In the run up to the arrival of the second Markets in Financial Instruments Directive (Mifid II), much comment has been devoted to its impact on corporate broking.
The regulation, which comes into force today, aims to increase transparency, by disclosing trading data and introducing tougher reporting requirements on transactions.
It is the most in-depth regulatory intervention the industry has seen in years.
But I’m yet to see anything written about what its impact will be on financial PR (FPR).
FPR is a rather opaque world, but with approximately 1,800 listed companies in the UK, and assuming an average annual fee of £80,000, the basic market is about £150m per year. This figure is consistent with what UK equity fund managers paid for investment research in 2017.
Long viewed as the poor relation to corporate brokers, FPR practitioners have historically been happy to stay relatively in the shadows – not least because the brokers are the main board level advisers for listed companies in the UK, whose job includes putting together the beauty parade lists when a company reviews its FPR adviser. In that context, no FPR firm would want to be seen biting the hand that feeds it.
In the US, where there are no brokers, companies are used to marketing and selling their shares directly. The role of the investor relations officer (IRO) in a US company is often a staging post on the way to an executive role.
Working with a major US company that operates in the consumer goods market, one IRO said to me: “we market and sell two things; consumer goods, and our shares. The idea that we’d rely on a third party to do either is laughable.”
In the UK, it is assumed that there are only three meaningful routes to attract and engage investor interest: sell-side analyst research, direct contact, and editorial media coverage in the financial media.
Post Mifid II, I have no doubt that brokers will continue to manage their corporate clients’ relationships with the major investment houses. But I’m also sure that British companies will increasingly look to manage their own investor outreach as well. Some will do this all by themselves, and some will make use of specialist firms.
According to Bloomberg data, the average number of analysts covering each FTSE 100 constituent is 21. This falls to 14 for the FTSE 350, and a rather miserable four for those outside but in the FTSE All Share.
Averages for AIM quoted companies are even less: two for those with an analyst following. Almost half of all the companies listed on AIM have no analyst coverage at all.
The number of sell-side analysts will almost certainly diminish again as funds look to rationalise their spending on brokers’ services. Companies can always look to fill the gap left by brokers by commissioning their own research.
Whatever happens, FPR firms will continue to ply their trade by helping companies to generate supportive comment in the financial press.
Companies are likely to benefit from proactive engagement with media commentators who, not covered by Mifid II, may become as valuable a source of comment as analysts are now.
But today, social and digital communications channels mean that there is much scope for companies of all sizes to market and sell their shares themselves, and in a relatively cost-effective manner.
The most recent surveys show that over 80 per cent of institutional fund managers use digital and social channels as part of their investment process. That percentage will only rise.
Whether it’s the company’s own website, Wikipedia entry, Linkedin profile, Facebook page (very important in the corporate world in South-East Asia), WeChat (huge in mainland China), or Twitter feed, “media” in an online sense is an option for those UK companies that want to take control over their investor relations efforts.
This should be a huge opportunity for FPR firms, so long as they’re smart enough to master the art of online communication. Many FPRs, I fear, are stuck in the pre-internet mindset, where they only look at offline media.
But in the post-Mifid II world, online channels need to be embraced and utilised. There are comparatively few equity investors, so identifying them, learning what influences them, and acting accordingly is relatively straightforward.
Right now, many corporate websites are pedestrian. They merely act as brochures on the web. But imagine a corporate website that engages, that brings investors into the market that the company inhabits, and that then maintains an ongoing conversation in an entertaining and engaging way.
Imagine that, when you look at any social media feed, you find yourself receiving thoughtful and insightful messages from a potential investee company.
If you’re serious about being a listed company, it’s incumbent to market your stock. With Mifid II coming into force today, there is a greater opportunity for FPR companies to help their clients to do this than ever before.