In the current financial crisis it is too easy for governments to polarise voters and the capital markets. In this edition of Overture, Fidelio explores how corporates have engaged effectively with the markets and as a result increased financing and strategic options.
Gillian Karran-Cumberlege
Where to start? Each day the triangular communication between politicians, the electorate and the markets becomes more complex. Nor is confusion the prerogative of Peripheral Eurozone countries. Leading US and Eurozone politicians have also confounded the markets, resulting in the loss or potential loss of the prized triple A rating for the US, Germany and France. And to top it all the UK Veto on Treaty Change has abruptly left UK voters and the Financial Services industry deeply nervous about being on the wrong-side of the fence.
Simon Derrick, Head of Currency Strategy at BNY Mellon, writes that the Eurozone is not a “Hotel California where you can check in and never leave. You can leave.” FX Week, 7th November 2011
And while governments struggle to satisfy the often conflicting demands of the voters and the markets, leading corporates go from strength to strength. Fidelio argues that herein lies a lesson.
While not ignoring the obvious legal distinctions between States and Corporates, there is also a clear overlap in stakeholder groups. And one key stakeholder for both is the Financial Markets. We suggest that corporate success is frequently predicated upon a good relationship with the market. Good in this context means firm and not subservient. This edition of Overture explores how such a capital market relationship is built and draws parallels for the politicians.
Consider the development of German corporates over the past two decades. Twenty odd years ago the track record of capital market communications in Germany was abysmal. Equally much of the funding required by German industry was provided by German banks which in turn held major stakes in German corporates. Then came German Reunification which led to significant financial demands at the sovereign level. New opportunities opened for German corporates which turned to the capital markets to achieve these goals.
Over the past twenty years German companies and Boards have dramatically improved their ability to communicate with investors. In the past ten years as Germany benefited from the Euro, German companies became even more professional in their dealings with the markets. This imperceptible improvement has led to German companies being ranked European if not world leaders in terms of Investor Relations. Indeed this is just one manifestation of the current strength and competitiveness of corporate Germany.
Worldwide successful corporates have learned to engage effectively with the markets. This engagement can be characterised by
• Temperate rather than hot headed words. Demonising the market and rating agencies is seldom constructive
• Sensible expectation management which also includes resisting misplaced market euphoria
• And technical competence. Most major corporates will have built up an internal capital market expertise. This ensures smooth running of the issuance/capital raising process and good relationship management
All of the above enables smart corporates to diversify funding and refinancing opportunities. Understanding, while not necessarily following, the market’s agenda is a key aspect of governance for corporates. And to be fair, the market also comprises some very bright minds whose analysis can provide helpful input into corporate decision making.
Parallels for governments are clear. Indeed some governments preside over the most sophisticated debt issuance programmes globally. Often the technical expertise here is embedded at the civil servant/public official level. As such both the US and the UK with their major financial centres are recognised to be skilled at understanding and handling debt investors. This makes the US’s political inability to handle the communication around raising the debt ceiling in Summer 2011 all the more surprising.
The Chinese government too has shown skill in expectation management around exchange rates for example. Of great interest is the pro-active approach of the Muslim Brotherhood in Egypt towards the markets, fielding economists in conference calls with investors in the wake of the Arab Spring.
Gideon Rachman comments “the markets are not the enemy of European politicians. They are their friends… they are all that stands between political leaders and angry citizens.” The Markets are not the Monster, FT, 21st November 2011
Against this backdrop the chosen vocabulary of European leaders when communicating with the markets has not been helpful. The FT also cites Jean-Claude Juncker “We have to be able to stop the financial markets. We have the instruments of torture in the basement.”
Politicians from Greece, Italy, France and Germany have also resorted to similarly incendiary language. This may well result in short-term gains in the polls. But the already hard-pressed European tax-payer and voter is neither willing nor able to assume the refinancing role of the capital markets. Therefore the polarisation of voters and investors cannot represent a solution to the current crisis in the Eurozone.
Successful corporates have developed the capability to engage with the markets. This increases both financing and strategic opportunities. Fidelio argues that politicians could do worse than look to this corporate example.
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will deal with
• Valuing Human Capital in the Automotive Sector
• What do SWFs look for in Management Teams?
• The Strategist and the Communicator
• Adding Value to Comp & Bens – Finance or HR?
• Quoted and Unquoted IR – a Convergence
• The Art of Building Shareholder Buy-in
Please email us with comments at info@fideliopartners.com or for more information visit fidelio.fuse-clients.co.uk.