UK regulator the Financial Conduct Authority’s (FCA) new policy statement on May 8, 2014 explicitly bans the use of dealing commissions to pay for corporate access. The FCA’s definition of corporate access is wide enough to encompass all forms of meetings between issuers and the buy side that can be intermediated by the sell side (one-on-one and group meetings, investor conferences, field trips). How will the new regulation affect corporates?
London-based IR consultancy RD:IR believes small and mid-caps will become less attractive for many brokers, particularly those that form part of investment banks, because the importance of trading commissions in their mix of revenues will become greater and, the smaller the stock, the smaller the value of trades. The tail of small caps is much longer than the tail of larger stocks and the fight for investors’ attention is therefore structurally more intense.
So if attracting investors’ attention was already more challenging for smaller companies, this challenge will only get tougher under the new regulatory regime. And whether or not fund managers internalize corporate access, whether they pay brokers out of their own funds or get it for free with the added pressure of complying with FCA rules on inducements, they will become pickier in selecting who they meet.
Companies of all sizes should consider this regulatory change as an opportunity to take more control over their engagement with investors. Broker-led non-deal roadshows can lead to misallocation of senior management time, potentially costing up to £20,000 ($33,700) per day, representing the combined average total pay package of a CEO and CFO of a FTSE 100 company.
Misallocation of senior management time is even more important outside the FTSE 100. Senior management attendance at investor meetings varies from 30 percent at mega-caps to 65 percent at small caps. In other words, the smaller the stock, the less developed the IR function, hence the greater the direct involvement of senior management in investor meetings. The cost of misallocated senior management time is therefore potentially greater for smaller companies, simply due to the greater IR involvement of senior executives.
Smaller companies need to be even more in control of their non-deal roadshow schedules. Roadshows should be established as the result of a thorough targeting exercise, which, when done methodically and regularly, can contribute to the expansion of a shareholder register, reduction in the concentration of the largest holders, and an improvement in geographical reach outside the domestic market.
Industry data highlights that smaller companies can achieve a roughly 50 percent increase in both investor meetings and sell-side coverage by increasing their IR budgets by 25 percent via an increase in headcount. In other words, larger IR teams deliver more IR activity, with benefits felt among both sell-side and buy-side audiences.
The changing dynamics of the corporate access market create an opportunity for quoted companies to revisit how they engage with investors and to examine whether existing IR resources are being used in the best way and/or whether additional resources are required.
Richard Davies is managing director of Richard Davies Investor Relations (RD:IR), the London-based independent global investor relations consultancy, acting for more than 600 public companies across all major capital markets.
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