Barbadian investors want sound financial information, which means our public companies must meet the dual challenge of collecting it and communicating it.
Traditionally, shareholders in publicly listed companies in Barbados have been a patient lot compared with their counterparts in larger countries. They have held onto shares, often passing them on to another generation, content to settle for a decent dividend and leave the running of the company to executives and directors who are supposed to know best.
To a large degree they have had little choice. Before the Barbados Stock Exchange was established in 1987, there were only a handful of publicly owned companies on the island, and the buying and selling of their shares was very much a private transaction.
Today, almost 25 years on, there are 23 companies listed on the BSE. And even though many Barbadians still prefer to deposit their cash in the bank, an investor culture is gaining momentum. The emergence of mutual funds has increased participation in equity investing, along with an awareness of the potential returns.
Indirectly, through mutual funds – and pension funds – thousands of Barbadians now have a stake in publicly listed companies (not only in Barbados but elsewhere in the Caribbean) and a strong vested interest in their performance. Investor knowledge is growing, and so are expectations, as the reality of a regional stock exchange draws closer.
In addition, analysts and advocacy groups are encouraging closer scrutiny of how companies are being managed and what executives and directors are doing to create value for shareholders. There are growing demands for greater disclosure of financial information, and better quality information, on which to base investment decisions.
Large-scale mergers, acquisitions and take-over bids have added impetus to these demands, as shareholders have to evaluate options including straight cash offers versus share swaps. And as the region’s largest companies continue seek to grow quickly through acquisitions this scenario will become more frequent.
In effect, the balance of power between corporate management and shareholders in Barbados, which has traditionally favoured management, is shifting towards shareholders. And this shift will require a change in management style as shareholders demand greater transparency and accountability from senior executives and boards of directors.
According to Philip Atkinson, head of assurance services with PricewaterhouseCoopers in Barbados, the tight-lipped approach of past generations of management will no longer work with better educated and more demanding investors.
“Those days are over,” he says. “Investors in Barbados today want to know how well management is looking after things, they want to know whether or not they have backed a winner, and they are beginning to understand that they have the right to ask for more information to assess performance.”
Agitation in the investor community has been growing steadily over the past decade, says Atkinson, and it will continue to do so as capital markets in Barbados and across the Caribbean become bigger and more sophisticated.
“Chief executives and directors have to accept this and adapt to it,” he adds. “They have to become accustomed to closer scrutiny, and even criticism, but most of all their companies will need to meet the dual challenge of collecting and communicating critical financial information.”
In essence, says Atkinson, public companies in Barbados, like their counterparts in more developed capital markets, must now acknowledge the importance of investor relations as a key function within the management process.
“Our practice of investor relations is not yet where it needs to be,” he says. “Very few, if any, Barbadian companies are holding regular shareholder sessions or making presentations to the investor community where there can be any real two-way communication between management and investors.”
To date, points out Atkinson, investor communication on the part of publicly listed companies has consisted primarily of a single publication – the annual report – followed by the annual general meeting, and little else of substance during the rest of the year.
“Much of the information that investors and the public get from companies in Barbados is related to the marketing of products and services, with an occasional report on charitable donations,” he says. “I believe that Barbadian investors are losing interest in this type of information, which they may come to see as a distraction from real issues. They want more relevant information: they now want to know about risk not just new products.”
Atkinson also believes that this historical reluctance on the part of executives to share such information is due to the small size and highly competitive nature of the Barbados market. Understandably, he says, executives worry about divulging financial information that can reveal corporate strategies and particular strengths, and even weaknesses, to the competition. And they must also worry about how inappropriately released information might affect share prices or create advantages for any specific group of investors.
“I know it is a balancing act, but other business communities have had to learn how to manage it and so must we,” the PwC partner says. “When executives of our public companies appear reluctant to share information, or become defensive, people may assume there is something to hide. In fact, there may be nothing to hide, but the perception can be damaging.”
If this perception is not addressed, the momentum towards an investment culture may well stall as lack of trust keeps potential investors away, he says.
But if public companies in Barbados are to improve their communication of important financial information, and thereby increase investor confidence, they must also improve their ability to collect that information. And that, says Atkinson, can be a major challenge.
The problem, he explains, is that accounting systems that have served well in the past are now being challenged to meet the requirements for disclosing more detailed financial information expected by international accounting standard-setters.
“The basic problem is a lack of accounting capacity and up-to-date skills, and this can only be fixed by investments in training,” says Atkinson. “Companies have to build this capacity in-house, because the days of relying on their auditors to pull together the required information are over.”
Furthermore, he says, standards for disclosure must be consistent among companies so that, in the event of mergers or acquisitions, shareholders on both sides can compare apples with apples. “Two companies may have different sets of auditors and advisors, but they can’t have different standards of financial disclosure.”
The PwC partner acknowledges that it will cost companies in Barbados to build their in-house capacity in order to meet more robust reporting requirements. “But given our changing environment it is the right thing to do,” he says. “Accounting standards around the world are now being written with greater transparency in mind.”