A Rogue Manifesto: Reforming Corporate Disclosure
Part 1 of 5
By Louis Corrigan
Hardly a day passes without some publicly-traded U.S. company shafting its owners. Despite years of shareholder activism, many corporations have made such a habit of disregarding their shareholders, particularly individual investors, that they literally don't think twice about it. Indeed, it's safe to say that few U.S. companies are as responsive or as accountable to the people who own them as they ought to be -- or as they will be.
Rogue wants this to change. America's public corporations simply must do a better job. They must start communicating equitably with shareholders as well as with the broader investment community. They must also adopt the modern reforms of corporate governance that allow shareholders more control over the companies they own.
This week, we'll look at the state of corporate communications. Consider the recent rally in the shares of COMPAQ COMPUTER (NYSE: CPQ). On Tuesday, the PC sales leader, with $18 billion in 1996 revenue including the recent acquisition of Tandem, came out with some good news: It was raising its revenue target for 2000 by 25%, from $40 billion to $50 billion. That news sent Compaq shares soaring to $69 7/16, up $5 on the day. Then an order imbalance Wednesday morning led to a delayed opening, as investors rushing to buy the stock caused it to gap up to around $73. The shares closed up $4 1/4 to $73 11/16, a gain of 14% in two days. All of this was great news for Compaq's shareholders.
Only trouble was, the PC manufacturer's officials never told shareholders what was afoot. Check the PR Newswire or the Business Wire. You won't find any official press release spreading the word. As is so typical, Compaq made the announcement before a Cowen & Co. technology conference in Boston on Tuesday. In other words, a small group of institutional investors had first dibs on this little nugget of news, and they couldn't get the speed-dials on their cell phones to work fast enough as they tried to contact traders at their firms. Dow Jones's peculiar headline Wednesday morning said it all: "Compaq Is Said To Be Looking For $50 Billion In Sales By Year 2000." The article attributed the revised projection to "a market source."
Let's face it, that's pathetic. Here we have one of America's leading companies making an announcement that virtually defines "material information," and your typical individual investors, including thousands of Compaq shareholders, are left completely out of the information loop. Company officials make a direct presentation at a private conference to some fast-money institutional investors while the masses get a second hand account that's a day late and $8 per share short. Compaq's actions, in this regard, represent standard operating procedure at hundreds if not thousands of America's public companies. Make no mistake, though, the comments by Compaq officials constitute selective disclosure. And though lawyers will quibble over the details of the matter, such selective disclosure is both wrong and illegal.
In 1996, the National Investor Relations Institute (NIRI), the main international professional organization for investor relations professionals, put out a pamphlet outlining standards and guidance for corporate disclosure. Drawing on the Supreme Court's interpretation of the Securities and Exchange Commission's (SEC) Rule 10b-5 anti-fraud provision, NIRI concluded that information was material "if its disclosure would be likely to have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision." That's a perfect way to describe Compaq's new forecast.
Selective disclosure occurs when a company official reveals material non-public information to an individual or group before making a full public disclosure. The NIRI handbook states that divulging such information "to a room full of securities analysts is also selective disclosure, unless followed immediately by a press release." Indeed, proper disclosure always requires that the information be made available to the entire investing public simultaneously, or nearly so. Again, NIRI holds that "[a]nnouncements of 'material' events or information are not deemed to have been properly disseminated or made 'public' until they have been released to the exchanges or The Nasdaq Stock Market and distributed electronically (usually via Business Wire or PR Newswire) to key media such as Dow Jones (The Wall Street Journal), Reuters, the New York Times, and local metro newspapers."
These are fairly specific guidelines that are rather unfairly ignored by even America's best public companies. In establishing a set of "best practices" for doing corporate communications, NIRI also offers some general rules such as "corporations should treat investors fairly, without discrimination, by providing equal access to information." Or, "Information should be released in a manner designed to reach the widest public audience possible, including the individual investor." NIRI's handbook makes it clear that since Compaq's officials went into the conference expecting to discuss the firm's new sales objectives, the company should have issued a press release that outlined these new developments before the Cowen & Co. conference began. Or at the very least, the company should have promptly issued a release once the presentation was over.
Rogue would like to see every public company officially adopt NIRI's disclosure guidelines as a baseline of what is acceptable for corporate communications. That means companies should do all they can to ensure that investors are both adequately, accurately, and equitably informed. Moreover, we would like to see investor relations become something more than a tool for the gatekeeping of corporate information and something less than a tool for public relations. Publicly traded companies should serve the interests of shareholders as well as cultivate those shareholders as owners. That means companies should strive to develop a community of informed investors by becoming more responsive to the possibilities for doing so.
What does this process entail? Today, most companies issue press releases via the wire services and send shareholders both annual and quarterly reports plus proxy statements, though clearly the Compaq example suggests that companies often fail to issue press releases when they should. Many firms also hold quarterly conference calls with Wall Street analysts and send their top officials to make presentations at trade shows and investor conferences. All of these efforts can and should be enhanced, covered, or supplemented through the use of new technologies.
- Companies should offer timely dissemination of press releases via e-mail or fax to shareholders who wish to receive them.
- Every public company should have a website that provides a full archive of financial reports and press releases going back at least two years.
- Quarterly conference calls should not be restricted to Wall Street analysts and should be widely publicized through press releases. The Motley Fool and other media should have live access to such calls with the ability to ask questions. To the extent that costs allow, individual investors should also have live and complete access. In other cases, company officials should field e-mail questions from individual investors. While companies need to speak to the analyst community, there's no reason for analysts to have privileged access to top company officials only to deny that access to individual investors.
- Conference calls should be made available to all investors via a widely publicized call-in number that allows access to the tape-delayed version. In addition (or as an alternative, in some cases), transcripts of the calls should be made available on a company's website on a timely basis.
- Companies should move toward RealAudio simulcasts of conference calls, annual shareholders' meetings, and other public presentations by company officials. Companies should use their websites, or an appropriate alternative site, to archive these events.
- Companies should provide ongoing online assistance to investors. Corporate communications chief Steve Push of GENZYME (Nasdaq: GENZ) has mastered the art of answering investor questions on the Fool's message boards. In other cases, some CEOs have visited the Fool and answered investors' questions in their company's message folder. Companies should consider monitoring these online message folders to answer such questions. Alternatives might include setting up a FAQ file on the company's website and also regularly posting responses to investors' E-mail questions.
- Companies should make it possible for shareholders to vote a proxy via the Internet.
The Internet can't replace traditional forms of corporate communications. Even so, the Web is accessible to everyone by way of public libraries and should be used as extensively as possible to enhance standard ways of educating shareholders. And the key to education is straight talk. If getting honest and timely information from the companies we own requires us to send America's corporate counsels to Siberia for re-education, let's do it. If it involves suing a Compaq for crimes against its individual investors, that, too, might work. New technology makes a transformation in the flow of information possible. But it doesn't guarantee that the managements of America's public companies can reorient themselves enough to realize that they are working for us. That's the next step.