MiFID II: Top tips to make sure you are ready
David Lloyd-Seed, Chair of the IR Society, and Director of IR at Telefonica UK (O2) offers some tactical advice to IR professionals ahead of MiFID II implementation in January 2018.
There’s been a lot written and talked about MiFID II already, so I am not going to add to the reams here. However, it has struck me how little has been said about the impact all this new regulation will have on listed companies themselves. What is clear is that no-one really knows what the World will really look like post implementation of MiFID II, but there is consensus that there will be a period of, possibly significant, turmoil until the great machine that is the capital markets works out how to make it work best.
The regulation most relevant to listed companies principally changes the way information will flow around the capital markets, that is information about the stocks and shares listed on the London Stock Exchange, ie our companies. Information is the oil that makes the capital markets engine work, and the cost of this oil, or facilitation of information flow, will partly shift from the buyers of stocks and shares to the issuers of stocks and shares – companies. So what can we do to be ready for this imminent shift and the period of turmoil that may commence on 3 January 2018? Well, here are my top tips, hope you find them useful
1) Know your investors: This may sound fairly obvious to many of you, but make sure you properly understand who your shareholders are, or indeed should or could be. Not just the names of the fund management firms, but the funds that own your shares, why they own them and how your shares fit into their portfolios. Make sure you know who the individuals are that make the decisions about owning your shares, and that you have a dialogue with them. There are some fantastic systems in the market today that, when fully utilised, can provide a richness of information only dreamed of a mere five years ago. Make sure you’ve got the one that best suits your needs and provides you with the information you need now and start enriching your database.
2) Understand what you will get from your corporate brokers. Many brokers out there are saying little will change and I do hope that is the case, however, I fear much may change.
Find out if their research department is investing in your sector – are they aiming for top three coverage of your whole sector, or are they just being selective with ‘maintenance’ research. If the former, great, but if the latter how good will they be at supporting your equity story. You may need to think about a change in corporate broker.
Interrogate them and understand which institutions they will continue to have a relationship with. They won’t be much help if they can only talk to a small proportion of your share register. They may promise that they can speak to everyone through corporate broking/corporate access, but I would question how rich the information flow will continue to be where the house does not have a research/equity trading relationship.
Work with them to establish how they will continue to support you in corporate access, you may be able to continue to rely on them for some outreach, but you may well need to look elsewhere, or do more yourself. Understanding how that support might change now, will help make sure you don’t get left behind in the competition for capital.
3) Talk to the analysts covering your stock – find out what will change. Talk to the analysts who currently cover you and try and find out the following:
- How will they be covering you and your sector going forward.
- How, and to whom, will they be distributing their research.
- How do they propose to approach coverage of your shares eg regular short update notes, or intermittent thought pieces.
- What will they continue to send you – notes on the sector or just on you. If the latter it will make it harder for you to put their position on your shares in context.
You may, of course, not get all the answers you wanted to hear from this exercise…if so, explore alternative ways of getting research written on your company. That may mean engaging new research houses, or may mean paid for research. Investors don’t mind if research is paid for by companies, so long as it is informative and insightful – information is what fuels their interest, so make sure they have access to it in anyway you can.
4) Understand how you will be able to collect consensus. Building on the above, IROs need to understand whether the information that comes from individual analysts will change, and therefore how companies will collect consensus. Will they continue to share their models with you or do you need to find a new way for them feed data into your consensus tracker?
I’m a great advocate for collecting consensus directly as that ensures you can understand how an analyst builds and works their model on your company. I suspect little will change here as analysts will likely want to continue to be part of consensus and there is no threat to their economic model in sharing their forecasts with a company. However, if the landscape does radically shift, IROs may need to look into using third party aggregators – so have a look around and see how these work and whether they work for you. With that in mind take the opportunity to make sure you understand how current consensus aggregators such as Bloomberg collect their data and how their analysis of the numbers may differ from yours.
5) Update your calling card. Investors often start looking at a company through their website and/or report and accounts. So make sure the information you have on there is clear, succinct, relevant and useful. Make sure it is easy to understand who you are, what you do, how you make money (business model and strategy), how you measure yourselves (KPIs), the key risks in your business and industry and how management is incentivised and rewarded. Make sure all relevant information, including any recent presentations you are using on roadshows, are easily available.
This exercise, combined with some of the other tips here may lead you to update your equity story. Ask yourself is it clear and punchy? Does it tell the story as we actually want to tell it? Does it appeal to the right investors? Does it cover all the bases? It’s always a good idea to do this exercise on a regular basis, but do it now, before everyone else beats you to it!
Having sat on the judging panel for our best practice awards, it struck me how hard some companies make it to understand the key reasons why and investor should buy your shares. So keep it clear and simple and make sure you stand out from the crowd.
6) Network. Build your network with both sell and buy side. Investors are always happy to hear directly from companies, so get out there and network, don’t rely on others to do it for you. Build your CRM database so you always know who is, or isn’t. or should be interested in your shares.
Network with your peers and other IROs. I’ve often said that IR can be a lonely role in companies, so use the IR Society to network with other IROs. Build your own network of IROs who are facing similar challenges to you. You never know how useful a piece of advice might be, and of course how useful your advice might be to others. We’re a rich pool of talent in the IR Industry, together each of us can be even better.
7) Make sure your management team understand the implications. There are some very enlightened management teams out there about IR, but sadly there are many less so. As a service function management are often reluctant to spend on IR. However as the burden of cost of accessing the capital markets shifts more on to companies themselves helping management teams understand the importance of good communication and of winning the competition for capital is vitally important. A good well communicated investment story can only lead to a full and fair valuation, which of course helps the value of share options!
8) Be prepared to do a lot more yourself. If there is one certainty of MiFID II it is that we will all likely be much busier, whether it be corporate access, feedback, research and consensus management or just updating our IR assets. Investors will undoubtedly rely more on IROs directly, while a good thing this will clearly take up more time. Think carefully about how you will prioritise and resource up – either internally or externally – to meet these challenges.
This is an exciting time for the IR industry and with a little bit of planning now, the transition into and through MiFID II should be relatively painless.
David Lloyd-Seed, Chair of the IR Society and Director of Investor Relations, Telefónica UK (O2)
For further information contact:
The Investor Relations Society
John Gollifer – General Manager: firstname.lastname@example.org / 020 7379 1763
Laura Hayter – Head of Policy and Communications: email@example.com / 020 7379 1763
Published 20 November, 2017