IR Monitor – 8th March 2023

This week’s news

Why companies are fleeing London 

As more businesses announce their intention to move away from London’s equity market for listing purposes – with many moving to New York instead – the Financial Times has reported on the reasons behind such great flight. Increasingly, executives see an attractive environment in the US with higher growth and a stronger investor pool. The UK market has partly been left behind according to some because it has not kept up with the growth of tech. Others are pointing to a lack of interest from domestic investors in the UK, and in particular from UK pension funds. UK-listed companies represented around 50% of British pension and insurance funds’ portfolios around 20 years ago, compared with 4% now. The UK government hopes to reinvigorate the City with its “Edinburgh reforms”, aiming to re-write EU-based rules, thereby attempting to ensure that London remains a competitive market. And whilst a number of companies that failed to list in the US seem to be ready to try their chances in the UK, competition from European exchanges is also stepping up, ready to challenge the UK further.

Boards must be ‘much more discerning’ about ESG risk materiality

At the ESG Integration Forum – Europe, Mark Babington, executive director of regulatory standards at the FRC, suggested that companies should select more carefully which material ESG topics they wish to report on, highlights IR Magazine. Babington suggests that companies can lose focus if they try to do too much, reinforcing the idea that, with the disclosure of any information, what matters is that it meets the needs of the stakeholders who the company are targeting and those reading the report. This follows news last month that the International Sustainability Standards Board (ISSB) will issue its first reporting standards at the end of the second quarter of this year, while the EU and the SEC in the US are also developing their own rules. It’s not about aiming for the highest level of disclosure, says Babington, and the regulator wants to avoid sustainability reporting becoming a box ticking exercise. When less is more…

Time for US boards to step up

In a piece in the Financial Times, former investment banker and author, William Cohan criticises the role of corporate boards in the US, suggesting that they are not performing the role intended of them: to act as a check on a company’s chief executive on behalf of shareholders, creditors and other stakeholders. Cohan notes that boards cannot let CEOs and management dominate board meetings and instead need to be asking the important questions. Highlighting examples where chief executives were operating with limited checks and balances, he stresses that board members should be holding management accountable and representing those who own the company. While corporate boards are essential to the management structure of many businesses, Cohan suggests that it may be time to separate CEO and board chair in American corporations further, in order to help resolve these issues.

In the end, “buybacks are not so bad”

DealBook has analysed the trillion-dollar debate over share buybacks. The White House is at odds with business leaders over SBB with the former preferring CEOs to use the money to reinvest in their businesses. Warren Buffett isn’t buying this argument. Investors tend to reward companies executing repurchases, with share prices increasing for nearly 55% of the 2,997 companies tracked by Bank of America that repurchased shares. Repurchases signal a healthy balance sheet to Wall Street and attract more investor interest. Buybacks also carry a lighter tax hit than dividends. However, buybacks don’t work for all companies, and that’s admitted even by Mr Buffett. Some companies may be buying back too many shares, whilst others may be repurchasing shares that are already too pricey, particularly the largest companies that are seen to be (still) relatively overvalued. But the verdict is that “buybacks are not so bad”, with Warren Buffet winning the argument.

Upcoming cybersecurity disclosure rules for listed companies a likely new headache for corporate executives 

In a Breakingviews article, Lisa Jucca writes that top execs in the US will soon no longer be able to ignore cybersecurity standards. Prompted by an upsurge in hacking and ransomware, up 38% globally from the previous year, US regulators are currently drafting specific disclosure rules for listed companies to reveal how they understand, handle and prevent cyber risks. Under the draft rules, which could be finalised this year, companies may have to reveal within four business days if a cyber-attack has materially affected their operations and also describe any procedure to identity and prevent such threats. Companies would also need to disclose the level of cyber expertise at board level. The move is likely to put pressure on European regulators, as companies in the EU do not have specific cyber risk disclosure requirements yet. The article notes that, armed with new disclosure, investors may be critical of spending shortfalls.

And finally… pre-arranged trading plans for company executives are now under the scrutiny of the U.S. Government

In the US, the DOJ and the SEC are investigating insider trading cases that involve pre-arranged trading plans, also known as 10b5-1 plans. These plans were once seen to be too daunting for regulators and prosecutors to go after as they historically protected CEOs and other officers of public companies from accusations of insider trading. Why? Because automatic and pre-arranged plans for the sale of company stock were agreed with no material non-public information available. However, two insider trading cases involving 10b5-1 plans have now been brought by the SEC in the past six months, including one accusing Ontrak CEO Terren Peizer of being aware of negative customer news for the company. Whilst the DOJ has also charged Peizer criminally, it had to acquire more evidence due to the protection of attorney-client privilege and it leveraged data analysis to prove insider trading. “I expect other such cases will follow”, warns the head of the DOJ’s criminal division.

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