We were pleased to meet recently with Professor John Kay, of the eponymous review, following our recent consultation on the subject as part of our objective of ensuring issuers' perspectives are considered and understood by key figures and bodies with regulatory significance. This is a summary of the points discussed:
Summary of main points discussed:
Issuers have responsibilities to keep the market informed – transparency is an integral part of successful communication with the financial markets. If the IMS was to become non-mandatory, the expectation is that many issuers would still continue with regular updates (there is some concern that smaller companies with more limited resources may choose not to, but the expectation is this would be detrimental both to the volatility of their share price and to their overall valuation). But we would welcome an environment that provided companies with flexibility to do whatever they felt was appropriate in terms of regular updates in the context of their industry, peer group etc – both in terms of timing and nature of disclosure. In addition, there are numerous other features of the market from trading to investing which put pressure towards short-term views – it is not just a function of issuer reporting. Any changes to that should be viewed in a wider context of how that may impact other market dynamics.
There is understanding from issuers that investors have significant resource constraints – either due to being a smaller manager, or due to the diverse and extensive range of company shares held in various portfolios across a large fund manager. But there is nevertheless a very unsatisfactory outcome of often limited engagement and or slavish adherence to proxy adviser recommendations, both of which can leave the issuer with no right to respond and no one to explain to (in our comply and explain regulatory regime). Issuers would like to see better transparency on the proxy adviser area – perhaps two first steps would be for investors to openly declare which proxy they use and for proxies themselves to outline better their recommendation criteria and methodology.
Benchmarking investment fund performance
This was discussed as a fundamental issue behind misalignment of value across the market structure. Rewarding performance relative to, for instance, a falling benchmark can hardly be seen to be beneficial to the ultimate owners of capital. There was also a view that investment funds targetting benchmarks have a tendency to become closet trackers and end up with such diverse portfolios to render any active engagement with the underlying issuers impossible to resource.
Multiple share classes
This was mentioned as a possible theoretical solution to the intractable problems. This feels like a step backwards. The long held tenet in the UK market of one share, one vote, is a principle which few are prepared to see relinquished. This is not an unwillingness to change, but a conscious decision to adhere to a founding principle of investment. Another major concern with a move in this direction is the likelihood it would significantly play into the hands of the intermediaries and the added complexity would potentially make the power of the proxy advisers higher. This could thus exacerbate the current problems, by multiplying them across further layers of investment. We do not support a move towards multiple share classes.
Changing market structures
The fundamental shift discussed here was that equity markets are now much less a source of new capital than a way for owners to release capital. The ultimate owners of companies capital are a much less important source of new capital for businesses; the debt markets have taken on this role. The spread of intermediaries and accompanying costs means equity capital raising is a costly affair. Pre-emption rights exacerbate this further. There was some discussion about potentially removing these (as happened in the US many years ago), but there was no clear view on whether or not this would actually be sufficient to draw corporates back to the equity markets.
Chair IR Society Policy committee
Published: 21 June, 2012