derek abdinor

The news du jour is that BHP Billiton has declined to pursue its offer for Rio Tinto. Whilst on the one hand the story has flummoxed the investor community, the back channel is that millions of pounds were spent consulting with the professionals who were drafting up the paperwork, dotting the i’s and twisting the fountain pen nibs. I quote heavily from The Times:

BHP infuriated its shareholders by revealing that it had spent $450 million (£291 million) on the failed deal, running up vast bills for the arrangement of financing and advice from investment banks, lawyers, accountants and public relations firms.

Rio Tinto, meanwhile, is estimated to have spent about £120 million on the six investment banks, two law firms, one accountant and one public relations company that it used to help to fend off the unwanted suitor.

With few sizeable global mergers and acquisitions mandates on the horizon, the collapse of the bid is a bitter blow to the many advisers.

Of the BHP fees, it is understood that about $75 million is for the $55 billion committed lending facility involving Goldman Sachs, Barclays, HSBC and others that the miner secured to help to fund the prospective $147.8 billion takeover bid last year.

Of BHP’s other fees, it is believed that the bulk will go to legal and tax advisers who charge by the hour and billed for thousands of hours worked, particularly on regulatory clearance. Goldman Sachs pocketed a significant success fee in February, when BHP initiated a formal bid, but since then will have been paid only relatively modest sums. Rio will reveal the cost of its defence next year.

This is the year when investors have begun rallying around executive compensation, dithering CEOs, slack risk management and financial oversight. I’m sure we’re headed for an age of corporate reform driven by the shareholders, although if it came chiefly from investment banks it would be a severely ironic age.

*disclaimer: I think BHP Billiton has the most attractive investor relations website, and has been for the last 4 years. I also admit to laughing out loud at the Rio Tinto url the first time it was sent to me without knowing it was a company.

Institutional investors of British banks have got more powerful over the years, at the expense of the retail investor. This power has been somewhat diluted by the weighing in of government in the form of bailouts.

Further evidence of executive compensation becoming the most scrutinised aspect of financial reporting is also revealed in the article, where majority investors expect to vote on pay and perks at the AGM.

From the Times online, 19 November 2008:
The City’s leading institutional investors are gearing up for their biggest assault on corporate Britain by demanding the right to vote out the board of every listed company each year.

Fund managers have been spurred to act after seeing their rights eroded during the Government’s £37 billion bailout of the banking sector and in the wake of a controversial £7.3 billion capital-raising drive by Barclays. The bank attempted to win over angry shareholders yesterday by offering its entire board for reelection next April. It also sought to mollify investors by promising that executives would not be paid bonuses this year.

Leading investors say that they want to extract more accountability from executive directors of British companies as they brace themselves for a severe recession. Peter Montagnon, director of investment affairs for the Association of British Insurers (ABI), said: “The annual election of directors is a desirable thing because it increases their accountability. A number of companies already do this and have found that it works. It adds to stability at companies because directors are more circumspect about the consequences of their actions.”

Companies must have individual directors reelected every three years, according to the Combined Code on Corporate Governance. That tends to entail a third of a given board being voted on each year.

Mr Montagnon said that annual elections would be especially useful when there were tensions over directors’ pay and perks. “The fact that they are prepared to stand for reelection could mean that shareholders could allow them greater latitude in designing remuneration policies. These could then become less formulaic and better tailored.”

The ABI represents powerful professional investors that, among them, own more than a fifth of the stock market. The National Association of Pension Funds (NAPF), a similarly influential lobby group, echoed the call. David Paterson, of the NAPF, said last night: “It is standard practice in the US and other parts of Europe [to select boards annually] and a number of our members think it is a good model for the UK. We would encourage the boards of all UK companies to offer themselves for reelection each year, and this will form part of the review of our corporate governance policies in 2009.”

The ABI welcomed the move by Barclays, which will give investors the right to oust members of the 17-strong board. However, Mr Montagnon lambasted the bank for failing to consult its shareholders before offering preferential terms to Middle Eastern investors, who could end up owning about a third of the bank. Despite the bank’s concessions, the ABI issued its most serious alert on Barclays’ capital plan yesterday. Fund managers said that they were furious over the bank’s handling of its fundraising but were unlikely to vote it down at an emergency meeting on Monday because of the risk of causing instability.

Alistair Darling, the Chancellor, also suggested that there would be a heavy price to pay for any successful rebellion, saying that any bank requiring government assistance in the future would not receive terms as generous as those already reached. Analysts said that that also represented a warning shot against any effort to derail the merger of HBOS and Lloyds TSB before a vote by Lloyds shareholders today. They said that it also implied that the present round of government aid may not be enough.

At present share prices the Government faces a loss of £10.4 billion on its £37 billion investment in the banks – equivalent to 3p on income tax or more than the cost of the 2012 Olympic

The rise of activist shareholders and government regulators will require cogent communication, and the loss and merger of investment firms may impact coverage.

The small guy

“Why do I need to communicate more than I have to with minority shareholders? If I want to talk to the market, I pick up the phone and call six investment houses.” A year ago this was the prevailing thought in investor relations. I sincerely hope it’s changed: retail investors are less likely to move shares around and tend to be loyal, also becoming informal marketers for your brand. Direct communication with them is building trust. Trust is the magic of the markets.

Earlier in the year, the regulators of the US markets mentioned a movement toward “reversing the deretailisation of our markets”. Before that had a chance to be implemented, the “governmentisation of our banks” seemed to be the trend. Cheap shots aside, expect direct communication to shareholders to be strategically, if not politically, endorsed in South Africa.

The board

I was recently in Washington DC for a financial reporting conference while the markets were diving like European centre-forwards. News of the AIG executive spa session on bailout money kept featuring. People throughout the reporting chain seem to be generally annoyed at the levels of board oversight employed in corporate America. How could one be on the board of Fannie Mae/Freddie Mac/Investment Banks and not see that one was leveraged dozens of times over? The days of non-executive board members giving the financials a cursory thumbing-through while they race from AGM to board meeting number 12 will come to pass. Perhaps the JSE could extend the AltX directors induction courses to other shores?

There needs to be internal assurance that the full financials are presented in the most accessible way to decision-makers as possible. PDFs of reports and access to the ERP system are not enough: the technologies are there or nascent and need to be employed to full effect. It’s a great truism that the information online is a double-edged sword: tools exist to compare executive compensation across companies.

The tactics

Communication and relationship-building will be key for the duration. Now is the time to work on your image to investors; huddle up and get the things done that you couldn’t when you were shuttling between Jozi and Cape Town and doing roadshows and analyst presentations. Linda Kelleher of the US National Investor Relations Institute urges one to use the corporate website to its full effect, and use related technologies where applicable.

More by Derek Abdinor

• Investor relations from here on in – 31 Oct 2008
• Investor relations online: it’s a niche thing – 30 Apr 2008
• Hypersonic advertising is pitched – 30 Jan 2008
• Paying attention – 25 Oct 2007
• An economy of attention – 25 Sep 2007

Dealstream Securities traded derivatives on the JSE Securities Exchange, specialising in listed single stock futures and CFDs. Alleged problems with its trade in CFDs led to them running out of liquidity with its clearing memberand they were pulled off the markets a few days ago.

Assuming that the investment/trading community is probably griping about this topic in the Bull Run or bottling it all up is not the case anymore. Social media is mostly cheap and free, and it makes the information that only a few people have (in this instance, that offices were locked up) go viral in a short space of time.

I listened to the guys who set up TroubleAtDealStream on the radio last night. They were angry about their margins losses through the sudden disappearance of Dealstream, so they sent each other SMS messages and got together. Some of them decided to set up the website at the above address. Sure its not a blog or wiki in the true sense, but its a really helpful resource and embodies collaboration and many-to-many publishing. See also Dealstreamfraud

What do we take away from this? The investment community realises that publishing and making their voices heard is easy, too easy if you’re using existing websites or properties. Does your IR deparment have a social media strategy?

Appendix:
Other examples of chatter around Dealstream:

Twitter mentions
Fin24 blogs
Forums
Comments on news articles (Moneyweb)
Technorati tags
Customer forums (HelloPeter)

The SEC announced last week that it would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors.

SEC Chairman Christopher Cox, as part of his drive to make global sampling of financial statements easier, pointed out that there are many business languages in the world, and in most of these countries they report in IFRS.

There’s some analysis by Charles Hoffman highlighting different reporting standards for public and private companies, and the webcast of the SEC announcement. Calls for comment on the proposal are open. It would make XBRL taxonomy easier, n’cest pas?

In a survey conducted by Agoracom, of 850+ Canadian retail investors, the following findings were made :

• 81% of Investors Prefer Small-Cap Resource Companies over Large-Cap.
• 48.4% of Investors were most Bullish on Gold compared to other minerals and metals.
• 73% of Investors Conduct the Majority of their Research (75%+) into New Stocks Online. This is a dramatic 18.65% increase over 67% of respondents in 2007 and serves as proof positive that an online investor relations program is critical if you want to reach new investors.
• 48% of Investors Conduct All of their Research (95%+) into New Stocks Online. No online IR program means you immediately miss out on 48% of all investors.

• 60% of Investors Use Discussion Forums For Information and/or Research.

• AGORACOM brand recognition amongst retail investors has risen by 360% over the same period last year. With 95% of our market budget allocated online, we are an actual case study about the power of online marketing to small-cap investors.

QUESTION #3 – What Percentage Of Your Research Into New Stocks Is Done Online?

100% of Research (21%)

90% of Research (27%)

75% of Research (25%)

50% of Research (18%)

< 50% of Research (16%)

NOTE: This is one of the most striking statistics in the entire survey. Specifically, 73% of small-cap investors use the web to conduct the majority (75% +) of their research into new stocks.

Even more striking is that fact that 48% of investors rely on the web entirely to find their next small-cap investment.

Finally, after averaging the numbers out, the web accounts for 77.05% of all research into new small-cap investments.

These figures are both striking and logical when you consider the fact that major finance media provides very little, if any, small-cap and micro-cap coverage.

Based on these figures, a CEO that fails to implement an online IR strategy is doing a great disservice to their company and shareholders.

****
excellent results from the survey by Agoracom. Retail investors were being arrogantly branded as nuisances less than a year ago, but with the increased shareholder activism and the market we’re in, they may be the best discerners of growth.

I’ve just put down a fascinating article in an old issue of IR Magazine, about the differences in IR language between the US and UK. The premise is that while language and verbage are 99% the same, meaning and emphasis is totally different. For example, “challenging” in plc terms may mean ‘dire’, or ‘SELL’; in the US that could translate to ‘we’re keen on going down this track’.

Simple analysis, but it twangs a chord. National characteristics aside, there are big differences in meaning, and when applied to considerable investments (another disputed term: define considerable) it forces the analyst to look for non-rational, body-language cues. I don’t think anyone wants analysis based on that.

What is the solution? Well, websites are mostly packed with annual report, filing and PR speak. Meaning that the company would rather you tire on the drudge stuff and give up and phone the IR people or arrange a meeting. Where, in front of them, you can perspire and look shifty when you’re actually looking to see if the air-conditioner is on.

This is the real reason why IR websites need to be more interactive.

If people find defensive stuff on your IR web pages, they’ll go to a 3rd party where you lose control of the message the instant they leave your site. Other sites have other agendas, other contexts, other ways of categorising your information.

So keep them on your site. But give them blogs and give them video. Now they can gauge the efficacy of your written word, and through video they can see that, indeed, you exist and resemble a dna-carrying member of homo sapiens sapiens.

Turn Social Media into a tool for you.

Web 2.0 is two-way. If your company info is on a video or photo sharing site, or some guy with a grudge and a blog is ranting about you, you can use new tools to find and monitor these conversations.

Be proactive.

It follows that you should use video and blogs to make your message real. If funky brands like Apple and Coca-Cola can have legions of suits in the background and still be seen as legit, your corporate site can have hipsters and baseball-caps front and centre.

I was kindly invited by James Governor (aka Monkchips) of Redmonk, to participate in a pre-conference Wiki, OpenAccountability. James is hyper-passionate about sustainability and web2, and doesn’t mince words or dialectics; I foresee him turning his dab hand to shareholder activism in time. I posted there, thought it would fit here too…

Corporate communication tends to follow a linear trail, a harbinger from the days when paper + letterhead + signature = legitimacy. It is requirement to communicate to all one’s shareholders as a matter of good governance, updating your investors on their investments and punting the company line into the marketplace as a cumulative benefit. The media that spring to mind here are the mailed reports, EDGAR filings and letters to shareholders.

However, lets scrutinise the company’s annual general meeting (AGM). The company publishes a notice to the AGM (usually as an addendum to the annual report) and sets out the agenda for which shareholders can vote at the AGM. These include appointment of directors, adoption of some matters of course but also how the board sets about allocating shares and profit. Very rarely are matters of strategic direction entertained at the AGM; it is assumed the board enjoys the confidence of the shareholders to do just that (much like cabinet and the president/PM).

WIth globalisation and cross-shareholding, voting by proxy accounts for a huge whack of all votes cast at the AGM. This is now moving into the online space to do away with paper and the attendant inefficiencies.

But why is this not more of a collaborative exercise? The agenda is set by the board, about the board, for the board. Why could a company not open a Wiki or Ideastorm to the shareholding public to know what issues they want to discuss? Those suggestions could be tallied by some impartial body (the Bourse, auditors, etc) and brought into the AGM.

This is how I see Web2 thinking infiltrating corporate culture, or rather capitalist culture. Business spend kaZillions on R+D and talent sourcing but assume those that invested in them will be satisfied with some paltry pre-defined choices? With the markets as they are, dialogue with potential investors is about sustainability and survival. Web2 is the key to that kingdom.

The Public Investment Corporation (PIC) of South Africa released a PDF on its website on April 1, displaying how it voted at various AGMs.

The PIC is tasked with investing the pension funds of government employees, and therefore tend to hold large chunks of equity in public companies. In fact, they hold over R700 billion assets under management, making them one of the largest investment managers in the country.

This powerful capital allows them to invest heavily in blue chips, and with it the concomitant power of having a say in how those organisations should be run. In early 2007 they held 17% of multinational Barloworld, which gave them a platform to vote against the re-election of Chairman Warren Clewlow. They put similar pressure on the board of Sasol, over transformation at executive level.

Most of their day-to-day voting decisions are against a perceived diluting of the PIC’s shareholding in the company at hand.

Read the document, fascinating read. A good study in the responsibilities of power. Well done on the disclosure document, a forum or blog on the PIC website would be an excellent addition.

This is verbatim:

IR Firm Pushes Retail investor

http://www.thefreelibrary.com/How+a+comprehensive+IR+program+pays+off:+an+investor+relations…-a0112360402

Has the recent runup in the stock market brought the individual investor, battered by years of losses, back into the market in a big way? Experts may be divided, but one sign that it has comes from the Financial Relations Board (FRB), a major public relations and investor relations firm.

The Chicago-based firm has launched a program designed to help companies woo retail investors, arguing that they tend to take a longer-term approach to ownership, providing greater stability and loyalty within the shareholder base.

The program attempts to capitalize on a clear trend in recent years: the proliferation of hedge funds–which now outnumber mutual funds in the U.S.–and their focus on short-term, often intraday, trading. In sharp contrast, individual holders frequently keep shares for three to seven years and often hold on to downtrodden stocks in the hopes that they will eventually see their paper losses disappear.

Moira Conlon, executive vice president and general manager of FRB, said in an interview that the firm has been marketing the program mostly to existing clients, especially those with strong consumer brands.

In some cases, Conlon says, companies can benefit from having a “fact sheet” and showing up at brokerage events to build outreach. “You need to find brokers who are position builders,” she adds. In addition, she says some FRB clients will mail the fact sheet to shareholders with a reply card, with the aim of getting a reply with the identity of their broker or money manager.

“Anyone who’s not marketing to retail needs to look at the landscape and realize they are missing an opportunity,” she says. “Whatever the size of the program, there’s an upside to be had in terms of stabilizing the [shareholder] base and reducing volatility. Other benefits include branding with investors.”

Conlon adds that “IR budgets haven’t grown” in the recent down years, but that “companies that are serious need to empower IR to get the job done.”