When George Kesteven, Manager of Corporate and Investor Relations at Sterling Resources, recently visited London and arranged to see one of the company’s U.K.-based analysts, together they toured a few bars in the old part of London near Bank Street. “He bought the first round of drinks and then I bought the second round and dinner,” Kesteven recalls. “That’s reasonable. There’s nothing extravagant involved. Yes, we discussed business, but it was more social than anything else.”
Selective disclosure is obviously a no-no in every reputable IRO’s book – and yet socializing with analysts and institutional investors remains a key part of the job for many IROs. Beyond the black-and-white ethical issues, how do IROs negotiate more nuanced situations?
Some argue that in today’s investing environment, reliable, two-way relationships with investors are more critical than ever. IROs “are a very important pipeline for information back to other members of management and the Board,” says Carol Hansell, Founder and Senior Partner at Hansell LLP, a Toronto law firm providing legal and governance advice to Boards and shareholders.
She continues: “With activism currently such a big deal, if a company ends up being surprised that an activist approached them, it’s worth wondering: Is there something lacking in the way they gather intelligence in the capital markets community?” Many IROs consider their network of personal relationships with analysts and investors a way to keep abreast of rumblings before a problem surfaces.
On the other hand, relationships between IROs and the buy- and sell-sides need to remain professional – a message so unassailable that selective disclosure rules have arguably reshaped the fundamental culture of the global financial community. And yet gray areas do exist. While paying for a modest dinner at a conference might be appropriate, what types of largesse might be deemed too generous?
Many public companies have formal codes of conduct, but the protocols for ‘social relationships’ are not necessarily spelled out clearly enough. Often, IROs are expected to have a good feel for what is acceptable and what’s not. That said, their intuitions run the gamut from a firm belief that socializing is a critical part of the job to the belief that golf is a game played with friends but not with investors or analysts.
For many IROs, the answers boil down to common sense and personal integrity. David Carey, Senior Vice President Capital Markets at ARC Resources Ltd., expresses it this way: “Our corporate ethics is that gifts must be something appropriate for your level and that you can reciprocate. Can I take somebody to a hockey game? Of course. Can I take someone for a round of golf? Yes. Could I fly someone down to Pebble Beach for a round of golf? No, I couldn’t.”
A New Climate
Ethical standards change with the times, and IROs who have been in the business for a while have witnessed this shift. Carey says that some public companies in Calgary and elsewhere in Canada once gave gifts at investor days – but that this practice has all but disappeared. He recalls some investors telling him that they were uncomfortable with the value of the company-branded gifts showered on them by one particular firm. And there are even rumours that a public company gave investors and analysts iPods – a gift that several turned down as too extravagant.
“For our investor day, we might give out pens – but they’re cheap ones,” Carey laughs.
Similarly, Carey remembers that as recently as five years ago, U.S. hedge fund managers would routinely call a few days before an earnings release to ask for information.
“Every quarter,” recalls Carey, “I’d say, ‘You know I can’t tell you that.’ But they’d keep calling me, which to me indicated that someone must have been telling them something. I don’t get those calls anymore.”
He continues: “Most portfolio managers are very conscious of not asking you questions that would get you in a position where you’d be talking about things you shouldn’t be talking about. Portfolio managers, especially American ones, are very sensitive to this.” He adds: “99.9% of portfolio managers do not want inside information.”
Kesteven agrees, noting that “the hinting call,” one in which the buy- and sell-side sniffed for clues about results and other as yet undisclosed information, has “died out.” He elaborates: “We’ve reached a level of professionalism and understanding around disclosure of what’s non-public material information that that’s not something done anymore.”
Malcolm White, Portfolio Manager at Signature Global Asset Management, a division of CI Investments, confirms the picture painted by both Carey and Kesteven. In his 14 years in his current role, he has “never experienced anything that would exceed guidelines for reasonableness” in his dealings with the companies in which he’s investing.
Although White credits selective disclosure rules and Sarbanes-Oxley with the tighter ethical standards, he also believes that the financial crisis and the demise of the more aggressive hedge funds have played a role, too.
He notes that at the height of the tech bubble, investment conferences often booked headline entertainers such as Robin Williams to perform. Such bygone lavishness has been chronicled in a few popular books, including The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess by former Galleon Group trader Turney Duff.
“Wall Street continues to be in cost-cutting mode and entertainment budgets in this industry have dwindled and dwindled to the point where they’re not relevant. Today,” he laughs, “we’re lucky to get a sandwich.”
Good Fences
As Robert Frost famously wrote, “Good fences make good neighbours.” And for many IROs, the secret to staying on the right side of the selective disclosure divide is having a clearly written, user friendly disclosure policy and adhering to a corporate-wide code of conduct.
Standards can differ by public company. “I’ve never golfed with anybody in an investor relations capacity,” says Greg Waller, Vice President Investor Relations at Teck Resources, Ltd. He notes that his company has clear guidelines for what’s appropriate in the company’s relationship with its investors, and crossing ethical lines “is not in our culture.”
And in fact, Richard Leblanc, Associate Professor of Law, Governance, and Ethics at York University in Toronto, contends that all one-on-one socializing by IROs outside the workplace is problematic. “There’s a fine line between relationship building and attempting to influence the objectivity of the analyst or investor,” he says.
Leblanc points out that a public company’s code of conduct should define practices, such as entertaining and gift giving. “At award-winning companies, relationship building is in the form of a roadshow. These companies are not wining and dining. They’re having meetings and presenting the company’s point of view. Everything should be formal, independent, and objective. Decisions should be made on price, quality, and service, not on personal relationships.” Specifically, he commends those companies with a $50 or $100 limit for meals that might “otherwise run into the thousands of dollars.”
More importantly, Leblanc feels that the IR profession is sorely in need of its own code of conduct to define which types of interactions with investors and analysts are appropriate and which overstep. “You’re talking about potential information transference that’s below the radar screen,” he says.
Leblanc believes that relationships with analysts are particularly fraught given that buy- and sell-side analysts are not governed by the same rigorous professional standards as attorneys or accountants.
Hansell points out that while having written disclosure guidelines and a code of conduct is an excellent idea, some rules can be very difficult to enforce. For instance, it’s now standard practice to have two or more individuals from a company participate in an investor meeting, but this rule often breaks down outside the workplace. “You can’t supervise everything,” she says. “People go to cocktail parties and they run into one another in shopping malls.”
As Hansell notes, IROs have social lives and many know portfolio managers or analysts as neighbours. What’s more, some IROs were analysts at previous jobs and may have formed friendships with individuals that they now meet within a new professional context. These relationships all have their own 'lines' that need to be considered and maintained.
Hansell believes that the thorniest issues involve gray areas of disclosure that come about in casual conversation. Particularly troubling, she says, are situations in which an IRO or other executive shares personal impressions that might cause one investor to gain an edge by having a more informed perspective.
As an example, she notes that an IRO might make an offhand comment about a particular executive who has historically not stayed in the same position for more than two years – or might remark that the general counsel seems disgruntled. “Nothing has actually happened, but [this kind of remark] is not good. The IRO is just sharing a personal observation, but that investor now has a different sense of what might be happening in the organization than others do,” she concludes.
Why Relationships Matter
Although the spotlight on selective disclosure has proven beneficial, many IROs and industry observers believe that getting to know investors and analysts personally continues to be worthwhile. “The point of an investor playing golf with the CEO is not to get inside information,” says Hansell. “I’ve heard people say, ‘It tells me everything I need to know if the guy cheats at golf – or if he has an enormous temper on the golf course.’ These things shape your view of somebody.”
While investors and analysts are drawing a bead on executives, IROs are equally eager for insights about institutional investors and sell-side analysts. “I want to know people away from their desks, rather than as strictly a byline in an analyst report,” says Kesteven.
Kesteven points out that instead of a traditional investor day, Sterling schedules an annual golf outing and dinner in Scotland and invites analysts, suppliers, and other external stakeholders to attend; attendees pay for their own transportation and lodgings but the company bears the expense of the event itself. “To me, that’s part of our job. These are really good opportunities to get to know the person behind the decisions in an informal setting,” he says. “We’re called ‘investor relations officers.’ And to me, that’s relationship building.”
Carey agrees, emphasizing that the rewards of successfully negotiating selective disclosure and other ethical minefields outweigh the risks. “Let’s face it,” he concludes. “If an investor has met the CEO and senior executives from a company and likes them on a personal level, that investor is more likely to take a meeting even if that investor isn’t interested in the company at that time.”