In the words of that great oracle, Posh Spice, ‘All you need is positivity.’
Or so thought the former CEOs of two Australian publicly listed companies which have failed spectacularly this year. These companies are HIH Insurance, which, despite receivers being appointed in March, continues to describe itself on its home page as ‘Australia’s international insurer’; and One.Tel, which portrays itself as a ‘global telecommunications carrier’.
Both companies were significant players in their respective markets, with HIH reporting just last year it was a ‘$2.5 bn gross earned premium business’ and One.Tel at one stage enjoying $5.4 bn in market capitalization. Since then HIH’s share price flatlined at 23 cents from an average of around $1.30 and One.Tel’s crawled into its coffin at 17 cents from a high of $2.20. In an interesting though unrelated twist, at one stage HIH held 44 mn One.Tel shares and the companies shared a director, Rodney Adler.
Look at the headlines
On January 23, 2000, HIH announced to the market a ‘strong profit rebound’. Excellent. Even better news for shareholders came on March 2, 2000 when the company quantified this to a ‘$100 mn turnaround’. Shareholders received further assurances about the company’s health on September 13, 2000, when the chairman and CEO issued a statement with the headline ‘financially strong and positioned for the future’.
One.Tel has a similar story. The company was quick to report milestones like the signing of its millionth customer, deals with BT Cellnet and cracking the S&P and FTSE World Indices. And as recently as February 2001 the company heralded it had ‘overachieved its upgraded forecast’ and increased revenue and profit; shareholders were even promised a one cent dividend.
According to Tony McLean, director of the Australian Shareholders Association, ‘As far as shareholders were concerned, both companies had a secure, even rosy future.’
Despite all this good news, by May 2001 both companies had been declared insolvent. How could two seemingly reputable Australian companies get it so utterly wrong? And what role did investor relations play in these collapses?
IR spotlight
Any evaluation of the IR practices of HIH and One.Tel needs to start with an assessment of the continuous disclosure practices of both companies. Continuous disclosure is without doubt the driving force in Australian investor relations. In line with the US SEC’s Reg FD from October 2000, last year the Australian Securities and Investments Commission (Asic) put guidelines in place to ensure all investors – be they stockbrokers, institutions, day traders or mums and dads – have equal, timely access to price sensitive information about the publicly listed companies in which they invest.
So how did HIH and One.Tel measure up against these guidelines? On the surface, things appear to have been pretty satisfactory. Both companies were issuing ample financial information; they were posting results announcements and full financial information on their web sites; and they were conducting roadshows twice-yearly. Both companies gave shareholders the option of receiving e-mail notification of company announcements.
In terms of providing shareholders with good access to information, market sentiment indicates that both HIH and One.Tel turned in reasonable performances. ‘Probably acceptable,’ is how Tony McLean describes these companies’ investor relations processes. Tony Jackson, an insurance analyst at Macquarie Bank, agrees, at least in the case of HIH: ‘There was no issue with the quantum of information or the availability of management,’ he says.
So what was the problem? HIH and One.Tel may have had adequate IR practices in place, but consider some of the tactics they used to keep the market fully informed. Ray Williams, the former HIH managing director who founded the company in 1968 and, in the words of Tony Jackson, ‘Ran the place with an iron fist,’ had a formidable reputation in the market. At one time a spat between Williams and two analysts who published unfavorable reports about the company resulted in the analysts being banned from future presentations.
The situation was almost the reverse at One.Tel. According to Paul Budde, managing director of Budde Communications, the only Australian independent telecoms research house, ‘They tried quite forcefully to get me to attend briefings.’
‘It was a very informal briefing procedure; we just sat in the middle of the office,’ he recalls. ‘If you asked direct questions, they wouldn’t answer you. I was actually the subject of an angry personal attack by Brad Keeling [one of the company’s joint managing directors], and when you start to get that sort of feedback, you know you’re on the right track.’
‘I was one of the few skeptics. Analysts were biased and they should take part of the blame,’ Budde concludes.
But if One.Tel was so keen to get analysts to attend the briefings, what were they saying at these briefings and how far away from the truth was it? Apparently even the company’s directors were duped. ‘Profoundly misled’ was how One.Tel’s highest profile directors, Lachlan Murdoch and James Packer – sons of Australia’s most famous businessmen, Rupert Murdoch and Kerry Packer – described the way in which they were treated by One.Tel’s joint managing directors, Jodee Rich and Brad Keeling.
According to Tony McLean, ‘Clearly, the companies’ financial positions were misrepresented to directors. And if the board doesn’t have the information, what can shareholders do?’
And if the board doesn’t have the information, how does that leave the IRO? One former HIH employee, who wishes to remain anonymous, states, ‘The information we were given earlier in 2000 turned out not to be the correct position of the company, even though we thought it was. It was very difficult trying to formulate a result, but we tried to make sure the analysts were operating on complete facts.’
Facts & fiction
What should an IRO do if they suspect the company is issuing incorrect information? Computershare Analytics’ Ian Matheson, chairman of Aira, the nascent Australasian Investor Relations Association, says there are a number of options: ‘These include approaching the independent directors about the issue and counseling management to disclose correct information,’ he suggests.
In One.Tel’s case, resignation might have been the only option: two IROs resigned in the last two years.
The integrity of companies’ own disclosure guidelines is key. In some companies, the IRO is actually in the dark about the true financial position of the company. Although the continuous disclosure regime has markedly improved communication between listed entities and shareholders, some companies remain reluctant to fully disclose price-sensitive information to the market.
Often these companies follow a one-way financial communications model rather than a two-way investor relations one, distributing financial information without encouraging feedback from the market. ‘Investor relations is more than simply issuing press releases at results time,’ notes Ian Matheson. ‘It’s about engaging the investment community.’ It seems both HIH and One.Tel were reluctant to genuinely consider the investment community’s opinions.
Coupled with this is the fact that some Australian IR personnel have only a limited understanding of financial data. Unlike disciplines such as law, accounting or even medicine, IR practitioners require no formal qualifications. Many come from a communications, not a finance background, and in the absence of mandatory investor relations qualifications, some don’t even understand a balance sheet.
Similarly, it’s not mandatory for people working in IR to belong to a professional association which requires members to update qualifications on a yearly basis.
To help address this, Ian Matheson believes IR managers need to at least have a good understanding of accounting practices.
‘As a general principle, the IRO is not doing themselves any favors by not understanding financial information. They need to make themselves fully informed about all aspects of the company’s finances.’ In the cases of HIH and One.Tel, IROs were often not granted access to this information.
While it seems unlikely that qualifications for investor relations will become compulsory in the near future, the development of a universal code of ethics for IR practitioners might help to ensure shareholders receive not only timely but factually correct information. Ian Matheson believes any code of ethics should ‘outline whistle-blowing procedures if the IRO knows information being disclosed is incorrect.’ Aira is currently developing its code of ethics.
The first line of the National Investor Relations Institute’s (Niri) code of ethics states that the key function of investor relations is ‘communication into the stock market of the bad and the good about a company’. Note the bad comes before the good. As evidenced above in the information issued by HIH and One.Tel, good news was far more prevalent than bad.
‘Lied outrageously’
According to Michael West, a journalist at The Australian newspaper and the focus of a personal attack by Ray Williams, HIH’s former managing director, HIH was ‘pugnacious and combative in trying to stop any news of deteriorating financial conditions. They lied outrageously to the market.’
The question is whether there is a culture in business to spin bad news into good, at the expense of the investor’s right to make financial decisions based on factual information. Ian Matheson believes that whether news is good or bad, it’s inherently subjective. ‘News is news, some of it’s good and some of it’s bad. There are inevitable bad news stories which people want to present in the best possible light, which is not necessarily bad. It’s better that the news is out there.’
The issue now for investor relations is whether continuous disclosure guidelines go far enough toward ensuring investors receive truthful information. Unfortunately, for HIH and One.Tel shareholders, equitable access to information and Asic’s focus on a continuous disclosure regime were not enough. Although they had ample access to timely information about the companies in which they were investing, that information was largely incorrect.
Shareholders who were on the register at the time the companies were declared insolvent are unlikely to realize any value from their investments in One.Tel or HIH, since creditors’ interests will be satisfied before those of the shareholders, who are last in line. It is doubtful whether there will be anything left after creditors have been paid off. All that will remain of these once significant Australian companies will be protracted investor-led court cases expected to tie up legal resources for years to come.
Depositary Receipts
Number crunching
After a stellar 2000 the ADR market has stagnated in the first half of 2001, new figures released by Citibank show.
A total of 17.1 bn ADR shares were traded in the first six months of 2001, compared to 17.3 bn shares traded over the same period last year. However, the amount of capital raised through ADRs has fallen sharply, reflecting difficult market conditions. Non-US companies succeeded in raising $3.8 bn in the first half of this year, compared to $16.5 bn in the same period last year.
However, the Citibank figures do reveal some cause for optimism. Individual investor interest in ADRs is again up, with Citibank predicting that ADRs as a percentage of US investment in non-US equities will reach 42 percent next year, compared to 38 percent last year and 15 percent in 1990.
The figures come as the Bank of New York’s ADR index, which benchmarks the performance of ADR programs, shows a 14.2 percent decline in the first quarter of 2001 alone.
Going global
It’s been a busy month for depositary receipt issuers in Asia. First, South Korean chaebol Hynix Semiconductor (formerly Hyundai Electronics) went ahead with a successful $1.25 bn global depositary receipt (GDR) issue, led by Citibank. Foreign investors were wooed by a hefty 25 percent discount on the GDRs, which were issued as part of Hynix’s ongoing debt restructuring plan. Local creditors had already warned that they would pull the plug on the company’s $4.4 bn debt rescue plan if the GDR offering flopped.
Meanwhile Japanese wireless group NTT DoCoMo has announced plans to go ahead with an ADR offering on the NYSE. The move could trigger a succession of US listings by Japanese companies who plan on using ADRs as acquisition currency, analysts claim.
