The FD Effect

The SEC's new corporate disclosure rule has CFOs saying more and talking less.

“We still do individual visits,” says Michael Lehman, CFO of Sun Microsystems Inc., based in Palo Alto, “but now we can say, ‘You know, we can’t talk about the quarter.’ [FD] gives us a legal means for not having those discussions.”

Making presentations at investment conferences has also become less troubling, because of the growing number of these events that are Web- cast. But participating in breakout sessions with individual analysts and investors still causes consternation for some. FedEx Corp., for one, has deliberately cut down on meetings with the more-established analysts who follow the company. “If someone is new to coverage, I would tell them where to find information and talk about our long-term strategies,” says investor relations vice president James Clippard. “But I’d be hesitant to do a one-on-one, because you may want to know only how the current business is, which is not where I want to go.”

A number of companies have gone so far as to establish a quiet period to restrict access to executives for the weeks prior to the earnings release. That way, nothing accidentally slips out.

Preannouncements. According to First Call/Thomson Financial, negative preannouncements were up 85 percent in the fourth quarter, the first since Reg FD took effect. Was the weakening economy to blame, or was it a sudden unwillingness on the part of executives to walk the Street down to an earnings expectation that could be met? “It’s now safer to preannounce than to jawbone analysts if estimates are too high,” says Chuck Hill, First Call’s research director.

Indeed, many companies that now give more explicit guidance on earnings also have a stated policy that they will issue a public disclosure as soon as that outlook changes. And they find this new approach empowering as well. Management is more in control of the flow of information, good or bad, rather than in a position of having to curry favor with analysts. And such control, says Geswein, bodes well for management credibility.

In his case, it wasn’t easy watching Diebold’s shares fall 15 percent after a preannouncement in mid-January that fourth-quarter earnings would be about 49 cents per share, below the 52-to-56-cent range set in its third-quarter release in October. But it meant keeping a promise to issue a public disclosure when the company’s performance wouldn’t meet the previous guidance. “We’d given an earnings range and detail around that, and once we knew we wouldn’t be in the range we’d given the market, we put out a preannouncement,” Geswein says. “My view is it’s coincidental that you have FD and so many preannouncements. The issue is credibility, and openness helps build credibility in the long run.”

Information Updates. The advent of FD has spurred many companies to use the Internet to provide broader and more frequent disclosures that, in many instances, go beyond earnings guidance and include key nonfinancial performance metrics.

“We’re now releasing more timely and useful information so investors can build their models and make a reasonable judgment about the company,” says Steve Warnecke, CFO of Denver-based Frontier Airlines Inc., which began posting monthly data on load factors and revenues and costs per seat-mile last November. “Those are the three numbers that matter if you want to figure [out] our monthly earnings.”

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