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Weldon walks a fine line

By Michael Coote

Friday 14th March 2003

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Continuous disclosure rules came in for New Zealand-listed companies in December, bringing our bourse in line with ASX rules.

Confusion is bound to arise as local directors come to grips with their duty to keep the exchange and market informed of all matters material to share price. Share prices are going to be in for a roller-coaster ride if the experiences of couple of companies ­ Baycorp Advantage and Tranz Rail Holdings ­ are anything to go by.

Last Friday FundSource hosted a well attended annual conference for investment professionals. One section of the conference had to do with managing change in organisations.

Two heavyweight speakers were Baycorp Advantage CEO Keith McLaughlin and Tranz Rail CEO Michael Beard. The third and last speaker was Stock Exchange CEO Mark Weldon.

Mr McLaughlin spoke mainly about his mauling by disclosure rules concerning Baycorp Advantage's admission that a trend in lower turnover was evident from results for last December and January. The company's shares plunged on the news.

The difficulty for Mr McLaughlin had been deciding what constituted a downtrend and when to report one.

A new age of corporate scholasticism is about to descend on us, it seems. While the best monastic minds of the Middle Ages tortured their wits with questions such as how many angels there were on the head of a pin, today's company officers need to determine how many data points in a series constitute a trend.

One explanation for the weaker numbers that occurred to Mr McLaughlin was that the effect was seasonal. December and January are times when Kiwis and Aussies head for the beach. Things might come right in February when they went back to work.

Not good enough, responded the board, which required disclosure. The rest is history.

One casualty, according to Mr McLaughlin, was his credibility and integrity in the market. Nobly, he took responsibility for the rout but surely he was not the one screaming "sell."

Mr McLaughlin revealed the board had 6am meetings to discuss if disclosure was to be made that day so it could not be attacked for hiding information. If the board had decided what to disclose but waited until next day, it could be queried over why it waited so long.

Disclosure has gone real time. For senior company officers, negative effects from disclosure could result in termination, as Mr McLaughlin indicated that leading shareholders in his company had implied.

So people like him are in a double bind ­ damned if they do by shareholders and damned if they don't by the exchange. It seems to put management into an impossible situation and to defeat the purpose of protecting shareholders' interests.

Mr McLaughlin challenged Mr Weldon to address continuous disclosure when his time to speak came. Tranz Rail's Mr Beard ruefully added to the tale by relating how his company got rapped for waiting a few days before disclosing weaker projections because initial forecasts seemed in too wide a range to be accurately informative.

Mr Weldon's turn came. The problem with continuous disclosure so far, he theorised, was that companies got straight into facts from the first sentence, baldly stating that results would be down on forecast. Instead they should provide a preamble, something that soothed the nerves and unlocked the wellsprings of human kindness.

The facts could be buried at the bottom of the soporific. Furthermore, companies should use disclosure not only to report "lagging indicators" such as dud financial results but also to tell a "story" with "leading indicators," things like aspirations and the appointment of new employees that shareholders might be "interested" in.

It was all a matter of finding out what interested shareholders and reciting what pleased them to hear via the medium of disclosure such that when bad news came along they would be more forgiving.

Perhaps Mr Weldon will be handling the NZSE's own disclosure in this way on listing. Indeed he has already practised quite a bit in boosting both his firm and its market.

This sort of serialised narrative disclosure sounds uncomfortably like PR of the sugar-coating-on-the-bitter-pill variety and is not likely to appease the markets, no matter how thickly facts are sweetly encrusted to diminish unpalatable shock on release.

Question time saw the audience curious. Was Mr Weldon suggesting, one interlocutor asked, that continuous disclosure requirements would be satisfied in the way just indicated by the NZSE's CEO?

One could have heard a pin drop. Almost imperceptibly the audience leaned forward in its seats.

But Mr Weldon was too smooth a customer to gibbet himself with an outright affirmative response. No, lagging indicators had their place, as did leading indicators. It was really about using one's own judgment as to what shareholders wanted to know.

Which took the likes of Mr McLaughlin back to square one. After all, continuous disclosure is not about using the NZSE to broadcast a corporate soap opera. It is a deadly serious game of avoiding legal hazard and career ruin.

In his speech Mr Weldon talked of how he disliked the colour orange no matter how many logical reasons for thinking otherwise were given him by an interior designer. Directors and managers have the same deep-seated aversion to lawsuits.

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