Timely shareholder ownership information is the centerpiece of any good IR program, but the problems IROs face in getting the details are almost legendary. It’s puzzling that in this age of heightened corporate transparency, public shareholder registers are still so unhelpful and investment institutions still so reluctant to provide concise holding information.
Ownership disclosure standards vary enormously from country to country, not to mention from institution to institution. But more often than not, getting behind the nominee and custodian names is a painstaking and costly process for companies and the stock surveillance firms they employ.
What’s in a name?
Even in the US, where disclosure standards are so often deemed to be the best in the world, a company can go for a long period without knowing a certain institution is a shareholder, only to find out when it’s too late. ‘It’s really frustrating,’ admits Mary Jensen, director of IR at California-based Essex Property Trust. ‘Sometimes I’ll mention to investors that they don’t have a position in our company when it turns out they do. I can’t justify spending a lot of money surveying our stock, but I want to know who’s moving in and out.’
And working out who is and who isn’t holding your stock is not a one-off process. According to Robin Jansen, head of investor relations at Royal Numico in Holland – where the bearer shareholder system makes unveiling stockholders even harder – obtaining shareholder identification is an ongoing process that takes place any time there is contact with an investor or potential investor. Whether for domestic or foreign shareholders, Jansen says the company is ‘basically dependent on the willingness of the underlying institutions to share their holding with us.’
A recent survey by the International Investor Relations Federation (IIRF) sheds more light on the prevailing sense of IRO despair on this issue. Of some 250 IR professionals canvassed worldwide, almost 60 percent express dissatisfaction with the shareholder disclosure practices in their own country, while a further 83 percent want the IIRF to lobby for greater transparency on a global scale.
Indeed, the IIRF hopes the survey will help kick-start a drive towards enhanced shareholder disclosure. While most IROs – perhaps unrealistically – would like to see legislation on this, the IIRF says the way forward in a global market with so many local jurisdictions is to get big investors to sign up to a code of best practice.
Eye of the beholder
One of the most interesting results of the IIRF survey is the disparity between the perceived quality of local shareholder information disclosure and the actual disclosure standards in place. It seems the hunger for ever more disclosure is notably higher in places like the US and the UK, where there are already good legal systems underpinning companies’ right to track their ownership. On the other hand, dissatisfaction is lower in regions with weaker systems.
The most fundamental difference in legal systems is between jurisdictions with registered share systems, typically but not exclusively in Anglo-Saxon countries; and those with bearer shares, as in much of continental Europe. For the former, companies at least have the shareholder register to serve as a starting point; the latter often have no starting point at all.
Nevertheless, according to Nick Arbuthnott, managing director at Citigate Financial Intelligence, which sponsored the IIRF survey, respondents in many countries misguidedly believe that theirs is the best system. ‘There’s a misperception of what they think they can identify and what they actually can,’ says Arbuthnott. ‘Companies get share registers and see a large holding of what they perceive to be the actual investors – but they often turn out to be just the custodians, with the real investors hiding behind.’
Indeed, even companies in countries with the easiest disclosure regimes can have difficulty when it comes to identifying foreign shareholders. UK companies have an absolute legal right under section 212 of the Companies Act to demand beneficial ownership information from anyone and everyone on their register. In practice this is often a clunky process, involving multiple notices being sent to layers of nominee holders masking the true beneficial owner. But it’s at its most problematic with foreign shareholders who, while technically subject to UK law if they own UK companies’ shares, are often impossible to track down for all practical purposes.
In the US – that other beacon of accessible share ownership data – the lynchpin of shareholder ID is the 13F filing system, which requires most institutions with US holdings to disclose those holdings at the end of each quarter. Foreign institutions are only subject to this regime if they operate in the US, and 13F filings are not nearly timely enough for companies wanting to keep up-to-date tabs on their owners. That’s why so many US IROs pay ID firms to track ownership data at the level of detail and timeliness they need.
But even for US and UK companies the amount of effort and cost expended on ID is largely a matter of choice. Some companies might undertake or commission ownership reports only before or after major announcements or shifts in position. Smaller firms with more stable bases might not even consider investor identification to be a part of their strategy. Take Coherent, a California-based laser manufacturer. ‘We take a longer-term approach; we’re not as interested in the day-to-day moving parts,’ explains Peter Schuman, director of investor relations at the firm. ‘It would change shareholder mentality if we were always looking at things on a daily, weekly or quarterly basis.’
Consensus time
Most IROs around the globe are clamoring for better ownership information, though, and they wholeheartedly endorse the IIRF’s drive for a global best practice standard. Continental European companies, for example, have to undertake all manner of stratagems to get the kind of information that’s relatively easy for their Anglo-Saxon counterparts to acquire. These include initiating surveys, working with bank custodians, running advertisements in newspapers, and sending out questionnaires with dividends and other correspondence.
Such heroic efforts are all very well but ‘it’s really a question of raising awareness and educating both the companies and the institutions,’ says Neil Ryder, program director at the IIRF. With this in mind, the IIRF has started contacting local IR societies to raise the profile of the issue and begin fine-tuning the crucial details of timeliness, holding levels and ownership details, which are needed to arrive at a best practice code with the buy side. Such a code would be helpful everywhere – in the US and the UK it could speed up the process, and arguably reduce some of the cost.
But the issue requires clarification. Companies need to be more realistic about the proportion of holders they can reasonably expect to identify. No fewer than 43 percent of IIRF respondents said they wanted to see shareholdings over 0.1 percent disclosed. That would mean disclosing virtually every holding, which at first sight seems extreme. But during hyperactive hostile takeover bids, it can be crucial. After all, if there are enough 0.1 percent holdings in the beneficial ownership of a single hostile bidder ‘held’ by anonymous Street names, they can add up to a serious threat. And knowing of their existence early on may ultimately mean the difference between a successful and an unsuccessful defense.
As for timing, many companies would like to have shareholder data made available to them on a monthly basis, but are probably oblivious to the costs such an arrangement would involve – both for the companies and the institutions – in terms of setting up systems to manage the data.
On the buy side there is a real reluctance to go on the record about this issue. Many institutions are wary of being cornered into a best practice code that would commit them to disclosing each and every investment in a detailed and timely way. They are also concerned that other institutions might exploit the disclosed information to determine their own positions. Yet institutions clearly benefit from being known to the companies in which they hold shares since – only then will they receive speedy disclosures from that company’s IRO.
Buy-side ignorance?
According to Ryder, there is also some buy-side ignorance. ‘We’ve found that many institutions are completely unaware of the difficulties that firms have in identifying their shareholders,’ he notes.
Indeed, 87 percent of institutions surveyed by the IIRF thought their domestic regulations were already adequate, suggesting an overall reluctance to change. However, 79 percent of institutions also recognized the benefits of greater shareholder transparency, while 66 percent accepted that they should reciprocate the increased disclosure that companies have been persuaded or forced to provide.
At a local level, institutional representatives in Germany, Hong Kong, Ireland, Italy, the UK and the US contacted for this article were all receptive to the idea of working with corporate representatives and regulators to devise a system that works for all parties.
The IIRF believes the most effective way of bringing change will be for the large institutional players to lead the way. Big global players are also eager not be perceived as being backward or accustomed to applying a broad disclosure standard for all countries.
This is a hugely complex issue that in a global market can only be addressed globally, not through a patchwork of local legislation. Open-ended discussion in tandem with local IR societies, buy-side institutions and regulators, as proposed by the IIRF, would be a constructive first step.
The US case
American companies have a reputation outside the US for being fixated on ownership and share price so it’s not surprising that so many US IROs surveyed by the IIRF – almost 60 percent – expressed displeasure with the timeliness of 13F filings. These provide institutional ownership information after each calendar quarter, but allow institutions a generous 45-day window.
‘By the time we get the information it’s really outdated and difficult for us to do anything with it. It’s hard for us to time any type of targeting with this,’ says Mary Jensen at Essex Property Trust. ‘By the time we’re identifying trends, they’re already over.’
For listed US companies, then, the issue of shareholder disclosure is one of timeliness. IROs need to fill the gaps between reporting periods – and the only way to do this is by commissioning surveillance services.
Peter Schuman at Coherent is probably the exception. Fairly accepting of the long-term cycles of 13F filings, his real problems start with foreign ownership information. ‘We have a publicly traded subsidiary in Germany and I do wish it had better information in Europe in terms of gathering the sort of 13F information that we have in the US,’ he notes.
The European case
According to the IIRF study, continental Europeans pay more for shareholder ID because their local systems are the least effective. And the higher costs tend to reduce the frequency with which they undertake it.
Nevertheless, Neil Ryder, program director at the IIRF, explains that there is often a misunderstanding about just how bad local disclosure conditions are. ‘Only the more experienced European IROs actually look to their US and UK peers with a certain amount of envy,’ he says.
‘Banks don’t really disclose anything; they’re not obliged to,’ says Iris Welten at Swiss chemical producer Clariant International. ‘Even when they do it doesn’t help much because they don’t give you a detailed breakdown of their clients. The stock exchange doesn’t feel responsible for it, either. What is missing is something like the SEC to bring in an overall control mechanism.’
Similarly, Stéphanie Atellian-Constand, head of marketing at French hotel and services group Accor, expresses her frustration about France’s TPI register system. ‘It is very expensive,’ she says. ‘In France you know who the main investors are, but it’s not very detailed so you don’t always know who your final investors are. If you don’t have a provider to do personal shareholder ID, you definitely won’t know who your shareholders are.’
These problems are only partially shared by companies in Sweden and Finland, where good domestic disclosure is the norm. But they still need to resort to commissioning reports for foreign shareholders. ‘Sweden is very open,’ says Pia Irell, corporate IR director at Sweden’s Gambro. ‘It’s very strange for us if we can’t get the information; we don’t want to force anyone to give it.’ But for foreign shareholders, she says, it ‘would be better if we had more timely and correct [data], because we rely on institutions reporting to us. If they don’t, you have no chance of knowing what’s going on.’
Some European IROs admire the UK system, but the burden there falls entirely on companies themselves. ID firms hold massive 212 databases of beneficial owners as well as automated procedures so UK IROs typically pay outside specialist firms to do the job for them.
