Australian investor relations is at a turning point. Seen as a world leader in corporate governance, Australia was one of the first to launch a continuous disclosure regime. But developments in international markets coupled with new regulatory requirements are making life tougher for Aussie IROs.
Against this backdrop, there were two shining stars at the third annual Investor Relations Magazine Australia Awards, held in Sydney in late September: building services company James Hardie and banking group ANZ. Both picked up a host of awards and lead the IR field in Australia.
Greg Baxter, head of IR at James Hardie and the winner of best investor relations officer for the second year in a row, believes the change in attitude toward corporate transparency is leading to a new conservatism in the Australian investment community. He says that one side effect of a whole raft of new initiatives – such as the Sarbanes-Oxley Act in the US, the establishment of the Australian Stock Exchange’s (ASX) corporate governance council and the latest tranche of legislation in an ongoing review of Australia’s corporate law – is an ’emerging caution and skepticism’.
Driving skittishness
One of the key issues driving this conservatism is corporate skittishness over so-called false markets, which happen when incomplete or incorrect information drives trading – such as when potential material information is published in the media that has not been released to the exchange. John Knowles, vice president of IR at BHP Steel, which won best investor relations for an IPO, believes this is one of the biggest challenges facing Australian IROs.
Now the Australian Securities and Investments Commission (Asic) may get the power to correct apparent false markets by forcing the company to make a disclosure. Not only that, but it would also be able to impose fines of up to A$1 mn on companies in breach of the new rules.
Companies are spooked. They are concerned that forced disclosures could prevent deals from going ahead, for example. ‘The decision to disclose should be made jointly by the regulator and the company,’ says Mark Gell, vice president of external and investor relations at OneSteel, which won the award for best overall investor relations by a non-ASX 100 company.
‘The issue needs further definition, or we risk growth transactions being lost because companies are forced to make a disclosure. Ultimately, shareholders lose out,’ adds Knowles, who believes the new rules need to retain flexibility. ‘We need to use common sense to make sure what we get isn’t too prescriptive.’
Rules vs concepts
But the issue is not that simple. Part of the IR community is calling for better defined rules because of Asic’s increased powers to impose fines. There is a conflict between the desire for a conceptual rather than rules-based approach, and the need to ensure companies know exactly when they will be contravening continuous disclosure obligations and therefore risking a fine.
Gell is particularly concerned over forecasts disclosure. ‘We had to provide prescriptive numbers for a recent upgrade, which were not signed off by the auditor,’ he explains. ‘If shares are sold on this basis, technically the company and its officers could be liable. This is a very gray area, which could one day be tested in the courts’.
Gell knows internal forecasting is ‘not a precise art’, even though some of the disclosure requirements assume forecasts should be taken as fact. ‘But business is seasonal, and you often don’t know how you’ll go until the end of the year. There’s a judgment element in forecasting and no amount of rules can change that. If people were to be punished for this it would be unfortunate,’ argues Gell.
Philip Gentry, head of investor relations at ANZ, is ‘reasonably optimistic we can find a balance.’ And he adds, ‘Corporations are approaching this constructively.’
‘Australia is at the forefront of disclosure – which is good, but also means that the issues are not well tested at this stage,’ Gentry continues. ‘The ASX and the investor community are still finding an appropriate balance between investors’ need for information, the requirements of corporations and the requirements of Asic.’
What this means for the average Australian IRO is an increased focus on the regulatory environment. ‘The IR role is much more broadly linked to the governance of companies now and that’s quite a change,’ Gentry says.
Rules aside, the ongoing bear market is something with which most IROs have only had limited experience. Until the last year, most had never had to issue bad news to the market, and had never seen share prices in free fall. The downturn has radically changed the behavior of investors and, in turn, investor relations programs.
‘Investors are changing their focus. Buy and sell decisions are being made much more frequently. It’s a challenge for the investor relations team to build an appropriate shareholder base in these conditions,’ Gentry explains, adding, ‘You need to really understand your shareholders and their medium-term interests.’
Down time
The volatile market is even tougher for smaller Australian companies, which have traditionally focused on operational activities at the expense of investor relations. In the current market, however, that approach could be a mistake.
Smaller companies need coverage, but there are now fewer analyst reports being published. Indeed, BNP Paribas, which was known for its small-cap research, withdrew from the Australian market earlier this year.
Mark Gell, for his part, has spent the last twelve months building a balanced shareholder base for OneSteel, which was spun-off from BHP and listed in October 2000. His major task now will be maintaining the momentum: ‘The share price has increased 100 percent over the last year, and the challenge will be to keep this going.’
Given the rise in shareholder activism in Australia and around the world, it has become increasingly important to genuinely listen to investors. To achieve this, says Baxter, James Hardie conducts regular research into investor perceptions. ‘We do omnibus surveys and rank ourselves against other companies. We also do anonymous qualitative research with investors after major announcements. We tend to feel we’re in tune with shareholder thinking,’ he says. ‘Shareholder activism is to be welcomed.’
‘Greater engagement with shareholders is a good thing,’ Baxter goes on. ‘We like to be proactive in engaging with shareholders on issues. We welcome open and frank dialogue; but I’m not sure how common that view is in the wider community.’
It all starts with the board, Baxter believes. ‘Our board has a genuine interest in and support of transparency and openness, and that’s imbued in the management team. In our company, the IR function is not seen as a middle-level function; it’s seen as the responsibility of the board and CEO.’ At James Hardie, Baxter says, the IR function is viewed as strategic rather than tactical.
Due to current market conditions, and the continued focus on corporate transparency, Australian companies need to more fully embrace the strategic side of investor relations. No longer is it appropriate to mail shareholders a hard copy of the annual report once a year to secure their ongoing support. Shareholders – and regulators – have become much more sophisticated and expect immediate updates on company news.
Corporates are under increasing scrutiny, and need to make sure they consistently meet best practice in disclosure and corporate governance. The challenge for Australian investor relations practitioners over the next year is to present and disclose information that meets both the market’s and the regulator’s requirements.
We look forward to congratulating these companies at the Investor Relations Magazine Australia Awards 2003.
Click here to see the winners.
