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Let me tell you a story

When Manchester United purchased Wayne Rooney in the summer of 2004, one of
the first actions the club took after nearing agreement with Everton over the
toe-breaking striker was to inform the stock exchange.

While Man Utd isn’t bothered by City matters (ie, London, not Manchester)
following its £800m buyout of the premier league club by the US Glazer family,
the Rooney stock exchange announcement illustrates how quoted companies have to
manage their financial communications with analysts, fund managers and the wider
stock market.

According to a report, A model of corporate financial communications,
published by the Institute of Chartered Accountants of Scotland, new guidance
could be created by the Financial Services Authority. The report suggests that
present financial communications can be seen as a success in the sense that
companies avoid the private release of price-sensitive information, which could
materially affect share prices and a failure in the sense that there are
information deficiencies in the communication both to the stock market and
through the operating and financial review.

According to report author John Holland of Glasgow University, policy makers
could require companies to disclose their ‘business model’ or value-creation
story in the OFR using three value-creation processes:

• First, qualitative or narrative disclosure could focus on how top
management play a role in creating and protecting value;

• Second, qualitative or narrative disclosure might focus on how business
operations and network alliances create value; and

• Third, the narrative concerning horizontal and network value-creation could
be structured around strategic options.

After interviewing quoted companies, the academic research by Holland
identified seven categories of value-relevant information (see box). Using these
categories, Holland suggested company announcements of price-sensitive
information to the stock exchange could be rationalised. The UK Listing Rules
indicate a host of specific events that have to be announced to the market
because they represent price-sensitive information. Academic research among UK
companies has also identified other corporate price-sensitive events such as the
launch of a new product, new investment, and new research and development

According to the ICAS report, many of these price-sensitive information
events can be categorised in two major ways. They are either to do with
hierarchical or top management value-creation process, or they could be
categorised as actions and events associated with the horizontal and network
value-creation process.

The research suggests that private interactions and disclosure could be
regulated in the same way. Fund managers and analysts could be asked to disclose
information about their private Q&A sessions with companies, with the
structure of disclosure based on the value-creation process.

Market regulators could ask companies to reveal which of their internal
intangible quantitative benchmark indicators were of most interest to those fund
managers and analysts. Regulators could also ask companies how they assessed the
extent to which their disclosures had a positive effect on the market’s
understanding and confidence.

According to Holland, demand-side and supply-side factors have been changing
the nature of the information gap between companies and the suppliers of risk
capital while these forces have also created a need on the part of companies to
develop their financial communication capabilities. The research found that,
while companies believe disclosure helps build confidence, it is fragile and
vulnerable to company surprises and to changes in market sentiment. Companies
learned to respond to the market and a strong streak of corporate opportunism

The seven categories of value-relevant information

Value (V) 1
The uncertain process of creating growth through strategic options – organic
growth and takeover targets – over a long-term horizon.

V2 New sources of additional value created by new strategic
options exercisable in the short-term to medium-term.

V3 New cashflows and earnings derived from the recent
exercise of strategic options.

V4 Value arising from current operations, current trading
and immediate growth.

V5 How top management and the board directly influence the
level of expected cashflows and the risks in V1 to V4.

V6 How top management and the board boost confidence in the
value-creation processes.

V7 The quality of corporate disclosure and its role in
creating confidence about the company value-creation process.

V1-V4 Relate to horizontal (or input, process, output) value
creation and network (alliances) value creation.

V5-V7 Relate to hierarchical (or board and top management)
value-creation processes.

A Model of Corporate Financial Communication – researcher John Holland,
the Institute of Chartered Accountants of Scotland

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