It’s settled: transparency has a direct impact on the cost of capital. Investors, especially large institutional investors, are key to this equation, intensifying their pressure on corporate management to increase levels of disclosure. The exchange is fair: the more information they get, the more confident they are about putting their money into the market.
The lesson has been learned time and again, with Enron just one of the most recent and harshest examples. From the Asian currency crisis to the dot-com boom and now Enron, if investors had known what was really happening they likely wouldn’t have risked investing, and valuations would never have been pushed so high. Investors don’t want to repeat those debacles, and they’re getting the support of governments on guidelines for corporate governance and transparency.
There has already been a lot of progress. It’s accepted that companies should not discriminate among different members of the investment community, that privileged information is an oxymoron. Who would disagree that everybody has the right to receive, in a timely manner, the same quantity and quality of material, price-sensitive information?
An outstanding problem is that each country has its own understanding of what material information is and when it should enter the public domain. Furthermore, the way that information is communicated varies around the globe. International investors often struggle over disparate company reports, and it’s not only about the numbers, it’s about culture.
Can you imagine a day when companies everywhere will ascribe to a universal disclosure system? No? Well, it’s certainly a long way off. Today there isn’t even an accepted benchmark against which levels of disclosure from different companies in different regions can be evaluated. The closest to a benchmark is the US, which is usually considered the most developed market for accounting and disclosure, and many countries are using the US as a model for best practice.
However, the US mirror has been smashed by the Enron disaster. The bankruptcy of the giant energy trading company has uncovered a more fragile system of checks and balances than anyone could have imagined. It appears the firm was hiding information when not giving false information. The result is a terrible hit to investors’ confidence. To restore it, the US, and the SEC in particular, are going to have to prescribe large doses of remedy.
The SEC’s reaction has been immediate though cautious. Harvey Pitt, the agency’s new chairman, warns in a public statement, ‘Believing that we can create a foolproof system is both illusory and dangerous.’ But he adds, ‘Investors are entitled to the best regulatory system possible, and we can achieve more than we presently do if we focus attention on finding solutions.’
One of these solutions is ramping up the flow of corporate information. According to Pitt, it’s not enough that companies release material information in quarterly reports; they should do it on a continuous basis, as is already the case in Australia. There the securities regulator enforces the disclosure of information as it arises. The debate is open in the US and perhaps, by extension, in Canada, which always looks closely at what its neighbor is doing.
Meanwhile, in Europe, the UK leads the way, though the Financial Services Authority has its hands full with homegrown corporate catastrophes involving companies like Marconi and NTL. The market is on tenterhooks waiting for the FSA’s first test case under new market abuse rules, which were finally put into effect in December. IROs and PR professionals are anxious about the possibility of being held personally liable for misleading information. (See the interview with the FSA’s Ken Rushton, head of the UK Listing Authority, page 61).
By contrast, Asia and Latin America still have primitive disclosure standards, with countries such as Singapore and Brazil standing out in the dark with new rules to enforce corporate transparency.
So despite the fact that there are still lots of things to do and to improve, it seems to be globally accepted that if they want to attract international money, companies have to more clearly express themselves. In this survey, IR professionals from around the world provide snapshots of their progress.
How things are changing
It’s a hectic time for UK companies, with rules in flux and the possibility of enforcement their own sword of Damocles. The Financial Services Authority took on sweeping new powers at the end of 2001, wielding a new code of market conduct designed to tackle abuse of the UK’s financial markets. The code deals with three main types of transgression: misuse of information; creating a false or misleading impression; and distorting the market. Although these abuses are already covered by existing criminal law, the new code applies to a wider range of activities and ‘to everyone who participates in, or whose conduct may have an effect on, the UK financial markets,’ says the FSA. This statement hits directly at IROs, who could personally be made responsible for disclosing wrong information and face financial penalties to be paid out of their own pockets.
According to Peter Hall, investor relations manager at BP in London, ‘The new rules are not at all clear. They are ambiguous and vague and that doesn’t help to achieve the FSA’s objective of transparency and openness because companies could now say less rather than more to avoid accusations of inaccuracy.’
Furthermore, Hall is concerned about the ‘confusing situation’ around the introduction of international accounting standards in Europe, due in 2005. ‘At the moment, BP’s accounting system is very similar to US Gaap, because we have lots of US investors, but IAS could be confusing for companies that are only following the existing UK system.’
Yet another preoccupation for the UK IR community is the arrival of new primary information providers (PIPs). A handful recognized by the FSA have geared up to compete with the London Stock Exchange’s Regulatory News Service for the dissemination of company announcements. Up until now, listed companies have had to make price-sensitive disclosures exclusively through RNS. With the end of RNS’s monopoly, companies expect costs to come down and technology and services to improve. Will the new competitive system fulfil their high expectations? Watch this space.
Getting closer to its neighbor
The proximity of Canada and the US is not only geographical but is also reflected in the two countries’ disclosure regimes. The Canadian concept of transparency is closely aligned to that of the US: all material information is made public on a timely basis and without any selective disclosure.
‘There are some differences regarding materiality between the two countries,’ says Sohrab Movahedi, director of investor relations at CIBC, one of Canada’s largest banks. ‘In Canada the standards may not be as strict as the US ones, but it’s quite appropriate to say that companies here try to follow the highest benchmarks set up in our neighbor country.’
Movahedi explains that since Reg FD was introduced in the US, CIBC’s policy has radically changed. The bank implemented a culture of openness and concern about what kind of information is disseminated. Now anyone can access the company’s quarterly reports and watch webcast presentations. And – inconceivable even two years ago – e-mails from investors are answered immediately.
‘We can’t have conversations behind closed doors; every event that could have an impact on the share price has to be shared with the public,’ says Movahedi. And, he adds, ‘Around quarter’s end we cut contact with the outside world to avoid any leak of information that could put us in an embarrassing situation. However, working for such a big organization, you never know who talks to whom.’
In the wake of Enron’s collapse, CIBC claims to be the only Canadian bank to have disclosed its exposure to the Texas energy trader, letting its investors assess the risk. ‘The response was very positive,’ says Movahedi. ‘We don’t hide behind technicalities. If there is information that has to be released, we do it regardless the legal definition of materiality. We gear ourselves by common sense.’
Movahedi concludes that while FD definitely seems to be the right formula for today, disclosure rules are continuously evolving and companies need to be prepared for changes.
Ahead of larger markets
Australia could well serve as inspiration for the SEC’s Harvey Pitt in his push for real-time disclosure. For years Australian companies have followed a system of continuous disclosure, which equates to Pitt’s ‘current information’ proposition. Under the regime, companies must immediately notify the market via an announcement to the Australian Stock Exchange (ASX) of any information that could have a material effect on the price or value of their securities. The ASX has best practice guidelines for listed companies, with most companies also developing their own policies.
Ian Matheson, chairman of the Australasian Investor Relations Association, boasts, ‘In this country, we have some of the highest levels of corporate transparency and disclosure in the world. Better than the US and the UK.’
Another hot topic in Australia right now is how companies deal with market speculation and rumors. Whether substantiated or not, these have a potential impact on share price. But lately more and more companies have been adopting a no comment policy.
The rules say they’re only obliged to comment if a formal request comes from the ASX, confirms Matheson.
He also affirms that Australia is far away from the debate over investor relations officers’ responsibilities. Most companies have disclosure offices responsible for following materiality guidelines.
Matheson adds that best practice guidelines recommend making good use of technology, particularly the internet, since it helps achieve the goal of equal information to everybody on a timely basis.
Geoff Wedgwood, investor relations manager at Woodside Petroleum, adds, ‘Beyond the minimum required by official policies, we are voluntarily doing some extra stuff. We have hardly any retail shareholders, so we don’t have meetings with them, but each presentation that we do for institutional investors is immediately sent to the ASX and to our web site, where private investors have access.’
Up in the air
In the US, the subject of disclosure is so hot that it almost burns. Regulation FD, which caused such a storm of controversy when it was launched in October 2000, could yet be eclipsed by a whole new disclosure model expected from the SEC’s new chairman, Harvey Pitt.
While Reg FD says all material information must be released to all in periodic reports, Pitt says periodical information is not enough and listed companies should be constantly releasing what he calls ‘current information.’ That means companies should keep investors up-to-date in real time, rather than waiting for periodical reports. He also insists that these reports have to be easy to understand.
Pitt’s ideas look especially prescient in light of the Enron disaster, and any formal proposal could perhaps help prevent similar meltdowns and restore investor confidence. Of course, the giant energy company’s collapse has also put the whole accounting system into question. ‘Public companies should identify the three, four or five most critical principles upon which their financial status depends, and which involve the most complex, subjective or ambiguous decisions or assessments,’ Pitt remarks in a public statement.
However, for Theodore Economou, director of IR at ITT, none of these issues raised by Pitt are really novel: ‘The spirit of Reg FD is that companies should report on an ongoing basis any change in expectations that may differ from the ones expressed in the periodic reports. The problem is companies don’t follow it.’ He says some firms wait until quarterly reports to inform investors; others just pass their monthly results on to investors and analysts and let them interpret the information; and a few companies send out regular press releases – which is what Reg FD recommends.
Therefore, if Pitt’s proposition goes ahead, the question would be how companies should make their information public; some voices inside the SEC itself have criticized the scarce use of the internet to disseminate information.
Economou points to another issue arising out of Enron’s ashes: just what an IRO’s responsibilities should amount to. According to published reports, Enron’s IR department gave misleading information to investors during conference calls. ‘Some people say that IROs should be responsible for deciding when a company has new material information that should be released and for making sure that the information is accurate,’ explains Economou.
Restoring investor confidence
The scenario in Latin America is grimmer than is typically the case in Asia (but see The Asian Exception, this page). According to a recent report from Standard & Poor’s, no company in the region scored higher than 60 percent on S&P’s disclosure benchmark. Only a few scored more than 50 percent, while no companies in Argentina or Peru scored as high as 40 percent. Beyond that, unlike Asia or other emerging markets, Latin America lacks even national standards of disclosure. One exception, though, is Brazil, which has official accounting principles regulated by a federal law and the Sao Paulo stock exchange, Bovespa, is promoting corporate governance guidelines to help protect minority shareholders and to attract foreign capital. Companies that voluntarily adopt the new guidelines can participate in a special market segment called the Novo Mercado (New Market.)
The main innovation of the Novo Mercado is the prohibition of preferred shares, which means companies can only issue ordinary shares with full voting rights for all shareholders. ‘At the moment only four major firms in Brazil have no preferred shares: those are steel giant CSN, electric utility Light, water company Sabesp and tobacco company Souza Cruz,’ says José Marcos Treiger, general director of IR at CSN.
Another new issue is the introduction of an arbitration panel in case there are any conflicts with shareholders.
The new market also dictates that companies must follow internationally accepted accounting standards such as US Gaap or IAS; they have to have at least a 25 percent free float; they have to limit the board of directors’ mandate to one year; and they have to issue quarterly reports, which is not a legal obligation in Brazil.
‘In my view, this initiative represents an important and major step for the recovery of our local equity market,’ says Treiger.
He explains that CSN has not committed itself yet to the Novo Mercado but it is seriously analyzing when to take the step. ‘However, CSN is already one of the most advanced Brazilian companies in IR, corporate governance and transparency since it belongs to the very selective group of 30 Brazilian companies listed on the NYSE,’ stresses Treiger.
The Asian exception
Singapore is considered a highly developed financial market and its level of disclosure is higher than in many other Asian countries, such as Taiwan. ‘Singapore’s degree of transparency is similar to global disclosure standards,’ confirms Gavin Hurle, director of IR at telecommunications company Singtel.
And Singtel, for its part, claims to be ahead of other companies in Singapore. Since the beginning of 2001 it’s been reporting on a quarterly basis, something the Stock Exchange of Singapore is only planning to introduce in 2003.
It also scored well in this magazine’s Asian Awards 2001.
Singtel was privatized in 1993 and has an important retail shareholder base that receives exactly the same information as the institutional investors do. Hurle says private investors have equal and timely access to information through the company web site, which features every presentation done for institutional investors. ‘Singtel is leader in disclosure in this market, with only a couple of other companies following a similar policy to ours,’ enthuses Hurle. ‘The quality of our reports and the quantity of information we disclose is benchmarked against other telecoms companies such as the UK’s BT or Vodafone.’
Hurle explains that the SES is encouraging companies to reach a level of disclosure on a par with international standards. But according to the Standard & Poor’s disclosure survey, Asian companies are still far from perfect and Singapore is no exception.
For now, companies listed on the SES are only required to disseminate half-yearly results. Additionally, the SES guidelines say that a listed company must always disclose all material information relating to the group as soon as possible by an announcement released to the SES, sending copies simultaneously to newspapers and newswire services.
