As the Volkswagen scandal rumbles on and the repercussions for the automotive industry continue to grow, so do the questions around how the company could have breached its duty of good governance, transparency and communication with shareholders (not to mention customers, industry bodies and politicians) quite so considerably.
The admission in September 2015 that Volkswagen was cheating pollution tests wiped €25 billion euros off the company’s stock market value and prompted some investors to campaign for the launch of a full-scale legal attack against management. While the Volkswagen case is at the extreme end of the spectrum, it serves as a reminder that a company’s relationship with its shareholders is rooted in communication. But for most companies, having to deal with issues on such a scale is unlikely; instead, the main day-to-day focus is on ensuring best practice communications with investors and other stakeholders.
‘Best practice communications’
Best practice communications is a phrase that is often discussed by a company’s management, its corporate brokers and PR advisors. But what exactly does it mean? While private companies have to make certain submissions to regulatory and government organisations, such as HM Revenue and Customs, these are nowhere near the scale of the legally binding reporting and disclosure requirements a company has to comply with once listed.
The duty of transparency that a public company has to all of its shareholders – however large or small – means that all its corporate governance procedures, executive remuneration, and operational and financial performance need to be publicly and widely available in the market. This means maintaining an up-to-date website with all relevant information – such as past results statements, stock exchange announcements and other press releases, information on the management team and board, and the company’s strategy and operations – easily accessible.
It also means that investors need to be provided with price-sensitive information on a synchronised and timely basis – usually via a regulatory announcement distributed to the relevant stock exchange (or exchanges) – so that there is no prejudice or advantage for some investors over others. What constitutes ‘price-sensitive’ or ‘material’ information encompasses a wide range of areas, and what is sensitive for one company might not be for another, but the FCA defines it as information which may, or would be likely to, lead to a substantial movement in the price of a company’s listed securities. This includes financial performance, acquisitions, and changes to the company’s CEO or CFO, amongst others.
As a result, upon becoming listed a company needs to carefully manage its flow of information to the outside world. Current UK regulatory rules require that listed companies publish their financial statements twice a year, with many preferring to also publish statements after the first and third quarters (although this is no longer obligatory). Management and employees must therefore ensure that they do not disclose any details on the company’s financial and operational performance (or inside information) to investors as well as family, friends or suppliers in the intervening period.
This also covers the media, and any interviews with local or even national press must not cover previously undisclosed price-sensitive information. The regulatory penalties can be severe and, for insider trading, can lead to criminal prosecutions.
The proliferation of social media as a tool for communication also means that companies need to be even more careful in what information they post on Twitter, Facebook and other platforms. In 2012 Netflix and its Chief Executive, Reed Hastings, faced the threat of civil action from regulators after he posted a revealing status on Facebook: ‘Netflix monthly viewing exceeded one billion hours for the first time ever in June.’ Although the post was accessible to Netflix’s 244,000 followers on Facebook, the US Securities and Exchange Commission considered this to be material information that should have been disclosed to the market via a press release or regulatory filing.
While complying with best practice communications is something that most listed companies take very seriously, on occasion things don’t go to plan – often with significant and wide-reaching consequences. In 2012 Google was left red-faced after it accidentally announced its results a few hours early, with the situation made worse by the fact that the numbers were significantly worse than expected. Although the company cited a mistake by its financial printer as the cause of the problem, its shares immediately slumped and were subsequently suspended by NASDAQ. Once they resumed, 40 minutes before the end of the day, the stock was trading 8% down.
The perils of selective disclosure are also great. Back in 2002 Carlsberg’s CFO Jesper Baernoldt was demoted after his IR department told selected analysts that their profit forecasts were too high, several days before the information was announced to the market. And even if there are no formal repercussions or allegations of wrongdoing, disclosure controversies can still have an adverse hit on a company’s reputation. Facebook’s IPO came under scrutiny in 2012 over its handling of sensitive information on revenue estimates in the Prospectus after a claim that one of its bookrunners verbally shared certain information with some larger institutional investors, but not with the wider market. Even more embarrassingly, Google was scolded by the US regulatory body, the SEC, in 2002 when a CEO interview in Playboy was seen to violate its pre-IPO ‘quiet period’. The business got away with it, but not without reputational cost.
The heart of compliance
Ultimately, whilst best practice reporting is something that all companies aspire to, it means much more than just complying with regulatory rules. It is about ensuring investors have a clear understanding of the business, its strategy, opportunities and risks so they can make informed investment decisions regarding the value of the company and its future prospects. This way, companies can be satisfied the share price is an accurate reflection of their business, and investors can be happy they are able to make investment decisions based on full information.