Membership Number or E-mail Address
Forgotten your password?
ICAS is an educator, examiner, regulator, thought leader and professional body for more 19,000 CAs.
Ensuring the highest professional and ethical standards lies at the heart of the ethos of our organisation.
Ensuring the highest professional and ethical standards lies at the heart of the ethos of our organisation.
ICAS is a thought leader in accountancy, finance and business. We aim to be at the heart of the debate on these issues always putting the public interest first.
ICAS is a provider of lifelong continuing professional development through courses and qualifications for our members and the wider business community.
ICAS aims to be at the heart of the news which matters for CAs striving to build the public profile of our organisation as one of the leading professional bodies in the world.
ICAS provides highly valued information resources to our members to allow them to access the detailed knowledge they require to deliver their work to the highest standards.
How do UK companies communicate with their institutional shareholders? This issue is of considerable importance to policy makers, accounting bodies and financial market regulators. The nature of private voluntary disclosure by companies to their core institutional shareholders casts light on the apparent privilege available to major institutional shareholders which is unavailable to other investors. Within the bounds of insider trading laws and Stock Exchange guidance on the dissemination of price sensitive information, there remains scope for legitimate exchange of information in private. Is that legitimate exchange beneficial only to the participants, or is there a wider benefit? Is the exchange in any way detrimental? This project provides insight into the communications between large UK companies and their core institutional shareholders which helps in forming a response to such questions.The interview discussions with finance directors and senior personnel in 33 large UK listed companies were conducted over a nine-month period from September 1995 to May 1996. The interviewee companies constituted 21 in the FTSE-100, nine in the FTSE-100 to FTSE-250 range, and three in the FTSE-250 to FTSE-500 range. Company participants were asked to explain the disclosure process and in particular to discuss in detail their private disclosure with institutional shareholders.Interview findingsThe key themes addressed by the interviews were:
Within those key themes the interviews identified and explored the following topics: the aims and constraints of the corporate communications process; the information agenda of company meetings; the costs and benefits of disclosure; dynamic exchange and learning between companies and institutional shareholders; voluntary disclosure; and the interactions between public domain and private communications.Aims and constraints of the corporate communications process - The interviews explored how policy decisions on corporate communications were driven by strategy and by corporate financing policy. The primary corporate purpose was to improve corporate financing capability and to prepare defences against takeover threats. The companies also attempted to improve the responsiveness of the stock market by creating a broadcasting system to communicate with the market, refining of the corporate image and seeking a favourable impact on share prices. Each company explained its perceptions of the constraints it faced in communications, arising from company law, financial services law, self regulatory bodies such as the Securities and Investment Board and the ASB, pressures from the stock market, competition within the sector, industry competition, and City social pressures. An important constraint was imposed by the Insider Trading law and by the Stock Exchange guidance on price sensitive information.Information agenda of company meetings - The interviews revealed that companies used practical rules of thumb to decide on the information released and on the communication channels used. The main corporate message formed the common root from which message variants were tailored to the needs of each channel and each institutional shareholder. The basic message was revealed in the OFR section of the annual report, to be expanded in private meetings. However the actual information disclosed in private meetings was contingent on a number of factors including the purpose of the meeting and the circumstances facing the company.Formally, the private meetings had an information agenda similar to the annual report. Informally, this base of public information could be a significant source for generating new information when used in the private dialogue.Costs and benefits of disclosure - The companies were aware of costs and benefits when choosing to devote time and effort on communications with institutional shareholders and analysts. These costs and benefits included the purpose of the meeting and the circumstances facing the company. The companies operated in a competitive market for reputation and credibility in corporate communications.The FTSE-100 companies had little choice but to have expensive corporate communications because they were not prepared to tolerate the perceived costs of poor communication. However, they did identify opportunities for economy and efficiency. These companies concentrated their corporate communications on core institutional shareholders and other influential parties. By restricting access in this way they sought to save on managerial time.Dynamic exchange and learning - Top management were thinking ahead and timed their internal planning cycle to have their most up-to-date strategic view ready for the external communication cycle immediately after the earnings announcement. Each company held an extensive debate at board level to identify and clarify strategy and the main message to be communicated. The existence of monitoring by the institutional shareholders sharpened up this process. It also supplied a means for companies to find out which strategies were acceptable to the institutional shareholders. The companies argued that during these interactions, both parties were moved up a learning curve and this led to the creation of a dual knowledge advantage. Through the core institutional shareholders the company gained an understanding of the broader market expectations.Voluntary disclosure - The annual report played a positive and central role in facilitating private disclosure. In turn, the private disclosure process improved institutional shareholders use of annual reports outside the private meetings. Public disclosures created a minimum disclosure baseline to be exceeded in private. The external reporting calendar also set the timetable for private interactions and information release creating a structure around which private voluntary disclosures could occur. The companies also argued that the private disclosure process had a positive effect on future institutional shareholders use of the annual report outside the private meetings.Interactions between public domain and private communications - Institutional communications and annual reports interacted to create a more comprehensive corporate disclosure system, and a richer information system for institutional shareholders. Despite the perceived limitations of annual reports, it was thought to be central to corporate communications to the City.If the annual report were removed it would become evident that other financial reporting functions and roles could not operate and some communication channels would be less effective. The published annual report, although poor in terms of new information, creates a structure around which private voluntary disclosures are much enhanced. The corporate perception of the value of reports relates to the fruitful interactions between external reporting and the private disclosure process when dealing with a limited number of core institutional shareholders, analysts and media.Issues for considerationTo what extent is this process of corporate communication constantly changing? Comparison of a static and a dynamic model, each based on the research findings, shows much more of interest in the dynamic model:
There is a broadly acceptable range of solutions or behaviour which satisfy the aims and objectives without compromising the known constraints on corporate communications.A dynamic model - Over a relatively short period of time there are constant changes in the relative combinations of private and public channels of communication and in decisions on which channel to use. Senior executives pursue public disclosure partly because they see benefits in market response and partly because they experience external pressures. Voluntary disclosure is provided in the public domain up to the point where it is thought to be sufficient to legitimise additional private disclosure around the same theme. Senior executives are also concerned to satisfy external or market benchmarks for good communication; company law and Stock Exchange regulations; financial reporting standards; and OFR guidance. Price sensitive information and other information is released timeously to ensure that there is not a false market in shares and to comply with regulatory requirements.Focus for future research - The dynamic model shows that private voluntary disclosure dominates public voluntary disclosure, interacting within a policy of corporate communications.The complexity of the interactive relationship between public and private disclosure channels suggests that research and policy questions should be explored across the communication system rather than merely focusing on marginal improvements to external reporting and other public disclosure mechanisms. This has particular relevance to questions regarding the limitations of annual reports and how, if at all, they can be overcome. The annual report is only one element of the total communication process but all elements are interdependent.Broader policy issues: ownership and control, corporate governance, insider dealing, and competitiveness - Separation of ownership and control may be a myth in the 1990s where major UK institutional shareholders can now have direct influence on internal strategy formulation, communicating their views on strategy to operational managers. The concentration of control in the hands of institutional shareholders now offers many opportunities for using relationships to encourage good corporate governance. However, the question remains, Who governs the governors? There is a possibility that the gains arising from the private exchange process could be confined to company managers and institutional shareholders. Increased transparency of this private process may be required in order to allay such fears. Such transparency could also demonstrate that the private interactions are making a positive contribution to innovation and national competitiveness.It would not be easy to persuade companies and institutional shareholders to relinquish their source of power and advantage by making private meetings more transparent. However, the process appears so central to corporate governance, insider dealing, and national competitiveness, that some form of regulation may have to be considered in the near future.ISBN 1 870250 56 0
© 2013 ICAS. All rights reserved. No part of this site may be reproduced without our permission.