Get documents about "Seminar Special The Credit Crunch
Document Sample
PrecisionIR Vcall
Transcript of 145 Cannon Street
London EC4N 5BQ
Investor Relations Society Phone: 020 7192 0893
Seminar Special: The Credit Crunch Fax: 020 8391 9522
October 15, 2008
info@vcall.com
www.vcall.com
www.investorcalendar.com
Participants
Philip Augar, Author
Akber Khan, Director, Head of CEEMA & Latin America Equity Focus, Deutsche Bank
Anne Simpson, Executive Director, International Corporate Governance Network
Lisa Williams, Head of IR, Debenhams
Michael Lever, Brunswick
Richard Davies, Managing Director, RD:IR, Moderator
Presentation
Richard - Moderator
Welcome, everybody, to this Investor Relations Society event, a special emergency
crisis credit crunch event. It’s so lovely to see so many people here and in fact, we've
got a sell-out and we have actually got a waiting list, and that is rather wonderful. So,
perhaps some good things come out of the bad. Why are we doing this? Well, I think
it’s probably quite clear. This is the biggest financial crisis since the 1930s; some
facts and figures to back that up. We’ve seen world economic growth predicted
dropping from 5…between 5% to 6% to 4% for the rest of the year which is not great
and actually looking out it’s going to get worse. Commodity prices are going up all
over the world. The global bank losses we believe total around US $ 1 trillion so it’s
quite a huge amount of money and obviously we have seen the bailouts and maybe
putting a sticking plaster (band-aid) on that partially and global mortgage backed
bonds have fallen by 80% in terms of volume over this year and so that has been
dropping like a stone and stock markets all over the world are falling and indeed, the
FTSE today was down 1.6% on yesterday and it now stands at 4323 and we also
have the looming spectre of inflation all around the world, so very much a crisis of the
financial markets. Now to talk about that, it’s very interesting and obviously that we in
the Investor Relations Society take all these things very seriously and you as investor
relations professionals, I'm sure, are finding it very difficult to actually voice in a way to
investors what you're doing and how your acting to this crisis indeed. When we talk to
fund managers about this, they're finding it very difficult to countenance what they
should do also. So, there is sort of almost a crisis of confidence and I think we are
seeing a crisis in many, many ways but certainly it is crisis in the financial system as
we know there is also a crisis I think in terms of the way that we perceive what are
banks should be doing. There is also a crisis I believe in the way that what auditors
have been doing for the last few years and also I think a crisis in corporate
governance in the banking section, in the financial, and there’s also the lack of insight
really from the investor community about what’s been happening. So, there’re some
really very big questions to answer, I think. How did we get into this state? What’s
going to happen next? How do we in the IR community react to these changes and
1
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
what’s going to happen going forward and how do we stop all these sorts of things
happening again if possible?
Now, to answer some of those very, very big questions we have for our guest panel
with us and I must say this was all put together at very short notice as you know. It
was very short notice to you and very short notice to our speakers so we’re very
grateful that our speakers managed to turn up in such short notice. And our panellists
today are Philip Augar who is an author many of you may have seen at previous
Investor Relations Society events. We have also with us Akber Khan who will be with
us shortly; he was the equity strategist from Deutsche Bank who is looking at this
issue from the sell side perspective. And then we have Anne Simpson who is
Executive Director of the International Corporate Governance Network, a network
we’ll talk about later. Lisa Williams, the head of IR at Debenhams, is going to be
joining us and also we have with us Michael Lever from Brunswick.
So just before we kick off, just to let you know that this is being recorded for archiving;
it’s not actually going out live today, but thank you very much for PrecisionIR for
putting all this together and making the facility available to record the events at such
short notice. If you could turn your mobile phones off, I’ve heard some lovely
ringtones earlier, one very trendy and rather marvellous but we’d prefer not to be
heard during the session and also when we get to the Q&A bit, if you can state your
name and company before asking your question that would be wonderful because
then the people who aren’t in the room later on will know who you are.
So a bit of thanks. First of all, thank you very much to Deutsche Bank once again.
We seem to be at Deutsche Bank every other week. It’s very marvellous, wonderful
coffee and buns. Thank you very much for the room, as you see, it’s a rather full
house, it’s rather wonderful. I would also like to thank CLS Communications who are
the sponsors of the Investor Relations Society events program; PrecisionIR as I said,
for recording today’s events; and of course, once again, Deutsche Bank for hosting
this event.
So on the panel we've got… just sort of the running order today. Okay. Right. 9
o’clock just about. We've got Philip kicking off and then we’re going to move on to
Akbar, if he gets here on time and then if not, then Anne and then Akbar after that.
Then we’re going to have a Q&A panel discussion. Obviously, there is rather loose
timings on these and we’ll see how we go and then at 10 o’clock, we’ll have another
break and then there’s more lovely coffee and then followed by another panel
discussion with Lisa Williams and Michael Lever and then we’re hoping to wrap this all
up by around 11 o’clock.
So, our first speaker is Philip Augar. Philip started working in the City as an
investment analyst and has been working investment…. works in investment banking
for over 20 years. Philip led NatWest’s global equity and bond business. He was
group MD at Schroders and was a member of the team who sold Schroders to
Citigroup in 2000. Philip is the author of two wonderful books, “The Death of
Gentlemanly Capitalism” and “The Greed Merchants: How the Investment Banks Play
the Free Market Game.” And he has got a new book out very soon, “Chasing Alpha:
2
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
The Rise and Fall of the City and the New Labour.” So a very, very apposite
contribution, I'm sure. Thank you very much, Philip.
Philip Augar - Author
Following Richard’s example, I'm going to stand up, so, and I think I should stand over
here or otherwise, I'm going to make shadows, little bunny rabbits, obviously (ph), all
over the screen. So if I stand here that everyone can hear me okay. Thank you very
much for inviting me. It’s always a great pleasure to come to an IRS meeting. I’ve
always found the… both the topics that have been selected and the quality of
questioning from the audience really excellent so it’s always something that I'm very
happy to do particularly, Richard, if you give such wonderful publicity to my books.
This one I really wanted to come to talk to you about because obviously it’s been
consuming all of our attention, the global financial crisis for the last several weeks.
And as it happens, I feel that we are probably in the bottom of a sort of U-shaped
valley now and there’ll be some bumps as we go along the bottom of the valley and
there’ll be some downs and ups, but my sense is, you know, we now should be
starting to look at reconstruction after this crisis and the reason I'm particularly
interested in speaking to you folks is that I think that the investor relations profession
will have a great role to play in the new shape of corporate governance and the
financial system that emerges out of this. So, I’ll explain why right now.
In a time of crisis like this, it’s very easy for policymakers and pundits and people
involved in the industry, if you like, to concentrate on fixing the symptoms and it’s
perfectly right that we do concentrate on fixing the symptoms. The symptoms of the
crisis in this case, you'll know about better than me, it’s the liquidity crisis. It’s the
need to recapitalize the banks. It’s the incentive structure. It’s the whole issue of
leverage. All of those things that Robert passed on the BBC that the FT’s excellent
team have been talking about and writing about in depth for the past several weeks.
But these, I feel are just symptoms of some underlying problems. And what I want to
do in the few minutes this morning is to identify what those underlying problems are
and try and work out how we can fix them. So the three underlying problems in my
view are: (1) Excessive deregulation of the financial services industry; 2) A misplaced
faith in shareholder value and in fact, a kind of a bastardization of the original concept
of shareholder value; and (3) An excessive burst of shareholder optimism. I want to
elaborate on each of those three now as to why I think that the underlying causes of
these problems and then give you what I think are the fixes for it.
So first of all, let’s talk about deregulation particularly of the financial services industry.
And I'm going to talk primarily from a U.K. perspective but you… as the prime minister
is very fond of saying, “This is a global financial crisis so we can’t just focus on the
U.K.”
The deregulation of the financial services industry in the U.K. really kicks off in the
1980s and I'm talking here about the abolition of exchange controls in the 1979. I'm
talking about the Big Bang reforms of 1986. I'm talking about the building society acts
of 1989 and 1997. And what these did was open up the U.K. financial services
industry to the American method of… the American business model let’s called it.
3
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
The kind of rip-roaring system where anything goes and anyone can do anything to
anyone. So that is the U.K. part of deregulation.
The U.S. part of deregulation was the gradual easing of the Glass-Steagall Act
throughout the ’90s and just to remind you, the Glass-Steagall Act was the Act which
separated banking from the securities industry and that was gradually eased as a
matter of practice during the 1990s and then there was finally a piece of legislation
called the Gramm Leach Bliley Act in 1999 which had an effect of it’s own…Glass-
Steagall is no more. What all of these pieces of deregulation in the financial services
industry did was that they created and with a due deference to our generous hosts
here. They created an incredibly powerful industry. They gave the financial services
industry a “cart blanche” to make a great deal of profit and to sell a lot of products very
aggressively to its customer base and I don’t blame the financial services industry for
making the most of those opportunities but it loaded things up very much in the
industry’s favor. So that is the role, I feel that… there’s a seat up here if you want one
a bit close to the speakers, but… you will be able to see my notes now and tell me
where I’m going wrong. So, that is the role of the financial services deregulation in
this crisis.
And it wasn’t a bad idea by the way. Deregulation is not a bad idea. I’m not opposed
to it. I just think it went too far. The same could be said of, to my mind, the second
cause of this crisis which is the growth of shareholder value which somehow morphed
from being shareholder value into that “let’s go for short term growth”. Shareholder
value as originally put forward was a pretty sensible idea. It was the invention of an
American academic with a funny name, Alfred Rappaport, who is a management guru
at the Northwest University Business School and he developed these ideas in the late
90s which said that the previous model of corporate governance where management
focused on the interest of customers, employees, suppliers, and shareholders was all
very well but it was a bit woolly and it encouraged lax management. It meant that
businesses were a bit sloppy and weren’t driven hard enough and he put forward the
priority pursuit of shareholder value as the new objective of management, and it had
an absolutely galvanizing effect on the corporate world particularly in the United
States and in Britain. Managements were absolutely energized. They were liberated
by this change. The idea of shareholder value was then seized by certain
management consultancies. Stern Stewart in the United States was one and of
course, by the investment bankers who, as a result of deregulation were becoming
very prosperous, very powerful, and very influential. And while that was going on they
suddenly see some ideas coming out of left field that say, “Hey, guys, anything goes.”
And they began to put together a whole suite of products that encouraged Chief
Executives that encouraged Board of Directors to maximize short-term earnings.
Now, I'm thinking here about takeovers, contested takeovers, and the whole suite of
new financial products that we’ve been reading about in the past few days.
Now, one further thing just came along to really, in my opinion at any rate, really
distort corporate behaviour and that was the introduction of share options. Share
options are heavily linked to the whole shareholder value scheme, the idea is, okay, if
we are going to run the business on shareholder value, how can we really motivate
management to ensure that they actually drive this in the hardest way and the way
4
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
that was developed was the idea that we’ll give them options and would incentivize
them to increase the share price.
So, now we have a powerful financial services industry, Chief Executives who are
really highly incentivized to go for short-term earnings growth and you’re beginning to
get the makings of a very, very dangerous situation, and then along comes the third
element which is shareholder activism. Now, shareholder activism has and this is
very much your territory and you folks probably know a great deal more about it than I
do, but shareholder activism has always existed as Richard pointed out at the
beginning, I’ve worked in the securities industry for 20 years, the end of the 70s, the
80s, and the 90s and I saw shareholder activism change over that period. When I
started in the late 70s, there was… actually, I would say quite a healthy dialogue
between institutional shareholders and Boards of Directors. It was led by the
nationalized state pension funds like British Gas, the post office, the electricity council
and some responsible insurance companies like the Pru and others and the habit
developed in the 70s and in the early 80s where shareholders were unhappy with the
performance of management. They would perhaps get together and then they would
have quiet behind-the-doors meetings and they would put across their view and
encourage management to work with shareholders to introduce value enhancing
policies. Somehow, in the 1980s, as the 80s and the 90s developed, this changed. It
started with the arrival of the American corporate raiders in the 80s, T. Boone
Pickens, Carl Licker Haan (ph), and others. It swept along much more rapidly in the
90s with the arrival of the activist hedge funds and it reached frankly absurd
proportions, in my opinion at any rate, in the early years of the 21st century when
shareholders with miniscule equity interest in companies, were in fact often with no
equity interest in companies if they use “contrast the difference” would attempt to
persuade shareholders and management to line up behind value enhancing strategies
or short-term value enhancing strategies.
Now, the consequence for this for management was that they actually felt that if they
did not do what shareholders wanted, they would be out the door pretty quickly and, I
mean, one of the most remarkable episodes was the case of Cadbury Schweppes,
which very soon after a minority activist shareholder appeared on the register and
demanded the de-merger, I think it was at the beverages division, suddenly turned
round and demerged said division having previously avowed that they wouldn’t do it.
Anthony Bolton, who is a very shrewd investor whose experience spans both the
modern and the earlier age, wrote in the financial times that this was really a prime
example of the tail wagging the dog.
So, all of these now comes together, very powerful financial services industry, the
equation of shareholder value in the minds of Chief Executives with just a dash for
short-term growth, and activist shareholders demanding an action now. What that
leads to is if you are on the Board of a British bank or a British building society, former
buildings society, this leads to a very dangerous situation, you’re incentivized to be
able to grow earnings per share, you’ve got fancy investment bank, as I used to be
one, I must be open on this, coming along offering you superb products that would
transform the banking system that were riskless because you could insure everything
with CDSs. This was the way to grow your business and at the same time you’ve got
yapping shareholders in the background saying, “If you don’t double your earnings per
5
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
share over the next five years, you’re out”. All of this comes together into this very
unhealthy overblown financial system that has led to the current crisis. So, that is why
I think that those three factors are the underlying causes of the problem.
Just in the last couple of minutes, let me just offer you some thoughts on how we
might fix these issues and I’d be very interested to hear your own thoughts on this.
First of all, fixing deregulation. In my opinion, we need to replace intelligent
intervention with the kind of “we know best approach”. We need to replace intelligent
intervention on the part of government and regulators with the hands-off approach that
has characterized the last several years. The financial services industry in Britain has
been saying if you over regulate us, we’re going to move elsewhere. It’s time to stop
all that. The government needs to step back into the frame and without getting heavy-
handed; without repeating the same mistakes the Americans made with Sarbanes-
Oxley, needs to introduce a proportioned approach to regulation of this industry.
Secondly, fixing shareholder value, I think actually we can largely rely on the market
to do this. Investors will re-price quality of earnings, solidity of balance sheets. They’ll
start to look dividend cover, things like that. They’ll start to look for longer term issues
that will get shareholder value back to what it was originally intended to be which
wasn’t just a dash for short-term earnings growth.
And then finally, fixing activism, putting the tail that wags the dog back in its place.
There is an enormous role for responsible investors for investing organizations like
NAPF and the ABI to trustees of pension funds and mutual fund boards. There is an
enormous responsibility on them to line up behind management, and I feel with an
enormous responsibility on you to speak to your employers and to your clients and to
get across to them the message that there is now a window. It may not be a very long
window. It might be two years. It might be five years. But there is an incredibly
important window now where managements can get across to investors that they
have a long-term strategy but it may not necessarily pay off in the quarterly earnings
out-performance. There may be periods of share price underperformance that they
and you now do have an opportunity to reposition Corporate UK and Corporate
Europe back in the original place where it was intended to be and that is as creator of
long-term shareholder value, which I'm going to leave it at that, if that’s okay.
Male
Thanks very much, indeed, Thank you Philip.
Richard - Moderator
Any questions for Philip directly before we move on to our second speaker? There
will be a Q&A at the end and a panel session anyways, but if you’ve got any
immediate questions for Philip or any of the other speakers as we go along, please
ask. Okay, as Akbar has just joined us, I think we’ll give you a few minutes till you to
catch your breath and we’ll move on to Anne, if that’s okay. Do you want to go
second?
6
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
Let me just introduce her. Anne is the Executive Director of the International
Corporate Governance Network. For those who don’t know, that’s a network of funds
and corporate governance folk drawn from 50 countries worldwide and with their
funds under management in total of around US$15 trillion. Anne is the senior faculty
fellow at the Yale School of Management where she teaches corporate governance
and as a member of the Operation and Board of Accountability. Anne is also a
member of the Private Sector Advisory Group to the World Bank’s global corporate
governance forum where she was formerly head of the secretariat and prior to joining
the World Bank in 1999, Anne was the joint Managing Director of PIRC, Pensions and
Investments Research Council. Which, I think, is a proxy advisor, I suppose you
could call it. Anne is also a member of OECD Advisor Group on Corporate
Governance and she is a member of the Editorial Board of the journal, Corporate
Governance. Anne?
Anne Simpson – International Corporate Governance Network – Executive
Director
Thank you.
Richard - Moderator
Senior (inaudible) person of the governance….
Anne Simpson – International Corporate Governance Network – Executive
Director
Far too many working groups so you brief them all out and I wonder how I get any
work done. I enjoyed Philip’s remarks and I think want to pick up two thoughts here.
There was a rather good comment made by the Head of Credit Suisse in the U.S.
while the Americans were saying they were somewhat fascinated by watching what
they thought until two weeks ago as a slow-moving train wreck, was the phrase. I
think the speed accelerated and the crash has happened or they think they’ve averted
it. But he said, “What ever happened to caveat emptor?” In other words those of you
with rusty Latin like me, buyer beware, and I want to reflect really on his comment
because the failure of that advice to the market is what is bringing the rush to
regulation and some of the panic measures that are there in efforts to redress the
problems that I think Philip has set out, some of which may be sensible and some of
which are very ill-advised. I think part of the US regulatory rush be it Obama’s or
McCain’s camp, congress is pretty fixed on looking at some of the issues like the,
what was done to dismantle the Glass-Steagall provisions and so forth. But the real
question is that the rush to regulation has not been accompanied by a rethink about
the role of the owners and that is really why this comment, this rather sensible
comment, “What happened to caveat emptor?” is for me a way of looking at what’s
going on at the moment.
So, first of all, let’s think about the “caveat.” What does that really means? If you are
to be issued with a warning, it’s most important that you understand that it’s a warning
unless it’s in terms that you can assess and I think one of the problems that’s gone
wrong in the market and we can see this now that it’s all happened is that complexity
and obscurity and abdication of responsibility to third-party agencies has led to a
situation where warnings are not properly understood. I know we’ve got to these
semi-philosophical commentary, even Paulson coming out with rather Zen-like
7
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
comments, “It’s not what you know, it’s what you don’t know you know” and “the
sound of one hand clapping” and yeah you’re the Treasury Secretary, this is not really
very helpful. I mean, the point is you have to… know what questions to ask and
enquire into the territory sensibly.
I was struck not so long ago by Robert Rubin writing in the New York Times as were
many others, that he had trouble understanding mortgage-backed securities at
Citicorp and I think if we’ve got to the point where a former treasury secretary cannot
understand what’s on the books of a major bank then what hope is that for the rest of
us. So, this issue about complexity poses new challenges for boards and why, I
suppose, if I have any advice, it would be to stiffen the spine of the independent
directors who may have been sitting there glazed… glazed over by technicalities and
getting to the point where asking the stupid question is understood to be a
fundamental part of your job, is something that would be very helpful.
On obscurity, I think often what were quite simple ideas, the simple idea being selling
mortgages to people who were not in a position to repay them. We saw all these,
didn’t we? Some years ago with the personal pension selling scandal - people being
sold products that actually were worse for them than what they already had - I mean,
this is all part unfortunately of what the market system is all about. I think these were
described as ninja mortgages, no income, no job, and no assets. But that didn’t
matter because if you’re going to sell on commission and then package up, securitize
the mortgage, slice it and dice it in 4000 different ways, and it would end up
somewhere in the portfolios of banks, not just in the U.S. but far flung, then really,
you’ve got a problem with the incentives. I don’t think just Philip with the management
of corporations but actually commission based and lack of regulation at the selling
end, which needs to be looked up.
So, what looks on one level like complexity is actually a problem to do with opacity.
It’s lack of transparency about the creation and ownership of risks that’s in the system,
what might start quite simple by the time it’s been packaged several times and
chopped into pieces and thrown around, you’re really just looking at something that is
almost impossible to value.
The third part of this caveat which has collapsed is this abdication of responsibility for
third parties. Now, first in the dock, obviously, credit ratings agencies used this
analogy last week saying, as we all know a fundamental problem with credit ratings
agencies is that they're paid by those who mail rating so if I get to my hairdresser and
say to him, “I’ll give you 50 quid and you tell how good I look.” You can imagine that
you’re not going to have a highly objective view of the situation and this is also true of
the corporate governance rating agencies that are out there. If you actually pull up
what’s been happening with assessments of boards and the quality of boards, what’s
happened I think is for the directors of banks and other users of credit rating products,
it’s almost been a suspension of judgment. It’s a louder suspension of judgment, so
rather than the market pricing things, you’re relying on ratings which give you comfort
and maybe stop you’re inquiring further which is very worrying. Now, the point is if
credit rating agencies were bullish, what would boards have to do in looking at
products and what the investors have to do and it worries me that some of the
structures that have been put in place even through the development of the
8
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
governance industry mean a culture, I think on boards, for example, about having a
risk committee on a bank and audit committees that when the whole board gets there,
there is this sense that “Ah well those people”, the officially defined financial experts,
they’ve dealt with this. And certainly in the U.S., I think the Sarbanes Oxley culture
Ah-hah! We now have got this very elaborate written legally robust system for dealing
with our internal controls has somehow prevented people from asking the most useful
question of all, which is the stupid question.
So, stiffening the spine of Boards and getting back to some of the basics in terms of
asking questions and being able to say that you do understand and if you do not
understand, then you jolly-well get to the bottom of it. That seems to me is not a
regulatory requirement about to be sorted out. And any amount of regulation won’t
solve that.
On the other aspects of the caveat and making sure that it’s understandable and
communicating the right message. There is a role for regulators on transparency
through the investment chain and that brings me the second part of our currently
favourite bit of Latin, which is “emptor,” and what has happened to the buyer. Now in
the Mid-Victorian, England when the joint-stock company was invented, in the long
shadow of the Bubble Act, which was a fabulous great scandal that meant that it was
actually illegal for over a hundred years to incorporate, remember that, as a regulatory
response of all time and France did something similar. You had to incorporate
through an act of parliament and actually that was probably quite helpful as the
empire developed that the government could issue its licenses and monopolies in that
way, but it was certainly not good for rising capital. But the model in the original form
was very simple. The public provides capital, directors are in place to make sure that
management is deploying that capital properly, and shareholders have the power to
hire and fire the Board, to call meetings, to put forward resolutions, to change
direction of strategy, and in due course also, to bring in, hire and fire, third-party
experts who could check via the auditors and check that all is well. Now the problem
is some of the major markets and let’s take the U.S. as a good example, is that basic
set of checks and balances simply isn’t in place. Over the last two years, half of the
S&P 500 has finally accepted that shareholders should be allowed to vote “No” as well
as “Yes” on the election of directors. And like one of the consequences of the very
meagre and while the pathetic regime of shareholders’ rights in the US is that
shareholders haven’t actually paid very much attention to Boards and it shows. If you
look at the quality of U.S. Boards, you will see the tinker, the tailor, the next door
neighbour, the hairdresser, the therapist, the kid’s best friend’s mother’s auntie, a
collection of very personally connected people but critically at the heart of it, only one
executive on the board who typically will be the chairman occasionally travelling. The
board is, in effect, rather weak and captured by management in an environment
where shareholders are more or less powerless. Their options are to sell or sue. Sell,
yes, you can see that you know the… something Philip didn’t touch on but the shorter
holding period, because I think that it reflects the short-termism that Philip was
touching on but also, access to the court litigation is your main route of redress. And
in that environment, I would say it is not surprising to find that very few companies talk
to their real owners. They talked to intermediaries as and when they need to and
there’s a great frenzy around that world but actually getting the real providers of
capital in touch with the Boards and getting the Boards to understand that what their
9
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
job is not to be decorative objects but actually to oversee the allocation of capital and
strategy that management is developing and executing. That, I think for the U.S.
market we are still at the very beginning and there is nothing in Sarbanes-Oxley that
that actually helps that I think. Its piled-up liabilities for Boards but it’s certainly had
not done anything for shareholders.
The other part of the “emptor” in thinking about how we fix all this is, if we’re doing that
stiffening in the spine of Boards then I will say the same message needs to go to the
institutions. Philip talked quite rightly about the “it feels like the good all days of the
’70s and ’80s where in a quiet gentlemen’s club, problems could be fixed over a few
brandies and cigars”. Well, no cigars now and no brandies and no quiet gentlemen’s
club. The whole world of the financial services industries exploded in ways that Philip
set out so well. However, the underlying provision of capital by the public is for long-
term purposes, whether it is through new products or growing products like
stakeholder pensions, defined contributions, the proportion of the market coming from
the public for long-term purposes is the same or greater than it has ever been,
pensions, mortgages, insurance. And this; I see nothing that is going to actually
overturn that trend over the long term even the entrance of sovereign wealth funds. I
mean these are the ultimate long-term owners, you know, because they are providing
for future generations and not even current generations of pensions. What has
happened is back to the theme of abdication of responsibility is that these owners, for
a variety of issues we do not have time to go in to the moment, chasing alpha, being
one of them, have handed over decision making to intermediaries and out of this, you
got ridiculous situations were we’ve had some of our members in confessional
moments, a Canadian fund at one of our meetings in New York last year, “You know
what, we just realized we have been under a lot of pressure about what is going in the
private equity industry and that we’ve got money behind some of these funds while
actually we are partners in the fund. We don’t have any reports. We don’t know
what’s going. We know that if it goes well, we will be paying outrageously extravagant
amounts of fees to these investors but then we realized we’re actually on the other
side of the table as well. We are the owners in the companies that these private
equity funds are targeting, so something is going rather wrong. Why are we paying
third parties to take some of our money to shake up Boards or refinance or load up
with debt or whatever clever plan there is and do something that we as owners have
not been prepared to do?” In other words, they come up with fancy ideas like sub
equity, which is you know, you get a little share of the new pie at the end of it and
there is little clever turns. It doesn’t remove the fundamental problem, which is why all
the institutions are not willing to get up on their hind legs and do the job that these
specialist vehicles are prepared to do.
The second part on the stiffening the spine, Philip talked about shareholder activism.
Now, I come out of that original world 20 years ago when the proxy voting agencies…
in fact, I think, PIRC was probably the first in the UK and actually in Europe and PIRC
was actually set up by a group of Medium-Sized Public Sector Pension Funds who
wanted to have influence and wanted to raise actually a range of ethical not just
governance issues. They wanted to have some restraints on the pressures during
takeovers and mergers to encourage long-term outcomes. They wanted to deal with
ethical issues like investing in South Africa. Now, they set up and owned that
business in order to give them a way to overcome collective action problems for small
10
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
shareholders. But what I think has happened is their industry has grown and is that
what was originally intended as a bridge to companies even if it was rather painful,
seeing whoever is trotting over the bridge to talk to you, it was intended to build upon
a sense of common purpose that shareholders have a responsibilities as owners and
Boards needed to respond to what owners were saying and fulfil their job in a more
active way. I think what is happening now, and certainly we see this in the U.S., is
that the proxy voting decisions are almost more important than the underlying
opinions of the owners and you see, some of the larger firms employing relatively
young but not well-qualified analysts who are producing reports giving voting
decisions completely disconnected from anything that is going on with the real money,
sort of Akbar’s world. And companies are in this difficult situation where they have the
fund manager or the holder of the real cash through shares (inaudible). All is well or
here’s the solution and then the vote actually goes in the different direction. So when,
for example, Knight Vinke picks up a tiny proportion of shares or the private equity
group picks up a relatively small proportion of Cadbury Schweppes, the only reason
that they will have influence is not because the Financial Times trumpets their
message all over the newspapers, it’s because the rest of the shareholder community
is either allowing it to happen. No, no, well, all right then yes because they are
persuaded themselves or because they are not paying attention.
So, “caveat”, yes; the warning. That needs to be better understood. Complexity,
opacity and third party… reliance on third parties, this is an issue. But on “emptor,” on
the role of the buyer, and this is very much ICGN’s world, we need to look again at
training the spotlight on the governance, the transparency and accountability of the
owners, and if we don’t put some time and effort into that, all the regulation in the
world won’t actually fix the system.
So, on our part, we’ve got a project which I was talking to Mike about earlier, which I
hope we can involve the IRS in. It’s a project called the Common Purpose in which
we have issued a statement on shareholder responsibilities, which cover many of the
issues I have touched on and others as well but what it is that makes investors bad
owners or with friends like this who needs enemies might be the sort of feeling in the
boardroom. What is it that shareholders could and should be doing and what we are
doing is going to business groups in different countries to actually talk about how we
can actually get a structured dialogue. I don’t mean a company, a kind of company
one-off when you are in trouble line of communication, but something which is
fundamental and can deal with some of the noise and we’ve had meetings so far with
the business roundtable in the U.S., the National Association of Corporate Directors in
the U.S. and we have got meetings coming up with the European director’s forum, set
out in March. But I think this is something where thinking about what would the guide,
what would the road map look to, what is the sort of marriage guidance, counselling
advice for owners and Boards? This might be something that we actually need
because complier explains simply isn’t doing the job. Thanks.
Richard - Moderator
Thank you very much, Anne. Okay, thank you very much. Thanks for coming back
so swiftly, as its past half past the hour already; I think we better crack on with the
second part of our morning session. Before we do that, I thought my (inaudible) to
look at some (inaudible) website, to mention the competition that are more or maybe
11
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
soon not to be competition, Merrill Lynch and the IMF put together a working paper on
the systemic banking crises issue and some of the key points, very interesting issue,
the FT reported this a couple of days ago, but they looked at a 124 banking crises
over the last 27 years; so clearly, this is nothing new in the world is there really. And
in this 124 banking crises, they discovered that in 55% of the banking crises, the
banking crises coincide with a currency crisis. They also found out that just over half
of the crisis episodes had in which there were sales of banks to foreigners, so that’s
what we’re seeing at the moment. Also that in 76% of episodes, banks are
recapitalized by the government. So again, that’s what is happening now; there’s
nothing new. And on a lighter note, we had a very rather…. but probably very
pragmatic contribution from our friend, the Deutsche Bank. I’ve read recently that
moving onto the retail sales, the luxury brand Burberry has reported strong sales in
the last quarter, and so, there is hope or maybe not.
Okay, thank you. Moving swiftly on. Lisa Williams is here from Debenhams and also
we have Michael Lever from Brunswick. Lisa, many of you all know, is head of IR at
Debenhams and prior to working at Debenhams in the IR Department, she was at
Rentokil Initial and prior to joining Rentokil, Lisa spent six years at Cookson Group as
the Manager of Investor Relations and Corporate Comms. Michael is a partner at
Brunswick and Michael has just joined the firm, actually very recently in July from
Credit Suisse where he was Managing Director in Corporate Broking with
responsibility for relationships with several of the leading financial institutions. So
they're both qualified to talk about this issue. Michael previously spent 20 years or
there about as a banking analyst; where did it all go wrong, specializing in the largest
UK institutions and was Head of Banking Research at several major investment banks
including Credit Suisse and HSBC. Prior to entering stock broking, Michael spent
nine years at the Bank of England primarily in banking supervision and as deputy
group leader of a team responsible for briefing the UK delegations to the IMF and the
World Bank, and so extremely well qualified to talk about the banking crises from the
inside. Then moving swiftly on, Lisa is going to talk with us about her view from the
Debenhams side of things.
Lisa Williams – Debenhams- Head of Investor Relations
Thank you, Richard and good morning. I think I'm going to stay sitting if you do not
mind partly because my microphone is a bit wobbly partly because I think I am
wearing the wrong shoes and the thought of standing up for 10 minutes in these heels
is beyond me. I am also not pretty tall so you wouldn’t really see me in the back if I
was standing up any way. I didn’t bother with any slides because to be honest, I
thought they’d be out of date before the ink was dry or whatever the digital equivalent
of that is. But what I really was going to do was just to give you some observations
from the sharp end and I think it is true to say that probably we at Debenhams are at
the very tip of that sharp end. I’m not expecting any sympathy from the rest of you,
but if you think of all the things that investors are not really very interested in at the
moment, I think we tick all the boxes. Obviously, as a retailer, we’re a consumer
facing business. We have a recent private equity history. We have a recent float so
there was a very defined starting point to take out a rather large share price fall from.
We’re highly leveraged to the tune of round about a billion pounds. When I left the
office, we were at mid cap stock. We couldn’t possibly be a small cap stock by now.
We have a fully leased estate of stores. We have no property to get us out of trouble.
12
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
We have an unusual shareholder base which is potentially more unusual this week
than it was last week because we have 13% of our stock which is split over two CFDs
between Baugur and Landsbanki. And we really don’t know where it is. It could now
belong to Baugur. It could belong to Landsbanki. It could belong to Landsbanki’s
administrators. It could belong to Philip Green, no idea. So if anyone sees 13% of my
stock hanging around anywhere, do pick it up, and send it home.
I thought, you know, to start, I would turn to the works of the great economists and
commentators to try and describe to you how we’re feeling about all this at
Debenhams. So I looked to Adam Smith. I looked at John Maynard Keynes. I looked
to Milton Friedman. I looked at Jeremy Clarkson. And I came up with this, and I just
like to share it with you. I think the way we feel at the moment is “Are we bothered?”
to which the answer has got to be yes but, no but… anyway, you get the picture.
I think what we have tried to do at Debenhams is accept quite quickly that things have
changed and we are now operating in a completely different environment both as a
retailer and as a listed company. There is no point us sitting and moaning about the
fact that the same shareholders who were concerned about our leverage at the
moment are the ones who 18 months ago were encouraging us to gear up. But at the
same time, it’s accepting that there has been change. We are trying our best not to
be deflected from our key strategic messages because many of the things that were
right for our business a year ago is still valid. And I’m very lucky, I think because I
have a seasoned experienced management team who have been in retail a long time
and have been around the block and okay at the moment conditions are probably
unprecedented but you know, we have had down turns before and, Mike, fortunately
knows how to run businesses in that environment. But if you’ve got a less
experienced management team and some of you may have that, they may need a bit
more hand holding and when you are out on the road that could well be you.
So the two big concerns that investors are inevitably concerned about with
Debenhams, we have two very large elephants in the room. So large that a lot of
meetings we go to, we have to have a bigger room to cram them both in and they
unsurprisingly are leverage and the consumer environment. I haven’t been in retail
that long but it seems that we don’t like to use the “R" word where we can. It’s a bit
like mentioning the Scottish play in the theatre. It’s the “R" word that rhymes with
depression. Oh, God, that’s worse. No, not the “D” word. So anyway, you know the
one I am talking about. And it’s easy to think of leverage and the difficult consumer
environment as two sides of the same coin but which we’re really trying to avoid
having to do that because we are trying to separate what we think of is the financial
health of the business from a strategic health and to demonstrate to the market that
we can make improvements on one side even if the other side is difficult.
So when we’re addressing these two big issues, the leverage and the consumer
environment, I think the way we are doing that they are both elements of the way we
are adapting to change into the way the market has changed and also is sticking to
our guns in each of them.
In terms of leverage, we actually are quite relaxed about it. I mean we may have a
billion pounds worth of debt but our refinancing window is open till May 2011. So
13
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
there is no immediate pressure on us to refinance but we have accepted, probably
been beaten into submission a little bit, that the market has concerns over that and it
is undoubtedly weighing on sentiment and it’s undoubtedly impacting valuations of
Debenhams. So when we did the interim results about six months ago, we outlined a
program of initiatives that we were about to take, intended to take leverage off the
agenda for Debenhams as soon as we possibly could. Obviously, it is difficult to get
rid of a billion pounds overnight, well actually it’s not impossible, but I don’t think any
of those options are probably available to us at the moment. And what we are doing
is not rocket science; it’s about controlling cost, it’s about controlling inventories, it’s
about an even more intense focus on working capital management. We have been a
little bit creative as well for the first time we offered script alternative to the dividend
which actually had a very high take up. I think about 45% of our shareholders took
that up whether they will do for the final dividends it doesn’t really matter because
they’ve all unfortunately lost money on that. And what we’re doing is updating the
market every time we report on how we are progressing against those initiatives and
that certainly seems to have gone down quite well but other than that, we have sort of
stuck to our story. We do not disclose our covenant levels despite being asked about
it on an almost hourly basis and I’ll mention in a moment one of the main reasons why
we don’t do that. We don’t think it’s going to add anything to the party. We don’t
really think that it will make debt concerns go away. So we have chosen not to do
that.
In terms of the consumer environment, there is really nothing we can do about that.
The environment is what it is, but we are carrying on to telling the same strategic story
in that for us as a retailer selling better products in better stores is the key to success
so we continue to focus on telling people about the changes that we have made
through our products in terms of upgrading the design and the quality and the value of
our products at all price points, about improving the in-store environment through
better visual merchandising and about opening new stores which not only look great
but deliver a very strong return on capital. We've got a very big new store opening in
a couple of weeks in… well, we have to call it Westfield, London. It’s probably White
City or Shepherd’s Bush to most of us but West Field is very touchy about it and it’s
going to be fantastic and people say to us why you're spending all this money on new
stores but we can return on capital of new stores of over 50% so why would we not
want to do that. As long as I think you’re not cannibalizing you’re existing sales, we,
at Debenhams, have quite an immature portfolio. We have about a 140 department
stores. We think that they are probably 214 shopping centres in the UK where a
Debenhams department store would be suitable so, why should we rob ourselves of
that opportunity to drive the business forward.
At the same time, the bit I suppose that is new to talking about the costumer
environment, is one of the key messages we are trying to get across to people is that
we are in control. We’re not just being tossed about in stormy waters and that we are
managing the business where we can and we are focusing on the things that are
under our control. So, that’s about the bottom line. It’s obviously about managing
cost and inventories and CapEx. It shows that we… but also about showing we’re
driving the top line, part of that is new stores. It’s product development. It’s investing
in technology that helps us deliver better service in the stores.
14
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
So that’s really what we’re doing about those two big elephants, but I think in a way
it’s all very well talking about what investors are worried about in my stock or in any of
your stocks but what’s really, really concerning investors at the moment is how much
money they’ve lost in the last couple of weeks. And in a lot of ways, micro doesn’t
matter anymore. It’s all about the macro and I think we, as investor relations people,
need to be sensitive to this. If you call an investor and he sounds rather harassed and
doesn’t call you back, it’s probably not personal, it’s probably not a lack of interest in
your stock, it’s really because they’ve got an awful lot of other things on their plate.
Now, if you’ve got, now we are on road show next week, we’ve got prelims, and I
suspect that we… a lot of the meetings that we do in our road show won’t last an hour
because people will actually have other things to do. And I will have a CEO and CFO
who will be moaning at me. But, you know, It’s probably still worth it because one of
the things we have to make sure we don’t do at the moment is to pull the shutters
down and I know it’s very easy especially if you have a CFO like mine to say, “Well,
who in the world is going to buy retail stock at the moment? What’s the point of road
showing?” I do think that’s quite a mistake because it may all be about blue chip and
large caps at the moment which is not that much good to Debenhams but we do need
to be positioned for when the market comes back. And what we’ve seen over the last
couple of days, you can see I read this last night because it’s changed this morning,
but when the market rallies it rallies hard and okay at the moment, it’s much stronger
in the FTSE than in the 250, but our turn will come and at some point, investors are
going to have to buy back into stocks like Debenhams and we need to keep the
dialogue open as much as we can in the meantime. It’s pretty obvious that sentiment
is extremely fragile and we need to keep information flowing and the market even
though it might look like it’s not noticing especially little old stocks like mine, I’m still
expecting the same level of disclosure even if it looks like they’re not taking an notice.
I was talking to one of my brokers yesterday and he said he had another client who is
thinking of paring their prelims back to the absolute minimum, you know, they're not
even going to bother doing a presentation, they do not think people are going to be
interested. But I do think that’s a mistake, you know, you just have to keep going.
The market is particularly sensitive I think to misinformation or a lack of information
and that’s about operational issues not just about financial issues. Let me give you an
example; in early September at Debenhams, we run a promotion which was 20% off
promotion throughout the store I’m sure most of you took advantage of the fantastic
value we were offering during that week. But on the morning of the sale when the
promotion was launched, an analyst or somebody else had seen, either seen one of
the ads in the papers or who passed the store and decided without bothering to check
that it must be a fire sale because we had breached our covenants and the next thing
we knew, the share price was off 10%. Actually what it was was a promotion to try
and encourage people to start thinking about buying their autumn/winter wardrobes.
So, a bit of note to self, next time we come up with a promotion people aren’t
expecting, at least mention to the house analysts and to house spec sales so they can
try to squash that rumour before you wonder why the share prices are down 6% and
have to launch a full scale damage limitation exercise.
That sort of brings me onto the sell side, those of whom who were left. I think we
certainly in retail have lost a couple along the way. Inevitably, the things that
investors are talking about others… the sell side are talking about are the same things
15
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
that investors are talking about, our debt and the consumer in the economic
environment. And this I think is causing us a little bit of a problem. I don’t know, Tim,
whether you’re finding it… you probably don’t know the level of debt we have but
certainly in retail, a lot of sell side analysts don’t really understand the debt markets
and this often is exposed by the rather odd questions they ask. I was once asked by
an analyst… I don’t think it was at Debenhams, I think it was at one of the other
heavily indebted companies I have worked for in the past, whether we thought we
were going to go into Chapter 11? He clearly didn’t even get what the regulatory
regime is. I think probably at least half the analysts in the retail think that if you’ve
breached a covenant, you just go bust and that’s it, end of story. And my CFO likes to
tell a story that if… as we have a fully leased estate, we have no property and often
banks will foreclose on debt if they think they can do better than you can with your
assets. But obviously, with us, all they would get would be a rather large quantity of
lady’s knickers and it will take them quite a long time to make a billion pounds out of
lady’s knickers and they’d actually rather that we did that than them. So, there was no
particular reason why, even if hypothetically, we came up against a covenant and got
a waiver, we don’t go bust. But I think that it is something that you need to be aware
of, that the equity sell-side are pretty rubbish on that. It is actually one of the reasons
why we have chosen not to disclose what our covenant levels are because all that
would do would move us from a debate over the covenant levels to a debate over
headroom with ill-informed parties who don’t really understand what headroom is let
alone what the adequacy of headroom might be. I do, however, think it is worth as IR
people making sure that we know, you know, what we ought to do about debt,
particularly about your own balance sheets. If you don’t feel comfortable on that, I’m
pretty certain your treasury team aren’t doing much these days. So, they will probably
manage to find at least three or four minutes to explain to you the niceties and if you
ever find out what pricing 15 through the CDS means, I’d be delighted to know.
It’s particularly frustrating on debt but also on other issues. If analysts are publishing
stuff which is wrong particularly given that we’ve already talked about market
sentiment being very fragile, it’s even worse if they continue to publish after you have
pointed out their mistakes, especially if they’re one of these increasing number of
houses who actively push their research to the press. We have had particular
incidences of that lately. And what we have done is taken a very robust approach to
that. If misinformation starts to have a negative impact on your business particularly
on operational aspects of your business, I don’t think you have to just sit and take it.
There are options open to you and certainly we have explored those recently either
legal or regulatory solutions and actually on the issue that we’ve had, I think we have
finally come to a conclusion.
It’s also worth bearing in mind that a lot of analysts I mean in retail, as a lot of our
analysts are wise old heads or certainly at least old heads. I’m not sure any of them
are that are wise but in other sectors that I’ve worked in actually a lot of analysts are
quite young. They’re reasonably new to the game. They haven’t been through this
sort of turmoil. They are running around like headless chickens. There are also
worried I guess about their own jobs and to a certain extent we can cut them some
slack but they also have to deliver and we have to make sure that they’re not making
what I think is a difficult job even more difficult.
16
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
I think that’s probably all I really wanted to say. In summary, it is tough out there but
we’re not helpless. We’re not victims. We can do something about it. We need to
keep going. And I wanted to leave you with another thought from a cultural icon, a
slightly more sophisticated one. I don’t know if anyone is familiar with the works of a
Japanese surrealist author called Haruki Murakami and he writes novels but he has
recently written a memoir of his marathon running activities which is a great book but
his marathon running mantra is “pain is inevitable but suffering is optional” and I’d like
to think that’s where we, at least Debenhams, might come out.
I will now pass onto Michael who... Well, I have heard some of what Michael has to
say a couple of weeks ago and I recommend you take notes because I have been
recycling it and looking very smart to my friends for the past two weeks. So, simply
the same is my advice?
Michael Lever – Brunswick- Partner
I think Lisa has been particularly kind. It’s been particularly interesting for me having
been on the sell side for about 20 years and moving to Brunswick in July to look at the
communication from the other side of the fence. And so, I was very keen to take up
the opportunity this morning to come and talk to you. I think that we start from the
proposition where there’s clearly an umbilical cord between IR and PR and the
requirement of seamless and timely coordination between the two which is vital most
of the time becomes even more necessary in the light of the current banking crisis.
So what I want to do in a few moments allocated to me this morning really is to focus
my time on the challenges of communicating in a bear market and many of my
remarks will be applicable to IR as well. So, I do want to apologize if some of you in
the room feel that I should stray a little bit beyond my patch.
I think the starting point for me is to consider just who we are actually communicating
with. Now, I think gone are the days when it was just sort of a traditional media of
newspapers, news wires, broadcasters which communicators had to contend with and
the internet has certainly changed all that and the advent of websites, blogs, and
social media, pod casting, and other things I don’t really understand about, mean that
we have a different audiences and those audiences are growing very fast indeed. To
give an example, the number of blogs is more than a hundred times bigger than it was
just three years ago and it’s actually doubling every 200 days. So it’s a phenomenal
growth. They’re also been very keenly followed and I think those of you who pay any
attention whatsoever to what’s been happening in the banking world and Robert
Peston will know that his well-informed “blog” has captured a very wide audience
during the current banking crisis. So I think the point is that online media is becoming
a major source of information for all your audiences including consumers and
employees. So if you are to control the communication’s agenda which I think is all
the more important in a bear market then it’s important to drive all those
communications through all the critical channels including online. So, if there’s
messaging to be done for example, an announcement day, then do involve the online
reporters, the media, and online publications, the people that post online videos, and
so on. Now, of course I think what we’ve talked about this morning is a lot about
external audiences so I just wanted to pause for a minute and talk about the internal
stakeholders which we haven’t really talked about this morning much. And I think the
internal stakeholders are equally important to the external one. Employees are often
17
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
advocates for their companies. They may also be shareholders in those companies
and quite possibly, face the downturn and a declining share price, they will inevitably I
think feel fairly depressed and demotivated. So I think it’s vital that senior
management regularly communicate with their employees whether by intranet, blogs,
letters, face to face meetings, or a combination of all those methodologies and what I
don’t mean is just a reportage of results and so on. But I think meeting employees is
a question of demonstrating leadership particularly at this time, demonstrating
concern for their wellbeing and empathy for their worries. In short, it’s about providing
reassurance that management remain in control of their company’s destinies. And that
employees that are as much a part of that destiny as other stakeholders and that’s
something I think we need to focus on and we’re not doing enough of at the moment.
I now want to talk a little bit about how one should communicate in a downturn. I think
the starting point is to recognize and I’d pick up here on the question which we had
over there before the break. The starting point is to recognize that keeping your head
down and saying nothing in my view is not an option and nor should it be. I think
leaving aside this sort of technical market continuing obligation on companies to
inform the market as soon as possible of any material change in their prospects. If
there is a news vacuum we have found that the media will fill it and in a downturn,
they will certainly not be looking for good news. So in down markets I think we all find
that scepticism is usually the safest starting point for the media and of course, the
market, as the risk of being proved wrong is frankly highly reduced. And even if you
are proved wrong in the end, the end is a long time away and nobody will probably
remember. So I think continuing communication is important and there is also a need
to recognize in a down market that the impact of any communication and particularly
positive news will have a much shorter shelf life than when things are on the up and
again, I think that’s something we’d picked up on a little bit earlier.
So putting it another way, in the bear market, the benefits of any news flow tend to be
transitory. I think because commentators expect things to get worse, the fact that the
news at a given point of time is satisfactory is discounted on the basis that it will not
last. And to use market terminology, any good news is just good for the day. So I
think it will therefore be inevitable pressure for increased, a more frequently disclosure
especially in response to rumour and speculations to provide the certainty that the
market needs.
I recognize this carries the unwelcome risk of setting a precedent. With that said, we
do not advocate any hard and fast rules on the frequency or content of
communications but with regard to additional disclosures, it has to be recognized that
once new information is given, it may well provoke further demands for details which
may not be appropriate to give and despite the pressure to give those details. Even if
you do not get those demands, additional information once given is very difficult to
take back even when the reasons for those disclosures have become less relevant. I
think in some, but not all circumstances, it may be sufficient to direct inquirers to
previous statements or financial disclosures. I think there is tendency of us all
because we know our companies very well to assume that everybody in the market
knows the company equally well and that they may well be mileage in actually going
back to some of the inquirers and actually directing them to previous statements or
previous parts of the financial disclosure which will provide the answers rather than
18
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
offering up new disclosures. However, where the answer does not lie in previous
statements or financial disclosures then it is preferable in our view to make highly
targeted additional disclosures rather than allow the market to trade on a totally false
and exaggerated premise. So silence is not the answer.
Now, to give you an example from Barclays, the bank was faced around the time of
interim result with considerable speculation both in the market and in the media over
the adequacy of its write downs against its holdings of the securities backed by
residential and commercial property as well as against its portfolio of leveraged loans.
What the bank did in response was it published 10 pages of additional information on
the nature of these exposures and provisioning taken against them. These were
generally regarded as best in class disclosure and welcomed even by those market
commentators and analysts who were negative in the stock. In fact, one of the
biggest bears in Barclays stood up and congratulated the management at the time of
the interim results on the additional disclosure. Now of course, as time has gone on
and things have moved, Barclays’ position has changed, there have been fresh
concerns for the banking sectors we all know more generally. And I think this just
goes to illustrate the point that any disclosure you do give, you must recognize that
the market will treat them as transitory. But I think I still firmly believe that providing
the market with additional disclosures and valuable insights to allow more meaningful
comparisons to be made as was done in the case of Barclays is a valuable exercise.
It is not clear if and when Barclays will withdraw that disclosure but best practice
suggest to me that if you have given additional disclosure, you ought to give the
market some notice when you're going to withdraw it. Now, regardless of whether or
not additional disclosures are given, I think it is likely that both the style and the
content will change in the downturn.
In terms of style, I think when I was thinking about this the other evening, I think the
principle challenge in such an environment is striking the right balance in
communication between optimism and realism. Easier said than done, I know you'll
all say. I think all audiences accept that the near term outlook is wreathed in fog, it’s
far better to have an honest dialogue than risk your credibility with overoptimistic
predictions. As we all know, credibility once lost is very difficult to recover.
If I turn to look at the content of messaging, it’s important for companies to distinguish
between the short-term consequences on the banking crisis and the longer term
strategic story. In many cases, I think everybody accepts that it is difficult to give
precise guidance after the near term impacts of the financial crisis. One approach
would be to make sure that the media understands that causal links between what is
happening in the financial world and the real economy, all too often they don’t. So for
example, it is clear that the downturn in the housing market combined with the rising
cost and limited availability of credit is going to hit discretionary consumer expenditure
with the greatest impact being felt by those companies most closely aligned to the
housing market. The difficulty is always the guidance on the order of magnitude that
we all struggle with. And the companies may well not know. And I think their
shareholders and the market understand the companies may well not know. But I
believe in those circumstances, it will be helpful to offer guidance on the key
sensitivities and all ranges of possible outcomes rather than simply say, “We do not
know.”
19
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
Now information needs are constantly shifting, which is why communicators should
operate on the receipt as well as transmit mode regularly taking the market’s
temperature and adjusting their approach accordingly. It should be clear for example
to all of these that just making the same presentations with different figures may no
longer be appropriate or at the very least sufficient in current markets. Much of the
focus on the market’s immediate concerns has shifted from earnings to balance sheet
integrity. And so in addition to the usual numbers in sales and margins and earnings,
etc., interim management statements and result statements are going to have an
additional range of information and they should be covering areas such as cash flow
and gearing, interest cover, debt maturities, and so on. So we must allied to the
shifting information demands and those information demands are shifting more from
earnings to balance sheet at the current point in time.
In addition to using additional disclosures to provide as much comfort and clarity as
possible on the short-term outlook, it’s very important not to lose sight of the longer
term strategic story. It is important, therefore, for management to get the message
across that while they’re focused on the near term challenges, they are not
immobilized by them. They must re-articulate their company’s strategic vision and
how they propose to execute on it. This, of course, may have changed as the turmoil
and dislocation throws up opportunities. So, for example, as we have seen Barclays
has bought Lehman’s North American assets and Wachovia is in the process of
buying Wells Fargo, I’m sorry, I beg your pardon, Wells Fargo in the process of buying
Wachovia’s assets. Of course, recent events may change the long-term strategy and
not just the short-term performance. I think where that is the case, it is important for
management to explain the changes at the earliest possible opportunity.
So I just want to try and offer you a few conclusions. I think there is no doubt
communicating in the midst of a banking crisis presents particular challenges. Not
least of the short shelf life of messaging and the need to remain attuned to shifting
information requirements; don’t assume that the old information is still good enough.
However, we think that the principles of communication remain the same as in normal
times except for greater emphasis and these are communicate formally, regularly, and
consistently with all your internal and external audiences. You need to use news flow
to fill that vacuum; otherwise, you will find that others are filling the vacuum for you.
You need to set out your key performance indicators in which you judge your business
and provide sensitivities. It is important to maintain a clear narrative underpinning all
communications and you must try and help the audiences to see the company’s story
and its linkages to wider market developments. I think in these circumstances, it is
also important to keep channels of communication tightly controlled. In other words,
what I mean is use a small number of spokespeople using the same messages. And
finally, you must highlight structural trends and economic changes that impact on the
longer term strategy of your companies. Thank you very much for your attention.
Richard - Moderator
Okay. Thank you.
Male
20
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
For your (inaudible) issue, I have some (inaudible) ideas about what went wrong in
the banking sector but as you are an expert with 20 years in the banking sector
(inaudible). I'm very intrigued to know what your thoughts on what did go wrong and
why it went wrong and was this a failure of disclosure or was this a failure of people
asking the right questions?
Michael Lever – Brunswick- Partner
Well, I think that we had a little bit of this before the break but essentially, and Lisa
has heard me say this before, I have a very long blame list. The governments are
trying to take the plaudits at the moment for rescuing the banking sector but in reality
the governments, I think monetary policy, which remained too lax for too long is at the
heart of some of our problems. I think the rating agencies were mentioned as guilty
parties as well earlier today and I agree with that.
Richard - Moderator
I just wanted to say on that point as we did ask all three credit-rating agency, the big
three credit-rating agencies to come along today but all of them refused.
Michael Lever – Brunswick- Partner
That speaks volumes. I mean, I think we have to accept some responsibility. The
bankers must accept some responsibility clearly. I think the people who bought the
products must accept responsibility. They clearly didn’t understand the risk and I think
the regulators clearly bear a heavy burden of responsibility as well.
Male
Okay.
Richard - Moderator
Any questions for Michael or Lisa and if you could state your company name and
name. Thank you.
Diana Fawlkes – (inaudible)
Lisa you talked about your planning your meetings around your (inaudible) results but
looking out at your IR program going forward, are you doing any sort of major
changes to that or are you considering other things or different people…or spoke
people who… What are your plans for the next year?
Lisa Williams – Debenhams- Head of Investor Relations
We are changing a few things but they’re changes that we felt we needed to make
anyway. For Debenhams, for example, lots of people think of Debenhams as being
(inaudible) and private equity as opposed to thinking about the people who run the
fashion department or run the store business. And so we are sort of broadening the
appeal and the bench of talent that we actually put in front of the market. We are also
doing a lot more in terms of stores and store visits. You know, we’re doing something
with both the press and analysts at White City, sorry, West Fields, London. I have got
to put 10P in the swear box every time I use the wrong term. But we’re not really
doing anything different other than not taking it personally if people don’t want to see
us. Anyway, we’re going over to the U.S. next week and the program is maybe not as
A listers as it may have been in the previous years because we just have to accept
21
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
where our market cap is at the moment. People like Putnam, (inaudible), or
Wellington just don’t want to see us because we’re wasting each other’s time. So
there’s not really any significant change that has come out of the environment. If
anything, I think, we’re determined to show that, you know, it is business as usual.
Male
So, I think on that issue, a very interesting thing is that for the first time maybe we’ve
got a huge swath of companies and PLCs, where they are having to disclose nominal
growth figures when they do far less growth than they hitherto thought they would
experience and maybe lots of people in denial haven’t had the experience in dealing
with that before. Any tips on how to manage these storms…
Lisa Williams – Debenhams- Head of Investor Relations
On the basis that I’ve only ever managed profit downgrades… (laughter). Apparently
some people occasionally do one. I’ve never had the opportunity to do so. I think
it’s… I think you just have to get a bit of a thick skin to honest because you do
suddenly find that the analysts who used to be your friends, now feel that you are
responsible for the fact that, you know, they thought numbers were going to go up X
and now they’re going to go down X. So you just have to develop a bit of a thick skin
to make sure that you know what your key messages are and keep going with them
and hopefully you’ll get through it together but its… you're absolutely right, I think
there’s a lot of people, you know, as I was talking about on the sell side but also in IR,
who possibly haven’t been through these sorts of situations and have only worked for
companies where things have only ever gone up. Fortunately, I have only ever
worked for companies where everything has come down. One day, maybe.
Richard - Moderator
Have any points on that?
Michael Lever – Brunswick- Partner
I think that is absolutely right. I think what I took away from Lisa’s comments were
that it is important actually to show a little bit of self-help. Help the market. Educate
the market. Don’t assume that the market knows everything about you. And I think
that’s very true. I think there are a lot of new people in the market. A lot of these
analysts nowadays are covering more companies than they used to do in the past and
they aren’t perhaps as deeply embedded in the understanding of some of the
companies as some of the old wise heads used to be. So I think there is an education
job to be done and I think that is the key point I can take away from this.
Richard - Moderator
What Philip was telling earlier on, we’re talking about maybe a move of the paradigm,
a shift of the paradigm to a more longer term view both in terms of investment
horizons and in company reporting maybe. How does that fit with your idea about
more disclosure because that seems a much more reactive process rather than
looking at the longer term and thinking about the longer term trends within the
business?
Michael Lever – Brunswick- Partner
22
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
Well I think it’s important to do both. I’ve tried to bring out the fact that I think in the
near term you need to address, try and address some of the particular concerns in the
market in the near term by focusing on those areas particularly balance sheet areas
so that the market seems to most exercised (ph) at the moment and at the same time
try and re-articulate your longer term strategy. I think when you’re seeing market
gyrations of 30 or 40 or 50% and upwards on FTSE stocks in this environment, these
are sorts of movements you would usually see over a 2- or 3-year period. I mean to a
certain extent, the movements themselves have created more short-termism, I think,
and I think that one can try and help deal with that by, if you like, softening some of
the concerns which are leading to these gyrations. The gyrations are a function of an
information vacuum and uncertainty and lack of transparency and lack of belief. The
more that you can create an environment of certainty, the more you can give comfort
to the market, the less you’re likely to see the volatility. So I agree to a certain extent
with Philip but I think that the market has become more short term really as a function
of the role of some of the market players such as the hedge funds in the market now.
Hedge funds, there will be fewer in number but they’re not going to go away. And,
therefore, I think that despite the downturn that we’ve seen, there will still be short-
term pressures on companies and they’re just going to have to deal with those.
Richard - Moderator
Any more questions from the floor?
Male
What about some trust and confidence because as we know, it hasn’t been very
helpful, has it that we have had senior management of some companies, especially
the banks saying, “All is well.” and then the next day they go bust. And is it… what
can IRs do to increase the confidence and the trust in the investor market in their
senior management or indeed in their strategy?
Lisa Williams – Debenhams- Head of Investor Relations
I think it is very hard as IROs because to a certain extent, we have to believe what
management tells us and, you know, we then tell the story in good faith and we are
not necessarily in a position to know if the story that we’re telling is going off key
because we’re not necessarily, some of us are members of the Board, but an awful lot
of us certainly have not been on the Board of any of their companies that they’ve ever
worked for. We believe what we’re told. And I think it is extremely hard if actually it
turns out that that wasn’t the right story and actually that strategy you’ve been
plugging away to investors for the past two years was a nonsense and it’s extremely
hard because you have a certain amount of personal credibility invested in it. And I’m
not sure I know a solution other than to make sure you have a good enough
relationship with analysts, that people know you have given them the information that
you have had available to you. I don’t know whether Michael or anyone else has got
any views on that.
Michael Lever – Brunswick- Partner
No, I mean… it’s very, very, very difficult and I agree with what Lisa just said. I think
it’s important to have an open dialogue with the market and to try… and not just giving
them internal figures which you wouldn’t ordinarily give them. That basically debating
with them a range of possible scenarios, encouraging management I think to engage
23
Transcript:
Investor Relations Society
Seminar Special: The Credit Crunch
October 15, 2008
with a range of possible outcomes that might affect the strategy, not just assuming
that the strategy is going to proceed sweetly as normal despite the fact that we have
had a sort of Armageddon-type of scenario. So I think it is important not to be in
denial. I think it is important to provide as much information you can to allow the
market to come to it’ own conclusions. So the only thing I would strongly recommend
is engaging in a debate rather than simply transmitting information.
Male
So active engagement both ways.
Michael Lever – Brunswick- Partner
Active engagement both ways. Try and look at a range of potential scenario
outcomes with the market. If you’re able to put some figures on that, great. If not, let
them at least understand what the key sensitivities are around your strategy and its
delivery.
Male
Thank you.
Richard - Moderator
Any more questions? It’s 11:17 now so it’s sort of like we’re running out of time. In
that case, thank you very much for your contributions.
24
