The relationship between a corporate and its stakeholders is always delicate. The last couple of months have seen a couple of issues of particular interest to the treasurer community which reflect investor anxiety.
The Treasurer last month reported on Moody’s proposals for rating transitions for investment-grade issues subject to event risk. This month Moody’s has been at it again, this time suggesting a new framework for evaluating bond covenants. The rationale for the move by the rating agency is that in recent years as corporate strategies have become more aggressive, inadequate document protections have weakened the positions of bondholders vis-à-vis shareholders.
As private equity continues to exert its influence on the markets, corporates are appreciating investors’ concerns on changes of control and are increasingly comfortable with giving protection, although the extent is dictated by individual circumstances.
On the idea of Moody’s framework there seems to be some hesitation among treasurers, mostly on the grounds that sophisticated financial markets can work out for themselves what protection or otherwise individual change of control clauses offer.
Whatever the outcome of Moody’s covenant framework, it is another indication of the changing environment in which the treasurer is operating and will be operating. This is most starkly illustrated by the latest changes in British company law arising from the European Union’s transparency directive. As we have suggested before, the standard setters seem to be suggesting that the purpose of accounts is subtly shifting away from stewardship and towards being a tool to inform investment decisions.
The purpose of the transparency directive is to improve investor protection and the efficiency of the European capital markets. As part of the desire for greater investor protection, the companies bill currently completing its passage through parliament will make companies trading on a UK-regulated market liable to compensate investors for losses as a result of statements or omissions in annual or half-yearly reporting statements that were knowingly untrue or misleading and were made in bad faith or recklessly.
Under current UK law, shareholders have little redress against a company for losses arising from being misled by financial information unless a specific duty is owed, as, for instance, in a prospectus. The legislation therefore represents a major reordering of the balance of rights and responsibilities between corporates and investors. From disclosure and transparency through to liability, you can see the logical transition. The pressures are multiplying on treasurers – and their colleagues – not to get it wrong.
PETER WILLIAMS
Editor
See Marketwatch, pages 6 and 8
