Debate about fair access to corporate information is hotting up. Issues of continuous disclosure and privileged briefings are now firmly on the agenda and are likely to shape the future roles of many of the world’s investor relations professionals and corporate disclosure officers.
For once the discussion is not being wholly led by the US authorities. Toward the end of last year the Australian Securities and Investments Commission (ASIC) published its Heard it on the grapevine… draft guidance and discussion paper.
The purpose of this publication was to invite comment on the current environment of disclosure of information to investors. It also aimed to examine whether further guidance would be necessary in the interests of ensuring compliance with the continuous disclosure and insider trading provisions of both the existing legislation and the Australian Stock Exchange Listing rules.
The work of ASIC may well set the pace for other markets around the world as they grapple with the very same issues. According to ASIC’s Alison Champion, the submissions received by the end of the consultation period represented a ‘self-selected’ cross section of opinion of listed companies, investors and a range of others in the securities industry. Any final guideline – if, indeed, there is to be one – should be emerging as this issue of Investor Relations magazine goes to press.
Eye-to-eye
So why is the ASIC paper so special in global disclosure terms? It’s because it dares to tackle the issue of one-on-one briefings head on. One-on-one meetings have been a mainstay of investor relations practice since its inception. Today, though, questions are being asked by regulators about the wisdom of giving private briefings to key members of the investment community which might leave retail investors out in the cold. Even if new information is not being teased out, the method of explanation, intonation in management voices, mannerisms and more can give vital clues as to what might lie ahead. In the current environment that may even be deemed a kind of selective disclosure.
‘Selective briefings,’ according to the preamble to the ASIC paper, ‘can create opportunities for insider trading and also undermine ordinary investors’ confidence in the market as a level playing field.’ The paper carries on: ‘The purpose of the continuous disclosure requirements in the corporations law and stock exchange listing rules is to ensure that investors do receive equal and timely access to information.’
Furthermore, the Australian Shareholders’ Association (ASA) was noticeably swift in giving its ‘unequivocal’ support: ‘At present, Australian shareholders do not get equal and timely access to company information, and private briefings to analysts are seen to be just another opportunity for the big end of town to get the jump on small shareholders.’
However, the ASIC’s media spokesperson Irene O’Brien admits that there is ‘an absence of hard evidence’ of this and that therefore ‘we have assumed’ that this issue needs to be addressed.
Not surprisingly, the ASIC paper has caused consternation within Australia’s investor relations community. Many are annoyed by what they see as a regulator preparing to issue a diktat over an information process that it doesn’t completely understand. Yet some of those opposed to the paper’s thinking are reluctant to go on the record, fearing a further backlash.
‘The ASIC paper sets out to get listed companies to address a problem which they did not create and which for the most part doesn’t exist,’ says the IRO at one of Australia’s largest companies. He adds that the paper also wrongly assumes that all investors are the same. ‘Analysts who devote considerable time, effort and intellectual resources toward understanding companies and the sectors they operate in have quite different requirements to the small private investor who in any case would not know what to do with the vast bulk of corporate information if he or she had access to it.’
In the sights
In the USA the big guns of the Securities and Exchange Commission are also firmly trained on similar issues. ‘The behind-the-scenes feeding of material non-public information from companies to analysts is a stain on our markets,’ said SEC chairman Arthur Levitt speaking to The Economic Club of New York in October last year. ‘This selectiveness is a disservice to investors and it undermines the fundamental principle of fairness.’
The ASIC paper concentrates a good deal on this perception of privileged disclosure. It encourages all companies to consider the adequacy of their corporate disclosure practices in the light of its recommendations and the disclosure measures already put in place by some of the country’s leading companies.
Among its recommendations are nominating a corporate disclosure officer whose threefold function is to:
– Ensure the company complies with continuous disclosure requirements of the stock exchange;
– Oversee and coordinate all forms of disclosure by the company to whomsoever; and
– Educate all employees on the company’s disclosure policy.
It goes on to add that for smaller companies without an IRO the disclosure officer role might be performed by the company secretary.
While authorizing a limited number of employees to act as company spokespeople the paper also goes on to recommend advance authorization of company information before release, including that to be released in analyst briefings.
The role of the disclosure officer is central to the ASIC paper. Problems may arise, however, where words like ‘price sensitive’, ‘material’ and ‘significant’ are used to describe price sensitivity of company information.
Greg Baxter, head of investor relations at building materials group James Hardie, believes that exercising judgements as to what this means is what IR personnel are paid to do as well as establishing clear disclosure policies. The problem as he sees it is not what to release about a company’s affairs but how to release the enormous amount of company information which would require to be disseminated if the ideas raised by ASIC were made mandatory.
This is particularly the case when you consider that the paper goes on to suggest a variety of methods by which analyst information could be made more publicly available. It suggests putting in place procedures for reviewing briefings and discussions with analysts and ‘ensuring that shareholders are not denied access to any significant background information given to analysts.’
Among the measures the ASIC suggests are that companies should comment only on factual errors made in analysts’ draft reports. It also suggests having two people present and recording analyst discussions. Alternatively a stenographer can take down these discussions after which a verbatim transcript or summary can be posted on the company’s web site. If price sensitive information emerges in the process of these discussions then it should be released immediately to the stock exchange and then disseminated publicly.
Predictably such suggestions have drawn the heaviest criticism. Orient Capital, a leading Australian strategic investor relations consultancy responded to the ASIC paper on its own behalf and that of 13 of its clients. ‘If an analyst or fund manager asks a question about price sensitive information, which is not public, the overwhelming majority of companies would simply decline to answer such a question,’ wrote managing director, Frank Sufferini.
‘It is both a costly and impractical suggestion that companies hire stenographers to attend meetings with external parties,’ he continued. ‘Companies with good disclosure policies do not need to review tapes or transcripts, as the authorized representative of the company will know during a meeting whether or not price sensitive information has been disclosed.’
This is a view echoed by Peter Abraham, company secretary of CSR. ‘As a philosophy I support much of what the paper has to say. However, some of these ideas are economically impractical and unproductive. So many trivial things arise during discussions with analysts. It would be a waste of time to have it transcribed and post all this to a web site. Our company for example, from time to time invites groups of analysts to visit our sites. We may spend several days on a bus or a plane together. It would be completely impractical to note all of this down.’
Another IRO at one of Australia’s largest companies who preferred not to be named was more blunt. ‘Some of what they’re suggesting is completely impractical…We have a huge amount of contact with the investment community, we would fill up our web site with a load of completely irrelevant information. Whoever wrote this stuff has never worked in a major listed company and does not understand what the implications of some of these suggestions would be.’
But it is this large amount of off-the-record, informal contact between corporates and analysts which raises suspicions among private investors that privileged information is being passed around.
Open questions, transparent agreement Analysts themselves are another group that is likely to be unwilling to fall in with many of the suggestions set out in the ‘Grapevine’ paper. Making their questions available to the general public would, they say, infringe their intellectual property rights. They argue such questions arise from their skills and knowledge.
The paper addresses this issue in paragraph 18: ‘ASIC acknowledges that [giving away intellectual property free of charge] is a genuine concern for analysts and believes it can be accommodated. It is important that shareholders are not denied access to information provided to analysts…’
But Greg Baxter of James Hardie notes that analysts are working with their clients’ interests in mind whether on the buy- or sell-side. The end client is the individual through their pension plan or insurance policy.
Whatever the views of those trying to influence ASIC, the principle of greater transparency is not generally at issue. The discussion revolves around the quantum and definition of what is material to the share price and what is worth making public.
Indeed, the timing of the release of price sensitive information is also dealt with in the discussion paper, which contains a thinly veiled criticism of the way in which stock exchange information is currently reaching the public domain. ‘Listed companies must give all information required to be notified to the stock exchange under the continuous disclosure requirements of the stock exchange company announcements office,’ the draft states. ‘The stock exchange releases the information to ASIC and information vendors. Announcements are publicly available for a fee from the stock exchange or ASIC. They are also available on subscription from information vendors. While the information is then officially in the public domain, members of the public must pay to obtain access to it.’
The private investor could not reasonably be expected to pay to subscribe to the kind of information services the professional community has access to, so the playing field is certainly not level. Some commentators argue, however, that the bulk of the information available would not benefit the private investor in any case. Others argue that information should be posted on company web sites as soon as possible after it has been received and released by the stock exchange.
Peter Abraham at CSR says his company’s information is posted to its web site certainly within the day – and sometimes within an hour – of stock exchange release. But if the principle of simultaneous announcement is worth anything, then surely all interested parties should receive information at exactly the same time.
One of the options currently being considered is a 20 minute immediate time frame exclusive to the stock exchange. This is subject to the criticism that it serves to protect its own income stream and that of the information vendors and their subscribers – that is, the analysts and the institutions. Again, surely if the principle is worth anything, there should be no convenient time lags in revealing information to a privileged subsection of the public. This is key to the spirit of the ASIC paper.
Sector view
Despite the issues raised in the paper there is an alternative view doing the rounds of Sydney and Melbourne. This argues that what determines share price may in many cases have little to do with company information; rather more to do with peer group or sectoral information.
For example, recent research in the US has indicated that where there is takeover activity in a given sector, non-target or acquiror companies often show significant share price enhancement because the market concludes the transaction could trigger similar activity elsewhere in the sector. Similarly, index movements, interest rate changes, government economic numbers, rumor and a host of other factors can all have an impact on stock price.
All this raises a pretty fundamental question about corporate releases and other information disclosure by companies. How reflective is the share price of company information? And if the answer is ‘not very’, then how much it is worth having a debate around the subjects dealt with the current ASIC paper.
Significantly, several of Australia’s largest companies have chosen not to publicly discuss their reactions to the Grapevine report, preferring ‘low profile discussion’ with ASIC. One, after taking legal opinion, chose ‘not to provide public comment at this time.’
Australia’s investor community is taking the paper very seriously indeed. The environment surrounding one-on-one briefings is unlikely to be the same again. But then, with the growing importance of retail investors, maybe that’s the way it should be. The ASIC paper at least seems implicitly to support this view.
