IR practitioners always invoke transparency. But how transparent can you be when your attorneys and accountants fill your annual reports and earnings releases with euphemistic gobbledegook? SEC chairman Arthur Levitt is on the side of good IR, and perhaps nowhere more so than with the ‘plain English’ rules the SEC promulgated in October 1998.
His campaign seems to be succeeding, although no change has prompted such resistance from the legal profession since English courts dropped Norman French in 1650. None of the disasters the legal profession prophesied in 1650 came to pass, and few of today’s companies that went the extra nine yards with voluntary ‘translations’ into plain English would want to go back.
Nor would their investors. It seems that once managements began using plain English, they found it infectiously intoxicating when investors could at last understand them. The process was not without pain, but once it began, its effects went beyond the relatively limited areas to which the SEC rules presently apply.
Initially, the rules applied to mutual fund prospectuses and IPO summary and risk disclosure sections. The only new area the SEC has committed itself to is the summary term sheet in the offer statement. However, Levitt has also cast an owlish glare on the management discussion and analysis section of the annual report. With his battle cry, ‘Disclosure isn’t disclosure if it doesn’t communicate,’ he complains that too often the MD&A contains little discussion and almost no analysis. Add to that the SEC’s championship of individual investors and scrutiny of online brokerages, and it suggests an inexorable trend toward plain English documentation.
Plain pioneers
Texaco was one of the pilot companies for the plain English provisions. Liz Smith, Texaco’s IRO, is emphatic about her support of the process. ‘It’s my job to worry about how you talk to the investors. If it was a bad year, then let’s say it was a bad year. I write very directly with active verbs, like, This is the worst year I’ve seen in 33 years at Texaco.’
Of course, not everyone shares her robust outlook. ‘People grew up in formal legal speak, but even so, if you just put enough time and attention into [plain English], then it happens.’ She credits the controller’s department, which is responsible for the MD&A discussion and financial statement, with making the financial information much clearer – ‘But everyone wanted to do it.’ The next step, she says, is the shareholder letter – ‘All of us want it to be in plain English.’
When the rules came into force there were, initially at least, complaints of delays in clearing IPO documents. But the SEC’s Martin Dunn, associate director for corporate finance, who currently heads the plain English crusade, claims that that’s all over now. ‘In December and January, 1998-99, we were behind probably ten to fifteen days. But by spring last year, it was cleared up for the vast majority of cases,’ he says.
His staff of over 100 SEC attorneys monitor documents for plain English even as they check for other more traditional forms of compliance. Dunn summarizes: ‘Our early comments were very basic. We got as ready as we could, and had prepared advice, but until we saw it on a large scale we couldn’t really do anything. And the folks on the outside were learning. They had to see the comments a few times for it to sink in.’ Still, Dunn recalls, ‘At the beginning there were a few folks who just couldn’t believe we were serious.’
Because of the need for SEC approval, there has been no actual plain English punitive enforcement action against companies except perhaps indirectly. The word got around that well-written documents turn around in a much shorter time than inveterately obscure ones. For IPOs with millions hanging on their timing, there’s a potent inducement to linguistic clarity.
To help, Dunn points out that his staff collated their experience of the worst and best practices in a staff bulletin last June (revised staff legal bulletin number seven) to advise writers about the 40 or so most frequently made comments. ‘That meant that companies could check the first round of comments before they got here for the real deal-specific ones, and that helped a lot.’
So far there are no immediate plans to extend the provisions, except for tender offers under new M&A regulations, but Dunn reports, ‘We’re thrilled that people are extending it further anyway.’ He gives proxies as an example: ‘They’re a very good spot for plain English. We haven’t mandated it yet, but even so the plain English proxies we have seen look great.’
IR auxiliaries
The challenge for plain English proponents is how you go about changing the lifetime habits of whole professions. It’s certainly not easy. English professor Bill Lutz of Rutgers University helped draft the SEC’s original manual, and was brought in to help Texaco in the pilot study. He is one of a growing band of new IR auxiliaries – plain English consultants. It can be a heavy burden. ‘I was doing so many mutual fund prospectuses that I had to cut back – I was verging on insanity,’ he complains, mostly because he had to continually monitor the corrosive effects of their language on his own prose, which he prides himself on. What he does now is mostly annual reports, particularly MD&A. He is the first to admit that the final victory has yet to arrive. ‘Instead of being impossible to understand, now the plain English prospectuses are just difficult to understand.’
Lutz stresses there is no quick fix for conversion. ‘Some companies want to send their stuff to you so you can just rewrite it, and I have to tell them that it doesn’t work that way. It’s a long drawn-out process. It’s not just translation – taking long sentences and shortening them, or changing long words to shorter ones.’
Lutz says the process begins with finding out who will be involved within the company. ‘The last job I did had 28 people in the room, including the woman who was in charge of marketing and the mail room guy.’ Identifying the responsible people allows you to decide what information you need to include, even before you decide how you tell the story. ‘There’s a misconception that the more facts you provide the more information you’re providing. In fact, you have to exercise judgment, since your job is providing the information that your audience needs. Lawyers don’t like that. They want to throw everything in, but in doing so they actually provide less information.’
Lutz also points out that the ‘plain English’ title is something of a misnomer. The SEC realized that sometimes a picture, or at least a graph, is indeed worth a thousand words. One third of the SEC guide to plain English is actually devoted to design principles and the use of graphics. Cramped layout can be every bit as toxic as turgid prose. For example, Lutz says, ‘The three-year comparison is often done in print – at length – when all it needs is a table with a paragraph in explanation.’
Charlene Heykal began her New York-based plain language consultancy, Simplify, in 1988, ten years before the SEC moved. ‘I’d always found that it was a missionary effort. It wasn’t until the SEC gave a deadline that everyone took it seriously. Until the rules came no-one thought it was possible to draw up an insurance contract or a prospectus that would be understandable for lay people.’
She has more and more IR people coming for help. ‘Mostly I’ve been pleasantly surprised by the lawyers who are prepared to join in as long as they control content. Then they let us have our way on presentation.’
While acknowledging the effectiveness of the SEC stick, she also thinks the carrot of better business and a bigger bottom line is now even more effective in winning converts. ‘We save a lot of trees,’ for a start, she says, since a proxy statement need only be half or quarter of its former size. And she stresses the time saving, asserting that it takes at least 50 percent longer for the SEC to clear an IPO if the offering documents are not in plain English. ‘So we can be extremely helpful with our advice.’
According to Lutz, the process takes a lifetime of relearning, but more realistically, he sees at least three years for changing a corporate linguistic and information structure. Heykal’s Simplify appears to be slightly more product than process focused. She says, ‘We work with the lawyers and others involved so they know how to write, how to act. We completely redesign and rewrite documents so they have a template for the future. The approach is zero tolerance for jargon. Jargon is awful, unconscionable. It hides what is happening with people’s money, their life savings and their education.’
