New disclosure regime needs time

By GEOF SHIRTCLIFFE*

The Stock Exchange's continuous disclosure regime remains a subject of intense discussion.

Listed companies are having to get their heads around what the new rules require them to disclose, and when.

Investors and analysts are having to decide how to react to those disclosures, particularly those that include profit warnings. On occasion, the market reaction has been savage, further fuelling anxiety among listed companies.

Predictably, this apparent market indigestion has been met with calls to amend the new rules.

Brian Gaynor (Business Herald, February 24) advocates a precise definition of "change in financial forecast or expectation", so that it is clear when companies must disclose changing expectations.

He encourages "indicative profit revisions" when a company knows a reforecast is likely but not its details.

And he suggests that companies giving indicative profit revisions be prohibited from talking to analysts or investors until the revised forecast is released.

These calls are, at best, premature. We should allow the market a decent opportunity to adjust to the new rules before we think about whether they need fixing.

The continuous disclosure rules embody a simple concept: any information that a listed company is aware of and which could reasonably be expected to have a material effect on the price or value of its shares must be disclosed immediately.

The objective is increased investor confidence by reducing concern about insider trading and rumour-generated price distortion.

In practice, of course, there are exceptions: for example, for incomplete confidential negotiations. But these should not obscure the key point that the rules require a culture change in listed companies - as the ASX puts it, a culture of disclosure rather than a culture of compliance.

Gaynor's call to define "change in financial forecasts or expectations" misses the point. The rules require disclosure of all material information, whether it is a changed forecast/expectation or something else. There is nothing special about a changed forecast. If it is material, it should be disclosed.

Trying to define the trigger point for a change in financial forecast or expectation, and then requiring disclosure at that point, encourages a black-letter, "check-the-box" approach - a "compliance" rather than a "disclosure" mindset. Companies will tend to focus on that particular trigger point, rather than focus on keeping the market more generally abreast of all material information.

This approach can lead to shock announcements and subsequent share price savaging, precisely what Gaynor wants to avoid.

By contrast, encouraging companies to make use of "indicative profit revisions" is a good idea. A company making an indicative profit revision is simply saying to the market: "We know our previous forecast needs revising, and why, but we don't know by exactly how much, so stay tuned."

This is precisely what the continuous disclosure rules seek to encourage. Disclosure keeps the market informed, making it less likely to react violently when the exact position becomes known.

However, Gaynor's third proposal, that companies should not have contact with analysts and investors between indicative profit warnings and release of actual revised forecasts, should be unnecessary.

Under a continuous disclosure regime, communication bans should be irrelevant. All material information should already be in the market, so there should be nothing to keep analysts away from.

So, what can listed companies do to lessen their anxiety? The key thing is to understand the continuous disclosure vision: a vision of a continual flow of material information from a company, so that the market is always fully informed and surprises are rare; a vision in which a revised forecast or profit warning does not come as a huge shock, but as a natural flow-on from previous disclosures; a vision in which investors have confidence that their companies' "culture of disclosure" means no one will trade on the basis of privileged information.

We should not be surprised by teething problems. But neither should we assume that things will always be this way. As companies become more familiar with their obligations, we might expect them to cultivate investors by establishing a track record of timely disclosure. And as the market gets used to the greater number of unscheduled announcements this entails, we may see less-violent reactions to those announcements.

The new regime requires cultural change and this takes time.

* Geof Shirtcliffe is a corporate partner at Chapman Tripp

* Geof Shirtcliffe welcomes feedback to geof.shirtcliffe@chapmantripp.com