The Balancing Act of Continuous Disclosures

All parties accept the requirement for a consistent regime of continuous disclosure. What is more worrying is the requirement to respond to media speculation and the new powers of the ASX to enforce this. John Arbouw reports.

The trials, tribulations, blunders and unfortunate circumstances of PrayforBetterTimes Limited (see separate story) offers no easy explanation or condemnation about the debate currently surrounding Listing Rule 3.1B which force companies to respond to media speculation.

The new disclosure rules which came into effect in January have led to a good deal of concern being expressed by a number of high profile directors and chairmen regarding the power of the ASX to publish "necessary material" if a company fails to make an announcement after an ASX query.

Despite the ASX going on a roadshow around the country last year explaining how the new rules would work in practice and seeking views on how they could be improved, sections of the business community are clearly not won over.

Their fear is that the wording of the new rules creates too much uncertainty. The reality is that no one knows how the new rules will work in practice because they haven't been tested in all circumstances.

But no one is saying that continuous disclosure has become too onerous. A fair and open market where everyone has the same information at the same time is in everyone's interest.

Following AMP's embarrassment last year at being caught out talking to fund managers on one level and the rest of the market on another, listed companies are very cautious about analyst briefings.

While some of these practices have now been curbed, the demand for information by the market on company activities is also insatiable.

So is it all the fault of pesky journalists? Is it simply the lack of internal communication controls that put too many people in an inappropriate loop? Is there mischief afoot because someone with a vested interest wants to ramp up the share price? Or is this much ado about nothing as long as the ASX continues to apply the disclosure rules in a judicious and sensible way?

In an address to the Australian Graduate School of Management late last year, Wesfarmers CEO Michael Chaney said that the pressure exerted on chief executives by journalists seeking new growth stories is relentless.

"I think that one of Australia's problems in this regard is that, despite the fact we have a relatively small business sector, journalists still have to fill a whole Financial Review and the business section of other newspapers each day," he said.

"As a result they keep looking for new angles on companies and if they can't find any, write the same story again under a new headline. The focus can become very distracting.

"I recall one four year period in the late nineties when Wesfarmers was criticised repeatedly for "failing" to make acquisitions. Our response was that we had walked away or missed out because the price was above what we thought was fair value.

"With the firmest resolve in the world internally, it is hard to resist this sort of constant criticism. Your employees as well as your directors read newspapers and eventually people start to question the strategy.

"That pressure has led a lot of companies into making an investment at too high a price. At the time they tend to justify it on the basis of optimistic assumptions or "strategic" reasons, but at the heart of it is either a problem of wounded ego or a desperation to meet self-generated expectations.

"Ego gets in the way of judgment when a company promotes growth or size as its primary objective. It is very easy to get big but at the end of the day it is shareholder returns that count."

It is a view that is shared by others. Commonwealth Bank chief David Murray has called for a review of the disclosure rules while Perpetual Trustees' head Graham Bradley has cautioned the ASX on the use of its powers.

David Jones chairman, Dick Warburton believes there is a limit to how open you can be in the early stages of negotiation.

"In my opinion you cannot negotiate effectively if you are in the middle of a fishbowl," says Warburton. "If you are debating the possible merger of two companies on the front page of the Fin Review you have no hope.

"Take the situation of BankWest and St George. They have had some very embryonic discussions on getting together but haven't got down to the detail. The rumour got out that they were talking and they were asked by the ASX what was going on. They said they were only having preliminary talks but they were forced to respond. BankWest said forget it and pulled out of the deal."

"My view is that you should not have to respond to media rumours. I appreciate the ASX position about having an open market but it is counter-productive to be forced to respond to some of this speculation.

"The dilemma of course is that the deeper you get into negotiations the more people become involved including lawyers, merchant banks, the bankers and then you start to get people playing games.

"If you are at some stage in the merger talks but not near a conclusion and you are being asked by the ASX to report at what stage you are at then this could be very misleading to the market. The reality is that a lot of deals fall over at the last minute."

ASX managing director Richard Humphrey told the AFR last month it was nonsense to suggest that the new continuous disclosure requirement would prevent any deals. He said if the media was simply speculating or flying a kite then a simple denial would be sufficient.

What is at issue is the fact that the ASX is in possession of a weapon of mass exposure and that this weapon can be triggered by any number of circumstances beyond the control of the company.

The ASX maintains that it hasn't in the past and will not in the future use this weapon without substantial grounds.

The business community is naturally worried that in the current atmosphere any reasonable attempt to question compliance is immediately viewed as complicit. The media rumour response or lack of response is a damned if you do and a damned if you don't choice that pleases no one except those who have something to gain.

But the reality is that boards and management must learn to operate in a business climate that has been poisoned by malfeasance and incompetence. The most important victim from this hasn't been shareholders or creditors of failed companies but the loss of trust on all levels.

And praying for better times is not going to help.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.