Arm supplies semiconductors with its own programs on them for industries such as mobile phones. The admittedly weak results had been achieved in the teeth of a recession. But, as the company went on to point out, it had in fact gained market share, ameliorating the effect of the downturn by taking business from its rivals.
The wording of company announcements presents different challenges for investors and City professionals. For law firms and financial advisers, the priority is to see that the requirements of UK and European law are complied with alongside London Stock Exchange and Takeover Panel rules; for financial public relations advisers and each company’s in-house PR experts, the priority is to put the best gloss on the situation; while for investors the desire is to cut through the jargon and get to the nitty gritty.
It is true that many companies litter their announcements with meaningless phrases such as ‘challenging trading conditions’ and ‘in line with internal company expectations’ but they also include all the information needed to invest in the stock market, served up on a plate for those who know where to look and how to interpret the information. This information is published, within fairly narrow limits, at known times, so it is only in unexpected circumstances (such as a takeover bid) that stock market followers should ever be caught out.
By keeping fully informed, all investors can buy and sell shares with confidence, knowing that they have made an informed judgement. By knowing what investors need, company advisers can provide a better service.
Rodney Hobson
October 2009
Chapter 1. The Right To Be Informed
The UK’s record of preventing insider trading and forcing companies to be frank and upfront with investors has been rightly criticised. In particular, the Serious Fraud Office’s record in prosecuting insider traders has been poor and the conviction rate abysmal.
This is in sharp contrast to the situation in the United States, where admittedly the conviction rate is multiplied by plea bargaining and the very expensive legal process, which encourages guilty pleas and accusations against others rather than fighting a lengthy and ruinous case, however worthy the defence.
Nonetheless, the climate for change has come almost imperceptibly in the City. At one time companies would routinely tell newspapers that they were not prepared to comment on rumours. Now it is accepted practice that rumours of major events (such as a takeover approach or a slump in sales) must be confirmed or denied once they are out in the open.
That is only right and proper. Shareholders are entitled to know what is going on in the company that they own. It is quite outrageous if directors – who are after all merely the managers acting on behalf of the owners – feel they have the right to withhold important information.
While the right of the wider investing public to this information is not so clear-cut, it is in the interests of everyone that information should be freely available. The stock exchanges will generate more trades when investors are empowered to make informed decisions, which in turn increases the liquidity that oils the wheels of the market.
Finding a balance
There does admittedly have to be a balance. The board must be able to get on with the day-to-day running of the business and with making longer term strategic plans without having to turn to the shareholders every five minutes for permission to go to the toilet or to blow their noses.
The London Stock Exchange has over several decades made admirable strides towards finding the right balance. Now the internet, where information can be widely circulated in nanoseconds, has transformed the whole investment scene.
The mood has changed towards erring on the side of openness: if in doubt, make an announcement. That attitude will grow as the regulators tighten their grip.
The Wolfson case
Wolfson Microelectronics, a supplier of parts for the electronics industry, was fined £140,000 by the Financial Services Authority in January 2009 for delaying the disclosure of the loss of a major contract for 16 days.
Wolfson was told the previous March that it would not be required to supply parts in future for two iPods made by major customer Apple. Wolfson estimated that this represented a loss of $20 million, or 8% of its forecast revenue for 2008. However, it also expected to make up the shortfall by selling more than it had previously assumed to other customers, so revenue for the year was likely to meet published expectations.
Wolfson discussed the matter with its investor relations advisor, who wrongly recommended that there was no need to disclose the negative news. It was not for another eight days, after directors started to get cold feet at a board meeting, that the company contacted its corporate brokers and lawyers, who recommended disclosing the news.
Even then it took another seven days for an announcement to be made. When the news did emerge, Wolfson shares dropped 18% in one day.
Sceptics will point out that £140,000 is a comparatively small fine for a company of this size. However, the point is that Wolfson did take advice and felt that sales gains elsewhere offset the effect of the loss of the Apple contracts.
The view from the Financial Services Authority was unequivocal. It regarded the loss of sales to Apple as potential inside information and there was an obligation to disclose it. A spokeswoman commented:
It is unacceptable for a company not to disclose negative news because it believes other matters are likely to offset it. Doing this hampers an investor’s ability to make informed decisions and risks distorting the market.
One may feel it was a pity that it took 10 months for the FSA to make this pronouncement, but better late than never. The move towards greater disclosure is inexorable – why take the risk of a fine?
Honesty is the best policy – Barclays
The value of honesty in company announcements was exemplified by Barclays in the depths of the banking crisis. Its shares had slumped along with the rest of the sector, reaching 51.25p compared with 400p only four months earlier.
Although Barclays had apparently avoided ceding control to the government, a fate that befell Royal Bank of Scotland, Lloyds, HBOS and Bradford & Bingley, it was not out of the mire. Despite an injection of £5.3bn from Middle Eastern investors, plus a further £3bn available, it was feared that Barclays would still not have enough capital to survive in the dire circumstances surrounding the international banking sector.
Matters were made worse when RBS warned that its loss for 2008 would be a record £28bn, dwarfing the previous UK highest annual loss of £22bn reported some years earlier by telecoms group Vodafone.
Perhaps stung by press criticism that the board had lost the confidence of investors, the Barclays board resorted to the highly unusual tactic of issuing an open letter from Chairman Marcus Agius and Chief Executive John Varley ahead of the annual results due a couple of weeks later.
It is hard to think of a similar letter ever being issued by a listed company but, as the Barclays pair admitted with some degree of understatement:
Writing in this way ahead of the release of results is unusual, of course, but the turn of events is also unusual.
The key points of the letter were:
Barclays has £36bn of committed equity capital and reserves; we are well funded, and we are profitable. However, we know that our stakeholders want to see the detailed figures for 2008 as quickly as possible. To enable that, we will bring forward the release of our 2008 financial results, as agreed by our auditors, to Monday,