More than four years ago when Regulation FD was first introduced, I wrote an article suggesting that the policy was mostly bark, little bite, and had limited applicability. It appears I may have been premature in my assessment. Recent events involving the SEC and Flowserve have companies reconsidering their policy on issuing guidance and wondering if the future of one-on-one meetings is in jeopardy.
On March 24 this year the SEC settled enforcement proceedings citing Scott Greer, Flowserve’s chairman, president and CEO, and director of IR Michael Conley with violating Reg FD and Section 13(a) of the Securities Exchange Act of 1934. The SEC claims that on November 19, 2002, in a private company meeting attended by analysts from four investment and brokerage firms, Greer reaffirmed the company’s EPS guidance from the guidance issued less than a month earlier.
This striking development was preceded by a 2003 enforcement action against Schering-Plough and its former CEO, where the SEC alleged a breach of Reg FD based on an investor’s and an analyst’s interpretation of the CEO’s tone and downbeat demeanor. This could create a serious problem if the SEC is attempting to create clear rules regarding Reg FD, especially if based on such highly subjective issues as were seen in the Schering-Plough incident.
Having consulted with some of the top small and mid-cap US companies, the consensus is that, in enforcing Sarbanes-Oxley and Reg FD, the SEC is making it very difficult for companies to afford to stay public – and even harder to market their story to the investment community.
One CFO of a prominent mid-cap company says: ‘If the SEC continues to apply these regulations with a narrow view, it is moving in the direction of prohibiting investor communications, or at least one-on-one meetings with investors.’
‘This just reiterates the wisdom of not giving guidance, and also raises questions about what information can or should be communicated during one-on-one meetings,’ points out Ronald Taylor, CEO of DeVry.
He’s not alone in this view, either: according to a recent National Investor Relations Institute (Niri) survey of 527 corporate members on guidance practices, 29 percent of companies surveyed do not issue quantitative EPS guidance.
But how stringent does the SEC need to be with companies? ‘The commission needs to operate on the basis that company management is operating honestly and ethically, and situations like Enron or WorldCom are the exception, not the rule,’ suggests Dr Mark Frigo, director of the Center for Strategy, Execution and Valuation at DePaul University’s Kellstadt Graduate School of Business.
Until the SEC embraces Frigo’s belief, however, I strongly advise against companies issuing quarterly EPS guidance. It is better that they focus on annual guidance, with quarterly updates based on business and market trends, opportunities and new initiatives. The key to this modified approach is active and consistent communications with the investment community. No matter what the approach in issuing guidance, executive management must remember to take Reg FD seriously. The policy does have teeth and, if Flowserve is any indication, it will bite.
