Firms Face Tough Disclosure Issues

Feb 16, 2004  •  Post A Comment

As VP of investor relations at media giant Time Warner, John Martin is all too familiar with the various constituencies-investors, analysts and company executives among them-that have a stake in a company’s release of financial information and how the interests of those parties can occasionally conflict.
“[Disclosure] is something we focus on all the time as we strive to provide as much information in as simple a way as possible,” Mr. Martin said.
It’s a good thing he does. With virtually every media company extending its tentacles into businesses that a few years ago might have been seen as foreign, experts said a growing number of investor relations executives are adopting Mr. Martin’s philosophy.
In many ways, they don’t have much of a choice. Already corporations have seen their disclosure workloads balloon, thanks to a slew of regulations over the past three years that in the wake of scandals involving corporate malfeasance at companies such as Enron, WorldCom and Adelphia Communications have cast a spotlight on what companies are saying about themselves-and how they’re saying it.
Many investor relations executives said that to comply with the stricter regulations they have made their financial statements longer, which requires more effort to prepare. The fees to accountants and lawyers are skyrocketing, too, as part of the effort. And companies are finding themselves walking the delicate line between disclosing enough information and inundating people with too much. Another risk: making sure no disclosure gives away competitive secrets, but at the same time giving investors a clear picture of a company’s direction.
Executives are being held more accountable as well. Every financial statement now requires a signature from the top executive attesting to the veracity of the disclosure. What’s more, any executive who discloses material information to an investor or analyst must now make sure the entire public is made aware of that disclosed information to ensure no one has an unfair advantage.
“Disclosure and transparency are king,” said Charles Elson, a professor of corporate governance at the University of Delaware. “Investors are demanding more disclosure, and companies owe it to them to inform them in an expedited fashion.”
Now that demand could intensify, as forays into entirely new businesses create a need to provide even more data to shareholders. Indeed, with multiple system operators transforming themselves into telecommunications giants complete with high-speed data and telephone offerings, and some television station groups toying with the idea of using some of their digital spectrum for services such as data transmission, disclosing the right information could make the difference between a company being credited for having foresight or seeing its stock price get slammed by investors leery of buying into the new strategy.
Why? Each step away from a core business introduces a whole new level of risk that might turn off investors who bought into one thing and then find themselves with something different. Unless that move away from the core business is accompanied by full disclosure of new competitive and regulatory risks, investors are left confused-which can translate into a weak stock price.
“This is tricky stuff,” said Harold Vogel, CEO of media consulting firm Vogel Capital Management. When a company enters a new business, “often you have to make decisions about tremendous capital expenses without the ground below you being settled. You have to roll the dice.”
Kevin Carton, a partner and group leader of the entertainment and media group at PricewaterhouseCoopers, put it another way: “Companies that are going to diversify have to look at what impact it has on the stock price,” he said. “If there’s no upward tick, they won’t do it.” And upward ticks come only when investors fully understand what the company is doing.
A New Set of Risks
Such is the case with cable operators going into the telephony business, as the move introduces MSOs to a new set of competitive and regulatory risks that don’t exist in their core video business. Analysts said smart investor relations departments are responding by reviewing how traditional telephone companies release financial information, what metrics they use to measure their business and how those companies invest in capital and then follow the Bell companies’ lead when it comes to disclosing data about their telephone businesses. In addition, they are educating traditional cable analysts and investors about the nuances of the phone business while at the same time explaining the cable business to those more familiar with telephony.
“The more of that we can do balances us against the competition,” said one MSO executive. “As we move across sectors it will require us to be open to dealing with analysts and investors from other sectors.”