SEC Moving Towards Open Disclosure

By Richard McCaffery (TMF Gibson)
July 18, 2000

It's hard to find a company that doesn't talk about valuing shareholders. It's a lot harder to find companies that really do it.

As an example, look at systems integration company Electronics Data Systems (NYSE: EDS), which recently warned analysts in an after-hours pow-wow that second quarter revenues would come up short. The company's shares fell hard in after-hours trading and closed the next day at $43.75, more than 30% below their closing price two days earlier.

The issue is selective disclosure, but what's at stake is a shareholder's right to the same information to which professional investors are entitled. It's pretty straightforward, and pretty sad that some companies haven't agreed to toe the line.

Pizza restaurant chain Papa John's (Nasdaq: PZZA) went through its own selective disclosure flap last December, after the company told analysts to expect lower same- store sales for the fourth quarter. The company ended up losing about $260 million in market value, about one-quarter of its valuation. The issue for investors, beyond the Q4 same-store sales numbers, is simple: Why should the average investor hear the news secondhand from analysts, long after the shares have plunged more than 20%?

Otherwise solid companies like EDS and Papa John's can do better, and they should.

Fortunately, there are more and more examples of companies that put the little guy and his institutional brethren on the same pedestal. For example, 82% of companies open up their conference calls to reporters and average investors, according to Business Week.

If you want a model for companies that are taking the issue seriously, check out data communications company Infonet Services (NYSE: IN), which hosted an all-day "Investor Day" information broadcast for its shareholders on June 26. The company opened its webcast to everyone -- reviewing its business model, its strategic plan, the space in which it operates, and its growth drivers.

Why the push? In a Motley Fool interview, Morgan Molthrop, Infonet's vice president of investor relations, said: "We feel strongly that there are a lot of issues about a complicated company and a complicated story like ours that investors need to know about. If sophisticated investors have difficulty understanding, then you know that our individual investors are having difficulty understanding it. So, we've really put the onus on us to shed light on these issues -- not just for sophisticated investors, but for our individual investors as well."

Also good news for investors is that Arthur Levitt, chairman of the Securities and Exchange Commission (SEC), is tired of the old boys network and wants to see change. The SEC proposed changes to the rules that permit companies to give information exclusively to Wall Street analysts. As expected, Wall Street is lobbying hard to keep the current system.

This is an issue close to every Fool's heart: that individual investors have a right to the same information as analysts and money managers; that the push for open disclosure will encourage the even flow of information, not inhibit it, as some industry observers have ridiculously argued; and that the best companies will push to better inform all investors, not just the select few.

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