Full, fair and timely disclosure

Open with picture of lone executive seated way across a large, intimidating corporate office.






The CEO of General Electric is an employee. The company that employs him has a market capitalisation of about USD$360,000,000,000 (http://www.marketwatch.com/tools/quotes/quotes.asp?siteid=mktw&sid=2148). That is greater than the GNP of Sweden, Taiwan, Indonesia or Saudi Arabia (http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29). So that puts him in a rather important position. He is an undemocratically appointed governor and custodian of huge national and cross-border resources, including human ones, to use the current management vernacular.

Because he (well, his company more precisely) funds his business in largest part with public funds, his company's financial affairs are regulated, both for the benefit of the public as well as for the benefit of the capital markets which provide the liquidity for all such companies. This regulation does not prescribe or proscribe how he is to run his business, but it does place on him the obligation to be completely transparent with the public as to how he in fact employs his funds. Regardless of how big or important he or GE is.

This is the legal principle of full, fair and timely disclosure. He has the legal obligation to inform the public, in a non-discriminatory fashion, of any matter which could have a material impact on whether a reasonable investor would decide to buy, sell or hold his stock. (Look, this is not a law lecture, so the generalisations are close enough for the moment; if you need, or seek or expect legal, or other, advice, go somewhere else.) If he runs afoul of this legal requirement, he can find his arse in jail, as many recent examples of corporate shenanigans attest.

Now, slow fade to a remote outback shack with a spindly telephone line hanging slack from pole to porch.

The Australian government has been the monopoly owner of the Australian telephone system until the last decade. This has put the Oz telco (now known as Telstra) in a unique relationship with the population generally, with many people perceiving it to be a common carrier meant to provide a nondiscrimatory public communications service for the benefit of the broad community. It's taken on icon value in the vast Australian countryside, and the government has been most solicitous of keeping rural Australia onside with its plan to privatise the telco (e.g., http://news.yahoo.com/news?tmpl=story&u=/afp/20050812/bs_afp/australiatelecomcompanytelstra_050812040622).

In gradually introducing competition to lift the game of Telstra, and in selling off the business in bits and drabs to lift the amount of money the government has to throw around, the resultant economic, technological, market, and mainly political agenda, issues and manoeuvering have grown into a giant gordian knot.

I cannot begin to properly outline, review or explain all the machiavellian plots that the privitisation of Telstra entails. But it is approaching its end game. After 2 prior "tranches" of stock have been flogged off to the public, the government is still the 51% majority owner, and is preparing to "dump" or "place" all of it "on" or "with" (take your pick) the public. There is much at stake, including the political careers of some in government, and the management careers of some at Telstra. Not to mention the financial impact on the budget of both the government (seller) and the investing public (buyer).

And apart from all the other intrigue (not to mention the egos and a bit of Yank bashing), the part that is most interesting to me today is the complete and utter disregard that the majority shareholder has had for the principal of full, fair and timely disclosure. As best as I can figure it out, it is because they see this as a political issue that has no market ramifications, and to the extent that there are market ramifications acknowledged, they lay off the transparency obligations on the Telstra management's complete lack of knowledge of "how we do these things in Australia".

So let's see how this all got aired in the SMH. And bear in mind, that Telstra has a legal obligation of continuous disclosure, meaning it must keep the market informed (the whole market, not just certain players in it) of any material matter coming to its knowledge which could materially affect its share price.

It was reported today that the fantastic dividend yield mom and pop had been expecting from Telstra's profits was not all it might have been seen to be: "A confidential Telstra briefing paper reveals the company has been borrowing billions of dollars to pay dividends instead of spending on a network that has deteriorated to the point where one in seven phone lines is faulty. The paper - on which the Prime Minister, John Howard, and the Communications Minister, Helen Coonan, were briefed on August 11 - paints a bleak picture of the telecommunications company as it heads towards full privatisation. The Government was told Telstra had borrowed $550million in 2004-05 and would borrow $2.2billion this financial year to afford special dividends, even though the Telstra board acknowledged it "is not a sustainable policy or practice". http://www.smh.com.au/news/national/telstra-puts-callers-on-hold-to-pay-investors/2005/09/06/1125772527494.html

On Monday this week Telstra managment surprised the market when it announced an anticipated 10% fall in its earnings, blaming the shortfall in part on the competition and other regulatory strictures the government was implementing as part of the privitisation. I have read nothing that suggests the annoucement was wrong on the facts, though some have taken issue with its conclusions attibuting the shortfall to particular regulatory matters.

The government was expecting to get around $5.25/share on its sale, and after the announcement, the share price had dropped well below $4.50/share. The John Howard government was ropable at the announcement. "John Howard has called Telstra's senior management disgraceful', savagely rebuking it for talking down the company's share price and campaigning against government regulation." (http://www.smh.com.au/news/national/youre-a-disgrace-pm-tells-telstra/2005/09/06/1125772527449.html)

Now at least one Enron executive is in jail for portraying Enron's accounts as far more hunky-dory than they really were. And as its CEO Ken Lay is about to find out, corporate fraud it is not just a matter of fudging books; it includes touting stock when you have or know of material adverse information that you have failed to disclose.

That said, pay very close attention here. What I am about to say does NOT mean that I am accusing John Howard of committing corporate (or any other) fraud. Sellers are free to stretch truth, to merely tout, to dress up their goods, to put their best foot forward. That's part of the great fun and tradition of the bazaar. But we have moved beyond caveat emptor and there are limits, sometimes not very bright lines, as to how far we can go in our enthusiastic promotion of things. So in that context, consider what John Howard is reported to have said: "I do not believe for a moment … that the remarks that were made by senior executives of Telstra were in any way helpful.... I think it is the obligation of senior executives of Telstra to talk up the company's interest, not to talk them down. That is a view which I have communicated very directly to the chairman of the board on behalf of the Government." (Id.)

I would think that the most critical time for a company to pay attention to its full, fair and timely disclosure obligations was when it was preparing to go "tap" the investing market. The Telstra announcement has sparked an investigation, but I'm not sure that the other public statements of the majority shareholder have. (http://www.smh.com.au/news/business/asic-probes-telstra-downgrade/2005/09/06/1125772521945.html)

And, as I indicated, this is a drama that would have awed Machiavelli. These people are not babes in the woods. They are very well versed and very well advised. And they all have their own interests. See, e.g., http://www.smh.com.au/news/alan-kohler/sol-opens-curtain-on-fight-for-survival/2005/09/06/1125772521527.html and http://www.smh.com.au/news/business/wrong-time-and-place-for-stoush/2005/09/06/1125772521970.html.

But they all must act within the rules of the game, and that would seem to me to include full, fair and timely disclosure of all the information being selectively disclosed to particular market participants, including especially that being presented behind closed doors, that materially affect the Telstra share price. It is not good enough to just dismiss the obligation of transparency with slurs of North American "amigos" (http://www.smh.com.au/news/national/gang-of-fours-revolution-backfires/2005/09/06/1125772522114.html) and allusions to some supra-legal nonsense about "how we do this" in Australia, which I heard expressed a couple of times on radio this morning.

Fade to black with Jesse Colin Young voice over singing, "let your light shine".