RSS feeds'Sell in May and go away' used to be the mantra of a more leisurely class of stockbrokers. It probably doesn’t work now. And another mantra that works even less is predicting the direction in which the business world may move across this new year.
But there are two themes which people ought to have uppermost in their minds as the year and their business prospects unfold. The first is the dilemma posed by private equity. In the first half of 2006, there were more funds raised through private equity than through IPOs and the public markets. Now we all know why this is.
It is argued that it is much easier to pull value out of a wayward company if you can do it, as it were, behind closed doors. And all the support can be rejuvenated. As one venture capitalist often boasts, he can get the auditors in and tell them that what they did last time was a disgrace and can they, for gratis, do it again, only effectively this time round.
The issue is partly one of whether it is good for the economy generally and for the wider ranks of stakeholders, and even pension holders, to have enterprises taken off the public markets and for public disclosure of information to vanish.
This is now seen as a real threat to the markets. In November, a consortium of interested parties produced a new approach to the disclosure model. They called it Report Leadership and they produced a number of ways in which existing internal information could be disclosed and provided a pro-forma set of accounts showing how it would work. The consortium consisted of the management accountancy body, CIMA, accounting firm PricewaterhouseCoopers, design house Radley Yeldar and the engineering group Tomkins.
It was the finance director at Tomkins, Ken Lever, who linked the consortium’s efforts to the non-disclosure of private equity information. Lever also represents the influential Hundred Group of Finance Directors and runs its financial reporting committee. He saw the proposed system as bridging the disclosure gap between private equity and public companies. The useful information which drives private equity investment is there, obviously, in public companies. It just isn’t made available to investors.
“This new system tries to create, for the public market, the information available to private equity,” he said. A proper debate between investors and owners could ensue. “In private equity you have that discussion,” he said. “In public companies you can’t have that discussion for regulatory reasons. This new system helps towards that.”
Anything that promotes the idea of companies making more of the internal information available to investors will help. And, as there is perceived to be an increasing divide between what is seen as impenetrable accounting information and accessible narrative information, this trend will continue. This is where public companies find themselves currently under performance pressure from privately held companies. That pressure can only put more information of a useful – non-accounting – sort into standard corporate disclosures. It is an obvious way for public companies to level their wildly askew playing field in the investor arena.
The second theme, which should gain more support through the coming year, is a fundamental view of corporate governance. No one could deny that corporate governance has transformed the security and stability of the UK corporate sector and of similarly enlightened corporate sectors around the world.
What is sometimes denied is that it is not all upside. The rise of corporate governance has also created a side-effect, which people need to be watchful about. There is a tendency among the investment community not to value good corporate governance just for the stability it fosters, but also for the simpler quality of seeming to lock stability into the corporate model. In other words, the investment community also wants corporate governance to be strong because that way it covers its back. Lawyers love it.
This has a knock-on effect. Some companies can overreact. The result is that they think the share price is best protected by avoiding disaster rather than necessarily going for growth. It is a difficult balance at the best of times. But following the corporate governance theme too slavishly can start to do damage to companies. Playing terribly safe may protect a share price. But in the long term, it is not going to do investors any favours. Corporate strengths have as much to do with products and services as they do with ensuring that an organisation is effectively run.
And finally, as we look ahead to the new year, all financial directors can look forward to one bonus. The tide is turning when it comes to international financial reporting standards versus intangible items such as key performance indicators. And it is running one way only for the year ahead. With all the steady rubbishing of international financial reporting standards and the comeback of narrative reporting, it will be much easier to create a smokescreen, which means that investors think one thing while the FD knows another.
