As we close the books on 2005, the year will be remembered for many historic, tragic and controversial events. Some, such as Hurricane Katrina and the earthquake in Pakistan, were beyond our control. Others, such as sentencing corporate executives to hard time and the appointment of a new SEC chieftain, were well within our control. Economic stability was questionable throughout the year, leading to many high-profile corporate bankruptcy filings, and we had our usual number of political scandals to keep us occupied. The airline industry navigated turbulent skies, while the US auto industry can’t seem to get it in gear.
Although my cherished crystal ball is in the shop for repairs, several current trends should shed light on what 2006 will bring:
- Sarbanes-Oxley is here to stay – at least until something better comes along. Institutional investors appear willing to pay the costs of compliance, but many continue to believe certain elements of the act will be curtailed because of the unfair burden on smaller issuers. The possibility of an increase in companies ‘going dark’ or leaving an exchange to avoid the compliance cost is very real. And many experts believe some foreign issuers are having second thoughts about listing in the US because of the regulatory environment.
- The industry is keeping a close eye on Fidelity Investments, the world’s largest mutual fund company, which wants to cut the cost of buying and selling shares. The fund giant is pressing Wall Street firms to end a long-standing practice of packaging trading and research services. Fidelity began a pilot program with Lehman Brothers in October under which it pays separately for trading and research. If other large asset managers follow Fidelity’s lead, costs may fall for many investors as fund managers pass on savings from lower trading commissions.
- Brokerage firms will continue to exit research. Face it: research is not as profitable as it once was, nor are the compensation levels attracting the highest-quality talent they once did. In addition, Wall Street research has become problematic for many reasons, including investor skepticism over the scandals of the past decade. While investors read research, how influential is it in terms of investment decisions these days? This trend should continue to fuel the opportunity for independent research firms to gain in stature and credibility.
- Hedge funds will brandish more influence over corporate boards. We expect more scenarios similar to the highly public battle we witnessed with Blockbuster, where, after amassing a nearly 10 percent stake in the company, billionaire financier Carl Icahn, with the backing of powerful hedge funds, managed to win himself and two allies seats on Blockbuster’s board.
Hulus Alpay is senior vice president of New York-based IR and PR firm Makovsky & Company.
