Speaking to the ex-derivatives salesman who now runs the most successful brokerage in Eastern Europe
Frank Zappa was not the only visitor to Prague after the heady days of the Velvet Revolution. Richard Wood, a derivatives salesman with Salomon Brothers in his early thirties, gave up his London job and drifted to the beautiful city straddling the River Vltava. Wood & Co is now the most successful brokerage in central Europe, and a powerful force for injecting investor relations-type thinking into local managements whose buccaneering habits have left many foreign and local investors breathless. And sometimes penniless.
This June, Wood & Co disentangled itself from a bond-trading partnership with Commerzbank, leaving it free to specialize in equities. Wood set up the company in 1993 ready to cope with the anticipated demands of Prague’s mass privatization program when prime minister Vaclav Klaus captivated foreign investors. ‘They really liked what he said: no gradual privatization, and the intellectually brilliant creation of coupon privatization,’ Wood reminisces wistfully.
Dream into nightmare
However, the dream soon became a nightmare. Foreign investors ‘were surprised by the avarice and lack of control in the emerging Czech capital market.’ The ironic result of a program to give all Czech citizens a stake in the country’s industry and commerce was that now, Wood says, ‘Czech individual investors see the equity markets as a place to lose your money.’
The coupons in the 1,500 privatized enterprises went into closed end funds whose managements, according to Wood, ‘treated them as a honey-pot, taking out extraordinary management fees, extraordinary advertising fees and churning their portfolios through their brothers’ brokerage companies at undisclosed commissions and spreads. It was the most appalling rip-off,’ he adds.
Without strong securities regulations, let alone regulators, the looting not only disillusioned investors, it also cost Klaus the election this June. As a result Wood & Co is snugly set in its scenic offices a stone’s throw from the Charles Bridge, in what ‘has been one of the most investor-unfriendly countries in the world for the last three or four years,’ according to Wood.
In fact, the brokerage firm is a member of the stock exchanges in Warsaw, Kiev, Budapest and Prague. In addition, it researches and sells stocks in a number of other countries, including Romania and Slovakia. Altogether, Wood and his colleagues do far more business outside the Czech Republic than in it. ‘Our headquarters is something of an anomaly,’ he confesses. But he says it’s a much more pleasant place than, say, Warsaw. ‘We’re really a regional investment bank and we have to have our HQ somewhere. We’ve resisted having it in London since we don’t want to be like everybody else.’
Backed by the company’s center of business gravity, Wood’s view is that Poland and Hungary got it right by privatizing their state-owned industries gradually and for cash, rather than by coupons to the cash-poor citizenry. In particular, he praises the Hungarians for the welcome they have given to foreign capital. That approach has left the economy dominated by foreign companies, ‘But the Hungarians are getting much richer as a result.’
The other countries in the region, according to Wood, are only good by comparison with the Czech Republic. He cites the example of a Polish company which in June threatened to sue Wood & Co for putting a sell recommendation on its stock only nine months after underwriting its IPO. Wood insists that his company’s research has to be as close to reality as it can be. ‘The great thing about the Polish capital market,’ he explains, ‘is that you have big, bold entrepreneurs who have been trying to make money throughout the 1970s and 1980s, under communism. They are tough guys – bullies, and they have got a hell of a long way because of it.’
Wood’s big task is to teach them IR 101: essentially that other shareholders are partners, not enemies. ‘Often, they run very good companies, but they need hard lessons about how to deal with minority investors,’ he says. ‘This is often the first time they come across a situation where you really don’t have to do something, but it will be to your great advantage in the end if you do.’ Wood has to convince them that when they issue stock, even though they own it, they shouldn’t be buying to achieve the highest price; they should be seeking the right price so that they can return to the markets when they need to.
‘That’s an incredibly difficult concept to get through to someone like that,’ says Wood. ‘Normally if he’s selling widgets then he wants the highest price for them, and it’s not easy explaining that yes, you can screw this investor, but it will come back to haunt you in two years time.’ Just as difficult is trying to persuade a Polish boss that: ‘Although you’re very busy now, and you probably really don’t want to go around and talk to your investors in America, you have to go.’
Some companies threaten to be terminally IR-unfriendly, and Wood says these have to be filtered out. ‘We have a simple screening mechanism for companies that we’re interested in researching and recommending,’ he explains. ‘If they don’t want to talk to us in an open and honest manner, then they might have the best factory in the world, the most wonderful sales dynamics, but we won’t touch them. Our whole reputation is based on the robustness and trustworthiness of our evaluations,’ he declares.
That involves knowledge not just of the individual companies but also of general conditions. For instance, according to Wood, ‘Managers treat shareholders very well when markets are rising and only try to steal when they are going down.’ Hungary’s rising market has raised morality, but now that Poland’s market has gone down, ‘Those domineering entrepreneurs need watching.’
Share options are actually illegal in Poland and the Czech Republic, but in most companies managements do still own stock by one means or another. Wood cautions that this does not necessarily protect minority investors from the UK or US, ‘because if he takes a dollar out of the company then that’s all his, but if he leaves it in, then only 20 percent of it is.’
This interview was conducted before the most recent market upheavals in the region but, significantly, Wood was extremely wary of Russia (‘very wild’) and the Ukraine (‘very difficult’). So what about Romania or Bulgaria? ‘Forget it, at least for now anyway.’
Such gloomy forebodings apart, in Poland and Hungary there are securities commissions and legal structures that really have teeth and in general the behavior is good. But there is more to investor relations than abiding by legal minima. Wood explains that last year, the company brought a deal to market for Amica, a Polish white goods maker. The management wanted to give themselves extra voting rights. ‘It was a poison pill deal and was perfectly legal, and in the past we’ve tried to go out to see the company and tell them what it’s like in the UK or US.’
But this time, Wood eschewed such cultural imperialism and sent two of the firm’s Polish members of staff instead. ‘They told them, We’re all Poles together, and we’re friends, and yes this is perfectly legal, but we are going to tell you what will happen if you do this.’ That included warning of a lot of proxies being lined up against the deal. ‘It was so much more positive – and they backed down,’ says Wood.
The duo who were assigned this task were typical of Wood & Co, whose staff is three-quarters local and, in most cases, fluent in several regional languages. For Wood this is clearly a major contributing factor to the firm’s success: ‘Although we don’t have hundreds of millions of dollars of capital, we can protect our clients because we’re local. And we add real extra value.’
Following the demerger with Commerzbank, the company is changing its management structure to empower its people in the various countries of operation. Wood is convinced that there is a real opportunity for a regional player like Wood & Co. But he says it’s essential for outside firms to accept that countries in the region are not necessarily going to take on wholesale American or British market methods.
On the other hand, bottom-line investor relations standards, regardless of the regional language used, are not just options: they are obligations. ‘They can pursue whatever model they want, German or Anglo-Saxon,’ says Wood. ‘But here at Wood & Co we will make sure that nothing is shown to westerners unless it passes certain standards that we can be proud of.’