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© The Z/Yen Group of Companies 2008
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Professor Michael Mainelli
Executive Chairman, Z/Yen Limited
Mercers’ School Memorial Professor of Commerce at Gresham College
[An edited version of this article first appeared as "Place Your Bets” (investor
relations at online gambling firms), Real IR, page 12, Caspian Publishing
Limited (November 2006).]
“Shares in two Colombian agri-businesses collapsed on the LSE yesterday with
news of the arrests of both chief executives at an FAO conference in Rome.
CocaFarma and Colombian Gold spokespeople …”
The analogy to online gambling above is imperfect, but these two imaginary firms
were conducting illegal business. CocaFarma’s and Colombian Gold’s
transactions, and their customers’ transactions, were illegal in their main
markets, while perhaps tolerated in their home market. The most imperfect
bit of the analogy is that the drugs firms’ businesses would be illegal in the
UK, the country of listing, even if they didn’t conduct business here, (but hey,
the headline got your attention).
Turning to the reality of online gambling, the events precipitated this month by
the US Unlawful Internet Gambling Enforcement Act (UIGEA) have been anticipated.
The risks were known - from the 14 June 2005 PartyGaming prospectus – “The US
Department of Justice considers that companies offering online gaming to US
residents are in violation of existing US federal laws, including (but not
limited to) the Wire Act, the Illegal Gambling Business Act, the Paraphernalia
Act and the Travel Act. In addition, a number of federal statutes prohibit
actions that are not specific to gaming, but are premised upon activities that
violate federal or state law. Such statutes include, but are not limited
to, the Racketeer Influenced and Corrupt Organizations Act and legislation
related to money laundering, the collection of unlawful debts and ‘aiding and
abetting’ an offence.”
You were forewarned, and the business model was clear too, “offshore gaming
companies rely on the apparent unwillingness or inability of regulators
generally to bring actions against businesses with no physical presence in the
relevant country.” … “Governments may seek to impede the online gaming industry
by introducing legislation designed to prohibit or restrict financial
institutions, payment processors, media providers and other suppliers from
transacting with and providing services to online gaming operators.”
Investor relations must “tell it like it is” while “putting a good spin on it”.
This is a genuine paradox because we are providing information that other
people, investors, are going to use to make a decision. We have some ideas
of how to provide investors with information so they can “make a neutral
decision” or “buy our firm’s shares in preference to others”, but we can’t
really do both. I prefer to focus on investor relations providing
information that limits surprises, at least surprises due to information the
company already held or should have held. In online gambling I think that
that has been largely fulfilled.
What did the online gambling investor relations do well? For a start, they had a
good base of open information about the risks, as you can see above.
Secondly, they didn’t over-react. 888 – “The Board will continue to seek
clarification of the overall US legal position to determine whether and to what
extent if any resumption of participation by US customers is feasible. At
present however no assurance can be given that this will be possible.”
PartyGaming – “…will affect the processing of payments between US customers and
online gaming companies, including PartyGaming, that are publicly traded and
licensed and regulated in respected jurisdictions.” Thirdly, they didn’t draw
their key suppliers into the problem. It must have been tempting to think
about involving the large card companies or payment providers, but it wouldn’t
have helped and would sour future relations.
Moreover, the business decision was clear, made rapidly and, in conjunction with
IR, communicated without equivocation. The IR story was straight, not “we
shall fight …” but “we are withdrawing …”. Better to make a clean retreat
and return later than tar the growing and substantial ex-USA business.
What can the wider investor relations community learn? I think we can expect
many more similar cases. Look out for situations where your business faces
legality and, therefore, extra-territoriality issues. Almost all global
businesses have these issues, generic drug companies and pricing, media
companies and international rights, telcos and the content of network traffic,
or energy firms and the environment.
The two big global battlegrounds for commerce in the 21st century appear to be
intellectual property and the environment. Intellectual property issues
are complex to explain but affect every firm that touches patents (technology,
manufacturing), copyright (media, music), design (manufacturing, consumer goods)
or trademarks (everyone).
On the environment, we seem to have reached the tipping point where any material
environmental connection has international ramifications. The ‘Butterfly
Effect’ of Chaos Theory implies that “a small perturbation in the beat of an
Amazonian butterfly’s wings can create a hurricane in Florida”. We now
have the ‘Butterfly Effect Corollary’, “any small perturbation in a Western
company is presumed to affect, somehow, a butterfly in the Amazon”.
What are the implications? As many of these issues will have international legal
or tax ramifications, financial communications professionals must have rapid
access to appropriate, pre-briefed legal and tax advice, but can prepare
themselves too by ensuring they understand international government interactions
better. For instance, online gambling firms needed a good understanding of
US county, state and federal interactions. How might Louisiana actions
affect a New York court? A federal court? A World Trade Organisation case?
Financial communicators need to be informed on too wide a range of issues.
Investor relations departments need ready access to information, but also need
expert support. The lines of communication with experts need to be cleared
in advance. One of the smartest things I have observed lately is the use
of experts to develop “thought leadership” pieces, e.g. developing
publications on the importance of gambling to wider financial services.
Because the experts have been working on developing material for marketing and
investor relations, they are well-briefed to support investor relations in times
of frenzy.
The increasing importance of sentiment over fundamentals means we will see more
rapid and wilder swings like the 80% swings we’ve seen in online gambling.
Investor relations experts need top-notch information processing to react to
these swings, implying superb web monitoring, deep information services, clear
electronic communication channels and systems.
Returning to online gambling, is there any advice an outsider can give some
professionals who reacted well in a crisis? Perhaps. Looking to the
longer-term, I think firms can wring a bit of knowledge from investor relations
experience in, you won’t believe this, the tobacco industry. The core
theme of tobacco investor relations, emerging from setback after setback, is
“choice”. “Tobacco companies do not do good, or bad, things – we provide
our customers with a choice. If society wishes to outlaw that choice, so
be it. Until then…”. Personally, I have personal problems with the
ethics of that approach, but I have to admire the skilful way it presents the
situation. In this interconnected world few commercial transactions are
purely good or bad, and none are made in isolation. The challenge for
investor relations experts is presenting that complexity fairly so there are
fewer surprises for investors.
Professor Michael Mainelli, PhD FCCA
FCMC MBCS CITP MSI, originally undertook aerospace and computing research,
followed by seven years as a partner in a large international accountancy
practice before a spell as Corporate Development Director of Europe’s largest
R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming
a director of Z/Yen (Michael_Mainelli@zyen.com).
Michael was the British Computer Society’s Director of the Year for 2004/2005.
Michael is Mercers’ School Memorial Professor of Commerce at Gresham College (www.gresham.ac.uk).
Michael’s humorous risk/reward management novel, “Clean Business Cuisine: Now
and Z/Yen”, written with Ian Harris, was published in 2000; it was a Sunday
Times Book of the Week; Accountancy Age described it as “surprisingly funny
considering it is written by a couple of accountants”.
Z/Yen Limited is a risk/reward management firm helping
organisations make better choices. Z/Yen undertakes strategy, finance, systems,
marketing and intelligence projects in a wide variety of fields, such as
developing the leading risk/reward prediction engine, helping a global charity
win a good governance award or benchmarking transaction costs worldwide for
investment banks.
Z/Yen Group Limited, 5-7 St Helen’s Place, London EC3A 6AU, United Kingdom;
tel: +44 (0) 207-562-9562.
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