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Feb 26, 2014

Feeling the effects of far-flung regulation

On the trail of intrepid moves by regulators in Brazil, Australia and South Africa

‘Out of left field’ is an expression from baseball referring to the furthest throw to first base. Some of the best ideas come from left field: they are unexpected, innovative and, often, literally from the furthest corners of the world.

IR Magazine set out to explore three regulatory initiatives that first splashed down far away but the ripples from which have hit IR professionals everywhere: Australia’s obligatory social media monitoring, Brazil’s mandatory investor relations director and South Africa’s might-as-well-be-required integrated reporting. As it turns out, however, two out of three looked bigger from abroad than they ever did at home.

Social media down under 

Ian Matheson, founder and CEO of the Australasian Investor Relations Association (AIRA), admits he was ‘staggered’ to hear service providers at NIRI’s annual conference last June trumpeting how the Australian Securities Exchange (ASX) made it a rule that companies had to monitor social media. ‘That’s an overstatement,’ Matheson says from Sydney.

The Australian development came last spring, right around the time the SEC issued its Netflix report allowing social media to be used for disclosure, which triggered a lot of discussion about how investors use Twitter, including the notion that IROs needed to start listening more to what’s being said on social media channels about their companies. ASX issued guidance that was seen to have strongly vindicated that notion, while signaling that those smooth Australians were ahead of the rest of the world in using social media.

In fact, the ASX’s Guidance Note 8, drafted in October 2012 and finalized in March 2013, tacks social media onto a broader look at market-sensitive information, when to disclose it and the use of trading halts. In part, the guidance says the ASX would ‘strongly encourage’ a company to monitor social media while waiting for board approval to issue an announcement and prior to a trading halt (while also monitoring its share price, mainstream news, analyst inquiries, and so on).

It also recommends a company should monitor social media if it’s sitting on market-sensitive information that’s excluded from immediate disclosure rules, like M&A negotiations.

Being aware

Matheson says the ASX was really telling companies they had to be aware of online chatter around deals and other corporate actions, but it wasn’t making monitoring mandatory the rest of the time. As for Australia being at the bleeding edge of Twitter, he adds: ‘It’s probably the same here as it is in most parts of the world. There’s a lot of hype about social media for IR purposes, but the actual use by investors, analysts and companies is very patchy.'

Helmut Bossert

'Only a few Brazilian companies have good IR for foreign investors' – Helmut Bossert, VALOR

Australian IROs were far more exercised last year about an old-school hoax: a fake news release about bank funding being pulled from a coal mining company, Whitehaven Coal, which sent shares into free fall. That got everyone thinking about how easy it is to float fake stories, in both mainstream and social media, and how companies had to be able to respond very quickly. Social media monitoring built up a head of steam but has since ‘sort of fizzled,’ Matheson remarks.

There were rumors Australia was making webcasts obligatory for earnings announcements, but Matheson debunks that story, too. While AIRA, for its part, wants companies to webcast all significant events, the ASX is agnostic.

Besides, with Australia holding the presidency of the G20 this year, its new federal government is pushing regulators like the Australian Securities and Investments Commission to consolidate rules and guidelines, rather than make entirely new ones.

IR – it’s the law

Whenever the conversation turns to how critical IR is in the life of a public company, Brazil is sometimes held up as a model, a Shangri-La for investor relations – for there, it is said, every public company must, by law, have someone responsible for IR. 

In fact, as IR Magazine discovered in its pursuit of this investor-relational unicorn, Brazil’s version of the SEC, the Comissão de Valores Mobiliários (CVM), doesn’t just mandate a corporate investor relations officer, it stipulates a member of the board. That must mean IR is taken extremely seriously by every company, right?

The rule was spelled out in December 1993, in CVM Instruction 202, and reiterated in 2009’s Instruction 480, or the ‘new 202’: ‘In order for a company to be registered with the CVM, the company’s bylaws or the board of administrators shall attribute to one director the accountability for relationship with investors, which may be exercised together with other executive attributions.’ This IR director is responsible for providing information to investors, the CVM and the stock exchange.

Perhaps it would have been different if the CVM had said it could be a corporate officer in charge of IR. Even today, more than 90 percent of those IR directors are CFOs and really just titular investor relations chiefs. 

Helmut Bossert, today an IR consultant in São Paulo with VALOR Partners, worked on the sell side for more than 30 years before getting into investor relations at the end of the 1990s. He established the IR programs for Sabesp and then Natura, two of the first companies to list on the extremely successful Novo Mercado, a premium listing tier of the country’s stock exchange, BM&F Bovespa. 

The origins of IR

Until the 1990s, Bossert recalls, it was rare for Brazilian companies to have someone dedicated to IR. That decade, as a new economic plan took hold, inflation stabilized and foreign investment started flowing in earnest, CVM responded by inserting an IR director into the rules so every company would have someone capable of talking to money men from London, New York and elsewhere.

So according to lore, CVM overnight created modern Brazilian IR. ‘Actually no,’ Bossert laughs. ‘Even today, only a few companies have good IR for foreign investors.’

From 1992 – when Aracruz Celulose became the first Brazilian ADR listed on the NYSE – to around 1998, Brazilian stocks boomed. There followed ‘a very dark period’ until 2002, when a recovery took hold, coinciding with the launch of Novo Mercado. During the 1990s boom, the biggest companies with NYSE listings – including Vale (then called CVRD), Telebras and Petrobras – developed IR prowess. But it wasn’t until 2002 that investor relations took root more broadly. ‘Now we’re in a much better position,’ Bossert says, ‘though we still have a lot to learn.’

IR as cost-cutting

‘Companies look to reduce their expenses, so instead of putting a new person on the board, they just pick the CFO to fulfill the CVM requirement,’ Bossert explains. At Natura, for example, where he was a very senior executive always in front of investors at conferences and on non-deal roadshows, the official IR director was (and still is) the chief financial officer. 

Make no mistake, Brazilian IR these days can be superb. Last year, when IR Magazine attended the annual conference jointly held by ABRASCA, the country’s listed companies association, and IBRI, its IR society, we were amazed by its size and energy level.

A country with around one tenth the number of listed companies as the US fields a vastly disproportionate number of well-qualified IR professionals. But is that because IR in Brazil is enshrined in law? According to Bossert, that myth is busted.

Gold made good

Dogged by disillusion, we turn finally to South Africa, where integrated reporting, in a world first, entered the listing rules of the Johannesburg Stock Exchange (JSE). That can only be good, but is it too good to be true? It turns out it’s even better than hoped.

Michelle Joubert

'South African companies are very conscious of CSR responsibilities'  Michelle Joubert, Johannesburg Stock Exchange

Many corporate governance principles from the latest King Report on Governance (King III) became mandatory in South Africa in 2010, which is a big change from the old voluntary guidelines. Integrated reporting falls in the ‘apply or explain’ category, but according to Michelle Joubert, the JSE’s head of investor relations, it has been so widely adopted by the more than 300 companies on the exchange that it might as well be mandatory already.

Now integrated reporting is spreading around the world, shepherded by the International Integrated Reporting Council, which is chaired by Mervyn King, the eponymous reports’ author, a former judge who was called upon by the late South African leader Nelson Mandela to overhaul that nation’s corporate governance after the end of apartheid.

Joubert is in a unique position, handling investor relations for JSE itself but also enjoying a bird’s-eye view of JSE-listed companies, and she sees integrated reporting as having had major impacts from both perspectives. The JSE was already in the vanguard: in 2004 it launched its own SRI index, the first in emerging markets – and the first anywhere to be created by a stock exchange.

‘Because of our history as a country, companies in South Africa are very conscious of their social responsibilities, corporate governance responsibilities and environmental responsibilities,’ Joubert points out.

During apartheid, values-based investors focused intensely on South Africa. ‘As apartheid turned into democracy, companies started looking at how they could grow their positive social impact and report on it,’ Joubert continues. ‘The requirement that they consider all these elements in an integrated strategy, which then forms the foundation of an integrated report, was not unexpected.’

Fast adoption

Integrated reporting arrived with hardly any debate, impelled by strong public and investment community pressure. Sustainability used to be in the background for companies, in terms of both strategy and reporting. Now it has moved front and center, with South Africa’s mining companies often leading the way, considering they have always had both community and environmental issues to cope with.

‘The whole business of being an IR practitioner has also changed dramatically, with new relationships with a whole range of other players beyond the CFO and CEO,’ Joubert says. ‘You’re considering real business strategy, including impacts beyond the financial.’

Interestingly, accusations of ‘greenwash’ leveled at sustainability reports have receded. ‘If you produce something that’s a real and practical consideration of how ESG factors drive the company’s strategy, it can’t be greenwashed,’ Joubert maintains.

Integrated reporting may be one of South Africa’s most successful exports, though Joubert doesn’t see it quite that way. While the JSE is a trendsetter and sought after as an integrated reporting pioneer – such as at the World Federation of Exchanges – she insists everyone is on a learning curve together.

Even so, of the three pioneering moves explored in this article, developed by rule makers beyond the fringes of the world’s financial centers, South Africa’s is no doubt the most genuine – not to mention the most influential.