What has quarterly reporting done for the US? That’s what some European companies are asking in the face of the European Commission’s new transparency directive which will introduce, among other things, mandatory quarterly reporting for EU-listed companies by 2005. With new disclosure guidelines for companies and investors alike, the directive is the EC’s boldest move to increase disclosure in the post-Enron world.
Disclosure standards vary widely across the continent and only eight of the EU’s 15 member states mandate quarterly filings. That means fewer than a third of the EU’s 6,000 listed companies are obliged to publish results quarterly. Current EU legislation requires companies to report only every six months, so mandatory first and third quarter reporting would have a profound impact on the responsibilities and workload of European IROs.
The transparency directive is one of several new proposals designed to build a single financial market by 2005. Other areas touched by the proposals are new disclosure guidelines for annual meetings and proxy voting for beneficial shareowners.
According to the EC, current European corporate disclosure standards ‘lag behind, no longer reflect best practice and are clearly outdated.’ To the annoyance of some, US standards are the yardstick throughout the proposal. ‘Many European publicly-traded companies having doubts about quarterly reporting should be aware that trends in US markets strongly influence developments in European securities markets, more so than the performance of European companies,’ states the directive. ‘Introducing quarterly financial information should be part of our efforts to persuade international investors to diversify further their investments across world stock markets.’
US style
‘We are interested in US standards, but we are not fully convinced of the utility of having them in Europe,’ says Nicole Micheletti, honorary chairman of France’s IR association, Cercle de Liaison des Informateurs Financiers en France (Cliff). ‘We’re prepared for it, but we’re still not convinced quarterly reporting will solve the problems of the stock market. We’d just like more flexibility.’
The effects of Sarbanes-Oxley have been trickling into Europe ever since it was passed last summer and many European companies have responded with better corporate governance. But the proposed introduction of quarterly reporting is meeting tougher corporate resistance with critics branding it a knee-jerk reaction to US corporate scandals.
‘The interesting thing,’ says Ken Rushton, director of listings at the UK’s Financial Services Authority, ‘is that post-Enron, many of the commentators in the US are questioning the wisdom of quarterly reporting for the very reason that it encourages short-termism – this at a time when Europe seems hell-bent on introducing it.’
According to Rushton, even the UK’s investment community is lukewarm about quarterly reporting. Investors and analysts fear companies may attempt to ‘massage figures’ to ensure earnings growth from quarter to quarter. Rushton has been arguing the directive should be subject to some form of cost-benefit analysis to weigh the real advantages of further burdening companies: ‘That’s what we would have to do here in the UK, but that’s not how the EC operates.’
Apprehension
Critics have been most vociferous in the UK, where only a minority of the 2,300 listed companies currently report quarterly. According to Andrew Hawkins, director-general of the UK’s Investor Relations Society, most UK companies believe mandatory quarterly reporting is unnecessary, inappropriate and could actually lead to worse standards of corporate disclosure.
‘The UK corporate community supports sensible and practical moves to improve transparency and disclosure standards but strongly opposes the plan to introduce mandatory quarterly reporting,’ Hawkins says in a statement. ‘If the EC wants a sound corporate transparency model to impose across the whole of the EU, it is blindingly obvious that the Anglo-Saxon one is its only choice.’
In Germany, only around 300 out of 900 or so publicly-listed companies report quarterly. According to Kay Bommer, chairman of Germany’s IR association, Dirk, most of them now accept the inevitability of the quarterly reporting directive. While Dirk firmly believes that quarterlies make sense, Bommer admits there has been understandable resistance from some German companies. ‘They would like a more flexible regime,’ he explains. ‘Companies might be too small. What if they have a free float of 3 percent or any other characteristics that would not justify reporting quarterly?’
One high-profile case of German corporate dissent is that of Porsche CEO Wendelin Wiedeking, who contends that quarterly reporting distracts executives from focusing on their business. The car manufacturing industry is cyclical, he says, but the cycles are not three months long.
The cold shoulder
So is the EC playing down the opposition? It says some issuers are merely ‘hesitant’ or have suggested a graduated approach based on the size of the issuer and type of security. However, the EC has gone out of its way to stress that ‘a large majority of securities regulators, stock exchanges and investors fully backed the idea of quarterly reporting’ during the consultation process.
But in a recent letter to the Financial Times, Pierre Bollon, director-general of France’s asset management association, and Peter Montagnon, head of investment affairs at the Association of British Insurers, raised serious questions about quarterly reporting, saying it had not helped prevent corporate scandals in the US. ‘Quarterly reporting is not a substitute for reliable ad hoc announcements,’ they wrote, arguing it’s more important to release price-sensitive news ‘accurately and promptly to the whole market in an orderly way.’
The EC has compromised by backtracking on audited results to save companies time and money. According to Dirk’s Bommer, this is a definite plus. ‘It’s a good compromise. The main issue here is not that companies are cheating when they don’t have audited reports; it’s a matter of time and of cost,’ he explains. ‘Having audited reports would have introduced even more cost and endangered a company’s ability to report on time.’
But the FSA’s Rushton disagrees: ‘Companies will still want some sort of audit comfort,’ he says. ‘Then there’s the suggestion that figures can be limited to just turnover and profit. But in order to get to profit you’ve actually got to get through the whole P&L. It really is comparable to an interim report.’
The others
Besides Europe’s three largest markets, France, Germany and the UK, others like Belgium and Holland where quarterly reporting is not yet compulsory appear to be a lot more sanguine about the directive. ‘We are absolutely in favor of it, although smaller companies will need more time,’ says Herman Geuze, chairman of the Netherlands’ IR society. ‘The Netherlands is a small country so it would be absurd to stand alone in Europe.’
Similarly, according to Guy Elewaut, chairman of the Belgian Investor Relations Association (Bira) and VP of IR and corporate communications at Delhaize Group, the move to quarterly reporting is both inevitable and desirable. And while a few companies are still against the measure, 14 of Belgium’s 20 largest companies already report quarterly. For Bira the main point of contention is not quarterly reporting but the speed of delivering the annual report. Under the directive, reports must be released within 90 days of the financial year-end, compared to the current six-month period. In this too, the EC’s directive draws a parallel with the US and its 90-day deadline.
‘There is too much focus on speed, and speed can be negative for the quality of the information,’ says Bira’s Elewaut. ‘We have glossy annual reports in Europe which take more time to print and produce and it will not be possible to do them in the same form in 90 days. So we’ll be moving toward the very simple 10K document of the SEC.’
The EC may well water down more of the divisive aspects of the transparency directive. Quarterly reporting, however, is likely to stay on the menu, as it still enjoys the support of almost all member state financial regulators. Companies would be well advised to be prepared.
Web bound
The transparency directive has major new guidelines for online disclosure, but do they go far enough?
As part of the EU’s efforts to build a single financial market by 2005, the transparency directive proposal includes landmark initiatives to encourage more online reporting. Companies will not only be able to publish their results on the internet rather than through official news services, but shareholders may also be allowed to vote via the internet.
Because the net predates so much of existing company law, online reporting guidelines have developed mostly on a local rather than a pan-European scale. That’s surprising given that many European large caps have significant numbers of overseas investors which the internet is well-suited to handle.
But for some observers, the directive’s proposed electronic disclosure falls short because the ultimate responsibility for disclosure will still rest with each member state’s regulator. The proposal only directs each member state to operate a system for disseminating issuer information at a single source at a national level.
This would mean each member state drafting guidelines to give the public access to information through real-time electronic networks.
‘The first difficulty with the transparency directive is that it does not go far enough in creating a pan-European regime for disclosure,’ says Mark Hynes, a director at PR Newswire. ‘The investor still has to go to different places to get information on listed companies.’
According to the directive, financial information may also be posted directly to the issuer’s web site, as long as there’s an efficient electronic alert system. A lot of responses to the consultation process support this idea, though newspapers and news agencies are opposed on the grounds that, they claim, internet access is not available everywhere in the EU.
And this method alone, without a central European information repository, would be of little use, says Hynes. ‘Just imagine retail investors or journalists having to register on thousands of companies’ web sites. It’s simply not going to work terribly well.’
According to Hynes, another shortcoming of the directive is that companies would only be obliged to disseminate information in their home markets. ‘Home market is not defined as well as it might be. It could be simply the country where the company is listed or the country where it’s domiciled,’ says Hynes. ‘For example, having to disseminate information only in the UK would mean that Greek, German and French investors probably wouldn’t get it. Similarly, if you’re a Greek company and you’re only required to send out information throughout Greece, then UK investors are not going to hear about you.’
On the other hand, the directive does address an issue that European corporate governance activists have long campaigned for: web voting for annual meetings.
Because most European companies already deem online reporting to be as important as any other means, the web aspects of the directive are welcome first steps.
A growing number of analysts and investors now prefer web information to hard copy, so the next big step may be to let companies opt out of printed annual reports, thus saving money on printing and mailing. But the EC is a slow-moving beast and the push for online reporting may ultimately come not from regulators but from investors themselves.
Transparency directive in a nutshell
1. Changes to AGMs to facilitate proxy voting (especially by foreign investors). Issuers must provide information on the time, place and agenda of shareholder meetings. Proxy forms must be delivered to everyone entitled to vote, together
with the notice of the meeting.
2. Annual reports required within three months of the year-end. Companies also
have to provide a detailed semi-annual report, and most significantly, unaudited quarterly financial information for the first and third quarters of the financial year.
3. A lower threshold for investors to report beneficial ownership, and a time frame shortened from seven to five days. Investors are also obliged to release the same information to local financial authorities.
