A prerequisite for good investor relations is knowing who your shareholders are. In an ideally transparent world, companies and investors would be able to reach out to each other for AGMs, corporate actions or simple feedback through direct communication lines. In reality, large-scale institutional ownership added to the custodial holding model make the identification process highly complex, and in most countries there is little legislation to underpin this often arduous task.
An attempt at transparency was made in the 1970s when the US introduced 13F filings, whereby funds make their holdings public every quarter. This data is then published into the Edgar repository and repackaged for the likes of Bloomberg or Thomson Reuters.
The system presents a certain number of flaws, highlights Mark Simms, CEO of London-based advisory CMi2i. First of all, funds are unhappy about their holding positions being made available not only to corporates but also to their competitors. The statement, which can be made up to 45 days after filing, is more often than not an outdated snapshot, especially if the fund has high turnover. In addition, there are variations in terms of filing for international securities, with some quarters dealing with ordinary stock and some with ADRs. If a US issuer struggles to know who owns its shares, being a non-US firm just adds to the complexity.
This is why most service providers in the arena are highly specialized geographically. ‘Having a depth of knowledge of the share register landscape and regional ownership patterns – including knowing where the bones are buried – provides 90 percent of what is typically needed to perform effective shareholder ID in a non-disclosure market,’ explains Lucas Scheer, president of New York-based LS Global, which caters mostly to Asian firms. ‘Being able to conduct an effective research campaign and targeting the appropriate institutions to contact during a short timeframe provides the rest.’
Full disclosure zones The UK legislation, created in the mid-1980s and replicated in nearly a dozen countries, aims to counter those inadequacies by giving issuers the legal right to know who has a beneficial interest in their company. The problem lies in how shares are held, Simms explains.
What appears on a company share register is the nominee, usually a custodian hired to hold shares on behalf of institutions. A global custodian may have 4,000 or 5,000 different funds as clients, and they’re not obliged to disclose more than the minimum information: what the shares are and what the account is, sometimes just in the form of a code. ‘And what you may be sitting on is not a fund at all but another layer of custody, and another…’ Simms warns.
Once you’ve gone through the custody channel, the fund identified may be a pooled account, holding on behalf of numerous different funds, a designated account or a one-on-one account. ‘Take the British Airways pension fund, for example, where money is managed internally: British Airways would be the beneficial holder,’ Simms says. ‘At Dutch pension fund APG, some of the money is externally multi-managed, which means APG is not the investment decisionmaker, so there’s no use interacting with it.’
Establishing where the vote goes can be equally challenging. ‘The votes could go to the beneficial holder, to the asset manager or to the multi-managed fund,’ Simms says. ‘They could be loaned out with a contract for difference or tied up in a prop desk, in a prime brokerage account. So you have to create this mapping table that goes through layers of complexity.’
Once the identification is done, the information has to be reconciled through the clearing houses and the layers of custody back to lists on the vote or share register, a lengthy process that at least has the benefit of being supported by a legal framework. ‘If you’re a US corporate, you can’t do any of this,’ Simms notes.
Most advisers take a mechanical approach to the analysis work by putting in place a straightforward process. ‘We make it easy for the custodians to respond to us,’ explains Alison Owers, CEO of Orient Capital, a global IR consultancy. ‘Getting the granularity is not a problem because of our methodology around it. If there’s a challenge for us as a business, it’s the demand, so we have to make sure we can maintain the quality. For the industry, the issue is often about ensuring the custodians can – and do – comply.’