Investors will penalize companies that are not forthcoming enough about regulatory risk, says Susan Witt
Industry regulation can create complex operating risk exposure for many companies, posing a challenging issue for communications with foreign investors.
As firms in regulated sectors – ranging from energy and environmental services to telecoms and media – are subject to localized oversight regimes, it takes effort and planning by these firms’ IR teams to ensure investors and buy-side analysts based in other countries have the clear, nuanced understanding of regulatory risk needed to accurately assess the operating profile and outlook.
Suzanne Senellart, a senior portfolio manager for Natixis Asset Management, says quite a few of the corporates she follows could and should improve their approach to communicating with global investors about regulatory risk.
‘After all, this type of risk is surely central to the business model in some sectors, so we want to look carefully at company-specific exposures and management’s strategies for mitigating them,’ she explains. At the same time, she acknowledges heavy constraints on disclosures about such topics, in view of political sensitivities and necessarily confidential relations with regulators.
Stephan Lowis, vice president of investor relations at the energy group RWE, points out that, in keeping investors abreast of potential regulatory risks, management’s critical goal must be to strike a proper balance between transparency and other imperatives such as the ongoing dialogue with oversight authorities.
Lowis adds that management’s own lack of visibility sometimes limits its ability to comment on certain regulatory issues – for instance, the long-term evolution of Europe’s carbon-emissions permitting framework, or political risk associated with unforeseen events (such as the reactor failures at Japan’s Fukushima Daiichi nuclear plant) that might affect local regulation.
‘When remarking on matters that aren’t yet clarified, you don’t want to say anything that could turn out to be misleading,’ Lowis says.
Always open
Lowis and Senellart agree that firms always benefit by maintaining the fullest possible degree of openness in their communications, even when dealing with the subtlest complexities. That goes for regulation as well as all other subjects. As Senellart puts it: ‘Investors will penalize a company when they sense that management is less forthcoming about risks than it could be.’
It’s grasping those subtle complexities, usually with political dimensions, that can challenge international investors as they evaluate and monitor exposures to regulatory systems across different countries.
That’s why these investors turn to various local sources – including sell-side research, domestic press coverage and regulators’ bulletins – to complement whatever information they glean directly from companies.
But firms in regulated markets can design their investor outreach practices to build confidence by providing insight into both management’s view of regulatory risk and the strategic plan for confronting it.
Both Lowis and Senellart see one-on-one meetings with foreign investors as the most effective medium for conveying management’s perspective on current regulatory risks.
According to Lowis, the one-on-one context allows international buy-side institutions the freedom to ask as many questions as they like on aspects of regulation that concern them – or that may be confusing from an extra-territorial point of view – without having to indicate their thinking to other asset managers or analysts.
‘Without any disclosure of non-public information, one-on-one discussions help management to explain its own viewpoint as thoroughly as possible,’ he explains.
In meetings, Senellart has observed that company executives rarely bring up regulation without prompting, unless related, high-profile news has recently emerged. ‘Investors always ask about regulatory risk, and get willing replies; but the quality of the responses is uneven, and managements don’t always seem very well prepared for these questions,’ she says.
She would like to see companies handle the topic more proactively in one-on-one talks and investor forums.
Reports and presentations
Corporate reports and presentations add the most value for foreign investors when they portray industry regulation from a global perspective. That means briefly summarizing the regulatory framework of company activities, and any recent or expected changes, in purely economic terms; in most cases, it’s best to avoid legal references.
Text and graphics should focus tightly on the current regulatory developments that matter most for your firm’s risk exposure and future profitability, given its asset base, core activities and performance obligations.
Lowis recommends a communication tool that has proved useful to RWE: occasional fact books designed for international investors, to present information on complicated subjects –for example, Germany’s overhaul of energy utility tariff regulation, which took effect a couple of years ago.
‘Fact books can work well if you keep them simple, concise and not overlong,’ advises Lowis. ‘Be sure to include plenty of charts. This format serves as a very good support document for one-on-one meetings.’
He stresses, however, that it’s the meetings themselves that count most. ‘When we sit down and talk with foreign institutions, and hear their questions on the difficult topics, we learn a lot about how to address their concerns in the future,’ he notes.
Susan Witt is an independent financial communications consultant. She is a former credit analyst for Standard and Poor’s and the Pension Benefit Guaranty Corporation, and her professional experience also includes corporate accounting as well as economic and financial forecasting in the US and Europe.
