Guidance - Latest Trends and Best Practices, featuring Ashton Partners and a panel of NIRI experts
Members of the Cincinnati Tri State NIRI Chapter gathered Nov. 9 for an interesting and informative discussion on earnings guidance and the impact of this summer's Reg FD decision involving Siebel Systems.
Special guest was Elizabeth Saunders, founding partner and chairman of Ashton Partners.
Saunders provided her perspective in light of the U.S. District Court Judge George B. Daniels' decision on August 31 dismissing SEC charges against Siebel Systems. The SEC had alleged that Siebel executives violated Regulation FD in statements made during a meeting with investment professionals in 2003. Siebel filed a motion to dismiss the charges, and Judge Daniels granted the motion.
Saunders said the SEC is unlikely to appeal that ruling. She said the case was important for several reasons:
- It was the first litigated FD challenge and likely will be the only litigated FD challenge for some time.
- The ruling gave Regulation FD new visibility and forced companies in the public realm to look anew at their own interpretations and application of the rule.
- The ruling told the SEC not to nit-pick every word in a release, script or conversation in searching for Reg FD violations. Rather, the SEC should pay attention to the complete set of information that managements disclose, and whether new comments are truly material in light of prior public disclosures.
- The ruling acknowledged the SEC's contention that Siebel's IRO should have better prepared his CEO on what could be discussed in a private investor meeting. Those comments reinforce the importance of disclosure training, Saunders said. Do it, do it well and do it often. Once is not enough. Make sure management is prepped thoroughly and sufficiently.
The ruling, she said, also was important for what it did not do:
- It did not tell the SEC to stop enforcing Reg FD.
- It did not support the contention of some that Reg FD is unconstitutional because it interferes with free-speech rights.
- It did not provide any new guidance in terms of what is material and what is not.
- Given that the federal judiciary in New York is reputed to be aggressive in securities cases, other districts might rule differently.
Saunders provided those attending with these best-practice ideas:
- Create a disclosure "cheat sheet" for each quarter that includes 10 items that border on new disclosure, what has been asked and what the company has said in the past about each topic, and what numbers have been previously disclosed on those items. Going over that cheat sheet in advance of each investor contact will ensure everyone is on the same page on hot-button issues that could cause disclosure headaches if not handled properly.
- On the quarterly preparations and mock Q&A work the IRO does with the management team, make sure it is done well. Don't inundate management with 100 questions. Instead, pick the top 10 and make sure they are the hardest, most relevant questions that could be asked. Don't shy away from the tough ones. Prepare management to face them and answer in accordance with past disclosure.
- Help the CEO and CFO better understand what really drives the stock price. Strip out all the market factors and all the things the outside of the company's control. Figure out what inside the company's control does move the price, and help your team understand and communicate that core value.
Saunders noted that investment professionals have mixed views about guidance. Some won't invest in or report on companies that don't provide guidance. But providing guidance also confounds some hedge fund managers, because it undermines their value of their own analysis of the company's position.
"Giving more color on the business eliminates some of the impact of hedge funds," she said. "Hedge funds don't want you to disclose or guide. They don't want you to have those deep, broad conversations."
From her conversations and dealings with hedge fund managers, she said she knows this for a fact. "They have told me they don't like companies that guide a lot or that have extremely proactive IR programs. They say it is harder for them to get their edge in."
After Saunders' presentation, two practicing IROs in the Cincinnati Tri State NIRI Chapter - Tim Stautberg of E.W. Scripps and Al Beaupre of Milacron, gave their views on guidance.
Stautberg that that his company believes it is important to share its best thinking with investors so they can make more informed choices. Scripps provides broad revenue and expense guidance for each of its business units, believing that composite numbers don't really tell the whole story. In addition to providing important color and detail to investors, that deep level of disclosure also creates "an umbrella for us to talk under" in subsequent one-on-one conversations. "Investors have choices," Stautberg said. "We want to give them the information they need to make the choice to invest in us."
Beaupre noted that, "The more you communicate, the better, and the worse times are, the more you communicate."
Beaupre said that each quarter, Milacron includes a projection sheet in its earnings releases, providing a guidance range as well as management's assumptions. Sometimes, while projections may stay the same, management's confidence in those projections may shift. If that is the case, management is upfront about the change.
It's an openness that is appreciated.
"It really builds credibility," Beaupre said. "We owe it to our shareholders to share our assumptions with them and to help the street understand our confidence in our guidance."