[VIEWPOINT]Investors need good informationThe disclosure rule requires publicly traded companies to provide material information to potential investors at the same time it is provided to professional analysts and in comprehensible language.
Kim Chung-ho, a vice chairman of the Center for Free Enterprise, recently wrote here that the rule has had a short but dismal history in Korea, but he failed to distinguish between the spirit of the rule and the problems in its implementation. Let's concentrate only on the "quality of information" component because that is what Mr. Kim mainly discussed.
As a promoter of free enterprise in Korea, I understand Mr. Kim's disappointment in the poor quality of corporate communications. But he is misguided if he thinks the problem is in the rule, and not with Korean companies' long-held disregard for corporate governance, transparency and disclosure. In his criticism of the rule, Mr. Kim focuses on the inconveniences it has caused companies, their executives and (what appears to be) select analysts. He forgets that the rule was created to also protect investors and employees.
Resistance to the rule is not unique to Korea. The United States is experiencing the same challenges and issues, but Mr. Kim's contention that there is a strong demand in the United States to abolish the disclosure rule is not true. After recent corporate scandals there, there is even more pressure to keep and strengthen the rule.
Mr. Kim raises several problems with the workings of the rule, but here are three examples of how points he makes are problems with the implementation of the rule, not the disclosure requirements themselves.
Mr. Kim says that executives shun fund managers and analysts because they are afraid of being reprimanded by the authorities. Not true. Executives are ignoring those people because they have nothing good to say about their companies during these trying economic times. Do we really believe that when times are good and executives have exciting news about their growth prospects and results that they will not speak because of the disclosure rule? They will want the news to go out to a wide audience in simple language. The disclosure rule, though, requires that bad news be distributed the same way as good news.
Second, In saying that company executives have "canceled a series of news conferences on next year's business outlook," Mr. Kim ignores the fact that a "safe harbor statement" was created precisely to protect executives from liability in making predictive statements. A "safe harbor statement" is a disclaimer in the U.S. Private Securities Litigation Reform Act of 1995 to encourage executives to talk about their business outlook, performance targets and other predictions. The disclaimer includes words like, "actual results could differ" and "note our risk factors": The rule requires that executives provide quality, relevant and insightful information on a timely basis.
Third, Mr. Kim also says it is not possible for one person to possess all material information regarding a company, so it would make sense to have more than one person give out material information. There is a huge problem associated with what he proposes but that is another lengthy conversation. Simply put, there should be a centralized place for information management in Korean companies. This allows for information consistency and increases a company's ability to make educated, strategic communications decisions based on centralized information. This centralized place should be in the investor relations department: The disclosure rule requires consistency in company messages and fairness in information distribution to the general public.
Either Korean regulators have failed to properly explain the rule and its use or Korean companies are choosing not to adopt the spirit of the rule. International firms with well-run investor-relations staffs say the rule has not affected their levels of disclosure -- they had been following the principles of the rule even before it was required. The only companies affected by the rule are ones that have not adopted the best investor-relations practices.
By now, many people have heard the term "Korea discount" as it applies to stock valuations. Korean companies' inability to establish credibility with investors will hinder any progress made towards global standards. Important regulations like the disclosure rule cannot be dismissed or ignored because they are inconvenient for companies here.
* The writer is an independent investor-relations consultant.
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