Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, November 09, 2006

A bad idea for issuers and for investors.

First a disclosure. As noted in my personal details, even though this is a personal blog, I work for PR Newswire, a news dissemination company. Now the bad idea.

A couple of weeks ago, the CEO of Sun Microsystems, Jonathan Schwartz, posted on his blog the view that web posting should suffice for meeting transparency obligations of listed companies. This week, the notion has been rebutted by no lesser person than SEC Chairman Christopher Cox, although in his reply, Mr Cox leaves the door open for further discussion.

This idea surfaces every now and again. Something similar was proposed back in 1999 by Commissioner Unger. It was subsequently dropped as being unworkable. Again in 2002, the European Commission in a consultation on what was to become the Transparency Obligations Directive, proposed it again. It was once again shown to be unworkable, and replaced with the tried and tested option of properly distributed press releases serving the financial services community best.

Why has the concept been found wanting? Here are 10 reasons.

1. Push versus pull. A posting on a website requires investors to proactively set up to receive the information. This has consequences such as the institutional market (with greater resources to do this) being better informed than retail, creating selective disclosure.

2. Formatting. No matter what format is loaded on to the website, it will inconvenience some part of the media and delivery chain, reducing the visibility of news in the multitudes of media. The equity terminals are notoriously inflexible in catching news from multiple, random sources. Reuters et al are highly unlikely to redesign their entire editorial processes to accommodate this notion.

3. Validation/ editorial checking. There is well-substantiated evidence that show the number of occasions on which a release - fully approved by the company - has mistakes. 3rd party eyes and ears can help ensure that incorrect information does not reach the markets.

4. Security of posting. Is the person posting the release on the issuer's website entitled to do so? Would every company have to create restricted zones for IR, corporate secretary etc?

5. Role of financial PR companies. Financial PR companies post large numbers of results releases to the newswires. Would every company expect to give the PR companies access to the (secure) area of their website?

6. Down time. No single source can be relied upon 100% - the newswires have (had to) invest in redundancy of systems, ensuring permanent access. Not every company will have the resources to do this, and smaller caps are especially vulnerable.

7. Access to the 'editorial process'. Journalists work in many different ways, some on email, some using newswires, some on fax etc, with a constantly moving population. It is unreasonable to expect all companies to keep up to date with journalist changes, or to develop multiple mechanisms to deliver to these different audiences. And expecting investors and journalists to re-register is frankly unrealistic.

8. New media types are constantly emerging - it is in the commercial interests of the newswire to constantly patrol for these media, and harness them. Would all quoted companies be as diligent?

9. Simultaneity. The principles of good disclosure - never mind the law of the land - requires news to be accessible to all investors at the same time. This would be impossible for companies to achieve.

10. These challenges will inevitably hurt smaller companies most, a) by increasing cost to enhance their websites to the necessary degree, and b) investors will access large companies first; an investment story from a smaller company will win less prominence, ultimately strangling some prematurely, due to less access to capital.

OK rant over.


  • At 9:51 am, Blogger Dominic Jones said…

    Aside from the fact that I and many others can contradict every point you've made, don't you think it is in the interests of the newswires to work with companies -- and their shareholders -- rather than against them?

    The more your employer and others dismiss modern technologies out of fear for their proprietary technologies and networks, the more motivated people are to undo them. There is a huge opportunity here for someone to take the lead using open source, extensible technology to further democratize access to information at negligible cost to companies, and ultimately their shareholders.

    As for former Commissioner Unger, as I recall it was December 2001 and not 1999, and her recommendation was based on the input of IR firms, issuers and investors who felt it was stupid to make companies issue news releases about something that was scheduled and which everyone knew was going to happen at a specific date and time. Again, her recommendation covered only scheduled disclosures, nothing else.

    When Reg. FD was passed, it was envisaged that technology would advance to the point where website postings could satisfy requirements for certain disclosures. One year later, Unger said that time had come.

    It is now five years on and today a company can build and host a robust, reliable website with a built-in wire service for less than the cost of a can of Coke.

    But you know that. This is one of them.

  • At 9:20 am, Anonymous Anonymous said…

    These comments have been invaluable to me as is this whole site. I thank you for your comment.


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