Exams littered my desk. Grades were due the following day, and I’d been through the three stacks twice. The course – a world pioneer on investor relations and disclosure – fits into NYU’s continued education program under ‘public relations and marketing.’ But only one of the 22 students that signed up for the spring 1999 class was there for the PR credit: the other 21 were there because of their interest in IR.
There were three lawyers, a corporate secretary, six IROs, and seven IR consultants. The rest were executives who wanted to know more about IR. And, of course, there was the brave PR cross-over. One woman had such a sharp and skeptical expression on her face the first class that I was sure she would drop out. (She turned out to be one of my best students.) I knew I’d been unmasked when I received an e-mail from one student giving me the answer to the question she’d asked the night before, with a note attached, ‘Is this the first class you’ve taught?’
Material evidence
Still, we’d made it through selective disclosure, the ’33 Act, the ’34 Act, managing earnings, and materiality. Now the exams sat in three piles on my desk, sorted by the type of assignment:
1. A letter to SEC chairman Arthur Levitt on whether teleconference calls are a form of selective disclosure, along with advice on how to remedy the situation if they are.
2. A memo to senior management of a corporation on the company’s IR web site, and what kinds of legal pitfalls they should protect themselves against.
3. An essay on the intersection of psychology and investor relations.
The answers, like the questions, ranged from robotic to wacky. Teleconference calls had been a topic of hot debate in our class. Most students agreed teleconference calls might well be sophisticated selective disclosure, given the intonation of the speakers, the ‘flavor’ provided, and the selectivity of the audience. For instance, if a company took steps to block individual investors and the media, that would conflict directly with the commission’s idea of ‘a level playing field’ for all investors.
One student wrote: ‘The impact of the individual investor cannot be overestimated. If we consider the increasing sophistication of these investors and their desire to be actively involved in managing their investments, it becomes inevitable that they will demand a level playing field.’ She went on to say that if we begin with the proposition that individual investors will soon develop a ‘no tolerance’ attitude toward selective corporate disclosures, ‘the corporations that will come out as winners will be those providing the fastest and widest dissemination of their information to the whole investment community.’
In other words, because recent trends – online trading, information explosions via the internet – have significantly increased the power of individual investors, the companies that cater to them most aggressively will actually benefit from these trends. She went further to say that ‘while many individual investors now take a proactive role in managing their finances, there are still many more who have a life away from their computer screens.’ What do they do for information? They turn to the media: CNNfn, MSNBC, and Bloomberg, in particular. ‘As financial reporters become more sophisticated, they play an important role in interpreting complex data.’
Whether or not her faith in the media reflected reality, she pointed out that in our business perception is reality. Bloomberg has been making a lot of headway with the SEC on the issue of selective disclosure, and the SEC is convinced the media has a place at the teleconference table.
Her suggestion was to stream the calls live through the internet and allow some questions by media and individual investors, perhaps after an initial round of questions from analysts and portfolio managers. This student also took into account corporate concerns about media misinterpretation of sophisticated data on the calls. ‘Providing access to conference calls to journalists may lead to misquoting or misinterpretation of information provided by management which could in turn provide a basis for litigation. The SEC should concede that companies who are willing to engage in more expansive and inclusive means of disclosure should not be penalized for their efforts.’ She suggests standards for safe harbor language that would be specifically applicable to conference calls and ‘to the varied forms of technology through which they are disseminated.’
IR web sites
Most students chose to answer the question on IR web sites. Many actually used the memo for their own corporations or clients, thereby killing two birds with one shot. This is the sign of an efficient IRO.
The main points made by students were the more information a company placed on its web site, the less likely an IRO would have to spend time responding to information requests. However, web sites also opened up an array of legal issues making their maintenance laborious.
‘All companies have a duty to correct and update information on their web sites,’ wrote one student. ‘Management should be aware that discrepancies between printed documents and those on the web might indicate irregularities. These irregularities might mean the difference between a court deciding to throw out a case under safe harbor rules or allowing the case to move into discovery.’ In other words, if you make a change or update information in an annual report, a press release on the site might not be unilaterally effective. A company with its annual on the web should find a way to make sure the correction exists somewhere within that document.
One student suggested that releases more than a year old be accessible only in an archive section of the site, which has protective language that denies any duty to update historical information.
Many students pointed out the different and conflicting natures of the marketing aspect of web sites versus the investor relations section. ‘IROs need to make sure that marketing text does not provide hype or forward-looking information that does not agree with the text of the IR portion of the site.’ Examples of content that could be construed as forward-looking, as espoused by one student: sales forecasts for new products and services, statements about new products currently under development, and statements discussing a strategy’s impact on competitors. ‘Overzealous announcements,’ wrote another student, ‘can be misleading to individuals and could result in stock purchase for the wrong reason.’
Psychology and investor relations
The least answered question was the third, on the intersection between IR and psychology. I had begun the first class with a show of hands to indicate who believed the following statement: ‘Corporations are empires and their chief executives are their rulers.’ Everyone’s hand went up. In that case, I said, the investor relations officer is a courtier and his or her existence relies upon the graces of the ruler.
My point was this: the investor relations officer is in a most precarious position, accommodating internal audiences, gleaning information from all over the company, supplying information to external audiences, including investors and regulators, and filtering feedback to the CEO and senior managers. It’s a Freudian paradise, replete with jealousies from corollary departments and issues of tender senior egos. A few brave students ventured into this heady domain.
‘The psychological challenge of managing earnings,’ wrote one student, ‘requires an understanding of the analyst’s concerns and the geography of the boundary of information that the investor relations officer is able to push.’ He went on to say that SEC chairman Arthur Levitt’s comments about the game of managing earnings being one of winks and nods was, while an exaggeration, a poignant one that ‘should put IROs on notice that such behavior is now unacceptable.’
In fact, we spent much of the class exploring that boundary, and the papers reflected an understanding of the concerns of each constituency. And, as one student not so aptly stated, ‘Allowing oneself to become accustomed to the ups and downs of the market, and the highs and lows of the CEO’s personality, will mentally prepare an investor relations officer for any unfamiliar situation.’ Or, investor relations is the training ground for a life of familiarity and grace with power.
But the winning quote of the semester came from a student with real moxie: ‘ With a bit of psychology and a bit of diplomacy thrown in with common sense, handling these volatile and reactionary people [chief executives, specifically] may even become second nature.’ Which proved to me that Machiavelli is alive and well, and living in corporate America.
Morgan Molthrop is director of investor relations for Infonet Services in Los Angeles, California. He is an adjunct professor of investor relations disclosure at New York University.
