduce them as more of the audience switches to the webcast.

The latest buzz in conferencing is podcasting, which lets listeners download recordings to portable music players. But rather than setting the IR world ablaze, podcasting is being adopted slowly as an add-on distribution channel for the webcast. Companies are curious, especially considering the huge popularity of podcasting for mainstream media, but few have actually started using it for conference calls.

In fact, the availability of new technology is not an issue because conferencing companies keep producing innovations. Rather, the question is whether companies are willing to adopt the new tools. What matters is that there’s choice. The menu keeps expanding, and IROs can pick and choose, deciding over time what their favorite flavors are.

by Dea Katel

Thanks to IR Magazine for allowing us to bring this article to you.

SNL Financial’s Gregg Amonette looks at investors’ evolving view of IR

Attracting buy-side attention is one of the most challenging and fundamental jobs for IROs. With thousands of public companies competing for capital and newly public companies entering the fray every day, it’s more difficult than ever for IROs to get their companies on the radar screen.

A study conducted by Rivel Research that includes interviews with more than 300 buy-side analysts and portfolio managers suggests the top three sources the buy side uses to source new investment ideas are in-house research (85 percent), brokerage house research (75 percent) and articles in general business and trade publications (75 percent).

This means IROs should first target the buy-side analyst as a key generator of investment ideas within the institution. Analysts are known as the gatekeepers to the portfolio manager and should be a communication point for your company’s message. Find out who they are and get to know them.

Second, polish your media skills or work with your company’s communications department to seek out exposure in business and trade publications. Many investment ideas are generated through small but well-placed articles read by analysts or portfolio managers while commuting to the office.

Rivel’s study finds that improving financials and visibility can get small-cap firms on the radar screen. Small caps need to be more proactive by showing up at conferences, making presentations, having one-on-ones and doing roadshows.

The survey also finds that institutions conduct their due diligence phase by using in-house research to assess management credibility (83 percent), the company’s business strategy (77 percent), reliability of cash flow (72 percent), attractive earnings-per-share growth (68 percent), balance sheet strength (61 percent), return on invested capital (58 percent) and revenue growth (54 percent).

Intangibles now carry as much weight as the tangible metrics used to value companies. The Rivel survey indicates that key components of management credibility include the ability to meet or exceed stated goals (68 percent), honesty and openness (43 percent) and acting in the best interests of shareholders (15 percent).

Once an institution buys your company’s stock, communications become extremely important. Quarterly conference calls (79 percent) are the most important means of communication along with in-house research (79 percent) and SEC filings (73 percent).

When asked about forward-looking guidance, 65 percent of respondents rate it as ‘very important’, while 85 percent expect guidance to be issued quarterly. Companies that don’t provide earnings guidance may have a tough time attracting attention: 22 percent of respondents would avoid recommending or investing in a firm based on a lack of earnings guidance.

According to the survey, 56 percent of respondents bought stock as a result of interacting with the company’s IRO. More than half (55 percent) requested a meeting with a company as a result of conversations with the IRO, and 50 percent recommended a company to colleagues after interacting with the IRO. These responses indicate that the role of IR continues to increase in importance for the buy side. In some cases, buy-siders view the IRO as an expert on his or her company – someone they can count on to deliver the depth and breadth of information they need to make an investment decision.

Thanks to IR Magazine for allowing us to bring this article to you.

Jeff Cossette studies the debate over ticker extensions and dual-class shares in Canada

It has been more than a year since the Toronto Stock Exchange (TSX), prodded by the Canadian Coalition for Good Governance (CCGG), ordered issuers to affix new extensions to their stock symbols. And it has been just over a month since the TSX put the kibosh on the whole program. With some 20 percent of TSX and S&P Composite Index companies maintaining some form of subordinated voting structure, the idea was to inform investors of their voting rights, thus increasing transparency and market efficiency. But in response to complaints from the CCGG and many other ‘vocal opponents’ among the buy side, sell side, traders and issuers, the TSX is discontinuing the program.

The exchange stopped giving special extensions to new listings and said existing issuers would lose theirs during a three-month process starting in May 2006. When that process is complete, the TSX will make available ‘comprehensive details’ on share structures on its web site.

‘One thing we accomplished with the initiative was to bring about a greater understanding of the different types of voting shares some issuers have,’ says Steve Kee, a TSX spokesman. ‘Companies should be encouraged to continue to discuss and talk about their share structures so shareholders are aware of what they’re investing in.’

Having put forward the concept of the symbol extension in October 2003, the CCGG remains a strong supporter of labeling dual-class shares. But David Beatty, CCGG managing director, believes the modified system did not achieve its desired goal of clarifying the identification of subordinated voting structures, pointing out that ‘the large number of extensions along with the inconsistent application of the extension rules have made the [initiative] more cumbersome than we believe was originally intended.’

The five new suffixes were MV for multiple voting, NV for non-voting, RV for restricted voting, LV for limited voting and SV for subordinated voting. The symbol for Quebecor World, for example, became IQW.SV to denote a subordinated voting issue. Sometimes the old A or B extensions, if used at all, were dropped and replaced by their voting designations. In other cases, the new voting designations were added to A or B extensions. Thus film company M8 Entertainment’s class A multiple voting shares switched from MEE.A to MEE.MV.A, but Telus’ class A non-voting shares simply changed from T.A to T.NV.

Traders loathed the extra letters, saying they caused computer problems and order entry keystroke errors. A report by TD Securities concludes: ‘The prevailing industry view we hear is that education on voting rights needs to be more grassroots, and that the point of execution, when an investor looks up a symbol to invest, is simply too late in the process to make a difference.’

As for issuers, despite initial confusion about the symbol change, most seemed to adapt without difficulty. ‘It took a little communication at the outset – particularly with retail investors,’ says Jane Watson, former vice president of IR at IT provider CGI Group. ‘Other than that, our life is unchanged.’

‘People on either side didn’t operate any differently from how they did before the change,’ adds Bob Tait, president and CEO of the Canadian Investor Relations Institute. ‘Those who have to answer questions about their classes of shares still have to answer the same questions. If anybody was making a different investment decision based on the new symbols, we did not hear about it.’

What was the point?
Of course, making investment decisions was what the new symbol extensions were supposed to be all about. So what was the point? Some market participants say there is no direct relationship between good corporate governance and dual-class shares. ‘Inferring that two classes of shares means poor corporate governance is an over-simplification resulting from a lack of analysis,’ comments Réjean Bourque, vice president of IR at Bombardier, who notes that both Enron and WorldCom were single class.

‘You can have a company that has good corporate governance practices as well as dual-class shares,’ agrees Beatty. ‘The two are not mutually exclusive. People will continue to invest in well-run dual-class companies. Subordinated voting structures pose a greater risk for investors because when a problem arises there are exceptionally limited options. And if a company doesn’t want to change its share structure, [the CCGG] can’t force it. What we can do is ensure firms with voting risks are labeled.’ He would like to see a single mark – such as ‘X’ – denoting all kinds of subordinated voting structures.

Labeled or not, dual-class shares are a fact of life in the Canadian market, and include such big names as Magna International, Molson and Rogers Communications. Controlling shareholders argue that such structures let them build long-term value while insulating them from short-term financial expectations and corporate raiders. They also point out that, in many cases, dual-class companies have performed perfectly well.

On the other hand, institutional investors say dual-class companies are too pervasive for them to ‘vote with their feet’ to avoid them. They say such structures are inherently unfair, raise the risk of poor performance, entrench management and allow managers to appropriate benefits due to shareholders. The poster boys here are Hollinger’s Conrad Black for allegedly looting his company and Magna International’s Frank Stronach for paying himself a huge salary.

For now, all shareholders can do is sell their shares, ask owners for change or hope the TSX and regulators amend the rulebook. Last August three money managers who owned 39 percent of the non-voting shares and 29 percent of the equity of executive search firm Caldwell Partners wrote to its founder and CEO asking for change. Doug Caldwell turned down their request.

‘It’s frustrating,’ admits Colin Stewart, a partner at JC Clark, one of the dissident investors. ‘But it’s a positive step whenever these issues are brought into the public light. It’s a slow process but as awareness grows it eventually has to bring change.’

Brian Barsness, vice president of fund manager Meritas Financial, says more and more companies can expect to face shareholder resolutions calling for the elimination of special voting shares. In 2004 Meritas voted against directors at Magna International to protest against the company’s dual-class shares. ‘Pressure is growing on dual-class companies and fewer of these structures will come to market,’ predicts Barsness, pointing out that the recent lifting of foreign content caps in retirement portfolios will increase the heat in boardrooms. ‘If we are looking for just industry representation, we can find another auto parts maker outside Canada.’ Interestingly, that is, in fact, exactly what Meritas decided to do.

by Jeff Cossette

Thanks to IR Magazine for allowing us to bring this article to you.

Elizabeth Judd finds that open and honest communication is the cornerstone of targeting

Editor’s note: This special research feature is sponsored by Global Consulting Group (GCG)

When Lukoil, an international energy company based in Moscow, embarked upon a three-year strategy to strengthen its fundamentals and shed its image as an emerging markets player, a key part of its vision was targeting a wider range of long-term investors. In the past year Lukoil has had more international investors buying its shares, leading to some stellar results. The price of its ADRs increased 60 percent in the first eight months of 2005, far exceeding the 15 percent to 20 percent growth experienced by the broader energy market, according to Gennady Krasovsky, head of IR at Lukoil. ‘One of the main drivers for investors is to find a good story,’ he says.

But marketing will succeed only if a company has done its homework, Krasovsky points out. After Lukoil improved its business model and made its information more transparent, it actively sought US and European investors by initiating one-on-one meetings, conference calls, field trips to its facilities, and roadshows. ‘You can create a good story, but if the financials don’t support it, your story will make no sense,’ Krasovsky maintains.

Targeting investors is the cornerstone of any well-run IR effort. ‘Investor relations is a form of marketing, and we are marketing a financial instrument,’ says Anne McBride, founder of the Anne McBride Company and now vice chair of IR at Global Consulting Group (GCG). She also points out that today’s public companies must compete for attention against 13,000 other US listed companies. ‘You have fewer analysts, fewer market makers, and many more companies vying for institutional dollars,’ she observes. ‘The right message is critical – but if you are not bringing that message to the right audience, it falls on deaf ears. This is why targeting is essential.’

An inward glance
Aladdin Knowledge Systems, an Israeli digital security company listed on Nasdaq since 1993, redoubled its investor targeting efforts after the tech bubble burst and its stock went from a high of $42 to a mere $0.82 per share, recalls CFO Erez Rosen. At that time, Aladdin hired GCG and began strengthening its communications skills and investment message. ‘We believe we have a fantastic story but we had to make sure the market knew it,’ says Rosen. ‘So we worked on creating press releases, scripts and corporate presentations.’

This type of messaging is central to any savvy targeting program, notes Erik Knettel, deputy director of GCG in Manhattan. ‘You need a good roadmap of where the firm is going,’ he says.

For Lukoil, a full-blown targeting strategy was launched a year ago and revolved around identifying quality institutions that either held positions in energy companies similar to Lukoil or invested in Russian or Eastern European companies. The strategy worked. Krasovsky notes that his company’s trading volume has doubled since 2003. He also says that instead of a shareholder roster full of speculative investors, Lukoil stock is now held by an array of global and pension funds with an investing horizon of one to three years.

Before approaching potential investors, it’s important to create some metrics for them to benchmark against. McBride suggests these financial metrics should help investors gauge whether or not a company is delivering on its business plan.

However, companies also need to establish a calendar, mapping out their targeting strategy for the coming year. McBride recalls her experience as an IRO, when she’d begin the year by assessing her company’s existing number of analysts and institutions and then set quantifiable goals for the number of new analysts, institutional investors and retail investors she wanted to attract over the next twelve months.

Although the actual goals will vary, some rules of thumb exist. McBride emphasizes the importance of balance in a company’s shareholder base. You don’t want to be too dependent on one or two institutions, especially index funds or quantitative investors that usually exit once their targets are met. US consumer companies, McBride points out, typically desire a 50-50 mix of institutions and retail investors, while international companies might seek a shareholder base that reflects the geographical distribution of their revenues.

Making life easier
Although an investor targeting campaign might hinge on high-tech databases, the overarching goal is simple. ‘Making the life of the institutional investor as easy as possible is the primary focus of IR,’ says Knettel. ‘The core of targeting is to maximize one of the scarcest resources for both senior management and institutional investors: time.’

One way a skilled IR consultant can save time is by analyzing the various databases and narrowing the universe of potential investors. ‘You don’t want to pull in investors that are potentially hostile toward senior management, investors with extremely high turnover rates, or investors whose strategy is shorting securities,’ says Knettel.

On the other hand, the best targeting firms are open-minded. Recently, hedge funds have emerged as a force to be reckoned with and, although still varied in quality, some have shed their short-term focus. ‘The community has become so large and the assets so much bigger that many investment professionals from the traditional investment community and sell side have gone into the hedge fund community,’ notes Knettel. ‘And in some cases they’ve become more like long-term investors.’ Finally, top management must commit to meeting its best prospects face to face. Rosen estimates Aladdin’s management team participated in more than 500 meetings with potential investors in the past two and a half years. ‘We were really salespeople for the company, and it helped,’ he explains. ‘More investors looked at our company and we now have a nice group of long-term shareholders.’

A holistic approach
Although meeting with the buy side can be immediately gratifying, it’s equally important to cultivate sell-side analysts. Knettel urges IROs to consider analysts beyond the primary analyst in a given sector. ‘Secondary analysts and associate analysts are literally the next generation,’ he observes. ‘When the primary analyst leaves, they step up.’ Knettel also advises exploring all sell-side avenues from regional brokerages to independent research firms to global research houses. ‘You want diversity and blend within your sell-side analyst base,’ he adds.

Rosen agrees. Even though analyst coverage has declined in the US in the past few years, Aladdin now has eight analysts covering its stock, compared with none in the not-so-distant past.

An investor targeting program will flourish only if the company makes good on its promises. Rosen perceives Aladdin’s investor outreach efforts as an outgrowth of its overall philosophy. ‘Everything we said, we stood behind,’ he says. ‘If we said we’d grow, we grew.’

In conclusion, he emphasizes the importance of communicating openly and honestly. ‘We made the assumption that every word we said was being written down by someone,’ he explains. ‘If we returned to that person, we should be credible. That’s how you create long-term relationships. It’s a must.’

Erik Knettel

Tel: +1 646 284 9415

E-mail: eknettel@hfgcg.com

Web site: www.hfgcg.com

by Elizabeth Judd

Thanks to IR Magazine for allowing us to bring this article to you.

Investors want more and better information from companies on climate risk. Adrienne Baker reports.

Global warming deserves its own category in the investment world as an intangible that’s difficult to quantify but impossible to ignore. Scientists and governments around the world agree greenhouse gas (GHG) emissions are causing climate change and need to be curbed but cannot predict a timeline for their potentially disastrous effect. This makes it challenging for firms to anticipate how global warming will affect profits.

With more mainstream investors and analysts interested in the issue, however, there’s a push for companies to improve disclosure in this area. ‘For now, investors would like to see more companies provide the sort of disclosure that some firms already do,’ says Abby Cohen, chief US portfolio strategist at Goldman Sachs.

Companies in large emitting sectors, such as energy and automotive firms, are being the most up front on this issue by releasing information on their carbon emissions and producing sustainability reports. This level of disclosure is sufficient for now because it’s difficult for companies and investors to assess the long-term impact of climate change on financial performance.

‘Some companies don’t know what the long-term liability [of climate change is],’ says Cohen, who likens climate risk assessment to asbestos liability determination in the past. ‘If you had asked companies 40 years ago what the long-term liability of using asbestos was, they would not have known.’

‘We haven’t reached the point where we can link climate change to valuation,’ notes Matthew Taylor, manager of London-based BP’s corporate responsibility team. BP has been reporting on its carbon emissions since 1997 when it pledged to reduce emissions by 10 percent by 2010. The company reached that goal in 2001 and saved $650 mn in the process. Now its goal is to avoid an increase in total emissions before 2012.

Few bites
While clearly committed to talking about this issue, Taylor says the petroleum giant gets few questions from investors about global warming and the risks it poses to the oil business.

In the last year, for example, BP received only around half a dozen questions on climate change – and some of these were directly related to a UK newspaper story (in the Independent) about BP’s lobbying efforts against a US bill outlining mandatory curbs on carbon emissions. ‘We felt the bill was an unworkable solution for the transport sector – and it was that specific element [of the bill] we felt was unworkable,’ explains Taylor.

Ford Motor Company also receives a surprisingly small number of queries from investors on climate change. ‘We get questions about hybrid technology,’ says Barbara Gasper, vice president of IR at the Michigan-based automotive company. ‘That is something US-based investors are picking up on. But in the course of that conversation it usually ends up getting to how much profit we are making on this vehicle. At the end of the day, it all translates to how something contributes to the bottom line.’

European investors, on the other hand, pay more attention to climate change risk and have a longer-term view of the issue, Gasper adds.

Despite seemingly few questions from investors, institutions are getting hungrier for information on global warming and how it relates to financial performance. ‘This subject is something that is moving from the long term to the short term in the way investors are looking at it,’ says Tim Purcell of CO3, a London-based corporate social responsibility (CSR) communications consultancy. ‘It’s also the subject of analysts’ reports because the information is beginning to be quantifiable – but it’s still very much in its infancy’

At a UN summit this past May in New York it was evident mainstream investors are waking up to the fact that climate change will eventually impact valuation. Hundreds of institutional money managers representing more than $3 tn in assets attended the summit on climate risk and an action plan was put together that includes pushing for better research from investment banks on climate change risk.

Investment banking giant Goldman Sachs is getting requests from its institutional clients about climate change and is treating the topic as an investment issue. ‘From an investor perspective, we aren’t looking at it in terms of dollars and cents, but as an equity liability risk premium,’ says Cohen. In other words, climate change is being considered as a factor affecting investor confidence in the company’s long-term viability.

Climate risk doesn’t directly impact investment decisions unless it’s affecting valuation through present or future cash flow, or the fund has a specific socially responsible investment (SRI) mandate, according to a recent study of climate change investor sentiment conducted by Richard Davies Investor Relations for IR magazine. The study polled 51 fund managers, four pension fund consultants and 25 sell-side firms across Europe.

Cohen thinks climate change risk will ultimately affect how the market prices shares. ‘Very often things can be mispriced [with] assets or liabilities not properly valued until enough investors have that eureka moment and say, This is important, and then the price adjusts,’ she says. ‘That’s why it’s important that there is a critical mass focusing on this issue.’

The bottom line
While many companies are fairly good at disclosing information on carbon emissions, it’s very difficult for investors to compare these disclosures. This was one of the conclusions of a recent report from London-based Henderson Global Investors, which shows that less than 50 percent of FTSE 100 companies – representing two thirds of total emissions among this group – disclose their carbon emissions. ‘The real issue is lack of comparability in data,’ notes Vince Chaney, head of commercial development at Trucost, the UK-based environmental research company that conducted the Henderson study.

Universal performance indicators that measure climate change impact are necessary for investors to be able to compare risk across different companies and sectors. ‘It’s something we are working on quite intensely,’ says Chaney. In July Trucost and the UK’s Department for Environment Food and Rural Affairs (Defra) released reporting guidelines for environmental performance for UK companies. ‘There is a convergence on climate change now with people realizing they should be looking at GHG emissions in absolute quantities,’ Chaney adds.

Trucost is seeing an increasing number of investors looking at global warming, and Chaney says the firm is approaching this from two sides. ‘One is the modeling side, which looks at the financial impact, and the other is the engagement side – investors want to know companies are looking at this,’ he explains. Index investors will be engaging companies about disclosing information on this topic, according to Chaney, while stock-picking investors will be trying to avoid companies where the risk from climate change is significant. ‘They’re more interested in the financial aspect,’ he points out.

In Europe there is now a mandate for companies to report connections between environmental risk and financial performance under new operating and financial review (OFR) guidelines. But it will be a while before companies are able to draw a direct link between share price performance and global warming.

The bright side
Still, some companies are trying to gauge the long-term business implications of environmental change. At the end of the year, Ford Motor Company will issue a report looking at the business implications of its reduction of GHG emissions over the next five to ten years. The company decided to prepare the report following a shareholder resolution requesting the information.

‘We think it is important that there is a dialogue on the impact of climate change on our business and industry, and which policies are necessary to address this impact,’ says Niel Golightly, director of sustainable business strategies at Ford.

While stopping short of putting a dollar value on climate change risk, Ford’s report will include more analysis on the impact of a carbon-constrained economy. ‘We can see it as a risk or as an opportunity,’ adds Golightly.

Viewing it as an opportunity is how GE is approaching climate change risk. In May the Connecticut-based mega-cap company announced its decision to double its investment in energy-efficient and environment-friendly technology to $1.5 bn over the next five years.

‘We reached a tipping point where these technologies were affordable for customers and became something we could make money from,’ says Peter O’Toole, director of public relations at GE. ‘So this is not GE changing its stripes as a company that grows aggressively each year – these technologies have become so economically viable, they will all break even or be profitable within the first year.’

The impact on the bottom line is always part of CEO Jeff Immelt’s methodology, adds O’Toole. ‘If it’s green for the environment, it will be green for the bottom line [is Immelt’s thinking]’, O’Toole says.

Notorious shareholder activist Bob Monks, who has invested in Trucost, thinks GE’s approach to climate change is spot-on. ‘Essentially, capitalism is the best way of dealing with the issues,’ he says. ‘[GE’s action] concedes there is a social problem that society demands be answered.’

For now, the greatest incentive for disclosing climate change risk has to do with corporate image. ‘[Disclosing information on this] inspires investor confidence,’ says Lucie Sinclair of CO3. Therefore, even if it’s impossible to put a dollar value on its current or future impact today, companies need to disclose as much information as possible to allow investors and analysts to understand climate change’s business implications. ‘The most important thing is to get the dialogue started with investors,’ concludes Cohen. ‘Those companies that have been forthcoming are in fact being well received by investors.

by Adrienne Baker Thanks to IR Magazine for allowing us to bring this article to you.

Hulus Alpay tackles intangible assets and measuring the success of roadshows

Q - In trying to assess the results of our last roadshow, my CEO wants me to try to get deeper insight into how fund managers are reading our message before we set up further meetings. What is the best way to elicit candid feedback from the buy side?

A - Investors are generally not a shy breed and are pretty vocal about their thoughts on companies, as well as the management teams they have met with after an investor meeting. However, there are instances where having an independent third party professional gauge perceptions for the company results in more objective feedback. If you have exhausted your own efforts and there is a hunger for more valuable insight, it’s time to call in some external support.

Consultants that can guarantee anonymity for their interviewees are usually considered to get the most candid and productive feedback. I have even seen cases where an investor is guaranteed anonymity but insists on being cited because he or she wants the message heard loud and clear by management.

A further avenue to consider in this area is your sell-side analysts and their respective client/corporate services group. Both can be helpful in gathering perceptions and providing recommendations based on meetings they have set up for the company.

Q - Are there any hard and fast rules about disclosing information on intangibles? We’re trying to boost our disclosure of non-financial metrics but it’s hard to know what investors and analysts want to learn.

A - As the reforms wrought by Sarbanes-Oxley have enhanced how financial information is reported, investors want to know more about the ‘softer side’ of the business: intangible items that don’t show up on a balance sheet or an income statement.

No-one disputes the value of intangibles, as well as the need to properly and consistently communicate with investors to ensure that these valuable assets are truly appreciated by Wall Street. Intangibles vary in importance from industry to industry but, in general, include: leadership, strategy, communications, brand, reputation, alliances and networks, technology, human capital, workplace/culture, innovation, intellectual capital and adaptability.

There really isn’t a hard and fast rule about reporting intangibles. Determining which ones count most at any given time, however, is critical in communicating effectively and optimizing intangibles’ contributions to your company’s valuation.

The good news is that the SEC and academia are looking at bringing some much needed insight into the topic to keep up with investor demands and the evolution of financial reporting.

E-mail questions to advice@thecrossbordergroup.com. Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.

Thanks to IR Magazine for allowing us to bring this article to you.

Richard Carpenter finds out how this Hong Kong-based team runs its IR shop

It is just over eight years since China Mobile – then known as China Telecom – listed its shares and ADRs on the Hong Kong Stock Exchange and NYSE, respectively. At the time of its IPO in the fall of 1997, the Chinese economy was beginning to murmur but international investors had not realized its full potential. At the time, Asia was still reeling from a currency crisis and few would have predicted the way the region in general and China in particular would recover over the coming decade.

Today, China Mobile offers a potent mix for investors, a direct play into the world’s fastest-growing economy and vibrant telecom sector. The company already boasts the world’s largest mobile subscriber base at around 205 mn people – but that still represents only a relatively small chunk of the country’s 1.3 bn overall population. There is, as one analyst puts it, room for expansion.

Learning curve
The last eight years presented a steep learning curve for China Mobile as it came to grips with growing levels of interest from overseas investors. Grace Wong, company secretary and deputy general manager of IR, explains that the early days as a public company were characterized by more of a reactive approach. The company had to feel its way around, learning what investors expected and wanted and then, slowly, expand the information offer accordingly.

‘In the beginning we really focused on the sell side,’ says Wong, adding that the analyst community provided a simple yet efficient means of building an investor following both in Asia and the US. That was important as, at the time, there were just two people looking after IR and they did not have access to all of the tools the IR team takes for granted now. ‘Today, our approach is far more balanced,’ continues Wong. ‘The sell side, particularly in Hong Kong, still knows us very well and we take care to ensure it is kept up to date. But we also focus on fund managers and have built up our own contacts over time.’

Wong now heads up a seven-strong team and stresses the fact that she and her colleagues come from a range of professional disciplines. Wong, for example, is a qualified company secretary and recently added that responsibility to her IR role for the company. The team also boasts a qualified analyst and some accountants. ‘We deal with a lot of compliance issues so those backgrounds help,’ explains Wong, noting the need for knowledge of US, Asian and European disclosure regimes.

She adds that having people with a financial and regulatory background on the team helps China Mobile to understand and comment on sell-side models and the like, as well as to appreciate the regulatory issues its audiences face.

Wong says the senior management team at China Mobile has always tried to take IR seriously. In recent years, however, the IR function has been elevated up the corporate ladder – certainly in practice if not in the strict hierarchical sense. And the November 2004 appointment of Wang Jianzhou as executive director, chairman and CEO following the resignation of Wang Xiaochu strengthened that trend. The result is that most senior management members are keen to talk to investors and go out of their way to attend investor events and roadshows. Analysts have certainly noted the more proactive approach to IR (see What the analyst says, below).

Cross-country
Despite senior management’s commitment to good information flow, Wong and her colleagues face a very serious logistical problem. They are based in Hong Kong, the main financial center in the region and home to the company’s main stock exchange listing. The senior management team, on the other hand, is based in Beijing, Shanghai and some other centers on the mainland. That means a lot of travel for Wong and her team, although the chairman and other members of the management team also regularly come to Hong Kong to meet with the financial community on its own territory.

Wong makes it clear she measures the company’s information flow relative to an international peer group, rather than against other Chinese companies. The web, e-mail and conference calls have really come into their own in recent years in terms of keeping them in touch with overseas investors. Most of the calendar presentations are available online in video and slide format – and they are easy to access, too.

The team also uses e-mail alerts to ensure its audiences are up to date with the release of new figures. Those include monthly updates on subscriber data and quarterly releases detailing changes in the company’s main key performance indicators, including key operating and financial data, such as Ebitda. ‘Analysts and investors know when to check on our web site for our monthly numbers but, if we have to change the date for any reason, we’ll make sure they are all well aware in advance so there is no confusion,’ says Wong.

Over the last year or so, the IR team has been concentrating on increasing the number of events it attends or organizes. Financial results are usually followed by a standard round of analyst briefings and conference calls out of Hong Kong, backed up by a tour of investors in the region and beyond. The aim has been to take senior management to the US at least once a year, taking in the east and west coasts in the trip. Japan is also an increasingly frequent stop off – Wong notes that several Japanese telecoms companies have similar business models so, despite cultural and language differences, Tokyo-based investors find it easy to understand her company.

Aside from these calendar events, Wong and her colleagues meet regularly with analysts and investors in one-on-one situations and make a real effort to attend investor conferences as much as possible. Indeed, several analysts note the value of this approach. What stands out, though, are the analyst education days. Wong thinks of these as reverse roadshows whereby analysts are invited to see the operations and speak with senior subsidiary management.

In May 2005, for example, analysts were invited to visit Shanghai Mobile and Hunan Mobile to gain a better understanding of what makes these subsidiary businesses tick. Meeting with local management is all important as the holding company is composed of some 31 local subsidiaries in which it owns a 100 percent interest – each subsidiary being representative of one of China’s provinces, autonomous regions or other municipalities.

Analysts and investors were also invited to a presentation in Hong Kong focusing on the company’s wireless data business. ‘We brought in a range of our partners and content providers to give the financial community a wider view of the data business – a key part of our new business this year,’ says Wong.

Feedback time
Of course, it’s not just about delivering information to the financial community. Much of Wong’s role concerns understanding what investors and analysts are thinking and then feeding that back to senior management so they can take it into account when planning their long and short-term strategy and other business decisions.

Wong provides a summary of analyst notes to senior management on a monthly basis, together with an overview of their thoughts on the competition. Management also receives a quarterly update on key shareholder movements in each market, together with Wong’s recommendations on how to respond to trading patterns. Should the company attend some extra investor conferences in the US, for example? Or does it need to schedule an additional trip to Singapore to see a major investor?

It’s only through experience that Wong and her team have become more adept at picking up on the various signals emanating from investors across the globe and reacting to them accordingly. There has, however, been a real attempt to seize the initiative and that means an increasing number of one-on-ones for Wong and the senior management team outside of the usual roadshow calendar. Luckily, she has the support of Wang Jianzhou, both in terms of time and resources. The investor community seems to appreciate that input, too.

Award-winning company
China Mobile was runner-up for several awards at the IR Magazine China Awards 2005, including the grand prix for best overall IR in the large-cap category, best IRO and best corporate governance. The company was nominated in these categories by an independent perception study of investors and analysts in the region. Here are some of the comments from perception study respondents:

‘The company has a good and professional PR department that keeps in close contact with analysts. It is also very keen to answer questions and tries to help outsiders understand the operations of the company.’

‘China Mobile is good because it releases information very quickly and the annual report is detailed in content.’

‘It has the decency to communicate with and protect its shareholders.’

‘It has some foreign investors, which typically improves corporate governance standards, and it has reputable independent directors.

Source: Investor Perception Study, Asia 2005/2006

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After decades of structural deficiencies and poor accountability, Latin America wants to wipe the slate clean. Adrian Holliday reports

Latin America still suffers debt defaults, endemic corruption and awful public and private governance. But, as snap judgments on Latin America go, does such a facile stereotype still hold true in 2005? Or are promises to tear out economic corruption from the roots – whether they come from Brazilian President Luiz Inacio Lula da Silva or Mexican President Vicente Fox – really translating into better Latin American business practice and IR?

Victor Bulmer-Thomas, director of Chatham House, an international analysis center based in London, says Latin American governance progress is now visible on several fronts. ‘On the plus side, you have a number of big companies with foreign participation, either with direct investment or minority shareholdings, which leads to better transparency and seats on the board,’ he points out. ‘At the top end of the scale, companies with ADR listings in New York have to do things properly. Most companies in Latin America, however, are not listed, tend to be family-managed, and are not run according to stock market requirements.’

Typically this means smaller companies have no real incentive to improve governance reporting. Most firms needing capital draw on their own resources or use personal contacts through the extended family network. ‘Very few actually go outside onto international markets,’ says Bulmer-Thomas. This is reflected in patchy stock market representation. There are only two major stock markets in the region, one in Mexico City, the other in São Paulo, and many companies that are listed aren’t actively traded, so liquidity is often poor.

Breakaway pack
For the larger companies that have to communicate with public investors, however, the picture is improving, according to Dean Newman, fund manager of Invesco Perpetual’s Latin American Fund. ‘In many ways, IR in Latin America is not that different,’ he says. ‘Generally, access to Latin companies in the UK is good: they travel and there’s a good array of conferences here and abroad.’

The quality of roadshows organized by brokers, however, is often imprecise. ‘Many are so desperate to take companies on roadshows,’ Newman continues. ‘Companies really need to have a very clear view on why they should use a certain broker over another. If they’re using the right broker, it can really benefit the company.’

But even if you don’t buy or own, says Newman, seeing Latin American companies regularly – roughly every nine months – means you can build a picture and ‘see how the strategy evolves and how straight they are. Some can see the way the world is going, and they’re saying, Let’s be exemplars, understanding and talking shareholder value.’

Where Latin America can be markedly different from other markets is the troubled issue of company ownership and control, warns Dr Mark Mobius of Franklin Templeton Investments. ‘There can be a tendency for companies to be controlled by a small number of shares and these are the issues [their] IR people tend to skirt around, or provide excuses about,’ he says. Voting issues, especially minority rights, remain a problem some Latin American governments seem reluctant to rectify, ‘or may even aid and abet,’ according to Mobius. ‘Brazil is the biggest offender.’

Voting rights are critical because some Latin American companies still issue preference shares, which carry no voting rights, rather than ordinary shares. This means the real control can remain with family members of a company, even if they personally hold little stock.

Nevertheless, Jules Mort, fund manger of Threadneedle’s Latin America Growth Fund, says Latin American governance is a much improved beast, compared with the past. Look no further than Brazil’s Novo Mercado, Mort adds, a secondary stock exchange where companies must adopt western-style governance standards to be listed. ‘I won’t meet a new firm that is not preparing to list on the Novo Mercado,’ he states.

Mort says most companies on Brazil’s Novo Mercado now also offer 100 percent tag-along rights to shareholders, allowing them to receive the same price for their stock in any merger or takeover that a controlling shareholder would receive. This hasn’t always been the case. Two years ago the brewer Ambev was taken over by Interbrew, which bought controlling shares in the Brazilian company. ‘It was an unfavorable transaction for minority shareholders,’ recalls Mort. ‘Interbrew used Ambev’s non-voting shares to buy some Interbrew assets at what we considered to be a very high multiple, which meant the controlling shareholders benefited disproportionately.’

On the broader IRO front, however, Mort is optimistic. ‘Typically, Latin American IROs are well prepared, know their companies well, and understand the concerns foreign investors have,’ he says. ‘They tend to be well educated and fluent in English, often with MBA backgrounds. Compared with some Asian companies, they’re often a lot more sophisticated.’

The positive IR news flow continues from Dariusz Sliwinski, a global emerging markets fund manager from Martin Currie Investment Management in Edinburgh. ‘Yes, there are [Latin American IR] bad guys who give information only when you request it, and it can be pretty convoluted,’ he says. ‘But it is much better than you would expect from some of the ownership structures. You can always call them. Even state-controlled disclosure is fantastic and timely, and some companies will tell you more than you need to know.’

Governance cracks
That seems to depend on who you talk to, however. Karina Litvack, head of governance and socially responsible investment (SRI) at Foreign & Colonial Asset Management, says some Brazilian companies can still be conveniently hazy about board directors, not even bothering to supply their names, let alone biographies.

‘In effect, we can be asked to rubber-stamp the board when it is supposed to be protecting our interests – that is a governance red flag to us,’ Litvack says. ‘We also have concerns about the effectiveness of audit committees. It’s quite common to see related-party transactions, so you have to have a strong independent audit committee to make sure any transactions are being done at arm’s length in Mexico and Brazil.’

While Brazilian companies are required to have audit committees to list, the terms set in law are too weak, adds Litvak. ‘In Brazil you can get a carve-up situation with just three members on an audit committee, the first being voted in by the controlling shareholder, the second by preferred minority shareholders, and the third named by a combination of the two,’ she explains. ‘In principle, though, the audit committee should be 100 percent independent.’

Other cracks relate to the Latin American region still being very dependent on the health of the US economy, points out Ryan Hughes, investment manager at Chartwell Investment Management. ‘What we’ve been seeing is American companies that might have outsourced to the Far East now outsourcing to Latin America in the same way much of Europe outsources to eastern Europe,’ he says. ‘But this shift is also a weakness: when the US economy does poorly, much of the South American region also starts to underperform. It’s very North America-focused.’

This is true for near neighbor Mexico, but some say it’s not quite the same for Brazil, substantially further south, which is modestly increasing its exports and upping infrastructure investment under left-of-center President Lula da Silva.

Bulmer-Thomas says the region, be it Mexico, Brazil or Chile, is increasingly seeing improved political leadership, especially when it comes to tackling corruption, a common Latin American investor complaint. ‘The whole issue of corruption, both public and private, is now taken far more seriously than in the past and has also become an electoral issue,’ he notes. ‘Behavior that in the past might have been laughed off or ignored is much less tolerated, and that means businessmen with political ambitions are avoiding political scandals. The climate has changed dramatically.’

Great news, to be sure, but Mobius, an adroit veteran hooter a few hard bursts, just in case of complacency. ‘If you look back, Venezuela had great prospects; Argentina also,’ he points out. ‘Brazil has shown signs of reform and Mexico is also gradually improving. But it’s still a very mixed picture.’

Are investors ignoring Latin America at their peril? China and India have been the two countries on most people’s lips when discussing emerging markets in the last two years. But have investors missed out by ignoring Latin America? Hilary Cook of Barclays Stockbrokers remains cautious, but acknowledges there are opportunities to be had.

‘Most people, when they talk about emerging markets, tend to say you need a good slug in India, China or both,’ she says. ‘We concentrate on Asia so much that [South America] doesn’t feature. But [Latin Americans] do seem to have stopped being basket cases and are addressing reform issues.’

This is reflected in fund performance over the last year. Foreign & Colonial’s Latin American Investment Trust is up a huge 74.3 percent, with Scottish Widows’ Latin American Fund not far behind at 55.2 percent.

Investment bank Morgan Stanley supports a continuing strong Latin American investment story, fueled by possible interest rate falls and congenial valuations. ‘By the final quarter of 2005 there will be a broad consensus on local interest rates falling,’ predicts Morgan Stanley analyst Mario Epelbaum.

But, despite Mexico’s strong recent performance, Epelbaum says it’s no longer quite the deal it was. ‘At a forward consensus P/E of 12.1, Mexico’s valuation is approaching levels in which the market historically faces resistance,’ he notes. ‘Mexico trades at a 17 percent discount to the S&P, [but] when adjusted for sector weightings that discount shrinks to 7 percent – no longer a bargain.’

Others aren’t as generally bullish for the region. The Brazilian real and Mexican peso are considered overvalued by some, and could weaken further. Presidential elections are due in Brazil, Mexico, Chile and Colombia, and no market likes political uncertainty, especially when it hails from Latin America.

by Adrian Holliday

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Hulus Alpay offers advice on targeting investors overseas and weighing the benefits of Sox compliance

Q We are considering listing in the US and are always trying to attract more US investors, but I know some companies have found Sarbanes-Oxley requirements very onerous and unrewarding. Any insight?

A Most small US issuers, industry organizations and high-profile groups have publicly commented on the cost and time commitment of complying with the Sarbanes-Oxley Act, particularly with Section 404, which sets standards for internal controls over financial reporting.

In testimony at an SEC roundtable in April, a representative of the Business Roundtable reaffirmed the organization’s support for the principles of Sox law but stated: ‘The benefits of Section 404 have not always outweighed the burdens.’ The US Chamber of Commerce and the Financial Services Roundtable have taken similar positions.

However, the consensus among most investors is that the regulation is worth the added cost, even though they often indirectly pay the bill for compliance. They frequently ask about the financial impact of compliance and see the long-term benefit to the overall market psyche.

The Council of Institutional Investors said recently that effective internal controls are ‘critically important in reassuring investors about the reliability of financial statements, and in helping companies to deter fraud.’ When viewed as insurance against corporate malfeasance, Sox compliance is a reasonable cost of doing business in the US.

Q What is the best way to build international interest in your stock without doing a roadshow? Our budget doesn’t allow for an elaborate trip overseas but I would like to target European investors. Obviously the first step is finding the contacts – but how do you then attract their attention?

A Some years ago, AT&T ran an ad campaign with the theme: ‘Reach out and touch someone’. The telephone continues to be an effective tool for reaching people overseas. Simply call and introduce them to your company. E-mail is another avenue when time zones come into play, though it lacks the personal touch.

Offer to send background materials and to put investors on your list for news and invitations to future conference calls. Then follow up at appropriate times, particularly after a major announcement, to solicit their feedback. This type of personal attention can go a long way in differentiating your company from the myriad of firms out there with a similar investment profile to yours.

I would also recommend maintaining a simple log of investor reactions and comments, including what time of day they like to be contacted and why. This can be helpful in fine-tuning your targeting and outreach efforts.

E-mail questions to advice@thecrossbordergroup.com. Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.

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Dea Katel reports on IR’s latest views on market intelligence tools

While there has been a strong push from regulators to force issuers to be more transparent, institutional investors have not come under the same pressure. Because of this, it’s still very challenging, even with the myriad of technologies and tools available, to determine who is buying and selling a company’s stock at any given time. Market intelligence tools have certainly adapted to reflect changes in the investment community over the last decade but stock surveillance still requires a careful balance of solid data and