IR Monitor – 02 August 2023

In this week’s newsletter:

• Companies are increasingly caught up in governments’ competing aims. What to do? In a feature on “The overstretched CEO”, The Economist suggests an answer: When deciding whether to speak up, bosses of global firms should use long-term shareholder value as their lodestar. The more directly what they say affects their business, the more credibility they have and the less risk of appearing a fraud or a hypocrite.
• New SEC rule requires public companies to disclose cybersecurity breaches within 4 days if those breaches could affect the bottom line, reports the Wall Street Journal. Delays will be permitted if immediate disclosure poses serious national security or public safety risks
• In media and to a lesser extent City circles, quarterly reporting has long seemed unnecessary argues Simon English in Tomorrow’s Business. There often isn’t much new to report. It might be preferable if companies got on with what they said they were going to do rather than just talking about it all the time
• Microcaps keep joining the main market despite rule change. Companies with a standard listing on the UK’s main market can operate with little oversight, explains the Investors’ Chronicle, and more rule changes are on the way
• Mentions of a “soft landing” on earnings calls have popped up with more frequency, says The New York Times, suggesting a growing belief that the economy is likely to avoid a recession
• And finally … Why do so many major companies release results on the same day in July? asks Ian King at Sky News. So many companies publishing results at the same time makes it very difficult for investors and media to properly assess how a business has performed in recent months and judge how it will do in the future

This week’s news

Companies are increasingly caught up in governments’ competing aims. What to do?

Since the 1970s there was an unspoken agreement between government and business that held sway in America and much of the West. Companies aimed for shareholder value by maximising wealth for their owners, promising efficiency, prosperity and jobs. Governments set taxes and wrote rules, but largely left businesses alone. Although the gains of the system were not evenly spread across society, trade flourished and consumers benefited from greater choice and cheaper goods. Today the rules of the game have changed. Governments are becoming more interventionist, driven by fragile supply chains post pandemic, a more threatening China, and the dangers of climate change. Company CEOs are expected to be contortionists, balancing the needs of employees, suppliers and above all shareholders while staying within the limits set by governments. But they are now balancing on a tightrope that is harder than ever given the stakes are much higher, what with the world becoming more fractious and governments increasingly attempting to manipulate corporate behaviour. CEOs need a new approach for a new age. They cannot hide from politics and geopolitics, but outspokenness can backfire: to find their balance, long-term shareholder value must always remain their North Star. 

New SEC rule requires public companies to disclose cybersecurity breaches within 4 days

Last week the Securities and Exchange Commission adopted rules which require public companies to disclose within four days all cybersecurity breaches that could affect their bottom lines. Delays will only be permitted if immediate disclosure poses serious national security or public safety risks. In order to protect investors, the new rules also require publicly traded companies to annually disclose information on their cybersecurity risk management and executive expertise in the field. Though this could pose a challenge for smaller companies with limited resources, the intention behind the move is to ensure greater transparency into an otherwise opaque but growing risk, and to encourage general improvements in cyber defences across the board. The new measure has been welcomed by many, with one leading figure in cybersecurity noting how “for a long time, the largest and most powerful U.S. companies have treated cybersecurity as a nice-to-have, not a must have. Now, it’s abundantly clear that corporate leaders must elevate cybersecurity within their organizations.”

Quarterly reporting has long seemed unnecessary 

BT reported its first quarter results last week, but this time with a twist: from now on trading updates will be shorter, at most a page or two in length, and investors will not be hearing as much from CEO Philip Jansen. As Simon English in Tomorrow’s Business points out, within the world of journalism and the City, quarterly reporting has long been regarded as superfluous. To allow big businesses to look further ahead than next week, freeing them from quarterly reporting constraints would seem like the wisest decision. Moreover, most of the time companies aren’t providing fundamentally new information in these reports (apart from numbers…): it would be a far better use of their time to actually turn those words into action. But this comes with a warning sign: it is important not to mistake fewer words for fewer pages that need filling, as more meaningful business updates should be provided. After all, if you stop feeding the monster, he gets hungry, and sometimes that’s when the story can go wrong…

Microcaps keep joining the main market despite rule change

Companies looking to list on the London Stock Exchange are now subject to more and more regulatory requirements, and small or micro caps have long weighed the pros and cons of listing on the Alternative Investment Market (AIM) as a cheaper option. However, the Investors Chronicle reports that the standard main market (or standard list) has also become a listing venue of note for micro caps, thanks to accessible requirements until the end of 2021. The standard list has however become the “substandard list” for many, due to an overwhelming number of issuers being seen as “hugely speculative and malnourished” companies. Whilst the Financial Conduct Authority (FCA) tried to remediate this by increasing the market cap rule from £0.7m to £30m in 2021, it is now proposing new changes to its listing rules aimed at attracting more companies to the market, including a potential merge of the Premium Main Market with the Standard Main Market. The results of a consultation on these potential changes are due to be published soon.

Mentions of a “soft landing” on earnings calls have popped up with more frequency

S&P 500 executives are increasingly optimistic of a “soft landing”, as more and more have mentioned the phrase on recent earnings calls. According to the New York Times, despite inflation still soaring and corporate profits looking shaky, business leaders have seemingly displayed growing belief that the global economy will be able to avoid a recession, with experts even saying that the broad consensus view is that inflation will slow down, and that the third quarter of 2023 will bring good fortune in relation to the strength of the consumer. Important to note… while we may attempt to speak this into existence and just because people repeat the phrase, nothing is fated to happen!

And finally… why do so many major companies release results on the same day in July?

Regardless of sector, business, or market cap, a plethora of companies publish their earnings at the same time, often making results season dense and difficult to navigate for investors, analysts, and media. Ian King of Sky News believes that this is unlikely to change, given that the insistence from industry regulators that companies get their results in a timely fashion will remain, and July and February will continue to be windows of concentrated financial results. Similarly, the middle three days of the week are generally preferred for earnings releases, with Thursdays a popular option due to the historical preference of chief executives and officers to hold presentation and Q&A rehearsals during the first part of the week… What to do to change the status quo? The author suggests that UK companies could follow US counterparts and publish results after market close, but also notes that this would be hampered by limited after hours liquidity in the UK… As such, it may just be that investors will continue to be saddled with the current arrangement.

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