Second of two parts
With the implementation of the Securities and Exchange Commission's Regulation "Fair Disclosure" (FD) just six weeks away, companies and analysts are still befuddled about its effect on their external
communications.
The regulation requires that companies release material information - that is, news which a reasonable investor would consider in making a decision - to the general public at the same time it's
provided to Wall Street, ending the casual and common practice of selective disclosure.
The push for FD came from growing public perceptions that insiders got news in advance, allowing them to make a killing or cut their losses at the expense of those who heard the news later. "The SEC
has really put a focus on an area where I think public companies got sloppy, in the selective disclosure [of] information," says Thomas Franco, chairman and CEO of Broadgate Consultants, Inc., a New York-
based capital markets communications advisor. "You weren't supposed to selectively disclose before. You're not supposed to selectively disclose now."
Areas of Risk
There are three major areas where companies need to reconsider their conduct, identified by almost a dozen analysts and IR practitioners contacted by PRN. First is the widespread custom of
reviewing analysts' drafts of reports in advance of corporate quarterly earnings statements. Analysts generally prepare their own estimates of what a company's earnings are likely to be, and corporations
have gotten into the practice of looking them over and suggesting revisions. When the analysts' reports are released, they frequently have an impact on company stock prices, as investors consider them an
indicator of actual upcoming results. Companies have been known to use this "consultation" as an opportunity to "walk the Street down," to gently lower market expectations if the news is not good, but
individual investors rarely, if ever, heard the news in time to act.
Donald Eagon Jr., VP of global communications and IR at Diebold Inc., knows that these kinds of reviews must be handled carefully. "For us, the biggest question internally is the statement by the SEC
concerning earnings guidance. That is one that could force companies to make a lot of changes," Eagon says.
"We've had a lot of discussions about [quarterly projections]," agrees Jeff Majtyka, managing director of Brainerd Communicators, an IR consulting firm. "Companies participate to varying degrees in
helping analysts prepare accurate reports... Some people will say [you should] review a draft research report, because if there are mistakes in it, it's going to come back to haunt you."
A second risky practice is that of holding "analyst days," or one-on-one meetings between analysts and management. The National Investor Relations Institute surveyed 462 IR professionals from companies
of all sizes before FD was approved by the SEC. It found that almost 35% said they might cut back or eliminate one-on-one meetings with analysts and institutional investors. Another 22% said they might
cut back or end the Q&A part of their conference calls, while 10% said they might cut back or eliminate conference calls altogether.
While many companies are only covered by one or two analysts it's a practice that may be curtailed in its current "press the flesh" form, says David Schellhase, general counsel for Linuxcare, a San
Francisco software services vendor. Instead, companies should implement open teleconferences and Webcasts of analysts' and investors' meetings. (The big corporate winners under FD are the companies that
provide such services.)
The third risky practice is corporate attendance at analysts' conferences. The tradition of "breakout sessions," where CEOs can talk to smaller groups about their companies' prospects, doesn't fit well
under FD; they customarily have not been open to the public, either physically or electronically. "Breakout sessions may be jeopardized," Majtyka acknowledges, but neither he nor Schellhase believes the
conferences themselves will end.
There are other unresolved issues, such as young companies whose employees are shareholders. How does "material information" get released to the general public in that scenario? "Obviously people also
are concerned about selective enforcement," says Alex Stanton, president of Stanton Crenshaw Communications, a technology and corporate PR firm in New York. "Somebody's going to have to be made an example
of."
Will Analysts Shake Out?
There are different kinds of analysts - financial analysts that work for banks and brokerages, internal financial and industry analysts that do research for companies, industry analysts that work for
consulting and research firms. Most of FD is aimed at financial analysts with banks and brokerages, those who influence the direction a stock moves. Over the years, many of them have concentrated more on
making contacts and less on analysis of information.
"Most analysts are a bunch of sheep, they don't differ from what [corporations] tell them," sniffs Bob Olstein, principal of Olstein & Associates and a regular on TV business programs. "I don't
think they should keep their jobs right now, they should go be reporters. I don't think it's an analyst's job to quote what the management tells them."
Broadgate's Franco agrees, though more tactfully. "I think there's a whole generation of financial analysts who have grown up (a) in a protracted bull market, and (b) in an environment where they were
the recipients of information that facilitated their analysis," he observes. "Analysis is hard work; maybe they'll become portfolio managers. Clearly the need for high-quality analysts at investment
management firms will become greater, not less."
Franco sees opportunities for IR professionals in this case, for instance, providing analysts with more industry disclosure to complement allowed, company-specific information. "I think financial
public relations will become much more important," he says. "I think there was a period of time when the media was distrusted. Maybe the proliferation of economic news programming has helped to reposition
the media's role. Particularly with respect to writing about companies, a Forbes article is seen as being more evenhanded than comments [from an analyst]."
Stanton agrees the communications shakeout from FD presents opportunities. "This sort of lack of clarity, this period with a lot of gray area, does give investor and corporate communications
professionals a chance to redefine it. Here's where it's heading, here's what the SEC wants us to do, we can do something new and creative," he says. "Those who are willing to venture forth on the dance
floor at the prom, some of them are going to come up with some best practices around this."
(Franco, 212/232-2222; Olstein, 914/701-7565; Schellhase, 415/354-4299; Stanton, 212/780-1900; Eagon,330/490-3770; Majtyka, 212/986-6667)
Tips for Dealing With FD
Norma LaRosa, president and cofounder of Kensington Group Inc., an information research and consulting firm, offers several suggestions for coping with Regulation FD:
- Make sure you have nondisclosure agreements in place with your vendors and suppliers, and make them explicit, not just part of annual contracts.
- Consult your internal legal counsel every step of the way.
- Make sure your company has consistent internal policies and practices in place.
- Make sure the policies and practices are applied globally, if you're part of an international company.
(LaRosa, 415/924-0468)
No Comment
The concerns and doubts sweeping business about Regulation FD may best be reflected by callbacks - or the lack of the addition to the sources we quote, PRN contacted a
half-dozen securities analysts, four research firms, and another half-dozen major U.S. corporations, none of whom returned our calls.
In one case, at a major research firm (that shall remain nameless), we were transferred four times in one call - we started with the public relations office, got bounced to a
VP, who passed us on to a group director, who kicked us on to a senior analyst, who transferred us back to the very same PR person we started with.