by Cathy Baron Tamraz, Chairman & Chief Executive Officer, Business Wire
Records are meant to be broken. Rules, on the other hand, aren’t.
And when those rules have a direct impact on both the fairness and workings of our financial markets, then an even higher standard of accountability is in order.
Unfortunately, it is becoming apparent that Regulation Fair Disclosure — which the SEC originally conceived to provide ALL investors with a level playing field — is something of a misnomer. “Request Fair Disclosure” or “Regulation Flex Disclosure” would seem to be more appropriate rubrics, as issuers who fail to meet Reg FD’s compliance standards continue to go unchallenged.
This troubling situation raises the obvious question: If rules aren’t enforced, then what is the purpose of having them in the first place?
The latest disclosure debacle involves Microsoft, which abruptly notified the market of its shift to a web-disclosure model. The company posted its earnings online, without benefit of a corresponding broadly disseminated release.
Microsoft’s ill-fated foray into web-based disclosure provides a textbook example of “worst practices” investor relations.
The company issued an advisory on October 27, 2010, alerting the marketplace that it would post its earnings on its website the next day. No time was specified as to when the results would be posted.
Microsoft’s disclosure strategy is problematic on many substantive levels. The SEC’s 2008 Interpretive Guidance Release states that companies can disclose material information on their web sites provided certain criteria are satisfied; a key requirement is that the corporate website is a “recognized disclosure channel.” This standard suggests that the issuer must be able to demonstrate that its website is a primary “go-to” site for investor information, over a sustained period of time.
Given the fact that Microsoft literally made the transition to web disclosure overnight, it makes a sham of one of the SEC’s few tangible web-disclosure guidelines. Unfortunately, there aren’t all that many requirements to begin with, which is the crux of the problem.
Clearly, Microsoft has one of the most heavily trafficked sites on the Internet. However, there isn’t necessarily a correlation between a popular consumer site, and a “recognized disclosure channel.” By my way of thinking, “recognized” suggests a documented and defensible track record over an extended time frame.
Microsoft’s arbitrary disclosure designation has short-circuited the SEC’s intent, giving the clause new meaning. The unwelcome result: Instant disclosure channel. The SEC’s Interpretive Guidance Release, already condemned by its critics for its lack of clarity, has effectively been watered down further by Microsoft’s unanswered actions.
Philosophical arguments aside, Microsoft’s disclosure process was badly bungled.
Here’s a chronology of the confusion (all times Eastern):
- Investors were frantically scrambling to get the results at market close; the results weren’t posted until 4:15 pm. That’s 15 minutes of high anxiety, angst and frustration as investors pounded the Microsoft site seeking the company’s results.
- The 8-K wasn’t filed until 4:28:49 p.m.
- The advisory press release finally moved almost a half-hour after the posting [4:44 p.m.], thus the Notice came AFTER the Access.
- The conference call was held at 5:30 p.m.
Without question, it was a disclosure disaster.
As noted, the 8-K was filed 13 minutes after the posting on Microsoft’s website. Our interpretation of Reg FD is that the filing should have preceded, or been filed simultaneously, with the web posting.
In a Dow Jones interview published in The Wall Street Journal, a Microsoft IR team member revealed a basic lack of understanding of what services are available today, as well as a blatant disregard for investor relations’ core mission.
The Microsoft spokesperson asserted that posting onto the company’s website allowed users to “see additional information that they wouldn’t see if they only looked at our press release.”
Definitely not true. Releases today are transmitted in XHTML format, which provides for increased online functionality and flexibility. Business Wire, for example, has all of the rich multimedia capabilities that Microsoft was seeking to accomplish on its own site; e.g., slides detailing the company’s performance, key operating metrics, and links to webcasts and other documents.
The major difference, however, is that Business Wire makes this information available to the entire investment community simultaneously, and in real-time. Business Wire’s patented news delivery platform distributes and posts to the world’s leading portals, financial information platforms, and databases, creating a true level playing field for all market participants. We literally push the information to millions of eyeballs around the globe, and everyone receives it AT THE SAME TIME. Yes, it’s ubiquitous.
In rationalizing the company’s decision, the Microsoft executive focused on the benefit of a reduced staff workload, concluding “it’s one less check mark.”
The critical lesson that has been lost here is that when it comes to investor relations, it’s not about the issuer, it’s about the shareholders. It’s unfortunate and inexcusable that the legitimate information needs of the marketplace are deliberately being sacrificed simply because they require an extra “check mark.” It’s a small price to pay, in our view, for market fairness.
Web disclosure clearly has major drawbacks; its obvious deficiencies disadvantage investors in multiple ways. Seasoned market observers shudder when imagining the ensuing anarchy if hundreds, or thousands, of issuers choose to follow Microsoft’s misguided example.
At a time when there continues to be a growing global demand for increased transparency and disclosure, Reg FD — the backbone of America’s disclosure system — is unfortunately being emasculated because of benign neglect and gross misinterpretation. The SEC needs to take decisive action reaffirming the basic tenets of Reg FD; otherwise, the concept of full and fair disclosure will prove to be more of an empty premise rather than an enduring, guiding principle that has proudly come to define our capital markets.
The facts speak for themselves: The SEC should take appropriate action to reverse these disturbing disclosure trends. The evidence supporting such a move is overwhelming.
Authoritative academic research conducted by a professor at the Harvard Business School has conclusively demonstrated that greater news dissemination improves stock liquidity and lowers volatility, while enhancing a firm’s visibility. It can even lower the cost of capital.
Independent surveys confirm that an overwhelming majority of securities attorneys continue to counsel corporate clients to broadly disseminate their news, rather than limiting distribution to a corporate website.
There’s a large investor in Omaha who doesn’t want to be checking hundreds of websites minute-by-minute throughout the day. But then again, who would?
- Here’s a related post on the 24/7 Wall St. site: Microsoft Goes Cheapo on Earnings Releases (MSFT)