IROs navigate a tightrope to satisfy investors’ desires to meet with management privately while also avoiding regulatory trouble. The SEC’s Regulation Fair Disclosure (Reg FD) requires limiting any intentional disclosure of material nonpublic information (MNPI). But investors spend considerable time and money to attend private meetings with management in efforts to glean any sort of informational advantage. How can IR professionals keep investors happy without running afoul of the SEC?
To understand the issue better, my co-authors and I survey more than 300 highly experienced buy side investors about their perceptions of private meetings. These investors have been around the block (averaging 20 years of experience) and know the private meeting landscape (averaging 23 private meetings per quarter). We ask them about the information content and method of communication in private meetings. What kind of information do they find helpful? Does communication method matter?
What we found was that investors are interested not just in the hard data when they meet privately with a firm’s managers, but just as much in softer elements, too. For instance, investors glean much from tone of voice and body language. They also listen intently to explanations of past performance or future strategies, which are as much about narrative as they are about data.
The results provide two approaches to help IROs navigate the potentially perilous problems that private meetings present.
First, structure private meetings to convey qualitative information and allow for nonverbal communication.
Investors attending private meetings are often not looking for the MNPI that the SEC is targeting. Specifically, the SEC is worried about verbal communication of quantitative information like updates on earnings guidance and comments on investment models. Investors, on the other hand, told us they find nonverbal communication and qualitative information to be especially informative. They thought vocal cues and body language were significantly more informative than a manager’s prepared remarks.
This is useful for managers because nonverbal communication and communication of qualitative information are all but ignored in the SEC’s Compliance and Disclosure Interpretations, the agency’s only guidance on the issue.. One reason for this may be the difficulty in enforcing Reg FD in relation to softer information. In 2005, the SEC lost the only Reg FD case that ever made it to court because the judge ruled that nonverbal communication was not sufficient to violate Reg FD. Since then, the SEC focuses Reg FD enforcement on ‘private statements that [are] explicitly inconsistent with the issuer’s public disclosures.’
So, IR professionals can avoid SEC scrutiny while still pleasing investors by tailoring private meetings to focus on qualitative information and nonverbal communication. Investors also find qualitative information relating to firm strategy and managers’ explanations of past results more informative than the quantitative topics of earnings guidance updates and comments on investment models.
However, focusing on softer information has downsides. Promoting nonverbal communication may entail increasing unscripted and informal interactions, which runs counter to the typical IR professional’s desire to control the narrative and stick to a script. This approach also entails holding more private meetings in person, which can be costlier. Additionally, this approach will only avoid compliance issues if the SEC continues its post-2005 focus on quantitative information and verbal communication. Further, this approach adheres to the letter of the law in Reg FD while skirting the spirit of the law, a level playing field for all investors, even those investors who do not attend private meetings.
A second approach is to limit private meetings to those that can be simultaneously webcast. This may be better if the SEC changes its regulatory focus or if IR professionals are interested in promoting a level playing field. This gives investors the management access they desire without Reg FD concerns. Some companies already follow some form of this approach. For example, Progressive’s Investor Relations Policy states that they simultaneously webcast investor meetings and prohibit private visits from analysts to avoid giving ‘preference to any individual or security firm.’
Reg FD compliance can be a pain but rendering all private meetings public eliminates the Reg FD issue and promotes a level playing field for all investors.
Michael Durney is a professor of accounting at the University of Iowa