Frances Maguire investigates why demands for more information on corporate actions are growing among both regulatory agencies and company shareholders.Falling share prices and the memories of the Enron and WorldCom accounting scandals have made stakeholders more aggressive in asking questions of the companies in which they hold shares and have led to a rise in demands for more accountable corporate governance.

Shares in Britain’s biggest companies have dropped as much as 90% following the end of the bull market. Against this background, shareholders are no longer content to just collect falling dividends, while pay-outs to executive directors go through the roof. They are demanding a greater say in the use of their investment.

Spirit of disclosure

The first step in that direction is greater disclosure. That does not have to mean longer, and weightier, annual reports packed with marketing blurb. It does, however, mean a move away from rules-based financial reporting through which loopholes are exploited, and this pushes companies towards compliance with the spirit of the principles.

In its response to the collapse of Enron, the Association of Chartered Certified Accountants (ACCA) strongly supported European Union moves to adopt International Financial Reporting and Auditing Standards in the next few years. It also urged greater independence of auditors and non-executive directors.

The relationship between a reporting entity and its professional advisers should become more transparent, according to ACCA. This should include limiting the ability of the audit firm to provide consultancy services and calling for full disclosure of audit and consulting fees in the annual report.

Furthermore, ACCA believes that investors, particularly institutional investors, must become more involved in developing mechanisms to monitor the independence of both non-executive directors and corporate audit committees. Such involvement of investors relies on two things: not so much more information but greater transparency, and use of voting rights.

SEC takes action

In terms of transparency, moves have already been made. In direct response to Enron, the US’s Securities & Exchanges Commission (SEC) drew up the Sarbane-Oxley Act, which was passed by Congress last July.

Presenting on the goals, contents and implementation of the Act in Germany earlier this year, SEC commissioner Paul Atkins said: “The Act attempts to provide fundamental mechanisms to prevent the misdeeds that led to investor losses. These mechanisms are intended as best practices.

“Many are not outright requirements but are requirements on corporations to disclose aspects and then let the market decide what importance to put on that disclosure.”

Also last year, the UK’s Department of Trade and Industry made an amendment to the Companies Act, specifying that companies disclose not only directors’ pay and perks, but also the performance targets attached to long-term incentive plans or share options.

The fullest disclosure by companies occurs at annual general meetings and the use of electronic proxy voting is rapidly increasing to ensure investors have fast and efficient access to voting. In the US, it is mandatory for issuers to communicate corporate actions with every individual shareholder, and the responsibility lies with the nominee owners to ensure shareholders are notified. In the UK and Europe, while it is not mandatory, custodian banks are increasingly offering electronic proxy voting services in a move towards best practice.

Since last year, HSBC has been offering an outsourced proxy voting service for institutional investors, provided by ADP Investor Communication Services, for UK and US meetings. Ian Twine, manager, corporate actions, at HSBC’s Global Investor Services division, says it is about to roll out proxy voting globally and is offering it to custody clients as part of its overall service. While it is not mandatory, he notes, there is a growing awareness among companies in Europe of the need to communicate with investors, as a voluntary move towards best practice.

HSBC has a staff of 84 based in London ensuring its institutional investors receive timely information to process corporate actions that affect their portfolios. But with mergers and takeovers at their lowest levels in 10 years, there is slightly less corporate actions activity.

Mr Twine says: “Overall, day-to-day volume is down as investors are not making any real changes to their portfolios year on year. Compared with the first quarter of 2002, we have processed 2.95% fewer corporate actions events this quarter.”

Electronic dissemination

In terms of the greater levels of disclosure demanded from listed companies, Mr Twine has noticed a marked move towards the electronic dissemination of information, with increasing numbers of companies choosing to send company reports via the internet.

If the information packs are to become weightier, electronic communication is an obvious route for companies. “One company claims that by choosing to send out its offer documents for a recent event electronically, it saved Ł2m [$3.2m],” says Mr Twine.

The complexity and lack of standardisation of events has made Citibank realistic about automation – it processes 400-500 corporate actions events each week globally. Charles Banister, European head for global product management at Citiglobal Transaction Services, says: “While basic automation is achievable, it will be difficult to get full straight-through processing for every event type. While we are increasing automation levels, in the end the 80/20 rule will apply.”

Proxy voting outsourced

Citibank has also outsourced its proxy voting service to ADP. Between mid-February and May 1, ADP processed 246.6 billion shares for proxy voting in the US alone. This resulted in 131 million proxy vote mailings for that period, and with a 65% response rate, it is no surprise that ADP is the largest user of the US postal service.

ADP director, Glen Good, says that ADP strongly encourages companies to move towards internet use, and it often scans annual reports and additional investor information to create URL links to the proxy vote.

As a result, ADP is also noting a growing use of the internet by shareholders in the US. Of the 161.4 billion share response rate for the above period, 100.1 billion responses came through proprietary systems used by institutional investors; 32.8 billion came on paper, compared with 21.9 billion via the internet, with the remainder by telephone.

Rising response rates, whatever the mechanism, show that investors are more keen than ever before to exercise their ownership rights at votes. There is little doubt that this is a response to the pay deals that executives are being awarded despite falling share values.

In the UK, the National Association of Pension Funds has gone as far as to recommend that its members abstain in annual general meeting voting in an attempt to block both the re-election of executives and the pay deals companies propose.

Other examples include companies that reward executive directors lump sums if the company is taken over, and serious relaxation of targets set for share options for company directors.

The most important need for disclosure is in mergers and acquisitions, especially where one or more of the companies involved is not listed but closely held. Here there is usually little information in the public domain and the shareholders are almost totally reliant on information provided by the companies and the auditor’s valuation to make investment decisions.

Content is critical

While the use of the internet can allow easy access to information, the content is critical. Shareholding patterns and full disclosure of the closely-held company’s business profile, report and accounts (covering as much as three years) is assumed by many as the minimum requirement, and yet it is not always available.

While this may not be the case in high-profile mergers such as DaimlerChrysler that had text book levels of disclosure and readily available facts and figures, it is the case for the hundreds of smaller corporate actions by lower profile companies that float through the systems daily.

The packs may be getting bigger and the internet is a more cost-effective way of disseminating large amounts of information at a lower cost, but the spirit of disclosure is still lacking. If companies want to hide something, they are able to do so for a long time.

The only armour investors have is the right to sell out at the point of the corporate action. And what smaller companies need to see is that a higher level of transparency avoids this, and gives company meetings and levels of disclosure more credibility.

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