The Asian financial crisis has slowly lifted this year, propelling share prices upwards. Even the more timid western fund managers have begun to reassess investment opportunities in the region. And Asian companies have been courting these new investors.
Yet for Asian companies this process demands a transparency and willingness to hunt for new shareholders which is completely alien to the Asian tradition. Nothing short of an IR revolution is in prospect.
The immediate crisis – which sent currencies and stockmarkets into freefall in the second half of 1997 and persisted into 1998 – has been eased by a virtuous circle of lower imports leading to smaller deficits, greater currency stability and lower interest rates. But for the longer term, Asian economies need to attract further significant foreign investment into their equity markets if they are to fully restore asset values.
That means a big shake-up for investor relations. In raging bull markets, it might have been possible to persuade western portfolio managers to invest in companies that were failing to provide full disclosure of financial information. After a big collapse in share values, they are unlikely to be so cavalier. Fund managers increasingly demand a western approach to investor relations from Asian corporates, and there are already clear indications that the quoted giants of the region are moving rapidly down this road.
Welcome change
‘Most Asian companies have traditionally underestimated the importance of investor relations,’ says Warwick Negus, Goldman Sachs International managing director. ‘IR was usually given to somebody quite junior in an organization, and there was not much information available. The financial crisis has changed that.’
‘The first reaction of companies was to ensure their survival, but since then they have been revising their approach to IR.’ That, according to Negus, means they are becoming far more accessible to investors. ‘It’s a welcome change. Senior directors are prepared to give more time to IR, and it is seen as a senior job function.’
Negus notes that fund managers are actively looking for investment opportunities in the region, and the only countries which are now really closed to them are the ones with exchange controls. Fund managers have a fiduciary responsibility to be able to liquidate investments, and the sort of capital controls in place in Malaysia, for example, are a serious impediment. On the other hand, Taiwan’s repeal of its emergency exchange controls has been widely praised.
‘The crisis has been a stimulant for IR activity,’ says Negus. ‘There is a need to communicate business opportunities, such as mergers and takeovers, to investors. And now senior managers are far more willing to participate in investor conferences. It’s a break with the past, and an indication of how IR will develop in the future. But Asian companies still have a long way to go to reach western standards.’
Fund managers are unanimous in requesting greater transparency with regard to cross guarantees to subsidiaries, and true cash flow. They also want to see a clear commitment to creating shareholder value – over and above the generation of turnover; programs for the disposal of non-performing assets; and possibly plans for expansion through the acquisition of rival companies. Any Asian IR strategy will have to heed these issues.
Turning point
However, fund managers are convinced that the Asian financial crisis marks a turning point in investor relations in the region, and that change has gone beyond the point of no return. Commerzbank’s Japanese equity strategist, Chris Rigg, predicts that in ten years Japan will have a fully Anglo-Saxon attitude to investor relations. He says he has seen a distinct pattern evolving over the past decade.
‘Since the early 1990s foreign ownership of shares has expanded from 9 percent to 16 percent of the Japanese market, so companies have had to become more investor friendly,’ explains Rigg. ‘Many now find themselves having to raise capital due to their debts, and are having to pay attention to outside shareholders to boost their equity.’
As a result, today all the leading Japanese companies have bi-lingual investor relations staff, a web site for shareholders and potential shareholders and regular investor meetings. ‘The chairman of Sony will travel to meet investors,’ notes Rigg. ‘That was unheard-of five years ago.’ Of course Sony is a shining beacon on the Japanese IR scene, consistently winning this magazine’s award for best IR in the US market by an Asia-Pacific company. But Rigg believes small and medium sized companies will find themselves increasingly following Sony’s example. ‘Senior management will have to court investors. The Asian financial crisis has given this process another push forward’.
Rigg highlights a generational change in Japanese management which is transforming attitudes to investor relations. ‘Younger managers have grown up in a different environment to their parents,’ he notes. ‘The stockmarket is 60 per cent lower than it was nine years ago, and profits are half what they were in 1978 in nominal terms. Young managers realize that attitudes have to change to attract new investors, and create shareholder value.’
In short, shareholders will have to be looked on as the owners of listed companies, rather than just people who have bought the stock. It is a move away from the days of family or state ownership, and requires a different approach to IR,’ Rigg maintains.
Go west, young manager
In the last ten years many young managers have been to America, and picked up western ideas of investor relations. ‘These individuals have now returned home, and are putting their newly-learned ideas into practice,’ says Rigg. ‘You see it particularly in companies like Toyota, Honda and Nomura, or even Hitachi. This summer the chairman of Hitachi, an industrial behemoth with a turnover of 2 percent of Japanese GDP, is going on a tour of investors – something which would never have happened five years ago’.
All the same, Hong Kong-based regional managing director for Prudential Portfolio Management Eric Sandlund says the initial reaction of some companies to the Asian financial crisis was to ‘turn turtle and retreat into their shell’. But he also reckons the crisis will prove beneficial to IR in the long run.
‘You do have an increasing recognition from smaller companies of the need to stay in touch and treat equity investors seriously,’ concedes Sandlund. ‘The president of Siam Cement recently admitted that in the past he had no interest in meeting shareholders. Now he spends 15-20 percent of his time with them, and has a web site for investors.’
What fund managers need from Asian companies, according to Sandlund, is a clear insight into what they are achieving, and what they want to achieve. ‘Now is the time to stress where you want to invest your equity, and how you will take your company forward in this more difficult environment. Those companies that invest in IR and give a better view of their operations will win new shareholders and reap the rewards in the future’.
Wake-up call
Sandlund says he was initially concerned that the Asian crisis would blow over too quickly, and allow firms to return to their bad habits. But he now believes it was severe enough to deliver a ‘wake-up call’ to the big groups. They now understand that the previous ‘floods of overseas money’ cannot be taken for granted. The development of coherent investor relations strategies, where none existed in the past, is the result.
Indeed, so proactive have some Asian companies become in promoting themselves to fund managers that an air of weariness has set in. ‘The next stage of their IR strategy has to be to deliver the goods, and then tell us about it,’ says Peter Warwick, a director of Flemings Investment Management. ‘We are a bit tired of hearing about the promises of a greater return on equity and the disposal of non-performing assets. We want further proof. That will require more transparency in itself.’
In any event, Warwick says, it is inappropriate to talk about the Asian market as if it were a single unit. Outside Japan, he contrasts the greater openness and willingness to embrace reform in Thailand and Korea with the resistance to change in the Philippines, Indonesia and, to some extent, Singapore. Both Thailand and Korea have been successful in attracting significant new foreign investment, particularly in the banking sector, and have become generally more friendly toward foreign investment.
A recent study from Credit Lyonnais Securities showed that foreign investment in South Korea totalled $21.6 bn over the 13 months to February 1, 1999; the equivalent figure for Thailand was $10.2 bn. Indonesia, by contrast, trailed with $555 mn, and even sophisticated Singapore clocked up just $2.3 bn in inward investment.
‘The pattern varies across the region,’ says Warwick. ‘There is often a fear from corporate managers that foreign shareholders will be inclined to sell to a predator, and they see it as in their self-interest to keep them out.’ In this case, it will be in the manager’s interest to keep company information as opaque as possible, and better investor relations will be viewed as a threat and not an opportunity for corporate development.
Yet without new investment from abroad, companies in these countries will be at a competitive disadvantage to those of Thailand or Korea, for example, and will find themselves losing market share in Asia. That factor alone may yet be enough to persuade them that an Anglo-Saxon approach to IR will be essential to their success, and produce a new wave of converts to providing greater transparency and creating shareholder value. But a cultural aversion to foreign ownership may mean that progress in IR could be slower than some fund managers hope.
Bleak alternative
The alternative is certainly bleak. Starved of investment, companies will eventually wither and die. For Asia is a highly competitive market characterized by over-capacity, with no room for corporate laggards. No wonder senior managers are now spending so much time on investor relations.
But some fund managers are worried that Asian companies’ conversion to the merits of IR will be a short-term phenomenon. ‘I have been touring the region for ten years, and have seen a big change in attitudes to investor relations,’ says John Pickard, head of Asia-Pacific Equities at Phillips & Drew Fund Management. ‘But I have to say that now share values have recovered a bit, there are signs that IR is slipping back again.’
Pickard says IR professionals have a lot to do educating their companies about the long-term value of keeping shareholders informed. ‘We make good long-term shareholders but it is very difficult for us if we don’t know what’s going on. It’s very frustrating for us if we cannot update our information. We have a fiduciary responsibility to keep up to date. If we don’t have this data and a cheap bid comes along, we will be inclined to take it. It is very much in the interests of companies to look after their key investors.’
‘We have had cases where we’ve bought on the basis of financial information in an offer document, and have gone back to companies later for an update. Then they say, ‘Oh the financial information was only for the offer.’ This is just not good enough. It’s no way to treat your investors, and we are inclined to sell in these circumstances.’
Asian models
Singapore, Australia and New Zealand are singled out by John Pickard as good examples of countries which have greatly improved their IR in recent years. He cites the Development Bank of Singapore as a company that used to operate behind closed doors, but now has an American chief executive who spent an hour-and-a-half with him on his last visit.
And he adds: ‘Australia and New Zealand have seen a big shift from promoting themselves through brokers toward in-house IR, and the result has been that investors have been looking at their markets in more depth. They have also recovered more quickly from the crisis than Asia.’ Moreover, Australasian companies operate in a legal and accounting environment that’s closer to the UK’s than to most of the rest of the region, which tends to make them more accessible to Anglo-Saxon investors. ‘I find these companies a joy to deal with,’ says Pickard. ‘I think they offer a model for what Asia could achieve.’
Scottish Widows’ head of Asia-Pacific equities, Neil MacKay, also claims it is imperative for Asian companies to see their investor relations develop through to full western standards of disclosure. ‘Half-way house is no good,’ he says. ‘For example, we need more disclosure on capital expenditure so that divisional performance can be analyzed. It is not just a matter of seeing more people and telling them a part of the story. We want the whole story.’
Hype alone will not be enough. Encouraging words will have to be matched by hard results. Like any revolution, the progress of investor relations in Asia is patchy and prone to set-backs. But as Asia-Pacific companies increasingly turn to western fund managers in their search for capital, they will find that good investor relations is essential to winning – and keeping – new shareholders.
