Professor Michael Mainelli, Executive Chairman, The Z/Yen Group
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, Caspian Publishing Limited (November 2006) page 12.]
“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.
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.
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