Taking stock of challenges

THE FRIDAY INTERVIEWwith Deirdre Somers, chief executive of the Irish Stock Exchange

THESE ARE hardy times for the Irish Stock Exchange (ISE). Share prices are well down from record levels seen early last year, a drop in fund listings is eroding profits, no big flotations are in sight and the fall-out from the DCC-Fyffes insider dealing affair has tarnished the market's image.

Yet ISE chief Deirdre Somers is resolutely upbeat. Almost a year into the job, she has big plans in train to increase the separation of the ISE's supervisory and commercial roles, revitalise its brand at home and expand its international business.

This is her first interview since she took the reins last July from Tom Healy, who had led the ISE for 20 years. Our meeting on Wednesday was scheduled before Jim Flavin finally resigned from DCC, insisting to the last that he always acted honourably, even though the Supreme Court found he broke the law when selling a €104 million stake in Fyffes.

Somers makes no apologies for the fact that the exchange, as primary regulator of the market, made no public comment on Mr Flavin's continuation as head of a major listed firm for the best part of a year, even after the highest court ruled that he engaged in insider dealing.

"I would say that there is most probably nobody more frustrated than me at the fact that we can't say anything public about that. This goes back to broader fundamentals, which is that the stock exchange had a role in relation to that case," she says.

The illegal deals in 2000 were investigated by the ISE, which sent a file to the Director of Public Prosecutions (DPP). Somers won't say anything about the ISE's findings, although the DPP did not bring charges. The law has changed since then, with responsibility for taking cases now with the financial regulator.

Somers says the ISE fulfilled its role and therefore is incapable of making any public statements. "It would be entirely inappropriate for the stock exchange to make public statements in relation to a matter which it investigated," she says. "What I am primarily concerned about is the perception of this market and the integrity of this market and therefore to the extent to which the resignation yesterday brings closure to a matter that has led to protracted debate and speculation in the market, then that is a good thing."

But was it appropriate for Mr Flavin to remain in office for as long as he did? "Matters of this nature are matters for the board of any publicly quoted company and I cannot think of any situation here or in Europe where the stock exchange or indeed the regulator would make an opinion in relation to the management of a board of a publicly quoted company because that's not the way it works. It's the function of the board."

Asked what reassurance she could give to investors and small-time shareholders that the Irish market is transparent, Somers says, "because this case was taken". Although she won't say whether things were done in relation to the exchange's response to the case that might have been done better, she says categorically that mistakes were not made.

Still, she acknowledges that the affair damaged perceptions of the ISE brand. Extensive market research late last year for a strategic review process showed that an overwhelmingly positive response among international businesses with ISE dealings was not matched at home.

The clear message from the Irish business community was that there was a lot of respect for the ISE at a functional level and that those working or interacting with the ISE reported a positive experience. "But more or less unanimously the perception of the brand was poor," Somers says.

"I think it's a function of two things. The first thing is that we're good at what we do, but we're not good at telling people about it . . . We don't manage the brand. we don't communicate as effectively as we should have and we've learned a lot of lessons from that.

"In the absence of clear corporate communication and more open brand management, the only thing that fills the vacuum is public comment and publicity and media comment. I think therefore that given that the nature of media is that it tends to concentrate on the negative than on the positive and because we haven't taken control of the positive, there was a disproportionate impact, reputationally, on the stock exchange from some media comment."

In this context, Somers says the issue cited by survey respondents - who included some the plc world, the public sector and the broking community - was the DCC-Fyffes affair. "There is no doubt that there is a perception that we are an organisation that is more a function of the past than of the future and that we need to change radically," she says.

"Most organisations, their brand promises the world and they struggle to deliver to it. I have an organisation where the delivery is no problem, there's unanimous support for everything we do, the effectiveness, the sophistication of it, but the brand is trailing behind."

She is determined to put that right. In addition, she says the organisation has decided to introduce a more formal separation of its supervisory and commercial roles. "We're looking to put a governance structure around that that would ensure not only the actuality of independence but the perception of it as well.

"There needs to be clarity around ensuring that those decisions that are made are completely unencumbered by any commercial interest whatsoever."

Stating that has always been the practice of the ISE, she says the aim in the current process is to have "a structure that delivers that perception as well as that reality". Somers says such changes are not a response to the DCC-Fyffes case, but are being undertaken because it is the proper thing to do.

"There cannot be ambiguity as to the two roles, particularly regulatory roles if you're trying to deliver something that can have integrity and something that meets the needs [and] the expectation of the market."

As for other challenges, Somers sees great potential to develop the ISE's funds debt listing business through which no fewer than 35,000 international securities are listed on the Dublin market. "We will be looking at more asset types. The great opportunity would be to establish Ireland as the centre for the internationally-traded market of some type of asset class. That, I believe is the true-long term focus for us," she says.

This she characterises as delivering more bespoke products to markets that demand them. Asset classes that might be exploited in that context include exchange-traded CFDs, funds and commodities and other derivatives, she says.

"The fundamental part of our strategy is to internationalise further, to take those niches that we have built up over the last 10 years and to start delivering more substance into those niches."

In the current year, however, Somers says the issuance of new securities on the exchange is down by 30-35 per cent as a result of the credit crunch. If the trend continues, this will take some 20 per cent from the ISE's gross annual income which came in around €25 million in 2006, the last year for which figures are available. Somers says a similar reduction in operating profits - €10 million in 2006 - is likely.

Credit crunch or not, however, it's a given that there isn't a long queue of Irish companies forming in Temple Bar outside the ISE's front door in Anglesea Street.

So is Somers concerned that the last major flotation - Smurfit Kappa - was more than a year ago? "Would I prefer that there was a bigger pipeline of companies coming to the market? Absolutely. Would I prefer that there was a better prospect of a bigger representation on the market? Absolutely. There isn't a single chief executive of any stock exchange who would answer no to either of those questions. Ireland as an economy is still in its adolescence. Therefore you need to be patient with these things."

Still, she sees a "huge problem" with the private owners of mid-sized companies selling their business before they achieve the scale required to go public. "One of the big challenges that Ireland faces is scaleability on indigenous Irish industry. There is thankfully and probably belatedly a lot more debate now around putting more encouragement into bringing indigenous companies to a scale at which they can become the acquirer rather than be the acquiree in any sort of trade scale," she says.

"Contrary to popular opinion, companies going private from the market would not bother us . . . Mergers between companies in Ireland is fantastic because you get scaleability overnight. What I think the real challenge for this economy is the international trade sale."

Citing the recent sales of windfarm operator Airtricity and software firm Havok, she says both could have been candidates for the stock market and could have been centres for new activity in Ireland rather disseminating it out. "That is like the sale of the family jewels. It is incumbent upon the policymakers and the various institutions of which I am one to ensure that we do whatever we can to support companies to get that next stage."

Agreeing with suggestions that the perpetual sale of mid-sized companies would ensure that there would be no new CRH or Jefferson Smurfit, she says nevertheless that Irish brokers and investors have been far more receptive to small-cap companies on the IEX index than their counterparts elsewhere. While the management teams that bring companies to their initial public offerings might not be best suited to life on the public markets, she says the ISE can at least assist on that front from a messaging perspective. "The true challenge for growth in entrepreneurship is scaleability in Irish industry. We have a role in that."

It's been a busy first year for Somers. Busy times ahead too.