I had breakfast with a pan African equities analyst today and we chatted about the communications coming out of listed companies in Zimbabwe. His comment on some Zimbabwe listed companies communications with the market: “they just lie”. This was not a blanket opinion, because as with everything in life there is a normal distribution curve of excellent, good, average and bad. So we were talking about the bad.
Not once did this blunt comment come up but a few times, with specific companies named. The analyst I met is no fool and is well travelled. The bluntness of the appraisal took me by surprise. But in many cases it’s correct.
Some executives in Zimbabwe think that they are not under the spotlight because they may not interact with international investors much. Trust me international investors ARE watching, silently and they don’t like what they see or hear and when they hear inconsistent messages or downright lies, they call it that way and their flags go up. Bad corporate governance.
There is plenty of evidence in corporate communications in Zimbabwe of the following:-
- talking up the future instead of candidly presenting the present
- not reviewing previous communications to ensure that current communications are consistent, or, to explain why current communications are inconsistent with previous communications
- not telling a consistent investment story
Our breakfast concluded in agreement that making up for lost reputation does not happen in the short term and can only be resolved by showing hard evidence of responsible communication, consistent communication and above all truthful communication year in year out. Sounds simple doesn’t it?
Where is the weakness? In independent Board members who actually don’t know what their role is: to provide checks and balances. I also think its ignorance. Not knowing what was said last time or what was promised, but this is the lesser of the evil.
For those companies that are true to their word and act with humility and transparency the loyalty gained from investors will be palpable.
Zimbabwean listed company executives are desperate to share the fact that they are bullish about the future of the Zimbabwean economy. Yes things are not normal at the moment, they are in fact very challenging (given the shaky state of the banking sector and the political environment etc). Equities are generally “undervalued” or, their prices reflect the risk of doing business in Zimbabwe. So why not share a little of the upside with your shareholders in an analyst meeting?
Because in most cases the CEO is wrong. In Zimbabwe, this penchant for talking up the future without considering exactly what they are saying, CEOs are destroying their credibility. From an investor relations perspective I would deliver ACTUAL good news with gusto, deliver only facts at present and warn and disclaim the future. Executives mix up all three so as to confuse investors. The result is that any good news about the future is ignored and investors are left to work out for themselves what the risks are.
In the US there are requirements for disclosure committees and warning language such as forward looking statements. Like this:-
Statements on this website (including fact sheet, presentations and all other media) that are not historical facts or information may be forward-looking statements.
These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include, but are not limited to the loss of key customers, the disruption to business and reductions in capacity and in demand.
While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.
Listening to executives in analyst presentations and assessing what they are saying about the future makes one realise that regulation is not a bad thing. “Do the right thing” they say. But executives don’t learn it appears. To be fair though the market in Zimbabwe is very difficult to read and directors do have an obligation to provide some guidance to shareholders. Its a delicate balance but one that does not have the spectre of litigation hanging over its head.
I replicate below an article from www3.cfo.com on the risks of litigation in US markets. Again, as I have said before, the gap between corporate communications governance in US markets and sub-Saharan markets could not be wider. I think there is significant scope for African companies to adopt best practice internationally and set their governance way above their peers. Just finding these companies is a challenge.
Upbeat Words in Earnings Statements Can Get You Sued, Research Shows
Companies that use overly optimistic language in earnings releases are 75% more likely to get sued after their stock performs poorly than companies that use more moderate language.
CFOs should carefully vet the words their companies use in earnings releases and other publicly disseminated documents about financial results — or those words could come back to haunt them.
Academic researchers recently concluded that companies that use overly optimistic language in earnings releases are 75% more likely to be sued after their stock performs poorly than companies that used more moderate language before a stock dip. Shareholder lawsuits following negative stock returns that cite CEOs, CFOs, and the company as defendants will often quote text in quarterly updates to back up the claim that the executives used materially misleading statements.
The researchers based their conclusion on a review of 165 companies that were accused of securities fraud in federal court. The cases alleged that the companies made material misrepresentations and omissions about their financial health and their future prospects. The academics compared those firms to another 165 companies with similar characteristics and economic declines that were not sued. Those that were hit with court documents had used more upbeat language in their earnings releases. “The results suggest that executives’ optimistic language can result in them getting sued,” says Jonathan Rogers, an associate accounting professor at the University of Chicago. His paper appeared in the American Accounting Association’s Accounting Review.
Although the researchers didn’t break out which words in particular kept cropping up in the suits they reviewed, “strong” did seem to be used frequently by the sued firms to describe how some areas were performing. Other examples could be an executive quoted as saying he is “very pleased” with the company’s historical results or a company mentioning customer-satisfaction scores that are better than those of its competitors.
While such derivative lawsuits are unlikely to reach the trial stage, they create a distraction for the CFOs and other managers cited in them, and can cost a company in terms of time, legal fees, and, possibly, settlement agreements, Rogers notes.
To lessen their risk, the researchers suggest managers “dampen the tone of their earnings announcements either by decreasing their use of positive language or by tempering their optimism with statements that are less favorable.” They don’t suggest that companies eliminate optimistic words altogether.
Many derivative suits will cite phrases pulled from these publicly available documents as a way to support the argument that a company and its managers were misleading. However, attorneys representing companies are usually able to get the courts to disregard such statements by calling them “puffery” and insisting the language should not be considered a material statement of fact. That doesn’t always happen, though, causing some uncertainty over how these cases will play out, the researchers note.
Another way to lessen the risk of litigation, the researchers suggest, is to make sure that company insiders are not selling their company stock in a way that would contradict any optimistic tone used in company releases. Insider sell-offs don’t necessarily raise a company’s litigation risk but could help fuel arguments used in shareholder litigation, they note.
Another defense, of course, is truth. Truthful, honest executives are less likely to be sued. Executives always need to be careful of the tone they use, whether in written form or in their talks with investors. And consistency may be key for expressing the truth to investors, some of which are more likely to notice a shift than others.
Hedge-fund managers, for example, will go to every sell-side conference to see if a certain CFO’s body language changes, looking for hints as to where the company is headed, says Beth Saunders, Americas chairman of FTI Consulting’s Strategic Communications practice. Her company helps executives prepare for interactions with shareholders. “A really good CFO shows believability,” she says. “Whether you are saying good or bad things, the only way you can be believable is to be who you are.”
Unlike Admiral Nelson, see the extract of the story below from Wikipedia, I have two eyes through which to assess the landscape, the corporate governance and communications landscape in Zimbabwe. And, unlike him, I am not ignoring what this investor relations landscape is telling me. In fact I am absorbing the fact that very few listed companies in Zimbabwe, if any, have disclosure committees. This can be attributed to the fact that that
legislation does not exist that requires them and
that listed company executives do not have to worry about this area of corporate governance because there is an absence of investors or stakeholders demanding accountability in this respect. Furthermore there is little or no commercial value to be had from taking an altruistic view.
So a recent study by Corporate Counsel.net was interesting to me because it highlighted the extent to which our African markets differ from those in First World markets. Here is the brief overview from Corporate Counsel.net:-
Survey Results: Disclosure Committees
We have posted the survey results regarding the latest disclosure committees trends, repeated below:
1. Back in mid-2008, we conducted a survey on disclosure committees (here are the results) – we are now canvassing to see if practices have changed. Our company:
- Has a disclosure committee – 96.7%
- Doesn’t have a disclosure committee (if you check this box, you are done) – 3.3%
2. Our disclosure committee has:
- More than 10 members – 32.1%
- Between 8-9 members – 39.3%
- Between 6-7 members – 21.4%
- Between 4-5 members – 7.14%
- Has less than 4 members – 0%
3. Our disclosure committee has the following types of members:
- CEO – 27.6%
- CFO – 75.9%
- Controller – 86.2%
- General Counsel – 86.2%
- Securities Counsel – 82.8%
- Compliance or Risk Management – 41.4%
- Investor Relations Officer – 72.4%
- Internal Auditor – 55.2%
- Officer from a Business Unit – 55.2%
- Other – 55.2%
4. For our disclosure committee:
- Someone takes minutes of meetings – 72.4%
- We don’t keep minutes of our meetings – 27.6%
I fail to see on the horizon a catalyst that will enable us to catch up with the First World in this key area. Disclosure Policies need disclosure committees to manage them. This issue matters because in the absence of checks and balances on proper communications practices investors raise their risk profile of investing, require a higher return and this increases the cost of raising capital.
On a slightly different note, In South Africa there is supposed to be a direct communications channel between investors and Disclosure Committees, by law. I don’ t see these channels. A secure website link to the Chairman would be way forward I guess.
Thanks to Wikipedia.org for the text below. Please donate to them….
On the morning of 2 April 1801, Nelson began to advance into Copenhagen harbour. The battle began badly for the British, with HMSAgamemnon, HMS Bellona and HMS Russell running aground, and the rest of the fleet encountering heavier fire from the Danish shore batteries than had been anticipated. Parker sent the signal for Nelson to withdraw, reasoning:
I will make the signal for recall for Nelson’s sake. If he is in a condition to continue the action he will disregard it; if he is not, it will be an excuse for his retreat and no blame can be attached to him.[170]
Nelson, directing action aboard HMS Elephant, was informed of the signal by the signal lieutenant, Frederick Langford, but angrily responded: ‘I told you to look out on the Danish commodore and let me know when he surrendered. Keep your eyes fixed on him.’[171] He then turned to his flag captain, Thomas Foley and said ‘You know, Foley, I have only one eye. I have a right to be blind sometimes.’ He raised the telescope to his blind eye, and said ‘I really do not see the signal.’[171][172] The battle lasted three hours, leaving both Danish and British fleets heavily damaged. At length Nelson despatched a letter to the Danish commander, Crown Prince Frederick calling for a truce, which the Prince accepted.[173] Parker approved of Nelson’s actions in retrospect, and Nelson was given the honour of going into Copenhagen the next day to open formal negotiations.[174][175] At a banquet that evening he told Prince Frederick that the battle had been the most severe he had ever been in.[176] The outcome of the battle and several weeks of ensuing negotiations was a 14 week armistice, and on Parker’s recall in May, Nelson became commander-in-chief in the Baltic Sea.[177] As a reward for the victory, he was created Viscount Nelson of the Nile and of Burnham Thorpe in the County of Norfolk, on 19 May 1801.[178] In addition, on 4 August 1801, he was created Baron Nelson, of the Nile and of Hilborough in the County of Norfolk, this time with a special remainder to his father and sisters.[179][180] Nelson subsequently sailed to the Russian naval base at Reval in May, and there learned that the pact of armed neutrality was to be disbanded. Satisfied with the outcome of the expedition, he returned to England, arriving on 1 July.[181]
