Investor Relations & Disclosure Practices - Observations on Academic Research

We came across this interesting blog post by John Palizza, Rice University instructor and founding partner of Palizza Partners who was prepping for his investor relations class. His post provides a summary of various research findings related to investor relations and disclosure practices. Here’s a highlight: “improvements in the quality and quantity of voluntary disclosures improves a stock’s share price, trading volumes and narrows the bid - ask spread. The result of all this is increased liquidity and decreased volatility.”

There are a number of additional conclusions he draws about IR as it relates to the size of the company as well as the positive effects of having an ongoing, transparent investor relations effort. Very interesting. (apologies for errors in the original post - TB)

Knock, knock. Who’s there? Is it Mandatory XBRL?!

The SEC Advisory Committee on Improvement to Financial Reporting (CIFiR), in a Draft Decision Memo and at its January 11th meeting, recommended the SEC transition to mandatory XBRL for all companies. CIFiR recommended the SEC phase-in XBRL as follows:

• The largest 500 domestic public reporting companies should be required to “furnish” XBRL tagged face financial statements and “block tagged” footnotes;
• One year later, all domestic “large accelerated filers” (~2,000 Companies) should be required to “furnish” XBRL tagged face financial statements and “block tagged” footnotes to the SEC.
• During the phase-in period, the SEC and the Public Company Accounting Oversight Board (PCAOB) should seek input from companies, investors, and other market participants as to the experience of such persons in preparing and using XBRL tagged financial statements using the U.S. GAAP taxonomies, and related costs. The SEC should consider conducting or commissioning a study of the rate of errors by companies in using the appropriate XBRL tags in comparison to the financial statement items. At the end of the phase-in period described above, and as promptly as practicable after the preconditions to full implementation discussed above are met, the SEC should evaluate the results from the phase-in period to determine whether and when to move from furnishing to official filing of XBRL tagged financial statements for domestic large accelerated filers, as well as the inclusion of all other reporting companies.

SUN SPOTS: Blinded by the Light

“Sun spots” was a term used in the days of satellite transmissions to explain periodic outages that mysteriously knocked out news delivery to network recipients. It is perhaps poetic justice that Sun Microsystems’ CEO Jonathan Schwartz has given the term new meaning in the Internet Age.

Sun ballyhooed that it would meet disclosure of its quarterly earnings via a web posting on its own site, accompanied by RSS feeds to registered subscribers. Ten minutes later, Sun broadly disseminated the news release via a commercial wire service. The evidence suggests that Sun’s high-profile experiment had decidedly mixed results; in our view, it was clearly not the great leap forward that Schwartz had touted for months on his blog.

Not Simultaneous, Not Fair, Not Instantaneous
I eagerly tried to access Sun’s earnings at precisely 4 pm/Eastern. Unfortunately, I kept getting a “Page Not Found” message. It wasn’t until 4:06 pm that I was finally able to view Sun’s results. Given Sun’s enormous server capacity–after all, servers are Sun’s core business–Sun’s seeming inability to accommodate the demand speaks volumes about the real downside of web-only disclosure.

In other words, if Sun can’t handle the load, what are the realistic chances of smaller companies, with more limited server resources, to deal with spikes associated with material news announcements? Casual observers may dismiss a six-minute delay as minimal. However, in today’s financial markets, six minutes is an eternity. Program trading now drives the markets, and the new mantra on Wall Street is that milliseconds matter.

The numbers tell the story best: Reuters didn’t move its first take until 4:16; Yahoo! Finance posted Sun’s press release at 4:11 (after it moved on a commercial newswire). As for those accessing via RSS feeds, those times were all over the map and that’s because RSS feeds are not push technology, nor are they simultaneous. This means that the material information was not received simultaneously by all market participants. So what’s “full and fair” about that?

In our view, this isn’t what the U.S. Securities and Exchange Commission had in mind when it implemented Regulation FD in 2000 to “level the playing field.” We think these results fall far short of the investing public’s desire for full, fair and simultaneous disclosure.

Business Wire News: Secure, Free & Simultaneous
Business Wire has a secure (independently audited in multiple jurisdictions worldwide) real-time network that allows investors anywhere in the world to access news at no charge. For some unknown reason, Jonathan Schwartz continues to harp on the misconception that commercial news wires are only available via proprietary services. NOT TRUE. Anyone, anywhere can access Business Wire and its competitors via the world’s most popular financial portals, news sites, online services and databases–again, simultaneously, in real-time and in multiple languages.

Everyone has equal, unrestricted access to material news announcements under the current disclosure model. The playing field is indeed level. Further, Business Wire’s presence on the internet, in conjunction with its myriad distribution channels, far eclipses any individual company’s web posting. And yes, we even offer RSS feeds at no charge.

An Accurate, Third-Party Historical Record
Another key issue that has thus far been ignored is archival capabilities. All news releases transmitted over Business Wire are permanently stored in Lexis-Nexis, Factiva, and other popular databases for future reference. Further, the lack of a central clearinghouse for material news announcements under Schwartz’ web-only framework raises all sorts of interesting questions that the SEC and class action law firms, among others, will need to address.

Disclosure Innovators & Experts
Business Wire is clearly not resting on its laurels and is constantly evaluating all new technologies. Just ask our CIO, Steve Messick, who was named one of the Premier 100 IT Leaders by Computerworld Magazine in 2003. The reality is that Business Wire has and will continue to push the envelope when it comes to disclosure, from its patented NX news delivery technology, to its leading role in providing public companies with turnkey XBRL solutions worldwide. But we’ll do it in a way that enhances transparency.

As the leading disseminator of material information for 46 years, this is our “circle of competence.” We are passionate about what we do because we believe strongly that broad and simultaneous dissemination of the press release remains at the heart of the disclosure process. We trust that all the other “commentators” have the experience and credentials to speak intelligently about this important topic.

We salute Jonathan Schwartz on Sun Microsystems’ strong quarterly performance. But with all due respect, we think the CEO of Sun should “stick to his knitting” and leave the important business of disclosure to the experts.

–Cathy Baron Tamraz, President and CEO, Business Wire

SUN’S SOLAR ECLIPSE: A Return to the Dark Age of Disclosure

The concept of full, fair and simultaneous disclosure will be taking a giant step backwards on Monday. In case you missed it, Sun Microsystems CEO Jonathan Schwartz has announced that Sun will post its fourth quarter and full 2007 fiscal year earnings announcement on its web site, submit an 8-K filing and will make it available to its RSS subscribers. Ten minutes later, the release will be broadly disseminated via a commercial news service. Sounds great in theory, and Sun’s approach is in compliance with Regulation FD. The problem is that while Sun is living up to the letter of Reg FD, its actions run counter to its spirit and intent, and threatens to do investors a tremendous disservice by setting a bad precedent. Schwartz has adroitly positioned himself as a modern day champion of the people, proclaiming that Sun is making market-moving information available to the masses for the first time. The reality, however, which Schwartz either doesn’t understand or chooses to ignore, is that price-sensitive information is universally available–simultaneously, in real-time, and at no charge–right now, and has been since the dawning of the Internet age. Schwartz writes on his blog that Sun’s decision “will place, for the first time, the general investing public–those with a web browser or a cell phone–on the same footing as those with access to private subscription services.” Very noble, certainly great PR, but flat-out wrong. Anyone, anywhere, can access Business Wire and its competitors at no charge on dozens of free financial portals and websites, in addition to many other traditional and online platforms. With Business Wire’s patented NX delivery platform, time-sensitive news is available at the same split second to investors worldwide. Sun’s decision to disclose via the web and RSS feeds, followed by broad wire delivery, is disclosure deja vu–a return to the bad old days before Reg FD made an earnest attempt to level the playing field. Prior to Reg FD there was a 15-minute delay that, for all intents and purposes, enabled those with privileged access to corporate information to make market decisions before the same information was disseminated to the general public. In September 2000, Business Wire made a bold and unilateral decision to end the 15-minute delay, and to make market news universally accessible to everyone without reservation. We remain strong proponents of Regulation FD, and the principles of full, fair, and simultaneous disclosure. That’s why we are speaking up, as others seek to erode it. Schwartz’ grandstanding masks several important substantive issues that Business Wire has addressed previously. RSS feeds are not simultaneous given the Internet’s architecture. Steve Messick, our chief information officer, recently blogged on the subject, explaining in layman’s terms why RSS feeds fail to meet the disclosure litmus test. Steve attempted to arrange a meeting with Jonathan to discuss the issue, but his invite has thus far gone unanswered. Given Sun’s core business, server capacity is unlikely to be an issue when Sun posts its earnings Monday. After all, Sun is the world’s fourth largest maker of server computers. For thousands of other listed companies, server capacity is likely to be a real issue, especially given the anticipated spikes in volume that usually accompany material news announcements. Sun’s potential to derive commercial benefit from companies ramping up their server capacity begs the obvious question: does Jonathan Schwartz have a hidden agenda in promoting Internet disclosure? Others have been quick to jump on Schwartz’ bandwagon, including Dominic Jones, who writes IR Web Report. We think that people who preach disclosure should practice it to the extent that they clearly spell out how they conceivably could benefit from a major policy shift. Jones is an IR web consultant; he, too, potentially stands to reap financial rewards should Internet disclosure take root, and demand for his services increase. It is worth noting that the European Commission rolled out its Transparency Obligations Directive [TOD] this past January in an attempt to introduce harmonized, pan-European disclosure standards across its 27 Member States. The EC, the Committee of European Securities Regulators, and others literally spent years studying various disclosure models. After all, they were starting from scratch, and they were anxious to do it right. At the end of the day, they decided upon what is often called the “North American Disclosure Model,” which is based on a push delivery, multi-channel platform that serves as the backbone of the U.S. and Canadian financial markets. The U.S. Securities and Exchange Commission, whose commitment to protecting the interests of individual investors has recently come under attack, should take a stand and unequivocally declare its firm support for a disclosure model that guarantees simultaneous, real-time, and unrestricted access for all investors. Sun should live up to its name and illuminate the path to greater transparency, instead of promoting a return to the dark days of disclosure. Neil Hershberg, Senior Vice President, Global Media

iPhone Hoax Underscores Need for Reliable Disclosure

The question of reliable disclosure in the changing media landscape, as well as that of journalistic standards in the blogsphere, was underscored this week when technology blog/magazine Engadget sent Apple stocks tumbling as a result of an email hoax.

On May 16 Engadget published on its site that they “have it on authority” that Apple pushed back the release date of its iPhone from June to October, and its new Leopard operating system from October to January 2008.

This news was enough to send Apple stocks sliding 4.3% in under six minutes, from $107.89 to $103.42, wiping out nearly $4 Billion of Apple’s market cap.

Later that day Apple clarified that both the iPhone and Leopard were on track. Engadget then told its readers the source it acted upon was an internal Apple email that turned out to be a hoax. Apple stocks recovered mostly later in the day.

It is unclear yet where the bogus email originated from, and whether Engadget tried at all to verify or cross-check the information prior to posting. What is clear however, is that the dissemination and publication of potentially market moving information is just as sensitive an issue as it has always been, and in fact even more so given the variety of new and immediate media available to both users and publishers. The iPhone hoax underscores how corporations bear the responsibility to disseminate their news in a consistent and trustworthy fashion that cannot easily be exploited by stock manipulators and pranksters. It also highlights the fact that new media outlets and bloggers bear the same responsibility as traditional journalists to verify the facts behind their statements.

Business Wire CIO Steve Messick speaks out on why RSS feeds do not meet fair disclosure requirements

Business Wire’s Chief Information Officer, Steve Messick, weighs into the conversation with his insights on why a public company delivering news via RSS feed would not meet disclosure: 

“There has been quite a bit of blogging back and forth the last few months over Regulation FD’s (Fair Disclosure) intended purpose and what platform best serves the goals intended by the regulation for both the investing public and corporate issuer.

More specifically, Jonathan Schwartz, CEO of Sun Microsystems, and the Honorable Christopher Cox, Chairman of the SEC, have opened this topic up with an interesting and timely exchange of the issues and technology at hand. 

Business Wire, one of the oldest and most respected companies tasked with ensuring fair disclosure for thousands of companies both domestic and abroad would like to add our insight into this important issue. When Reg. FD was adopted in 2000, many corporations abhorred the legislation as heavy-handed and an unnecessary burden on CFOs and their staff.  However, Mr. Schwartz and Chairman Cox concur that this is important and needed legislation. 

As a technologist and CEO of one of the world’s largest computer and software providers, Mr. Schwartz is in a unique position to discuss the corporate viewpoint, and also how technology can best serve the goals of Regulation FD. 

As experts in the field of disclosure and material news dissemination, Business Wire is also uniquely positioned to lend its knowledge and technology expertise to the discussion.   As chief information officer for Business Wire, I have been involved in software development and data communications for thirty years. I have also been a strong proponent of open standards technology since its inception. 

I remember my excitement at purchasing the second NCR Tower off the assembly line in 1983, one of the first commercially available UNIX systems on the market.  We were using LINUX and JAVA for mission critical systems and applications at Business Wire early in their product cycle and we have been active participants in open standards development with International Press Telecommunications Council (IPTC) and Extensible Business Reporting Language committees (XBRL).

So who cares?

Business Wire’s clients care when they need to get their news out quickly, reliably and accurately in order to satisfy Reg. FD.  The financial media and analysts care, too, because they need assurances that the news is sent at precisely the same instant to each and every recipient.

Let’s get to the point:

The root of the discussion centers on using “new” Internet technology as a means for disclosing material news to meet Reg. FD guidelines. Based upon comments made in Mr. Schwartz’s blog, we think he is way off base.

The specific “technologies” under discussion are corporate blogs (hosted on company websites) and RSS or Atom feeds, which would be used in lieu of a simultaneous and broadly disseminated news release to the media and investment community.

RSS is an accepted standard of information dissemination and blogs are becoming an acceptable means for corporations to communicate with the public. However, we do not agree that these are acceptable technologies for fair and simultaneous disclosure of material, market-moving information.  

And here’s why:

RSS (standard configuration), is a poll and pull-based Internet service. The fundamental flaw in a poll/pull protocol is that it requires the recipient of the information to ask for service–to poll for the content. By default, you cannot insure that all of these “askers” are going to receive service from the corporate web server simultaneously.

In other words RSS/Atom is not a simultaneous news delivery process protocol. It could be considered near simultaneous, but if I am an investor competing with other investors, I surely do not want to be the last one to get my poll acknowledged by the corporate web server.  

Here is a clarifying example:

I go to the post office to get my mail and packages every day. I may get to the post office after a long line has formed. As a result, others get their mail and packages before me. It isn’t possible for me and my fellow neighbors to receive our mail and packages at the same time.

The post office functions like RSS does as a delivery mechanism. RSS poll/pull administration requires you, the receiver, to configure every corporate news site that you want access to. You must also set your reader poll times to receive the feed–hopefully as fast as your competitor and/or other traders.

To further the example:

Now, I have just been informed now that my mail is located at several hundred post offices and some open and some close everyday at different times and some don’t even know when they are open. One post office sends me a bunch of junk mail that I really didn’t want and it took me a long time to read through it. Then I received a check in error and I cashed the check now causing more errors. I didn’t know the post office made errors and they didn’t inform me of this one.

I am going to have a real heck of a time getting my mail now as I go from post office to post office hoping they are open, have no lines, and hoping they give me the correct mail.  

This could be a real scenario for the institutional and/or retail investor trying to poll multiple corporate sites that have announced that their earnings will be available at some pre-determined time. As eager investors salivate waiting on the content of the blog to post, one would hope the investor relations web server is beefed up, reliable, redundant, and doesn’t get saturated when possibly thousands of investors try to poll and pull their announcement blog over to their RSS reader.  

To more generally discuss the technology being used by RSS, let’s compare poll vs. push technology. Business Wire, and presently the entire global financial community, including the SEC, agree that the push protocol is better. It allows the recipient to receive corporate information simultaneously rather than having to “ask” for it from a myriad of corporate web servers. This is inherently more efficient than each and every investor on the planet having to keep watch and poll every corporation that they are monitoring.

Let’s boil it down further:

What is the industry standard Internet protocol for simultaneously pushing financial information to the investor community? There isn’t one! 

In 1999, Business Wire envisioned the Internet as the financial communications platform of the future. The problem was that no TCP-IP based delivery protocol could insure sub-second simultaneous delivery of content over the internet at that time in order to meet Reg. FD’s guidelines. To remedy this situation, in 2003, Business Wire created and launched the NX news protocol and delivery system, for which we were awarded a patent in June of 2006.  

NX is a push process protocol we designed specifically for Reg. FD disclosure. NX insures that each and every reader gets the news content and automatically requests a resend if there is a problem. The NX reader is a simple Internet appliance that can read and process thousands of financial disclosures with no administration or maintenance.

NX is based on the IPTC’s XML standard for news delivery: NewsML. NewsML manages content format independence, yet provides for powerful news management capabilities. To our knowledge, we are the only wire service that has tested our NX technology in sub-second disclosure distribution and can make the claim that we are simultaneous in our delivery. 

So what does all of this really mean to the average retail or institutional investor?

It means distribution is fair and simultaneous, but information processing is still cumbersome. Plain text-based news releases require humans to read them, analyze them and input the numbers into their own spreadsheets manually. That is all about to change pending the acceptance of new financial data formats–XBRL specifically. The hope for XBRL is to enable analysis and investment decision making in sub-second scenarios. XBRL and NX technology combined will allow for Reg. FD to take hold of its primary goal, which is to provide both retail and institutional investors with the ability to make fast and intelligent decisions from Internet-based online corporate news and financial announcements.”