VideoGregory Geswein feels a bit like a jilted lover. The reason: In recent months, the CFO of Diebold Inc. hasn't been getting as many calls as he had from Wall Street analysts who follow the North Canton, Ohio, maker of automated teller machines. Sometimes Geswein will even get up the courage to call one he hasn't heard from lately. Not for a heart-to-heart, just to see if there are any questions.
"It's hard to get used to not hearing from some sell-side analysts on a weekly basis," he confesses.
As Geswein sees it, his phone isn't ringing as much, because of Regulation FD (Fair Disclosure), the new Securities and Exchange Commission rule that prohibits executives from feeding market-moving information to select individuals. It's not that Diebold has tried to freeze out analysts or major investors, as some companies have done. Rather, Geswein surmises, it's that Diebold is giving the Street more information than ever before.
Since October, when the regulation took effect, the company has disclosed additional performance data
in its quarterly earnings releases and conference calls. More significantly, it has begun to provide explicit forward-looking guidance, spelling out management expectations in bullet points: an earnings range for the upcoming quarter and full year, for example, or a revenue growth rate.
And one more thing: A disclosure policy statement on Diebold's Web site notes that executives will steadfastly refuse to review analysts' models, comment on estimates, or indicate whether the company is on- track to meet its targets--except in a public forum. "We're shoving out more information, but the Street knows that it won't get any more than is already out there," says Geswein, who joined Diebold in March 2000. "Our approach [to FD] has been to disclose our guidance to everybody: Let's guide the Street, rather than let the Street guide us."
In other words, the curious effect of FD has been to make Diebold more open and more tight-lipped at the same time. Just as telling, CFO spoke with a dozen finance chiefs and investor-relations officers and found that they all have responded to the new rule in similar ways.
QUALITY INFORMATION?
Reg FD is perhaps the most closely watched and hotly debated new securities rule in years. A pet project of former SEC chairman Arthur Levitt, FD was a response to his concern that executives would freely tip off analysts about the company's earnings prospects without disclosing the news publicly. Before he retired in February, Levitt deemed the rule a success. "You are now privy to the same information, and at the same time, as analysts, investment bankers, and every other professional on Wall Street," he told attendees at his 43rd and final town hall meeting for small investors.
There is no question that Reg FD has spurred companies to issue more press releases, file more 8Ks, and increase Web-casting of earnings calls in recent months. But while critics of the SEC rule acknowledge the increased volume of disclosures, they are skeptical about the quality of the information. "More dreck," says Boris Feldman, a securities lawyer at Wilson Sonsini Goodrich & Rosati, in Palo Alto, California. "Is the market better informed? Of course not. There's more transparency, but less meaningful information."
Others have gone so far as to blame the new regulation for a record number of negative preannouncements of earnings--nearly 800 in the fourth quarter. Because analysts are less likely to be told on the QT to shade their estimates, companies must go public when their earnings are off-target. Such surprises tend to make stocks move more dramatically.
"Analysts will tell you that companies are much less forthcoming," says Stuart Kaswell, a senior vice president of the Securities Industry Association (SIA), a trade group in New York and Washington, D.C., for Wall Street firms. "The chill has occurred exactly as we predicted."
If that can be proven--the SEC and the SIA are conducting research on the effects of FD--such fear-mongering could become the basis for efforts to lobby Levitt's successor to rescind the new rule. "There is no assurance that the people who lost the battle to stop FD will not try to roll it back," says Jay Perlman, associate general counsel of The Motley Fool, a Web site for individual investors that has rallied its members in support of FD.
MANY TENTACLES
In the meantime, Reg FD has been subtly reshaping the disclosure landscape in ways that will likely be permanent, no matter what happens in Washington. Here's how.
Guidance. Finance chiefs and IR specialists have found FD to be strangely liberating. Like Diebold, many of the companies contacted by CFO have started to comment in their public disclosures on future quarters. Doing so permits executives to reiterate these projections in conversations with analysts and investors, yet avoid the verbal sparring about the accuracy of the Street's expectations.
"The more you can release, the more you can talk about that information," Geswein observes. "Before, analysts would ask us if we were comfortable with their range [on Diebold's estimated earnings]. Now we give them our range."
Nevertheless, finance chiefs continue to face that dreaded end-of- the-quarter question: How are things going? "Analysts still ask that question constantly, but the safest approach is to say nothing," says Kevin Michaels, CFO of Powerwave Technologies Inc., an Irvine, California, manufacturer of wireless equipment. "It cuts down on the reasonable flow of information, but the fear is that the most innocuous thing might be construed as a selective disclosure."
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