Of mayors and Mammon
Chalkie muses on the matters of material disclosure.
The tawdry affair of Len Brown and his young paramour has told us more than we probably wanted to know about Auckland’s mayor, but it has also reminded us that much can go on behind closed doors.
For someone as square as Brown to emerge as a recklessly lustful lover is eye-opening and Chalkie can’t help wondering how many sober-suited corporate types have similarly secret lives. After all, it isn’t so long ago the world learned the salacious background to the Galleon insider trading scandal, in which former beauty queen, hedge fund analyst and general glamourpuss Danielle Chiesi obtained company secrets from men who should have known better.
‘‘I played him like a finely tuned piano,’’ she said of one encounter with an executive from information technology company Akamai.
Given the potential money to be made from commercial information, we should not be surprised that so much effort goes into getting it, even if most efforts don’t extend to wearing tight red dresses and fishnets.
Indeed, Chalkie reckons the difference between legal analysis and illegal insider information is not so much a bright line as a grey smudge. Chiesi just pushed the boundary.
For example, listed companies routinely hold briefings for analysts from which the great unwashed are excluded. Does that give those analysts an advantage? Presumably it does, or they wouldn’t happen.
Although stock exchange disclosure rules are designed to ensure material information about companies is published as quickly and widely as possible, the playing field is distinctly wonky.
One company that found out a few months ago how antsy people can get about a playing field was goldminer Newcrest. On June 7 Newcrest announced writedowns of A$5 billion-A$6 billion after reviewing its mining in light of lower gold prices. However, in the previous two days Newcrest’s share price fell from A$15.15 to A$13.36 on higher volume than usual, while on June 4 and 5 analysts from three firms – UBS, Citi and Credit Suisse – downgraded their outlooks on Newcrest from neutral to sell or from outperform to underperform.
Since Newcrest’s manager of investor relations had met analysts on May 29 and 30, and on June 5, there were widespread accusations that some analysts had a heads up on the bad news.
Australia’s regulator is investigating, but an internal review of Newcrest by former stock exchange head Maurice Newman recommended analyst briefings should be webcast as a matter of course.
‘‘The company should . . . also simultaneously release a link to a recording of such webcasts to the ASX . . . At the least, a transcript of the proceedings should be produced and posted on the company’s and ASX’s portals.’’
These days it is straightforward for companies to webcast all their briefings live and to make those webcasts available as archive material online, yet some still don’t do it. Among those that do, the execution is patchy.
Chalkie’s review of companies in the NZX20 found use of webcasting was common but often went no further than annual meetings and didn’t cover analyst briefings. Contact Energy appeared to provide only live webcasts, with no archive material available; Ryman seemed to do no financial webcasting at all, nor did Mainfreight or Port of Tauranga, or, surprisingly, software company Xero.
Fisher & Paykel Healthcare did webcasts but for some reason archived them for only two weeks, while Mighty River Power used to do webcasts but seemed to have stopped since becoming a listed company.
Granted, these things are minority interests and won’t garner the website hits of a pet cat doing something cute or a chicken laying giant eggs, but for committed investors they can convey important meaning.
According to research published in 2010, conference calls in which senior executives discuss results with analysts can be revealing.
In ‘‘Detecting deceptive discussions in conference calls’’, David Larcker and Anastasia Zakolyukina found there were links between the language used by chief executive officers (CEOs) and chief financial officers (CFOs) and subsequent revelations of accounting problems at their companies.
‘‘Overall, our results suggest that linguistic features of CEOs and CFOs in conference call narratives can be used to identify deceptive financial reporting,’’ they said.
The findings are obviously not foolproof – as soon as people realise what words sound iffy they will adjust their speech – but Chalkie reckons the underlying principles are sound. There have been many occasions when telltale verbal tics have alerted your correspondent to nefarious activity.
The researchers put their fingers on a few weasel ways. One was sheer volume – deceptive executives are more loquacious in their answers, apparently. Another was a frequent appeal to general knowledge.
‘‘Both CEOs and CFOs have more words that reference general knowledge such as ‘you know’ in deceptive instances,’’ they said. ‘‘Deceptive calls also have fewer non-extreme positive emotions words and mention shareholders’ value and value creation less often.’’
Unexpectedly, they also found CEOs and CFOs had significantly different speaking habits. Deceptive CEOs ‘‘use fewer selfreferences, more third person plural and more impersonal pronouns, fewer extreme negative emotions words, more extreme positive emotions words, fewer certainty words and fewer hesitations,’’ than their financial sidekicks.
Mm, perhaps this linguistic analysis is getting a bit cumbersome.
Still, it’s only fair to give everyone a crack at deciphering the code by publishing all briefing transcripts and recordings.
Then there’s the thorny question of selective shareholder access. Listed company chairmen and women and CEOs are often happy to take calls from institutional shareholders but less keen on chatting to the mums and dads without the protection of tea and sausage rolls at the annual meeting.
In the US, activist investor Carl Icahn provoked investor jealousy by inviting Apple CEO Tim Cook round to his apartment last month for dinner and trying to persuade him to engage in a huge share buyback.
Should Cook be holding private meetings with investors? Chalkie reckons not. It must take a supremely self-disciplined executive to stick to the script when being wined and dined by billionaires.
As a general rule of thumb, it makes sense to keep all investor communication in the public domain, including correspondence with fund managers and shareholders big and small.
That way, at least executives would know they were expected to publish transcripts of their conversations with people in fishnets and tight red dresses.