Issue: September 2012 / November 2012
Big step forward
The JSE is moving with the times. Listed companies must also. The rule amendment on print notices opens the way for much better electronic interaction as the King code envisages it.
Newton-King...bull by the horns
Inevitably, there’ll be significant cost savings to main-board companies from the rule amendment. But this is by no means the be-all and end-all. At only a fraction of these savings, companies become well placed to interact with their constituents through myriad techniques enabled by electronic media that print media cannot match.
Think sms and email alerts to anybody requesting them. Think hyperlinks to financial notices. Think website interpretation of those notices. Think access to liaison officers for answering questions being publicly available. Think away from accountant-speak to telling people, in ordinary language, how a company has performed and is likely to perform. Think, in a nutshell, of demystifying the reams of regulatory disclosures whose incomprehensibility for laymen defeats the transparency and accountability they’re supposed to advance.
As matters stand, companies profess to comply with the King III code on corporate governance. It says: “All communication to stakeholders should use clear and simple language and should set out all relevant facts, both positive and negative. It should be structured to enable its target market to understand the implications of the communication. Companies should use communication channels that are accessible to its stakeholders.”
And who are these “stakeholders”? No, they’re not only financially-sophisticated shareholders. Neither are they limited to professional analysts who attend briefings where published results are explained. Rather, according to King III, they’re “any group affected by and affecting the company’s operations”; in other words, from employees to customers and suppliers, existing and potential, as well as communities on whom a company’s social and economic policies can impact. It pretty much means society as a whole.
The legalistic requirements that adorn the Stock Exchange News Service (SENS) and newspapers’ financial advertisements are befuddling even to sophisticates. So complex are the terms, so technical the accounting and so laden the verbosity that they’re inviting as prison walls.
The riposte, complementary to the SENS regulatory disclosures, is in narrative reporting on companies’ websites. This will be up to the issuers. They’ll need to satisfy themselves, says the JSE, that “sufficient relevant information has been provided to investors”. It makes investors – who have the power to buy, sell, vote and bitch – the ultimate arbiters.
That’s as it should be. Investors are predominantly financial institutions, signatories to the Code for Responsible Investing which embraces King III, and which in turn represent pension funds who’re the largest single category of JSE investors. The better that these ultimate beneficiaries understand the companies where they’re invested, the better for financial literacy and the greater the scope for stakeholder inclusivity in corporate affairs.
It stands in contradistinction to the alienation and elitism that characterised the old print requirements. There’s been a dissymmetry of information between those who had access to financial notices and those who hadn’t; between those who understood them and those who didn’t.
For years since the advent of SENS, share prices have responded to company announcements before they were published as advertisements in newspapers. More than this, the advertisements were in newspapers that relatively few stakeholders read and fewer had a chance of understanding. Instead, the people who could call up SENS (and presumed to understand it) were the same people for whom replication of SENS was provided on the following day in specialist business newspapers.
Now comes the difference. First mooted in 1997, it’s been a long time coming. It also marks a baptism of fire for JSE chief executive Nicky Newton-King, new to the hot seat but keenly aware of the need for the bourse to sharpen its listings competitiveness.
While SENS will continue, thankfully in a brighter format, companies can apply their minds and their budgets to stakeholder communications a la King III. They have a vast electronic universe to tap.
Even at their highest circulations, newspapers with any sort of business readership reached only a fraction of the millions of people invested on the JSE via pension funds and other collective schemes.
By contrast, communications minister Dina Pule recently cited a study that over six million South Africans today have internet access: “In 2010 the broadband subscriber base increased by 50%. Much of this growth can be attributed to an impressive increase in the number of mobile broadband customers using smartphones. Mobile broadband grew by 31% in 2011 to reach 4,2m people in the country.” This is roughly 10 times the present circulation of the Sunday Times.
It’s to be expected that particular newspapers, which have commanded the lion’s share of financial-notice advertising, will scream against the diminishment of their captive revenues. Protests might sublimate the public interest to self-interest. When you’ve long enjoyed the benefit of mandatory financial advertising, at full rates rarely if ever discounted as frequently happens with other advertising, withdrawal will be commercially painful.
Of course, issuers can still place advertisements across as many pages as they wish using typefaces as large or tiny as they want. That some issuers intend to advertise as previously is no reason for compelling others to do the same. Bigger ads don’t necessarily correlate with better disclosure. Investors respond to content, however they receive it.
In any case, the old rule requiring that issuers publish announcements “in a national daily English language newspaper and in one other official language in a national daily newspaper” is not only antiquated but flawed. For practical purposes, the latter was merely another way of saying Afrikaans in the Sake section of Media24 dailies; the former was commonly taken to mean Business Day which never was “national” in the sense of nationwide availability prior to the stock exchange being opened for trading on weekday mornings.
Subsidisation of newspapers is not the business of the JSE. It has been the business of government. Consider a little history of financial notices.
The way things were
In bygone days, investors picked up their information from Reuters tickers in stockbrokers’ offices. Financial notices were sporadically placed in various newspapers, the Rand Daily Mail being a favourite.
Then came the mid-1980s and the “total onslaught” era of P W Botha. The RDM,which enjoyed a large following amongst black readers, was closed. In its stead, proprietor SA Associated Newspapers (SAAN) launched Business Day to a target market of predominantly white business readers. At the same time, Botha’s government granted the licence for M-Net subscription television to a consortium of daily newspaper owners.
The four dominant owners were Naspers, Perskor (since dismantled), Argus (now Independent) and SAAN (since renamed Times Media, then Johncom, now Avusa). Whatever the political underpinnings, the ostensible purpose was to cushion their bottom lines from the supposed threat of TV competition. Business Day was further protected by introduction of the JSE rule for mandatory publication of financial notices, effectively swaying the advertising its way because its niched distribution allowed lower rates than mass-circulation general dailies.
From the M-Net concession flowed Multichoice, Supersport and MTN. The same “M family”, as the newspaper consortium became known, enjoyed preferential entry. The TV and cellphone interests all became highly profitable, Naspers managing the TV operations with aplomb.
Over time, the different newspaper groups did different things with their respective shareholdings. Avusa, for instance, unbundled its MTN stake and sold out of television at huge profit.
Arguable today is whether sufficient proportions of that profit were ploughed back into investment for the sustainability of high-quality financial editorial, about which King II warned as far back as 2002. In this electronic age, local competition for the attention of core business readers is intensified by instant availability of iconic international titles.
There’s also a proliferation of free content. Print circulations are declining and internet usage is exploding. With subsidisation gone, and with it the ready revenues for investment in editorial, it’s on the production of content for which readers are prepared to pay in viable volumes that the survival of established South African business titles will increasingly rely.
Consolidation of the domestic market, certainly overtraded in content suppliers and possibly under-resourced in financial journalists competent to service them, cannot be far off. As the print-media scene suddenly breaks open, with control changes mooted at both the Avusa and Independent newspaper groups, so too do the communication challenges for listed companies need to be reapprised.
FOOD FOR THOUGHT
Companies and investors fret over shortfalls of a few pennies in earnings per share, even though the earnings number is incomprehensible. It mixes realised cash flows with subjective estimates of highly uncertain future outlays. Single estimates for these uncertain items make the earnings number even less useful because they ignore the wide range of possible outcomes. Earnings per share create an illusion of certainty that fails both investors and companies.
There is a better way. We need to adopt a corporate performance statement that is transparent and relevant for assessing value. This should include two separate sections: the cash flows the company realised during the reporting period and estimates of the company’s future cash flow commitments.
When investors and creditors have the information they need to manage their risks, they lower the rate of return that they demand. A lower cost of capital allows companies to invest profitably in more projects, leading to stronger economic growth.
Investors, managers and accountants are all heavily invested in the current accounting model. But this corporate performance statement offers benefits too great to ignore: not only more useful information, but greater trust in public companies and capital markets.
-- From an article in the Financial Times (May 31) by Michael Mauboussin (chief investment strategist at Legg Mason Capital Management) and Alfred Rappaport (professor emeritus at Northwestern University’s Kellogg Graduate School of Management).