October 19, 2010

CEOs Need to Be Asking Questions

In Denver, summer’s retreat this year toward the Continental Divide has been languid, its ambling trail marked by fiery aspens and long warm days.

But in the markets, pension funds have given stocks the cold shoulder, and fast. So says an article in the Wall Street Journal Monday, which traced the defection at noteworthy major corporate plans. Stocks comprise but half of plan assets now at best, and pensions themselves are in rapid decline as companies shift from defined benefits.

Less than five years ago, pensions had about 70% of assets in stocks. While public pension plans are still roughly two-thirds invested in equities, at some major corporate plans the goal is 30% in equities, or less. These pensions are moving to alternatives like bonds, commodities, private equity and so on, despite lower rates of return. Risk management is the top objective now, rather than maximum returns.

We could nod our heads approvingly. Sure, good. Managing risk is prudent. Maximizing returns is a risky gambit. But on the other hand, why invest capital if not for the maximum reasonable return? It’s surreal, even puerile, that we accept suboptimal objectives and define investment aims as “managing risk.” Remember when investing in diversified equities WAS managing risk?

And let’s think like investor-relations professionals. If money is fleeing the market upon which we rely, why? What is so afoul out there that managers of large assets think commodities make more sense than shares of growth enterprises?

Which gets us to our headline. “CEOs need to be asking questions,” writes reporter Jeremy Grant in a Financial Times article out Monday about the annual World Federation of Exchanges meeting, this year in Paris. There is open rebellion among exchanges about the state of trading markets.

Thomas Kloet from the Toronto Exchange told Grant: “The group that I don’t think we’ve heard enough from is the issuer community. What I think they don’t realize is that eight guys in a garage can trade their stock and effectively print (set the price for) that stock….”

On market fragmentation across multitudinous platforms, Antonio Zoido from Spain’s BME exchange said: “Ask the issuers. Do they want to be traded on all these venues? They don’t even know they are being traded on all these venues!”

Grant himself mused: “If I am a company CEO or investor relations officer, do I really understand where and how my company’s shares are traded these days? Probably not.”

Automated trading pioneer Thomas Peterffy, who founded automated global electronic market maker Interactive Brokers and keynoted, bluntly summed up the state of things: “A complete mess.”

There is perhaps been no more opportune time in a half-century for public companies to help reform our capital markets into an attractive, substantive place for investment dollars again. We can win back investors if our markets work. And since public companies are the heart of the market, they should be leaders in tuning the debate to capital formation.

By extension, investor-relations professionals should define the data that informs the job. IROs are not traders or investors. They are vested with a public responsibility, and with it comes an implicit right to know who trades the shares held by the audiences they serve.

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