PR NEWS introduces this new investor relations column, which will appear every six to eight weeks.
The conference call was once a fairly innocuous vehicle to allow management, analysts and investors to discuss the fundamentals influencing quarterly earnings. It has become a major bone of contention among corporations, individuals, the financial community and the media-with the SEC also expressing strong views.
The question under fire: who should participate?
The recent Association for Investment Management and Research study of analysts and investors made some interesting discoveries. Of those surveyed, 95 percent believe the conference call is "the most important and informative form of technology-aided communications between a public company and the investment community;" 63 percent felt the media should not be included.
This controversy is elevated by the National Investor Relations Institute (NIRI) 1998 survey which found that only 14% of its members invite the media to calls and 27% invite individual investors. Despite these results, NIRI advises companies to allow the media to participate in the calls to avoid charges of selective disclosure. They also recognize that interested reporters will find a way to listen, with or without a formal invitation.
Why all the Fuss?
Concerns have been raised that conference calls are used to release material information to a narrow audience. The Securities and Exchange Commission (SEC), in support of individual investors, is focusing on whether conference calls constitute selective disclosure by excluding an important segment of the investing population and its major information conduit.
There is evidence that trading has occurred during conference calls. This charge was supported when last year, a Bloomberg representative gave SEC Chairman Arthur Levitt call transcripts from companies that had excluded the media. The representative was able to document material information discussed during the call on which significant trading activity occurred before companies issued a follow-up release* (reported in "IR Update," March, 1999. L. Thompson, NIRI president).
The Facts
Most public companies want broad distribution of the best information to help investors make informed decisions. In that vein, management often contacts the press as a means of reaching a wider audience. Most companies seek press coverage. Few get it.
But companies also realize that good communication is targeted specifically to meet audience needs. In fact, the SEC has supported differential - not selective - disclosure, which recognizes that different audiences need different levels of information.
The value of conference calls is that they focus on the specific questions of trained analysts and professional investors who possess a deep and sophisticated understanding of the company.
The purpose of the call is not to release material information - that goal is achieved through the press release - but to help professionals understand the fundamentals that influence the figures and to further disseminate educated opinions to a broad range of investors. Clearly conference calls are more costly and time-efficient than alternative methods such as fielding 100 individual calls from analysts and investors, which gives the first 10 callers an advantage over the last 10.
With the possible exception of wire services and the Internet, most published sources can't expand disclosure anyway since they can't publish the information they've gleaned from the most recent call. By the time a publication can get its story out, the replay of the conference call is often available in a number of different venues and a variety of different formats.
From a company's point of view, there are only two reasons not to invite the media to a conference call.
First is the recognition that the material is basic and not the stuff of which news is made. A long discussion on margin growth, for instance, is not compelling to a reporter but may be key to an investor's evaluation.
Second, there is the risk of misquotes or incorrect attribution. Analysts and investors are concerned that the discussion will get off the mark as company management tries to meet the needs of a variety of audiences. It is also obliged to protect its investor base who may not wish to be quoted.
For that reason, many companies host a separate call for the media which focuses on their specific needs.
A Point of View
The risk of selective disclosure and continued pressure from the press and SEC is likely to turn the tide with more companies making the conference call a public forum.
As a result, discussions will become broader and more simplistic as management tries to satisfy a variety of interests in a reasonable period of time. Reporters will be selective in choosing the calls they wish to monitor, tuning in on those discussing newsier issues such as mergers and acquisitions or large companies about which they generally write. Analysts and investors will become frustrated with calls that don't address their needs.
A recent Fortune article quoted Morgan Stanley's Byron Wien saying he was worried that actions restricting the flow of information between companies and analysts will make the markets less efficient. That clearly is not a good thing for anyone.
Investor relations professionals need to think creatively about how to accomplish two important goals - granting access to the media and to individual investors as well as providing the most complete information on a company to its most knowledgeable and arguably, important audiences.
In the short term, IROs should spend more time with management prior to the call, extending the length of the presentation and rehearsing what will be discussed to avoid any semblance of selective disclosure no matter who is on the call.
Kay Breakstone is president and CEO of Ludgate Communications Inc., which provides a full range of media and financial communications services. If you have a topic you would like Contributing Columnist Kay Breakstone to explore, e-mail Senior Editor Debra Zimmerman Murphey at dmurphey@phillips com.