US CORPORATE disclosure practices are undergoing dramatic change. New regulations and new web communications technologies are disrupting established practices. The old model is under pressure and increasingly incapable of meeting the needs of companies and their investors.
Many companies now have a false sense of security about the compliance and effectiveness of their current information dissemination practices. Disclosure is fragmented across venues and topics, creating uncertainty for investors and the marketplace, and exposing companies to growing compliance risks.
In a new set of guidelines, we will outline a new online disclosure model built around a straightforward “comply and communicate” approach. The new online disclosure model can help companies listed on either the New York Stock Exchange or Nasdaq to achieve greater certainty of compliance, fairer and more direct access for investors, and the ability for companies to harness powerful new online communications channels.
The fact is, these changes are long overdue. The status quo is unsustainable. The regulatory and technology frameworks for a new online disclosure model are already in place and have been for some time. Investor relations website vendors are beginning to recognize this.
But what hasn’t occurred in any meaningful way is change by the corporate community, and the investor relations profession in particular. But doing nothing is no longer an option. We are beyond the point where inertia is a safe choice.
While most companies have made no changes to how they disseminate their disclosure information, some companies have begun to adopt new channels of communication, such as blogs and social networks. However, in many cases they’ve done so without due regard for regulatory constraints and investor expectations.
These companies also need to adopt the new online disclosure model to ensure that their social media activities are not exposing them to unnecessary risks.
Compliance increasingly uncertain under current model
When most companies today make disclosure information public, they turn to paid PR wire services to distribute the full-text of their information. However, this practice is no longer the most effective way to distribute company disclosure information.
Indeed, it is becoming increasingly clear that companies which continue to rely on full-text PR wire distribution for regulatory compliance are in fact exposing themselves to increased compliance risks and a potential backlash from investors frustrated by the uneven and haphazard nature of current corporate disclosure practices.
There are three key problems with the current full-text PR wire dissemination model:
1.) Lack of simultaneity.
Despite their best efforts, PR wire services cannot ensure simultaneous distribution of companies’ information to investors. There are delays between when information is received and processed by various recipients. Typically, expensive professional services such as Bloomberg, Reuters and Dow Jones receive and process PR wire releases before the same information appears on public channels.
The differences can be anything from 30 seconds to 7 minutes, which in a world of real-time information flows and high-frequency trading can make a meaningful difference to investors, especially if the information is released during normal or extended trading hours.
Company websites are often the last channels to post company press releases. This is because companies rarely post releases directly to their websites and instead rely on third-party feeds to automate the posting of releases. The result is that information passes through one or two intermediaries before it is posted to the company website, leading to processing delays.
While a few minutes difference is not a major compliance concern, the increasingly obvious lack of simultaneity in PR wire distribution is a potential public relations problem for IR departments. The lack of simultaneity reinforces for investors that the markets are not a level playing field. This can undermine investors’ confidence and provoke criticism of company disclosure practices, especially when companies have the option to adopt practices that offer more equitable access to information.
2.) Growing uncertainty over PR wire effectiveness for Reg FD compliance.
Although stock exchange regulators historically viewed PR wire releases as the best available method of disclosure, SEC rules have never expressly blessed PR wire releases for compliance under Regulation FD. This means that companies bear a risk when using PR wire releases to satisfy Reg FD. While this risk might have been negligible in the past, it may no longer be safe for companies to assume that PR wires satisfy Reg FD disclosure.
The rise of new web communication channels, the liberalization of stock exchange disclosure rules to recognize alternative channels, and increased SEC continuous disclosure requirements have diminished the primacy of the PR wires as disclosure tools. Consequently, companies are increasingly bypassing the PR wires when making important information public, and investors and the media are looking to these channels to keep track of developments at companies that interest them. With the growing interest in web disclosure, this trend is set to continue and will further erode the primacy of the PR wires.
In fact, the fall from prominence of the PR wires appears already to be far advanced, at least as far as investors are concerned. Research we conducted in June 2010 found that PR wire releases, especially by smaller, less followed companies, are generating very little measurable reaction from investors. This finding is based on a review we conducted of clicks on trackable links in public company news releases. We found that fewer than 12% of the clicks could be directly attributed to PR wire distribution.
Given this evident lack of PR wire efficacy, companies that continue rely on PR wires without verifying the actual effectiveness of the channel may be putting themselves at risk of contravening SEC rules. This is likely to prompt more companies to investigate more effective alternative methods of dissemination to achieve compliance, which in turn will further diminish the PR wire services’ role in the disclosure system.
3.) Full-text PR wires prevent company websites providing a compliance safety net.
Having a company website that is capable of meeting the public dissemination requirements under Regulation FD has become a vital asset for compliance in an era where more and more business communications are being conducted online. A Reg FD-compliant company website can help to shield company executives and investor relations officers from implicating Reg FD should they disclose material, non-public information online in a post on a blog or a social network.
However, full-text PR wire distribution undermines companies’ efforts to establish their IR websites as recognized channels of disclosure because investors can bypass their websites to access the disclosure information. Under the SEC’s guidance for public disclosure via company websites, actual usage by investors is a prerequisite for company websites to be considered recognized channels for the purposes of Reg FD.
In essence, by using full-text PR wire distribution for disclosure information companies are paying to weaken one of their most useful protections against contravening the requirements of Reg FD.
Current model leads to poor user experience
Under the distributed PR wire service model, control over the form and format of company disclosures is in the hands of the websites or information services that receive releases from the PR wire services.
In many cases, the receiving systems do not support basic formatting such as headings, bold text, hyperlinks or clean tables for financial statements. Consequently, releases distributed by PR wires can be difficult to read and use, even if the PR wires are distributing well-formatted content.
A further denuding factor is that distributed releases also are often placed on pages containing many distractions, including advertising and links to information that may not come from the company. These can interfere with effective communication and degrade the overall user experience.
And in most cases, third-party websites do not archive news releases for long enough periods, so investors cannot easily compare information between reporting periods.
Incomplete insight into audience needs and interests
Most PR wire services provide incomplete reports to clients on the number of sites their releases were distributed to, how many times the releases are viewed and how many clicks there were on links in releases. Comprehensive reports are impossible because the tracking tools employed by the PR wires do not work on all distribution points or they can be blocked by users’ browser settings.
And even if the reports were complete, they still would be unable to provide the same level of insight into web audiences as having investors visit company websites or use its email lists or social network updates.
High costs lead to less frequent and less complete disclosure
PR wire service distribution is not cheap, especially for smaller companies. According to CFO Magazine: “Sending out a 400-word release nationally costs around $700 for the major newswires, with additional fees nearing $200 for each additional 100 words. Adding graphics or video is extra, as are a host of ancillary services and features.”
Based on those fees, an average earnings release of 1,500 words costs in the region of $2,900, not counting potential additional formatting fees for financial tables. Thomson Reuters, however, puts the average cost of an earnings release at between $4,000 and $6,000.
On the face of it, this might not seem like much, but it’s important to consider the chilling effect that PR wire fees have on companies’ willingness to communicate relevant, but not necessarily material information to their investors.
If every communication to investors comes with a price tag to the company because it must be distributed by a PR wire release, it stands to reason that IR departments are much less likely to communicate frequently and at greater depth with their investors.
Inconsistent disclosure dissemination leads to uncertainty for investors
Due to the rise of new online communications channels and increased regulatory flexibility, there is no longer a single, reliable and consistent disclosure channel that investors can look to. This is not an entirely new development, but it has become much more of an issue over the past year.
As things stand, disclosure practices vary by company and by the nature of the information that is being disclosed. Some information is posted only on company websites, some is made public only in regulatory filings, and still others make their way to PR wires.
Fragmentation is further complicated by the fact that companies and their executives are increasingly using new online communications channels such as blogs, web feeds, social networks and document sharing services to disseminate their disclosure information. While these new channels are welcome additions to the disclosure matrix, they often are used without regard for regulatory compliance or the impact they have on investors.
The new online disclose model is chiefly aimed at addressing this widespread inconsistency in reporting practices by providing investors with a reliable, consistent and timely compliance channel while at the same time enhancing communications via company websites and associated technologies.
In coming blog posts, we will explore key aspects of the current and new models in greater detail. Our aim is to help foster discussion and to contribute our expertise to improving modern disclosure practices for the benefit of investors, the ultimate users of disclosure information.
- Buy The New Online Disclosure — practical guidelines to help companies implement an online disclosure model that ensures absolute certainty of compliance with Reg FD while enabling companies to take advantage of new online communications channels.