News from The Globe and Mail
Disclosure not simply 'all or nothing' affair
Saturday, June 21, 2003
As a professional portfolio manager, I spent 12 years sitting in darkened rooms listening to executives speak enthusiastically about their companies. I concluded that there is often a significant conceptual gap between the presenter and the listener.
At the heart of the issue is a difference in objectives; the presenter is selling a company, while the listener is buying a stock.
By this, I am not referring to the differences between long-term and short-term investors, but rather highlighting the potential for some specific conceptual problems that, when properly understood, can dramatically improve the communication between executives and their investors.
One of the biggest problems encountered by corporate executives is the investor's desire for information that cannot be readily or easily imparted. It could be that the information is unknown or there may be unwillingness by executives to disclose competitively sensitive information. It could also be that disclosure of such information would be in breach of Regulation FD (fair disclosure), which ensures that the public gets all information about a company in a fair and timely manner.
Faced with a sometimes-adversarial exchange with investors, many executives retreat from the process altogether, resorting to making meaningless generic comments about the company and its industry. The world of an investor is a relative one. Comparisons are constantly being made between one investment and another, the relative performance of asset classes and a particular company's performance relative to other companies and its expectations. It is a world of profit models, risk management, portfolio diversification and relative valuation. The specific fundamentals of a company are only relevant insofar as they create an appropriate investment opportunity.
Ultimately, the investor has to determine whether all known information about a company is fully priced into the stock.
The world of a corporate executive is often more absolute in nature: their concern is with hiring the right people, producing and pricing the right products at the right time, understanding the competitive landscape, allocating capital and successfully executing a strategic plan. Above all else, the focus is on optimizing the performance of the company in its marketplace. Stock market considerations are irrelevant to the day-to-day operations of a company.
Understanding some of these differences can greatly enhance the effectiveness of communication between executives and investors. Small improvements can be made in a company's presentation to help investors make efficient comparisons without necessarily subjecting executives to the risks associated with "selective" or "unfair" disclosure. Also, from a compliance point of view, it is far safer to build more information into a formal presentation than to risk saying something "sensitive" to a select group of investors during a private meeting.
A basic need of investors is to see more concrete evidence that a company is doing what it says it is doing. This type of evidence doesn't have to be competitively sensitive to be useful. Nor does it have to be substantial.
It is more about giving investors a better understanding of a company's operations, strategies and markets.
Investors ought to see more evidence of successful strategic execution and capital allocation processes, and that the right people with the right skills have been hired to do the right jobs. Large institutional investors may get the chance to ask executives all the questions they want, but there are many smaller investors who do not have the same opportunity.
A better appreciation of the needs of the audience and the conceptual differences that may exist between them is all it takes for communication between executives and their investors to be dramatically improved.
John Hasyn, CFA, is a principal of John Hasyn & Associates, an investor relations consultancy firm.
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