Clampdown on commission payments could spurn welcomed reforms
In early March, IROs embarking upon roadshows or preparing for investor meetings had good reason to question the machinery behind these events. That’s because the heretofore murky world of precisely who pays whom for corporate access has suddenly been thrust into the spotlight.
The UK’s Financial Services Authority (FSA) has threatened multimillion-pound fines for asset managers that do not follow the rules around payments for corporate access, and reiterated that commission payments may be used only to pay for execution and research.
The fallout from the FSA’s announcement remains to be seen, but many IR experts believe this is a very big deal indeed. ‘It looks like the regulators are going to change the whole corporate access market,’ says Adrian Rusling, partner at Phoenix-IR in Brussels.
Around the time of the FSA’s announcement came news stories suggesting that some investment banks are charging hedge funds $20,000 for an hour of face time with a CEO – often without executives’ knowledge their time is being sold.
Others in the IR world were equally surprised. ‘I had no clue such amounts were at play,’ says Anne Guimard, president of FINEO Investor Relations Advisors. ‘It left me speechless.’
In the wake of revelations like this, asset managers are clearly doing some soul-searching, too: at least one large US-based asset management firm circulated a letter announcing that it had altered internal language to make sure its commissions were not used for corporate access.
Who will pay?
‘We’d really like to see more transparency in payments for corporate access,’ says Emma Burdett, chair of the policy committee for the UK’s IR Society and a partner and head of IR at London-based Maitland. She explains that, under the current system, corporate access payments are often wrapped up in commission fees, and ‘you really don’t know what’s what.’
With the FSA clamping down on how corporate access is being paid for, one pressing issue is how future meetings between investors and management will be facilitated. ‘There are various ways to target investors: on their own, with brokerage firms and with IR advisers, such as ourselves,’ says Guimard.
Burdett notes that investors might pay for corporate access out of their own internal funds if they deem it an important-enough part of their research process. She’s concerned, however, that with internal IR budgets static or shrinking, companies would have trouble finding funds to hire third parties to handle corporate access.
Although the issue of payment for corporate access looms large, many IR practitioners seem to believe that, over time, the FSA’s clampdown will spur some welcome reforms. ‘I don’t think this will hinder communications between companies and investors,’ says Rusling. ‘I hope it will make the whole process much more transparent and eliminate the conflicts of interest.’
In addition, Burdett is optimistic that the quality of roadshows will improve thanks to the heightened scrutiny. ‘Too many non-deal roadshows are not fit for purpose anymore,’ she concludes. ‘A tick-box exercise with the same old people is not a particularly efficient use of anyone’s time. If it shakes that up and improves investor engagement, it will be a very good thing.’
