‘We’ve created a system that encourages disclosure directed more at averting liability than at informing.’ So believes SEC head Harvey Pitt, and many people agree. Meanwhile, the demands for this disclosure system to change grow ever louder.
Companies are finding themselves waging a war for the investing public’s confidence. They are involved in a PR campaign as much as anything else. Enron inverted the old Wall Street credo, ‘Buy on rumor, sell on fact.’ Now the motto is, ‘Sell on rumor, hold on fact.’
While it’s clear the corporate disclosure culture has to adapt to the public’s tainted perceptions, there are several advantages companies could gain without resorting to a complete overhaul of their internal reporting structures.
For one, they could sharpen their public image by showing how their senior executives are focused on full disclosure. During the bull market investors came to believe successful CEOs were the ones who drove the share price. Today investors are just as concerned about share price as they ever were, but they’re wary of earnings engineering by senior management. And the fallout from Enron has inextricably linked market price to transparency.
Investors expect CEOs to be chief expressive officers. To this end, companies could gain an edge by making investors feel intimately informed. In other words, investor relations has itself become a valuation metric.
Companies also gain an edge by making sure their numbers are clear and are presented in the proper context. Investors want to see Gaap figures. Pro-forma numbers are fine too, so long as they take a back seat to Gaap. Investors are looking for disclosures that are easy to understand, easy to explain and easy to incorporate into their models. The simpler the better.
Yet while these tactics may give the Street more of what it wants, they fail to address the Street’s current climate of nervousness. Investors want to have the sense that when they make an investment they know exactly what they are getting into.
With that in mind, we present our cover story Learning to fly, a look at the global airlines industry. Investors’ current behavior mirrors that of airline passengers during Q4 of last year when they felt vulnerable, and as a result they chose to not fly. The airlines’ campaign to rebuild customer confidence has shown the world how a decimated industry can pick itself up and start over again. IROs in every industry can learn from these efforts.
