The evolution of corporate access and the growth of the IR role
Over the past 20 years, several flagship regulations have forever changed how corporate management, brokers and asset managers interact, creating corporate access as we know it today and elevating the role IR professionals play.
Mifid II might be the latest regulatory change to upend the status quo in corporate access, as it forces the unbundling of payments for research and corporate access from trading commissions, but there have been a series of notable regulatory changes since 2000 that helped to create corporate access as it is today. The end result is an investment community that considers meetings with management and IR as critical to its investment process and an IR community that has firmly established itself as central to the idea of maximizing shareholder value.
As we pass the two-year anniversary of Mifid II’s implementation, it’s a good time to understand how regulatory change during the last 20 years has changed corporate access and, in turn, redefined the role of investor relations teams. Reg FD On October 23, 2000, the SEC’s Regulation Fair Disclosure (Reg FD) rule came into effect. Prior to its passing, investment banks enjoyed a privileged relationship with senior executives at many public companies. Under this system, material non-public information could be disclosed to analysts ahead of any public announcements. Analysts were seen as disseminators of this information to the marketplace, helping to push each stock to its fair value while the investor relations teams often played more of a supporting role for the CFO and management.
Institutional investors with the largest assets and commissions, and thus the best relationships with covering analysts, were generally the first to find out about market-moving information. As the SEC looked into how analysts were being briefed, it noted that when analysts or institutional investors were given information ahead of an earnings call, they were able to profit or avoid loss at the expense of those investors that didn’t have the same information. The regulator wanted to end the process of selective disclosure and effectively did so by enacting Reg FD – which created a level playing field and made it harder for investors to have an edge. As written, the rule applies to brokers, investment advisers, institutional investment managers, buy-side and sell-side analysts and shareholders who would trade on the basis of information gleaned.
Company executives could no longer discuss earnings results or estimates, mergers or acquisitions, new products or contracts or any other material information with other market participants privately. When accidental selective disclosure occurs, companies must make the disclosed information public within either 24 hours or by the opening of trading the next day.
Reg FD forever changed the relationship between investment banks and senior management but, more importantly, it turned the IR seat into one of much greater consequence. Companies now relied on IR teams to ensure they were Reg FD compliant, and to be the daily point of contact for investors looking to hear directly from management once their sell-side counterparts’ information edge had been marginalized.
Reg AC and the Global Settlement The SEC didn’t stop there on its journey to create greater transparency in investment banking. In April 2002, it announced a formal inquiry into industry practices concerning research analysts. It vowed to explore the potential for conflicts of interest to arise in a variety of places, including the public recommendations of analysts (stock ratings), the compensation of analysts and how banks were compensated around banking deals.
There was a flurry of regulatory activity, including rule changes for the National Association of Securities Dealers (NASD) and the NYSE, all of which ultimately led to the enactment of Regulation Analyst Certification (Reg AC) on April 14, 2003. The rule aimed to ‘promote the integrity of research reports and investor confidence in those reports’, asking that analysts certify their research as an accurate and truthful representation of their own views and requiring them to disclose whether they received any compensation or incentives in connection with it. The intended result was a research product that was unbiased and impartial.
Shortly afterwards, on April 28, 2003, the Global Research Analyst Settlement (Global Settlement) was formalized between the SEC, NASD, NYSE, the New York State attorney general and 10 of the largest investment banking firms at the time. As part of the agreement, the 10 firms paid $1.4 bn in fines for violations of securities laws during the dotcom boom – including issuing fraudulent research reports, receiving payments for research without disclosure and issuing reports that violated the principles of fair dealing.
More significant than the fines, however, were the changes the agreement brought into effect. Suddenly firewalls were put in place between banking and research, budget allocation for research had to be independent from banking, research analysts were prohibited from attending roadshow meetings during the advertising and promotion of deals, and analysts’ ratings history had to be disclosed. While these rules applied only to the 10 investment banks that signed up to the settlement, there was widespread adoption and the rules were formalized in 2010 as part of the self-regulatory organization rules adopted by the Financial Industry Regulatory Authority.
The fallout and rise of corporate access By the mid-2000s, following these landmark regulations, the job of sell-side analysts evolved considerably. They’d been previously compensated via investment banking deals and had enjoyed a privileged relationship with corporate management. Many analysts left the sell side to join the emerging hedge fund community, which promised outsized rewards for strong investment performance.
Just as today post-Mifid II, many industry pundits called it the end of sell-side research, but that proved unfounded – as it will again today. The focus shifted to writing differentiated research, providing insights to the investment community and assisting with idea generation. Sell-side research evolved to meet the demands of an increasingly complex buy side, and core to that offering was corporate access.
Many analysts reinvented themselves as shepherds of corporate management with the help of emerging corporate access desks that handled the execution of these events. With the promise of introducing management to new shareholders, helping to drive their stock price, analysts became essential in the relationship between institutional shareholders and corporate management.
While corporate access teams originally focused on keeping management relationships warm between investment banking opportunities, that all changed by the mid to late-2000s as equity investors, looking to engage with management teams directly and complement the research they were getting from the Street, started explicitly directing a material part of their commissions for access to management meetings. Corporate access had now been established as one of the primary drivers of commission for the equities business across the Street and was rapidly becoming a necessary component of any profitable equity franchise.
It didn’t take long for brokers to respond to the demands of their clients. Corporate access became a high-margin business centered on non-deal roadshows, field trips and conferences. While conferences had long existed as a platform for investment banks to highlight their broad relationships, they morphed into a speed-dating-like event where efficiency of management access reigned. The conference calendar exploded with events, management teams were inundated with requests and there was no shortage of opportunity to meet investors for most liquid companies.
Investor relations seized the opportunities resulting from these changes. Just like they do today, IR teams stepped in to ensure the meetings with management were the right meetings, that investors were prepared with the information they needed to make informed investment decisions in a compliant way, and that the return on executive time was maximized. Today, IR teams are increasingly the central information source for companies as they expand beyond financial reporting to include investor stewardship and ESG, and they are much more likely to meet investors on their own.
Then comes Mifid II Mifid II has thrown another curve in the evolution of corporate access and, while the outcomes are still debated, it is likely even more onus will fall on IR teams to either conduct investor outreach on their own or ensure their company is meeting with the investors best placed to own their shares.
The unbundling of research and trading disseminating from Europe has obliged the sell side to put a price on all forms of research it is offering and, as investors consolidate their trading relationships, the price discovery has extended to corporate access as well. Just as it has in the past, IR will seize this opportunity and be a successful steward of its company.
The regulatory environment will surely evolve as more landmark regulations emerge in the next 20 years, but the fundamental need for investors to both learn about their potential investments and gain trust in the management of these companies is likely to be at the core of active investment for the foreseeable future.
The last 20 years of change helped increase the prominence of the investor relations role – and it looks promising that this will continue for the next two decades.
About CorpAxe CorpAxe is the world leader in corporate access and resource-management solutions for the investment community. The CorpAxe suite of products allows investors to discover, originate, manage and value resources critical to the investment process, while meeting the demands of a rapidly changing regulatory environment.