Short term guidance:an end in sight?

More interesting news this week from the US in the sphere of short term guidance and short term performance communication. It looks as though this is a subject that will not lie down. Late last year, the Business Roundtable, the Disclosure Advisory Board and the Conference Board separately opined, as did the New York Chamber of Commerce.

Nonetheless, as we wait for the NIRI annual survey of how many public companies are still producing quarterly guidance, the weighty Committee for Economic Development (CED), a business-led policy group produced a report calling voluntary abandonment of the practice.

“Emphasis on quarterly earnings, compensation tied to earnings per share, shortened CEO tenures, and financial reports that fail adequately to inform about company performance impede the task of building long-term value” notes the report, which comes with the backing of some serious pension fund money.

Quarterly earnings guidance gained popularity during the dot-com era when investors had little understanding of what those new companies actually did for a living, let alone what their earnings may turn out to be. So the dot-commers started began issuing earnings forecasts. It turned out analysts on both sides of the divide liked this process, and when the boom ended, wanted to continue receiving them from ‘old economy’ stocks.

After all, the cynics say, it's much easier to focus analysis on the company's guidance than on building a financial model which combines past performance with new material disclosures about long term plans to forecast future results.

Another huge constituency that really likes quarterly earnings guidance: hedge funds need volatility, and the market's reactions to ‘penny miss’ results provide opportunities. And “whisper numbers” float around in chat rooms providing more volatility; and companies are expected to issue amended guidance.

However, the pressure is mounting from all sides on companies still producing quarterly guidance. The demand is for investor relations professionals to be allowed to educate the market on long term goals, and achievements along the path to meeting those goals. And this is a process very familiar to companies in Europe.

Recommendations for liability on ad hoc announcements: changing procedures?

The Davies Review has published its review of fraudulent misstatements made in ad hoc disclosures to the market as well as regular periodic ones. It makes a number of recommendations on redressing the imbalance between those disclosures made according to the Companies Act and those through the Transparency and Disclosure Rules.

The problem has arisen following European directives, including transparency rules, that have pushed Britain to develop a common understandingof the basis on which companies can be sued for misstatements.

The Davies Review commenced in October last year, consulted in March this year, and its recommendations include:

• extend the statutory regime to cover ad hoc disclosures, on the basis that at least some of these will appear anyway in periodic disclosures, and it is confusing to have different liability regime.
• extend the statutory regime to apply to disclosures by issuers on exchange-regulated markets, including AIM and Plus Market, and to all ‘multilateral trading facilities’ and other trading platforms for securities, on the grounds that while investors in these markets should accept the risk of different levels of disclosure than on the main market, they should still be protected from dishonest disclosure;
• extend the statutory regime to include liability for dishonest delay in making RIS statements, on the basis that where the purpose of the delay is fraudulent, this should be subject to claims for damages

Helpfully, the Review did NOT propose to impose statutory liability on directors or other advisers – including investor relations professionals! - or third parties in respect of misstatements in RIS announcements, on the basis that this is not necessary for deterrent purposes.

However, companies will now perhaps wish to review how their procedures in reviewing for liability work. Whilst annual and half year reports are already subjected to deeper review, to avoid misstatements, now that all disclosures are potentially to be subject to this regime, will companies want to make them subject to that deeper review, and what impact will that have on timings and the need to disseminate inside information without delay?

Time will tell.

Greater transparency of shareholder identity called for

A busy week at the National Investor Relations Institute annual jamboree in sunny Florida. The biggest gathering of IR professionals in the world, and among US companies’ principal concerns is how to identify their shareholders. After all, how can you build 2 way relations for all the positive reasons, with someone you don’t know?

So many at the conference welcomed a new report from the PR Newswire Disclosure Advisory Board calling for greater transparency. The thrust of the paper – which I helped draft – is that US companies have been subjected to a barrage of demands over recent years for more disclosure, more information, more quickly and simultaneously to all investors, however that investors are still operating largely under rules written in the 1930’s.

“We have charged IR professionals to promote corporate transparency, although left untouched the barriers to engagement with certain beneficial owners” says the report. Two other factors are playing a role: the existing rules pre-date the internet and electronic delivery of information. They assume that any filings must be done manually in paper form, and thus ignore the real-time nature of the market. And newer financial instruments such as derivatives are exacerbating the problem, as equity swaps, CFD’s and stock lending processes are often outside the ‘material’ definition anyway.

So what’s the answer? For many, a key paradox is the wide disparity between rules in the US and international best practice. In many countries, issuers have access to rules requiring both reactive disclosure by investors, where investors holding a percentage such as 3 or 5% are obliged to tell the company within 24 hours. The company is then obliged to tell the market.

In addition, companies in countries as widespread as UK, South Africa, Australia and France, can rely on a proactive approach where they can challenge investors they believe to hold their stock, often by approaching the nominee, and demand the identity of the underlying beneficial owner. And these rules have teeth, allowing companies to withhold dividend etc for non-compliance.

When you mention these rules to a typical US IRO, the reaction is often surprise and envy. Why cannot US rules – and after all we are operating in a global financial services marketplace – offer US companies the same tools?

How likely is change? As an illustration of the battle ahead, Bob Greifeld, President and CEO of the NASDAQ gave a stirring keynote address at NIRI. The first question during Q&A asked for opinion on the issue of shareholder identification. His response? “We are highly unlikely to see rule changes”.

So a long road ahead before we see international best practice in the US