Here’s a true story – honest: a few years ago, a particular barrister was defending a minor criminal who was on trial for breaking-and-entering or burglary or some such. Half way through the expert cross-examination from the prosecuting counsel, the accused cracked and said, “Okay, that’s it. I’ve had enough. I admit it. I did it. It’s a fair cop, guv, you’ve got me bang to rights.” The judge looked with sympathy at the defendant’s barrister whose case had crumpled and said, “Would you like the court to adjourn for five minutes while you consult with your client to reconsider his plea?” “No thank you, milord,” said the cheerily defiant barrister.
“But your client has just admitted that he committed the crime!” said the incredulous judge. “Ah, yes, milord,” said the barrister, “but the jury may not believe him!”
The lesson from this for FDs is that, even in the face of all the facts and evidence, the market – the ultimate jury as far as PLCs are concerned – may not believe you. And so it’s important to ensure that you work at communicating to build credibility in the market.
Against this background, I’d like to discuss a number of pressures that seem certain to result in companies reporting more frequently. Two recent regulatory pressures are the American SEC’s Regulation FD and the Financial Services Authority’s N2 regime, with its new “market abuse” rules. Both are aimed at eliminating selective disclosure to favoured analysts, investors, or journalists. For the UK regime, it’s worth looking at the PSI Guide, an appendix to the UK Listing Authority’s Guidance Manual that covers the dissemination of price sensitive information (see Shall we tell the market? Financial Director, February 2002). The basic rule is, if you’ve got price-sensitive information, get it out straight away.
Competition will be an interesting driver for more frequent financial reporting. If your industry peers have a more advanced information disclosure programme, it will be to your detriment. Their data can reveal (one-sided) information about you – for example, by suggesting you are losing market share. You can also get a reputation for having something to hide, raising uncertainty, risk and – by definition – your cost of capital. Remember, too, that capital markets are ever more global and that if your competitors have their headquarters in the US and are abiding by the more rigorous US disclosure regime, then they may be releasing more information through quarterly reports than you are under the UK regime.
It’s interesting that the largest UK companies – those with shares also listed in New York – comply with US quarterly reporting requirements.
And the smallest UK companies – those on techMARK, say, such as Marconi – are also required to report quarterly. But there’s a great swathe of companies in the middle that aren’t required to report every three months – and I suspect there will be increasing pressure on them to regularly publish more financial data. In Europe, it’s really only nouveau marche-type companies that are currently required to report every three months, while in Australia, mining companies have additional quarterly requirements.
What types of additional information are being reported and in what form?
There are full-blown quarterly reports, of course, and analysts love those – especially if you publish them as downloadable spreadsheets on your website. Other companies issue quarterly trading statements or seasonal updates, with retailers usually giving a Christmas trading report.
Pharmaceutical companies are typically very good at giving an annual or semi-annual review of their drug development pipelines so analysts have a clear picture of the progress of the various drugs that are making their way to commercial viability. Other companies issue key data every month. For example, British Airways issues monthly air traffic statistics.
In fact, a recent report by Andersen* revealed how most companies voluntarily issue statements over and above the ones they are obliged to release – although a significant minority still do no more than is absolutely necessary.
Clearly, there are some difficulties in the way of more frequent reporting, but most FDs I’ve spoken to who have moved into a quarterly reporting regime say it’s no big deal, once you’ve got the systems in place. One concern is the audit regime, under which only the final accounts have to be signed off. Interims and quarterly reports aren’t signed off, yet this is one area where Enron may begin to make its presence felt. The problem with Enron wasn’t the frequency of its reports, it was that the company was releasing arrant nonsense.
It’s an open question as to whether there is a professional appetite for more frequent auditing. So-called real-time auditing was the great white hope back when we were all destined to become end-to-end e-businesses.
But the reality is there are some “real-time” auditing software tools that really just allow you to perform spot-checks and reconciliations.
They can tell you whether a foreign exchange trader has breached his trading limits, but they can’t alert you to the fact that there are weaknesses in the settlements system that enable him to evade your controls. For now, nothing quite beats legions of 26-year-old auditors running around your company telling you what’s wrong.
The complaint that quarterly reporting will result in too much focus on short-term performance is probably misplaced. A recent survey by PricewaterhouseCoopers** (see Financial Directions in last month’s issue) shows how companies are already engaging in short-term cost-cutting measures that undermine the long-term commercial success of the business, to pander to analysts and meet quarterly forecasts. This is appeasement – and it’s a failure, not of analysts, but of FDs and CEOs who are failing to properly communicate their companies’ value creation strategies. You have to manage and explain future outcomes, rather than massage quarterly profit numbers. You should be creating value, not profits.
The benefits of more frequent, regularised reporting are greater earnings visibility – or “quality of earnings” as it used to be known in the City years ago. You get closer to a “no surprises” reporting environment and less “profit warning syndrome”. This results in less volatility in your share price which, by definition, results in a lower cost of capital, which, by definition, results in a higher market capitalisation for your company. Assuming, of course, that the market believes you.
* It’s Raining News, Andersen
** Strange days, PricewaterhouseCoopers.
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