I could not help but feel a sense of sympathy for Walmart’s communications team (IR, corporate comms, PR, internal comms) when reading this past Sunday’s front-cover New York Times story about the company’s bribery scandal (my colleague Jen highlighted the communication implications on Unboxed Thoughts yesterday). While I possess no inside knowledge beyond what the story outlined, I was repeatedly struck by what indicated to me an incident where top-level company officials thought they knew best and proceeded without counsel from a broader circle of advisors. As a communications practitioner, we have all been there. Company officials will often focus on only the legal consequences and not the impact on other constituents. The mindset is that legal trumps all, except when it’s only one facet of an issue like this one. In today’s world, communication is not a “siloed” discipline. Corporate governance is not the sole purview of legal. This responsibility now also falls to IR. But financial impact is no longer limited to IR and now trickles down to PR. My point is that communications is a chain; it’s all interwoven and as the old adage goes, you are only as strong as your weakest link. If you keep one constituency in the dark, you can bet that’s where the trouble will arise.
I know we all have regulatory fatigue and the last thing we want is another rule. However, this is one we can all agree on. And by “we” I mean IR practitioners and Wall Street. My proposed rule seeks to officially end the practice of companies attempting to bury bad news late on a Friday, or worse, over the weekend. This tactic never works and never has. Companies that use this tactic only succeed in unnecessarily angering their core constituents. If the news is material enough that it warrants an 8-K, and you have flexibility as to when to make the filing, don’t get cute and do it after market on a Friday.
In today’s marketplace this practice is baffling, especially considering that almost all public companies provide instant email notifications of when SEC filings are made. It’s comparable to a burglar calling the police to tell them he is robbing a house at 4:00 a.m. Why do companies continue to think they can outsmart Wall Street by employing such tactics?
I often write in this blog about the importance of knowing the nuances of corporate governance and disclosure requirements pertaining to IR, and by extension, PR. This has become even more important with the increasing number of regulatory requirements companies are forced to adhere to, ranging from Reg. FD to Sarbanes-Oxley to Dodd-Frank to each Exchange’s own listing requirements. Adding to this complexity is the incorporation of IR into broader communications programs, exposing those who are not familiar with regulatory requirements to a new environment, and vice versa.
This is a good thing, until it is not.
If you do not know these rules, not only will you be ineffective, but it can have a litany of disastrous consequences for your client, including a delayed or canceled IPO. I am not saying we all do not make mistakes -- even smart people make an occasional misstep. However, the care and sensitivity required around transactions (especially when dealing with Hart-Scott-Rodino), and in particular IPOs, is of the utmost importance.
Yet, we continue to see the same disclosure issues arise every quarter, with every type of transaction. It is irrelevant if the cause of a disclosure error is due to pressure from a client, or internal pressure to up-sell a client on a range of communications services an agency is not equipped to handle. What is relevant is a detailed understanding of what serves as the key tenets of our discipline: knowing disclosure requirements inside and out.
I offer three simple takeaways:
- If you do not know the disclosure requirements, learn them.
- If a client asks if you are well-versed in disclosure requirements before retaining your services, be honest about your limitations.
- If a client asks you to blatantly ignore the rules, reexamine if this is a relationship worth having, or will it eventually do more harm to your agency than it is worth.
In a highly regulated industry, ignorance is no excuse. The penalties to the agency and the client can be very costly.
Those of us who are IR practitioners are well-versed in the nuances between Schedule 13D and Schedule 13G filings. We have come to believe that “G” means “good” and that “D” means, well, something other than good.
We know that when an investor acquires more than 5% of a class of publicly traded securities (most often stock), that person has 10 days in which to alert the SEC via a Schedule 13D. The idea behind the filing is to let other investors know that someone has taken a meaningful ownership stake in a security. As part of the paper work when completing the filing, there is a section labeled “Purpose of Transaction” that makes it clear whether or not the investor may wage a proxy contest and in some way look to force change. Such change could include a potential sale of a company, a change in senior management and/or a change in corporate governance practices, among a laundry list of other desired outcomes.
Hedge funds tend to be those who fight for change the most often. Sure, some mutual funds are speaking out against poor corporate governance practices, but it is still the hedge funds who wage proxy contests and are able to fund them. Perhaps a proxy contest will be supported by mutual funds and other large institutional shareholders, but that’s about as far as they will go; they are not cutting any checks.
It is also hedge funds that have a much shorter investment horizon, meaning that the fastest way for them to generate the largest possible returns is through a liquidity even, such as the forced sale of the company or through similar means. This is often in contrast to a company that follows a 3-5 year business plan and other shareholders who may be longer-term holders. (We’ll come back to this in a minute.)
Transparency is an oft-repeated word these days. I can remember back to the good old days of Eliot Spitzer as New York AG crusading against equity analysts and tossing that word around. Sarbanes-Oxley made it stylish and the recession made it mandatory for corporate communicators, and in particular, Investor Relations Officers (IROs). An unscientific study found that “transparency” was used in 98% of 2010 annual shareholder letters. Jokes aside, transparency in many areas of communications is of course a good thing, in fact a necessity, and now even a requirement on many levels. But does the value of transparency hold true for all areas of communications? Well, that depends on who you ask.
From an institutional investor standpoint, let’s look at reporting and disclosure for portfolio holdings, focusing on Section 13 of the SEC reporting process, including F, G and D filings. As many of us are already aware, institutions managing over $100M in assets are required to disclose their equity holdings to the SEC on a quarterly basis. You see this in the form of 13-F Filings. It’s always lagging data, and when coupled with the myriad legal ways in which institutions can report their true positions by spreading them out, the information never proves all that useful. This is especially true in activist situations when real-time disclosure is of the most pressing need, and therefore waiting 45 days after the current quarter has expired limits or eliminates the value of the data. One work-around for IROs is the ability to engage in the art of shareholder ID; a service provided by several vendors who try to develop a profile of how existing shareholders may adjust their positions. For institutions, one of the drawbacks is that the reporting process can be onerous, especially to smaller funds with limited back-office infrastructure. (In a future post I will address potential changes to the classifications of passive and non-passive investors.)