IR Weekly – Monday 15th June
Welcome to FTI Consulting’s IR Weekly newsletter.
This week we open by looking at the suggestions made by the Autorité des Marchés Financiers to improve Mifid II. We then move to the boardroom, and the ongoing bind companies find themselves in on the subject of executive remuneration. Staying in the boardroom, Dr Alex Edmans suggests that widespread misunderstanding of dividends is causing issues for shareholders and executives alike. Next, we ask the question “What if an executive posts earnings results before their release?” before looking at the curious case of Hertz, who have announced a share sell-off after declaring bankruptcy. Finally, we end by considering the impact prolonged homeworking is having on confidentiality and the success of compliance protocols.
This week’s news
The Autorité des Marchés Financiers, the French financial regulator, has stated that changes are needed to Mifid II in order for the EU directive to reach its full potential. According to Ignites Europe, the AMF has made targeted recommendations based on five pillars, including fair pricing of research, better investor protection rules, providing market participants with a more comprehensive view of market realities, adjustments to share and derivative trading obligations, and regulatory changes to the European commodity derivatives markets. These recommendations have been made following a lengthy consultation process considering the impact of Mifid II in the two years it has been in force.
The executive pay revolution
The Financial Times reported that there have been more revolts over executive pay so far in 2020 than in the same period last year, despite the significant decrease in AGMs and a number of companies pledging executive pay cuts. Peter Reilly of FTI Consulting expects this trend to continue in the short term, as the reputational risk of perceived excessive pay packets remains in the spotlight, meaning remuneration committees have a balance to strike ahead of the end of the financial year.
Dr. Alex Edmans of the London Business School argued in the Wall Street Journal that dividends are heavily misunderstood, with detrimental consequences to almost everyone in the investment sphere. Shareholders who rely on dividend payouts for income can fail to grasp the impact of the consequent share price drop on the value of the investment going forward. This impacts decision-making in the boardroom, as companies cannot lower their dividend due to the effect this has on investor confidence, which means that CFOs can even prioritise dividends over profitable investments. Dr Edmans does suggest solutions however, including more flexible interpretations of dividend adjustments and ensuring that brokerage accounts show total returns so investors can see the repurcussions of dividend payouts.
What if an executive posts earnings results before their release?
IR Magazine asked what professionals would do if one of their traveling executives confused time zones and tweeted earnings results before their public release. Marisa Jacobs, former IRO at Crocs says it depends as the question assumes that the executive is in a time zone ahead of the company and so the release would presumably be keyed up for issuance in a few hours in any event. If it occurs when markets are closed, the damage is already contained. Kimberly Esterkin, managing director at ADDO Investor Relations, shares a similar sentiment saying there is no need for panic: “round up the troops and get your earnings release finalized as soon as possible. If it’s the day of your call, the release is likely in near-final form anyway”. The most radical response, however, comes from the senior director of investor relations at IMV, Marc Jasmin, who urges people to first call Donald Trump’s team “who probably have the greatest experience of dealing with this kind of erratic behaviour”.
The billion-dollar bankruptcy
Car-rental giant Hertz may have filed for bankruptcy last month, but as reported in the Wall Street Journal last week, they will continue to issue shares having been granted permission to sell $1 billion in shares by a bankruptcy court in the state of Delaware. The unusual move has mystified Wall Street, leading one financial blog to call it “The Most Absurd Moment in the History of Capital Markets”. Though stock in a bankruptcy is typically worthless, Hertz stock has been volatile over the past few weeks, and is trading above its value prior to the bankruptcy filing. Many traders are looking to Hertz as a gamble worth taking, but the firm’s bankruptcy went far beyond its stock price, with the firm $19 billion in debt as the pandemic has all but halted the car rental market.
And finally… homeworking makes spilling secrets easier
The Financial Times reported that working from home has increased the risks facing confidential information, especially for those who live with their partners. In 2018, the SEC charged consultant Peter Cho with civil insider trading, saying he bought options in Virgin America after overhearing his then fiancée, a UBS banker, as she worked on a deal involving the airline from their shared apartment. He paid $532,777 to settle the allegations. This is, of course, just one in a long line of “pillow talk” cases where traders have benefited from the utterances of their other half. Indeed, the FCA warned financial firms late last month to watch out for the dangers of market abuse posed by lockdown. New working patterns have rendered some compliance tools less effective; negotiations are no longer done face-to-face in secluded conference rooms and the general risk from cyber hacking has increased. Ironically, the easing of lockdowns may make some of these problems worse. Many corporate workers will start having face-to-face contact with more people, but won’t yet be returning to their secure offices. That increases the opportunity for mischief and inadvertent leaks, as Alex points out.
European Insurance Conference, J.P. Morgan (virtual), (16 June)
Design Software Conference, Berenberg (virtual), (17 June)
European Healthcare Conference, J.P. Morgan (virtual) (18 June)
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