John McInerneyMonday, October 5, 2015
In a piece replete with hints of impropriety, Monday’s Wall Street Journal ran a front-page article about private meetings between portfolio managers and senior executives of publicly traded companies, see “How Some Investors Get Special Access to Companies.” (Subscription required)
Private meetings between senior managements and large shareholders, analysts and prospects are part of the way information and ownership are distributed in America. Behind much of the WSJ article lurks a misplaced assumption that something improper is going on. Decades of investor relations advisory work with companies ranging from the giant to the tiny small, from the reticent to the forthcoming, says these concerns are generally misplaced.
It’s like the boogeyman in the closet: You’re sure he’s there—until you open the door.
The SEC adopted Regulation Fair Disclosure in 2000 to create “a clear rule prohibiting unfair selective disclosure,” specifically of “material non-public information.” Note that the SEC was not trying to address “market moving information,” though it is often interpreted or re-written to mean just that. What’s market moving to one investor is obvious to another.
Materiality is different—substantially so. It was defined by the Supreme Court in 1976 this way: “an omitted is material there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” The term has been slightly refined since then, but the basics remain.
The SEC has always prized the free flow of information and didn’t want Reg FD’s adoption to constrict it. Yet when Reg FD was first drafted, there were fears that one-on-one or group meetings of any size would vanish altogether with an overly strict interpretation of the Rule, one probably brought about by a suit claiming selective disclosure. Would a transcript of every private or group meeting have to be filed on Form 8-K? And if those 8-Ks were required, would all of those words be useful? (Remember, the Internet was a shadow of its current self then.)
The SEC thought the new Rule and the existing filings were adequate.
The WSJ’s article omits two essential facts: the extensive industry knowledge many investors possess, and the mosaic theory of investing. Many investors are spectacularly well-versed in the sectors and businesses they cover. In addition to company executives, they talk to suppliers, manufacturers, consumers, bankers of every kind and company competitors. Their meetings with senior company managers confirm (or cause them to question) aspects of the industries they cover. Many use this commanding industry experience as the base of their investments insights and recommendations.
Which leads to the mosaic theory. Meetings with senior managers are only a part of a mosaic of information that investors use to make investment decisions. One of the papers the WSJ cites from The Journal of Law and Economics specifically says that while “access to management continues to be a source of analysts’ informational advantage,” the findings “offer no basis for concluding that broker hosted investor conferences violate Regulation FD.”
As for body language, reporters use it all the time evaluating sources. Investors do too, and there’s nothing improper about it. Mr. Lafley’s addressing P&G shareholders only once a year, that’s good practice, especially if they heard from him every quarter for much of that time. P&G is a $76.3 billion enterprise that operates in over 70 countries and sells in 180 countries. Investors are just as interested in hearing from the heads of its five reporting divisions and major country heads as the chairman & CEO.
Finally, with all of the discussion about active vs. passive management, are we losing sight of the fact that the results of these meetings are proprietary? Why should the insights of intelligent analysts and portfolio managers be shared with the world? Their clients pay for that insight, and as long as the company has remained within the disclosure rules, it remains incumbent on the listed company to disclose.
– John McInerney