Ask the IR Experts
Do you have an IR question for our experts?
Email us: irquestions@equicomgroup.com.
IR Expert Q&A
How does a company promote analyst coverage?
What does guidance mean and what are the pros and cons of an issuer providing guidance?
What are the new financial accounting standards that issuers should be aware of before 2011?
What is a Disclosure Committee and what are some tips to improve its performance?
Hedge Funds – what are they and how do they relate to shareholder activism?
What is empty voting?
How does a company promote analyst coverage?
Analyst coverage improves the flow of information between management and investors. Financial analysts can help a company stand out from its competitors and create investor interest in its stock. Through research and interpretation, analysts will distill a company’s financial and non-financial results and help investors make informed decisions. The following is a list of tips to help generate and expand analyst coverage:
- Management should be accessible and available to the market
- Go beyond the minimum disclosure: help the investment community really understand your company and its industry
- Research your peer companies to determine which analysts cover them. Contact these analysts and meet with them. Inform them of your company’s reporting dates as well as any upcoming developments they may be interested in and put them on your company’s email distribution list.
- Increase interest in your company by holding an annual investors day; if the company has a manufacturing plant, hold the investors day at the facilities and provide details about the operations and new products.
- Establish a regular communications process including hosting quarterly conference calls, so that analysts and investors will be able to assess your company’s growth and development.
- Provide financial models if your business is complicated and illustrate your company’s trends through straightforward financial and non-financial tables/graphs. Supplying historical, current and prospective information will help analysts to make reasonable estimates of future performance.
- Be transparent and take the time to explain any unexpected changes in the company. This will help circumvent any negative assumptions made by investors and analysts.
The top complaints that analysts have:
- Communications received from management are too vague
- Not enough current financial information to create financial models
- Not enough information on Key Performance Drivers (KPI’s)
TOP What does guidance mean and what are the pros and cons of an issuer providing guidance?
Guidance is a “metrics of performance” that a company’s management pro-actively communicates with the street – i.e. quantitative results such as earnings per share (EPS), estimate or qualitative results such as key performance indicators (KPI’s). Should our clients be giving “guidance” to the street?
| PROS OF GUIDANCE |
CONS OF GUIDANCE |
| Provides clear benchmarks, reducing market uncertainty |
Focuses investors, and often the company itself, on short-term (quarterly results) at the expense of the long-term |
| Builds a greater consensus |
Quarterly guidance creates a sentiment of “produce results for today at the expense of tomorrow” |
| Reduces analysts forecast dispersions and increases accuracy |
Market risk of missing the numbers |
| Enhances confidence and credibility in management |
Less flexibility |
|
Challenge to maintain and update |
TOP
What are the new financial accounting standards that issuers should be aware of before 2011?
The Canadian Accounting Standards Board (AcSB) has announced a significant strategic decision to adopt International Financial Reporting Standards (IFRS) for all public companies, with a target date of 2011. The transition to IFRS represents the single largest change in financial reporting in the last 20 years. In the last decade, largely as a result of European support, the IFRS has gained a new level of respect in the global financial community. As Canadian public companies account for less than 4% of the global capital markets, it makes sense to adopt a set of accounting standards used by an ever-increasing number of countries. Finance professionals over the next few years should:
- Determine the major differences between Canadian GAAP and IFRS and how they relate to their company’s disclosure requirements
- Ensure the company’s financial reporting systems are flexible enough to make the switch
- What are the organization's training requirements to meet the deadlines etc.
For now, the AcSB is suggesting that public companies establish internal teams to assess the implications, some of which could be very significant.
TOP
What is a Disclosure Committee and what are some tips to improve its performance?
Currently, there is no legal requirement for companies to create Disclosure Committee (DC’s), although securities regulators in Canada and the U.S. recommend that companies establish them. While the nature of each DC may vary, the majority of companies do currently have one in place.
DC’s can vary in size from two to 18 people, and include a wide range of participants. Frequently members of the DC are the CFO, CEO, general counsel, corporate secretary and the head of investor relations (or IR consultant). Other members may include the COO, media spokespersons, corporate communications representatives and heads of the operating divisions.
The frequency of committee meetings varies from once a week to once every three months (to discuss quarterly results); with almost 50% meeting on an ad hoc basis, as disclosure issues arise.
The majority of DC’s are chaired by the President, the CEO or the CFO.
The DC reports to the Audit Committee or to the Board and in some cases, if the CEO is not on the DC, the DC reports to the CEO.
DC Tips:
- Have the Board approve the Disclosure Policy
- Communicate it to all employees
- A few days in advance of the DC meeting distribute the financial statements, press releases, and analyst/investor presentations to all DC participants
- Keep minutes of the meeting
- Have a formal assessment of the DC at least once a year
- Have DC members and the Board sign the Disclosure policy annually
Under NP 51-201 Section 6.2, it is best practice for companies to have a written disclosure policy.
TOP
Hedge Funds – what are they and how do they relate to shareholder activism?
Hedge Funds are an aggressively managed portfolio of investments that use several investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.
Hedge Fund activists tend to act swiftly, initially by growing their positions and making certain demands of the company’s management. Ethos Fund, for example, acquired a stake in Nestlé and then pressed for separation of the CEO and Chairman roles. Other hedge funds make far more intrusive demands, including the removal of board directors.
Most observers believe hedge fund activism is on the rise. In an April 18th, 2007 Wall Street Journal article, former SEC Chairman Richard Breeden, now a hedge fund manager himself, wrote that while activists account only for around 5% of all hedge fund money in the market today, this figure could rise to 20% over time.
TOP
What is empty voting?
Empty voting occurs when hedge funds either borrow shares or buy equity swaps to gain voting interest in a company without having the equivalent economic interest. This is another trend magnifying the clout of activist hedge funds.
For example, in 2004 when Perry Capital, a large shareholder in King Pharmaceuticals, wanted to ensure Mylan Laboratories' proposed acquisition of King went through, Perry bought and shorted almost 10% of Mylan’s shares through an off-market derivative transaction negotiated directly through a broker. This gave Perry the right to vote nearly 10% of Mylan’s shares without having any real economic interest in the company.
For investor relations professionals, empty voting is troubling as it is difficult to detect. You should continue to monitor who your shareholders are (on Bloomberg and/or Thomson).
TOP