VideoWhen asked who owns his company's stock, CFO David Bronson laughs. "I wish I knew," he says. Despite an active investor-relations program at the company, medical-supply distributor PSS/World Medical, plenty of shares change hands without Bronson ever knowing who is buying or selling. "I don't understand why investors get to know what we're doing but we don't get to know what they're doing," he says. "How does that promote an efficient market?"
Many companies find themselves in the same maddening position. After years of increasing demands for more transparency about corporate results and practices — most of which have been met — there remains a fundamental disconnect in shareholder relations: many investors are simply anonymous. "We have to disclose everything there is to disclose," says Brooke Wagner, vice president of corporate communications at Indevus Pharmaceuticals. "Yet we're not allowed to know who owns us."
While investment managers with more than $100 million in assets must report their holdings after the end of a quarter, that information is stale and frequently irrelevant by the time companies ever see it, thanks to the speed of the markets. There is also little oversight of the process, which means investors often neglect to file in a timely manner, particularly if they don't want to be identified. Other investors deliberately structure their funds to avoid triggering reporting requirements, maintaining just under the minimum number of assets or establishing multiple small funds to avoid reporting.
This creates a host of problems for finance executives and investor-relations teams, who are eager to communicate with — or at the very least identify — their shareholders. While most of the respondents to a new survey of finance executives and IR officers (IROs) conducted jointly by CFO magazine and the National Investor Relations Institute (NIRI) said they were at least "familiar" with their shareholder base, it's clear that familiarity is not enough. Instead, CFOs and IROs insist that specific knowledge of their shareholders would allow them to understand investors' goals, to better explain movements in their stock price, and to determine which of the many investors who contact their companies warrant the CFO's or CEO's valuable time. Perhaps most important, that knowledge can help them avoid being blindsided by one of the growing ranks of activist investors.
Cat and Mouse
But actually identifying stockholders is like "grasping for straws in the wind," says IR consultant Trudy Self. Part of the problem is that the rules to ensure transparency are woefully out of date. The Securities and Exchange Commission first drafted Section 13F, which requires investors with more than $100 million in assets under management to disclose their positions within 45 days of the end of each quarter, in 1975. That was long before the proliferation of hedge funds, electronic markets, and algorithmic trading.
Today, by the time a quarter closes, "an investor can build a position and liquidate it, build it and liquidate it, and you'd never know they were there," says Robert Weiner, vice president of investor relations at PSS. And that's particularly true in active segments like biotech. "We review the 13F ownership updates from Nasdaq each quarter as they go through," says Eileen McIntyre, senior director of corporate communications at Cubist Pharmaceuticals. But by that point, she says, "it's possible that the holdings of some hedge funds have already been sold."
Aside from the generous filing deadline, there is precious little enforcement of the rules. "There is no penalty if funds don't file within 45 days," says Maureen Wolff-Reid, president of investor-relations consultancy Sharon Merrill Associates and former NIRI chairperson. One IR officer who used to work for an institutional investor says that when he first joined the buy-side firm, he discovered four years' worth of unfiled 13F reports in the back office. And if they choose to file, "what will they report?" asks Wolff-Reid. "Will it be their current position, or their position as of an earlier date?"
Complicating matters are the deliberate efforts of some investors to remain anonymous. "There are certainly funds out there that don't want you to know," says Andrew Kramer, director of investor relations at Interactive Data, a financial-market-data provider. "They can go to great lengths to make sure you don't know." For example, a fund could buy shares on July 1, which they don't have to report until October. But if they sell by September 30, they don't have to report the position at all. Other investors hover just below the 5 percent ownership threshold that would require them to file a different disclosure form, Form 13D, with the SEC.
Such actions are not simply ploys to infuriate finance and IR executives, although they often produce that result. Many investors keep their positions quiet to evade copycats who could pile into or out of a stock and affect the price. Large, well-known investors like Warren Buffett's Berkshire Hathaway can even petition the SEC to keep their holdings out of the public eye. While these investors may still file a 13F, the SEC may agree not to publish the information it contains in an effort to avoid an impact on the stock in question.
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