Issue: June - Aug 2013


The long and the short of it

Survey examines how companies are reporting under a revised JSE rule. At this early stage, while they’re properly thinking through the process, a mixed bag is found.

The JSE is proud of its recognition as one of the best-regulated stock exchanges in the world. Since regulations can only be as good as they’re accepted and applied, one new regulation needs special attention.

It’s the rule on publication of short-form announcements in print media (TT March-May). Not only are there anomalies in it, leading to different interpretations, but it appears to operate in a silo distinct from the communication principles set out in the King III governance code.

This seems evident from an analysis of company results announced in print media from the beginning of January, when the new rule took effect, to end-April, when TT conducted a straw poll amongst across-section of reporting companies. The survey found little consistency.

Some companies stuck to short-form while others didn’t; some provided the basic information that short-form requires, while others went for a hybrid of short form and long; some offered on their websites merely a replication of their full SENS disclosures, while others complemented it with narrative explanation.

Because the short-form is so basic, drawing attention to essentials, it’s in the website narrative that King should kick in. There’s no other way for laymen to grasp what the SENS formalism is telling the financial sophisticates. Without user-friendly explanation awaiting the annual report, the communication principles of King are negated.

As a JSE listing requirement, King promotes communication with stakeholders that uses “clear and simple language...structured to enable its target market to understand the implications of the communication”. Further, it adds, companies “should use communication channels that are accessible to its stakeholders”.

Why bother? Not only because it’s a compliance standard. An overarching reason was recently argued by Reserve Bank governor Gill Marcus that ways had to be found to resolve labour disputes before they undermine the economy. One way, she said, is to “enable the workforce to have greater knowledge of the financial affairs of the company and sector”.

King . . . pension funds highlighted

The workforce, please note, not merely shareholders. Employees are identified by King as a key stakeholder grouping. Another key grouping, King noted, is the “ultimate beneficiaries of pension funds which are currently amongst the largest holders of equities in SA”.

Most companies pointed out that, as per the JSE rule, they communicated their financial results in accordance with their share registers. But registers largely record the shares held in institutions’ nominee accounts, not the beneficial owners. “Our experience is that most pension-fund members don’t know and couldn’t care about the companies where they’re invested,” one respondent explicitly stated.

Unfortunately, he’s right. Moot, however, is whether a cause could possibly lie in a failure to excite their attention. Where levels of consumer financial literacy are low, the technical nature of reports can be more intimidating than inviting.

Several respondents mentioned efforts to keep stakeholders informed through means additional to newspaper announcements. These companies hold workplace fora, for example, and are regularly in touch with suppliers. There’s also the integrated annual report, for anybody to read, and analyst presentations that trustees of pension funds are welcome to attend (were they to be notified).

Short-form announcements, which the JSE requires to be in a “widely circulated daily newspaper taking into account the specific composition and demographics of the issuers stakeholders”, is obviously less expensive than long-form. Their introduction creates the budgeting leeway for companies to do what King wants and Marcus implicitly endorses, embracing the technology opportunities now readily available; social media are amongst them.

Instead, many companies are sticking to long-form and placing them in media focused on sophisticated shareholders as per their registers. Reasons they offer:

  • The JSE rule 3.46 is ambiguous. It variously uses the terms “must” and “may”. Uncertain whether they must or may adopt short-form announcements, issuers read the rule as they want;
  • Cost savings, in that short-form announcements require less newspaper space, are limited. Issuers must still provide long-form announcements to SENS. The creation of short-form announcements, for newspaper publication, involves companies in additional costs. Some issuers consider it easier to supply a newspaper with the same content they supply to SENS, and contain the cost by squeezing the print version into the smallest space possible;
  • For short-form announcements, the minimum amount of information but no maximum is prescribed.  So short-form can become as long as the issuer chooses. This could make them more informative, but it could also make them less pithy;
  • Issuers have discretion to decide on the “widely-circulated daily newspaper”. There are three main problems. First, the term can mean anything in terms of circulation size, regional distribution and readership profile; no guidance is provided. Second, for so long as issuers look only to their share registers – where nominee holdings predominate -- they’d remain pretty much ignorant of their indirect shareholders and hence incapable of selecting the newspaper best capable of reaching them. Third, in practice the most probable determinant of issuers’ newspaper choice is comparative advertising rates and not stakeholder reach.

It’s an untested assumption that investors still rely on announcements in a newspaper, any newspaper, for financial results. Perhaps the time has come to test it, then to assess whether print media are required at all.

The time has certainly come for pension funds, as the Government Employees Pension Fund already has, to register their shares in their own names. Trustees who haven’t yet considered it are advised to check Regulation 28 (under the Pension Funds Act) and FSB circular PF 130 (about to become a directive) for a refresher on their responsibilities.

Still, the short-form exercise is merely a link in the communication chain. It’s a work in progress. All respondents to the survey have complied with the JSE rule in having disclosed the information required. But whether the announcement went into a daily newspaper reflecting the “composition and demographics of the issuer’s stakeholders” might be another matter.

Does such a daily newspaper, capturing the range of stakeholders from fund managers to customers and trade unions, actually exist? On what could the issuer base a “reasonable opinion”.

That said, certain companies went beyond the call of duty. Standard Bank, for instance, advertised in two dailies as well as a mass-circulation Sunday newspaper with a predominantly black readership. For those issuers looking for models of short-form announcements to emulate, provided they’re prepared to bear the costs of space and creativity for maximum impact, look no further than those of Sasol and FirstRand.

They’re amongst the outstanding handful to show – by the way in which they’ve presented concise information – that less can be more.